They may want to protect young industries or to preserve access to local consumer markets for domestic firms. First, let’s briefly discuss some of the reasons behind these interventions. Foreign court systems have varying methods of enforcing ones rights. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. Content Filtrations 6. Governments are also motivated by economic factors to intervene in trade. The distinction between the common law and civil law is more in theory rather than in practice. The country’s view on capitalism is also a factor for business consideration. In countries, such as Japan, the reliance on courts for conflict resolution is much lower compared to the US which is considered to be one of the most litigious societies in the world. Log in Sign up. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. Democracy is the most common form of government today. Let’s focus on the overarching modern political philosophies. An economic system in which the means of production are owned and controlled privately. This external element of business includes the effects of pressure groups. The most commonly known example of religious law is Islamic law, also known as ShariaIslamic religious law that addresses all aspect of daily life; in terms of business and finance, the law prohibits charging interest on money and other common investment activities, including hedging and short selling.. Islamic law governs a number of Islamic nations and communities around the world and is the most widely accepted religious law system. The interest-bearing accounts and loans, which fall under the strict ribamles, most futures and options, which are considered speculative and gharar, and insurance, because the outcome of the contract can no way be determined beforehand , are all haram. United Nations Commission on International Trade Law (UNCITRAL). The national government enforces it own laws. As a result, global businesses monitor and evaluate the political and legal climate in countries in which they currently operate or hope to operate in the future. The efficiency of enforcement of legal system is also lax in many low-income countries. A person is innocent unless proved guilty. Central to China’s approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. In some countries, the government controls more aspects of daily life than in others. The Political Environment. It’s the most widespread legal system in the world. STUDY. State Capitalism: Governments Seeking to Control Key Industries. A company may ask several questions regarding a prospective country’s government to assess possible risks: While any country can, in theory, pose a risk in all of these factors, some countries offer a more stable business environment than others. International law recognizes the sovereign right of anation to allow or deny foreign firms to conduct. Chapter 7 Political and Legal Systems in National Environments1 Sharia is the canonical law derived from a combination of sources, such as the Koran, the holy book of Islam, the Sunna, teachings and practices of the prophet Mohammed, and the fat was, the rulings of the Islamic scholars. Chapter 4 "World Economies" provides more details about developed and developing countries and emerging markets. Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,”, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html, http://www.arabianbusiness.com/511804-gulf-islamic-banks-assets-to-hit-300bn, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html, http://www.energyintel.com/documentdetail.asp?document_id=245527, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. For the purpose of this discussion, the main relevant difference is in ideology. Although there is significant overlapping in practice under the two systems, laws are much more rigid in the countries with civil-law system compared to common-law systems. China, for instance, has generally followed ‘rule by man and not by law’, the tradition of which still remains despite the country developing a model legal system. Many are permitted to engage in sale-buyback or leaseback of an asset. To decrease how vulnerable your business is to political conditions, it is especially important for the marketer to forecast risk and engage in business ventures that may benefit them. In contrast, a planned economyAn economic system in which the government or state directs and controls the economy, including the means and decision making for production. Although the terms “freedom” and “democracy” are often used interchangeably, the two are not synonymous. However, change can occur very quickly. Laws of most countries have elements of both common and civil law. It depends less on written statutes and codes. Plagiarism Prevention 4. This new combination has also posed more questions for businesses that are encountering new issues—such as privacy, individual rights, and intellectual rights protections—as they try to do business with China, now the second-largest economy in the world behind the United States. Courts can dismiss cases at their discretion, brought before them by foreigners. Common law originated from England and it is followed in most of the former British colonies, such as India, UK, the US, Canada, Australia, and New Zealand. The legal representative is the person with the greatest individual authority in a company in China. There are three main types of legal systems: (1) civil law, (2) common law, and (3) religious law. For example, the Chinese government owns almost all the major banks, the three largest oil companies, the three telecommunications carriers, and almost all of the media. 3. Different laws in foreign countries regulate financing or operations by foreigners. The company now has a 25 percent market share of polysilicon and almost 50 percent of the global market for solar-power equipment.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. International managers need to be aware of such situations. Source: Indonesia 2009: An official handbook There are more than thirteen major types of government, each of which consists of multiple variations. (e) Normally award of damages are in line with practicality but not as inflated as is often the case in the West. How involved is the government in the private sector? Ownership is established by use in common law countries whereas it requires registration in the civil law countries. This is the national government and it has six State Governments under it. The extent of separation of judicial powers between the judiciary and the public authorities varies considerably across nations. Also known as theocratic law; this legal system is based on religious guidelines. Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry. The two major categories of prosecution under the national government are drug importation and those related to infringement of social security laws. The history of the oil industry shows how various governments have, on occasion, protected their national companies’ access to oil through political force. Major similarities between the Sharia and secular law are that in both: 2. Compare and contrast the two forms of economic ideology discussed in this section. Every country has the right of jurisdiction within its own legal territory. