Politics and Law

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Chapter 4

• Politics and Law

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Learning Objectives

• To understand the importance of the political
  and legal environments in both the home and
  host countries to the international business
  executive.
• To learn how governments affect business
  through legislation and regulations.
• To see how the political actions of countries
  expose firms to international risks.
• To examine the differing laws regulating
  international trade found in different countries.
• To understand how international political
  relations, agreements, and treaties can affect
  international business.

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A Look at Three Segments

• The Home-Country Perspective
• Host Country Political and Legal Environment
• International Relations and Laws

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The Home Country Perspective

• Major areas of governmental activity that are
  of concern to the international business manager
• Embargoes and Sanctions
• Export Controls
• Regulation of International
• Business Behavior

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Sanctions and Embargoes

• Governmental actions that distort free flows of
  trade in goods, services, or ideas for
  adversarial and political, rather than economic,
  purposes.
• Sanctions tend to consist of specific coercive
  trade measures.
• Embargoes are typically broader in that they
  prohibit trade entirely.

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Export Controls

• Are designed to deny or delay the acquisition of
  strategically important goods by adversaries.
• The legal basis for export controls varies in
  nations.
• Most international business can be carried out
  under NLR conditions.
• Export licenses are issued by the Dept. of
  Commerce for commodities whose export is
  considered sensitive.

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How an Export License is Issued

• Specialists in the Department of Commerce match
  the exported commodity with the Critical
  Commodities list, the country of destination, and
  the recipient company.
• If no concerns exist in any one of the three
  areas, a license is issued.
• This process is only carried out if the product
  or the recipient country is considered sensitive.

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A New Environment for Export Controls

• The speed of change and the rapid dissemination
  of information and innovation around the world
• The issue of equipment size

• Focus of export controls on the Third World
• A loosening of mutual bonds among allied nations
• The increased foreign availability of high-tech
  products

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Implementation and Enforcement of Export Controls

• Export controls are increasingly difficult to
  implement and enforce.
• The number of countries that are able to
  manufacture products of strategic importance has
  increased.
• Products that are in need of control are
  developed and disseminated very quickly.
• It is difficult to control the transfer of
  technology and know-how.

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Regulation of International Business Behavior

• Regulations on firms varies substantially among
  nations.
• Nations may employ boycotts to govern business
  activities.
• Antitrust Laws are a regulatory activity.

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Bribery

• Firms operating abroad are affected by laws
  against bribery and corruption.
• International businesses may bribe to
  counterbalance poor product quality, to create a
  market for goods, or to stay competitive with
  other firms that bribe.

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Host Country

• Political Action and Risk
• Varies widely from country to country
• Economic Risk
• Less dangerous, but more common

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Three Types of Political Risk

• Ownership Risk
• Exposes property and life
• Operating Risk
• Interference with the ongoing operations of a
  firm
• Transfer Risk
• Limitations on the outflow of funds

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Political Risk May Involve

• Confiscation
• The government takeover of a firm without
  compensation to the owners.
• Expropriation
• A form of government takeover in which the firms
  owners are compensated.
• Domestication
• The government demands transfer of ownership and
  management responsibility.

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Economic Risk

• Exchange controls may be levied
• Tax policies may be used to control corporations
  and their capital
• Price controls may employed to control prices of
  imported products or services

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Managing the Risk

• Demonstration of concern with host countrys
  society can be effective.
• Firms can take out insurance to cover losses due
  to political and economic risk.

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Legal Differences and Restraints

• Countries differ in their laws as as well as in
  their use of the law. There are two major legal
  systems worldwide
• Common Law Based on tradition and dependent upon
  precedent and custom.
• Code Law Based on a comprehensive set of written
  statutes.

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International Relations and Laws

• International PoliticsThe effect of politics on
  international business is determined by both the
  bilateral political relations between home and
  host countries and by multilateral agreements
  governing the relations among groups of
  countries.
• International LawPlays an important role in the
  conduct of international business. Treaties and
  agreements have a strong influence on
  international business operations.

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International Law

• The World Trade Organization defines
  internationally acceptable economic practices for
  its member nations.
• The Patent Cooperation Treaty (PCT) provides
  procedures for filing patent applications.
• The United Nations has developed codes and
  guidelines that affect international business.

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In cases of disagreement, the parties can choose

• Arbitration Procedures are quicker and often
  spelled out in the original contract
• Litigation Often involves extensive delays and
  is very costly