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest. The complexity of trade in these situations increases, as throughout history, governments have come to the aid and protection of their nation’s largest business interests in markets around the world. For example, some countries’ governments have tried to limit the influence of American culture on local markets by limiting or denying the entry of American companies operating in the media, food, and music industries. To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. Disclaimer 9. Under international law, there are three basic types of jurisdictional principles. Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on operations. In this lesson, you'll learn about the political environment in international business, some of its key factors, and its impact. A legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. Terrorism, Crime, and Violence. form of government: totalitarianism/autocracy/democracy or other type of political system. Governments have several key policy areas that can be used to create rules and regulations to control and manage trade. The Christian Canon system is observed in the Vatican City. Two additional religious law systems are the Jewish Halacha and the Christian Canon system, neither of which is practiced at the national level in a country. Every nation has jurisdiction over conduct that adversely affects its national security even if such behaviour occurs outside the country. The system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. It has prepared a wide range of conventions, model laws, and other instruments dealing with the substantive law that governs trade transactions or other aspects of business law influencing international trade. Legal Systems in International Business: The major types of legal systems are briefly mentioned here. Nations have the right to impose restriction upon foreign citizens on their rights to travel and stay, their conduct, or area of business operations. At one end of the extremes of political philosophies, or ideologies, is anarchismA political ideology that contends that individuals should control political activities and public government is both unnecessary and unwanted., which contends that individuals should control political activities and public government is both unnecessary and unwanted. Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware. A country’s law regulate business practices, defines business policies, rights and obligations involved in business transactions. All S&P indices constituents are monitored on a daily basis to ensure that the indices maintain strict Sharia compliance. Therefore, a foreign firm involved in illegal business practices in India can be sued under Indian law. The legal system may be difficult to navigate or unavailable to foreigners. It may seem evident that businesses would prefer to operate in open, democratic countries; however, it can be difficult to determine which countries fit the democratic criteria. The complications in a meeting out of non-performance of a business contract also vary widely among the common- and civil-law countries. Trade Embargos and Sanctions 4. Depending on how long a company expects to operate in a country and how easy it is for it to enter and exit, a firm may also assess the country’s political risk and stability. Differences in the social, cultural, economic, legal and political conditions of the country affect international business procedures in different levels and degree depending on the countries infrastructure and relationship. On the other hand, governments may influence trade to reward a country for political support on global matters. Before publishing your articles on this site, please read the following pages: 1. State-owned companies control more than 75 percent of all crude oil production, in contrast with only 10 percent for private multinational oil firms.Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html; “Really Big Oil,” Economist, August 10, 2006, accessed December 21, 2010, http://www.economist.com/node/7276986. Although most countries are pluralistic politically, they may lean more to one extreme than the other. China is one of the more visible examples, with its strong government and limited individual rights. The independence of a country’s judicial system from political influences of the members of governments, citizens, or firms is crucial for the fair treatment a firm receives in its overseas operations. Legal systems are discussed in terms of the protections they offer for business: intellectual property, product safety, liability and contracts.The opening case describes the effect of widespread political and economic corruption in Brazil. International Business: Strategy, Management, and the New Realities 11 Political and Legal Systems are Dynamic • Political and legal systems are dynamic, constantly changing and interdependent. Although almost half of the world’s countries can be considered to be democracies, the number of “full democracies” is relatively low (only 30); 50 are rated as “flawed democracies.” Of the remaining 87 states, 51 are authoritarian and 36 are considered to be “hybrid regimes.” As could be expected, the developed OECD countries dominate among full democracies, although there are two Latin American, two central European and one African country, which suggest that the level of development is not a binding constraint. Many business analysts mention these issues in discussions of global business ethics and the role and responsibility of companies in different political environments. Whether the motive is economic (i.e., profit) or political (i.e., state control), “foreign firms and investors find that national and local rules and regulations are increasingly designed to favor domestic firms at their expense. In fact, political stability is a key part of government efforts to attract foreign investment to their country. State companies, like their private sector counterparts, get to keep the profits from oil production, creating a significant incentive for governments to either maintain or regain control of this very lucrative industry. Baidu self-censors and, as a result, has seen its revenues soar after Google limited its operations in the country.Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,” Wall Street Journal, November 9, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html. The thirteen largest oil companies (as measured by the reserves they control) in the world are all state-run and all are bigger than ExxonMobil, which is the world’s largest private oil company. A hostile takeover could overthrow a government, for instance. Judicial Independence and Efficiency 3. In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. In totalitarianism, the ideology influences or controls the people, not just a person or party. Nor can the same work culture be replicated elsewhere. Thus, a sovereign state exercises powers over its own members and in relation to other countries. Any changes are usually a reflection of a changing economic environment, like the world economic crisis of 2008, and not a change in the government players. For example, in Islamic law, business is directly impacted by the concept of interest. How did this happen so fast? Contrary to the approach of much of the world, which is moving more control to the private sector, China has steadfastly maintained its state control. 2. Start studying International Business Chapter 3: Governmental and Legal Systems. Sullivan 3-1 fChapter 3 The Political and Legal Environments Facing Business Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 3-2 fLearning Objectives Legal Systems. Emerging economies still promise opportunity but also political risk for international businesses. That was the reason for early writers of Economics preferred to caption their work as Political Economy. Capitalism is an economic system in which the means of production are owned and controlled privately. The Chinese model of an authoritarian government and a market-oriented economy has, at times, tilted favor toward companies, usually Chinese, who understand how to navigate the nuances of this new system. President Rousseff started a program called Brasil Maior in order to promote industry in the nation. Religious lawAlso known as theocratic law; this legal system is based on religious guidelines. Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. China’s ability to focus on dominating key industries inspires both fear and awe throughout the world. A political systemThe system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. Instead, most countries have a combination of both. In totalitarian systems, government’s power derives from a select group. (a) Contracts should be fair to all parties. A political ideology that contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. These are cultural, political and legal environments and the role each one plays. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. 24 February, 2015 - 17:30 . Brazil: Currently Dilma Rousseff is the President of Brazil. Politics changes can affect dramatically the manner that international business deal with import, export, and trade with another countries. (b) Gharar, the transaction involving fundamental uncertainty or speculation is prohibited. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices. The most significant difference in the common law and the civil law countries is in the protection of intellectual property. In the Persian Gulf region alone, there are twenty-two Sharia-compliant, Islamic banks, which in 2008 had approximately $300 billion in assets.Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,” Arabian Business, February 20, 2008, accessed December 21, 2010, http://www.arabianbusiness.com/511804-gulf-islamic-banks-assets-to-hit-300bn. Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,”. Businesses need to assess if a country believes in free markets, government control, or heavy intervention (often to the benefit of a few) in industry. Laws concerning employment and labor affect managing of workforce in international markets. A fair judicial system also reduces political risks in overseas markets. A country may also refuse entry to foreign citizens or restrict their travel. Members of the commission are elected for terms of six years, the term of half-members expiring every three years. In essence, there are three main kinds of legal systems—common law, civil law, and religious or theocratic law. There is heavy reliance on settling disputes through third party negotiations rather than courts. According to the Federal Constitution, the States have administrative competence or remaining competence to all subjects that are not privative of the Union and the Municipalities. What is a planned economy? This system is commonly referred to as “a socialist market economy with Chinese characteristics.” The Chinese are eager to portray their version of combining an authoritarian form of government with a market-oriented economy as a better alternative model for fledging economies, such as those in Africa. Some governments use trade as a retaliatory measure if another country is politically or economically unfair. It is extremely important for certain agreements in civil law countries to get registered, in order to be enforceable, whereas in common law countries, as long as the proof of the agreement can be established, an agreement is binding. China’s Communist Party outlines its goals in five-year plans. For instance, an Italian firm that sells India’s defense secrets can be booked under the Indian law. In current times, the Chinese government has been using a combination of government loans and investment in Africa to obtain access for Chinese companies to utilize local resources and commodities. A political ideology that asserts that both public and private groups are important in a well-functioning political system. Membership is structured so as to be representative of the world’s various geographic regions and their principal economic and legal systems. Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,”. Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. China has successfully combined state intervention with private investment to develop a robust, market-driven economy—all within a communist form of government. TOS 7. International Business Chapter 3: Governmental and Legal Systems. For instance, foreign governments have right to impose restrictions related to financial repatriation to other countries. The major types of legal systems are briefly mentioned here. The political and legal ystem in Australia: The Government of the Commonwealth of Australia is a federal one. It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. The legal framework was the least efficient in Venezuela (1.5) and had relatively low level of efficiency in Russian Federation (2.8), Brazil (2.9), China (3.6), Tanzania (3.7), and Thailand (4.4). Cultural and social factors might also impact a government’s intervention in trade. is also known as theocratic law and is based on religious guidelines. In the case study in Chapter 1 "Introduction", you discovered how US-based Google had to deal with the Chinese government’s restrictions on the freedom of speech in order to do business in China. Its general mandate is to harmonize and unify the laws of international trade. For example China worked a serious restructuration on their politics and regulations with the international companies, which include better conditions of work for the local employees. At the same time, an agreement would be signed for the bank to sell back the assets to the company at a later date and at a higher price. Start studying International Business Chapter 2: National Differences in Political, Economic, and Legal Systems. A political ideology that contends that individuals should control political activities and public government is both unnecessary and unwanted. Democratic governments derive their power from the people of the country either by direct referendum, called a direct democracy, or by means of elected representatives of the people, known as a representative democracy. Many common law countries, including the US and India have adapted commercial codes to govern business. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. A legal system based on traditions and precedence. Politically, a country’s government may seek to protect jobs or specific industries. Examples include changes in interest rates, civil unrest, government actions and issues with importing or exporting goods. In other words, the damages to property will be actual sums relating to repair and replacement of the property.