Its the most widespread legal system in the world. As shown in the opening case study, China is using its economic might to invest in Africa. In fact, political stability is a key part of government efforts to attract foreign investment to their country. Multinationals now find themselves competing as never before with state-owned companies armed with substantial financial and political support from their governments.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. Understand government-business trade relations and how political and legal factors impact international business. While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. globalization. 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. Compare and contrast the two forms of economic ideology discussed in this section. While the government still remains the dominant force by controlling more than a third of the economy, more private businesses have emerged. Political Risks in International Markets The political risks in international markets are as follows; 1. Although almost half of the worlds 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. Governments have several key policy areas in which they can create rules and regulations in order to control and manage trade, including tariffs, subsidies; import quotas and VER, currency controls, local content requirements, antidumping rules, export financing, free-trade zones, and administrative policies. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document? 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. Impact of Political & Legal Differences on International Retailing 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. Some banks will charge a large up-front fee. Each political systems philosophy impacts the policies that govern the local economy and business environment. 3.3 The Global Business Environment Learning Objective Appreciate how cultural, economic, legal, and political differences between countries create challenges to successful business dealings. Several things stand out in the 2008 index. According to Islamic law, banks cannot charge or benefit from interest. On Capitol Hill and in the courts, Republican lawmakers and activists are mounting a sweeping legal campaign against universities, think . There are three main types of legal systems: (1) civil law, (2) common law, and (3) religious law. There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. Each political systems philosophy impacts the policies that govern the local economy and business environment. Sharia has clear guidelines for aspects of life. Authoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. Legal systems are discussed in terms of the protections they offer . In reality, neither extreme exists in its purest form. In the broadest sense, capitalism is an economic system in which the means of production are owned and controlled privately. Islamic law governs a number of Islamic nations and communities around the world and is the most widely accepted religious law system. Some legal issues are detailed below: 1. 3.3 The Global Business Environment - Exploring Business The Political and Legal Environments Facing Business 2.4: Foreign Direct Investment Anonymous LibreTexts LEARNING OBJECTIVES Know the different political systems. With its huge population, China is in constant need of energy to meet the needs of its people and businesses. Understanding the balance between Chinas government structure and its ideology is essential to doing business in this complex country. Cultural and social factors might also impact a governments intervention in trade. In this paper the parameters of the political, legal, and the cultural environment of international business will be considered, The paper also relates how political, legal, and cultural incidents or situations may become roadblocks to the smooth operation of business ventures in foreign countries. This provision has generated an entire set of financial products and strategies to simulate interestor a gainfor an Islamic bank, while not technically being classified as interest. Within reason, in democracies, businesses understand that most rules survive changes in government. State Capitalism: Governments Seeking to Control Key Industries. While many countries in Asia and Latin America also are functioning democracies, their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes. Culture can be a powerful lever for maintaining, renewing, and shaping an organization's viability. The complexity of trade in these situations increases, as throughout history, governments have come to the aid and protection of their nations largest business interests in markets around the world. Central to Chinas 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. Chapter 11 Assignment - N/A; Chapter 15 Assignment - N/A; . New York CNN . For example, if a company wants to borrow money from an Islamic bank, it would sell its assets or product to the bank for a fixed price. What businesses must focus on is how a countrys political system impacts the economy as well as the particular firm and industry. Governments intervene in trade for a combination of political, economic, social, and cultural reasons. China has successfully combined state intervention with private investment to develop a robust, market-driven economyall within a communist form of government. Before we can evaluate the impact on business, lets first look at the different political and legal systems. International Business Chapter 7: Government Policy and - Studocu Even if a consensus on precise definitions has proved elusive, most observers today would agree that, at a minimum, the fundamental features of a democracy include government based on majority rule and the consent of the governed, the existence of free and fair elections, the protection of minorities and respect for basic human rights. For example, in Islamic law, business is directly impacted by the concept of interest. 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. The Internet has started to change this, as sellers and buyers have easier access to each other. How do political and legal realities impact international trade, and what do businesses need to think about as they develop their global strategy? The countrys view on capitalism is also a factor for business consideration. For example, if a company wants to borrow money from an Islamic bank, it would sell its assets or product to the bank for a fixed price. 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. One entrepreneur, Zhu Gongshan, received $1 billion in funding, including a sizeable investment from Chinas sovereign wealth fund, in record time, enabling his firm GCL-Poly Energy Holding to become one of the worlds biggest in less than three years. By Steven Lee Myers and Sheera Frenkel. 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 worlds largest private oil company. While many countries in Asia and Latin America also are functioning democracies, their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes. A main differentiator of political systems is each systems philosophy on the rights of the individual and the group as well as the role of government. Democracy has a number of variations, both in theory and practice, some of which provide better representation and more freedoms for their citizens than others. What is capitalism? Governments have several key policy areas that can be used to create rules and regulations to control and manage trade. 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. At the other extreme is totalitarianism, which contends that every aspect of an individuals life should be controlled and dictated by a strong central government. The economic system refers to the way in which a country organizes its economy: most are command, market, or mixed economies. Historically, there has been a direct relationship between the degree of economic . A company may ask several questions regarding a prospective countrys 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. To further illustrate the complexity of the definition of a democracy, the Economist Intelligence Units annual Index of Democracy uses a detailed questionnaire and analysis process to provide a snapshot of the current state of democracy worldwide for 165 independent states and two territories (this covers almost the entire population of the world and the vast majority of the worlds independent states (27 micro states are excluded) [as of 2008)].Economist Intelligence Unit, The Economist Intelligence Units Index of Democracy 2008, Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. China has successfully combined state intervention with private investment to develop a robust, market-driven economyall within a communist form of government. The most direct impact on business can be observed in Islamic lawwhich is a moral, rather than a commercial, legal system. U.S. counterintelligence officials say revised Chinese law potentially turns normal business activities into espionage. In common law systems, judges interpret the law and judicial rulings can set precedent. sensitive to these differences. National security issues can impact both the import and exports of a country, as some governments may not want advanced technological information to be sold to unfriendly foreign interests. What is capitalism? Authoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. Jim Trusty, who just quit Trump's team in the Mar-a-Lago classified documents case, cited "irreconcilable differences" with the ex-president in the CNN suit. The legal/political aspect is very important in global marketing. This page titled 3.13: Political and Legal Factors That Impact International Trade is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by Anonymous. Some banks will charge a large up-front fee. 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. Trump lawyer who quit docs case quits CNN defamation suit - CNBC National Differences in Political, Economic, and Legal Systems. Federal prosecutors arrested three investors on Thursday on insider trading charges related to a deal to take former President Donald Trump's media business public. Half of the worlds population lives in a democracy of some sort, although only some 14 percent reside in full democracies. Nevertheless, countries still have the ability to regulate or strong-arm companies into abiding by their rules and regulations. We also acknowledge previous National Science Foundation support under grant numbers 1246120, 1525057, and 1413739. For example, in Islamic law, business is directly impacted by the concept of interest. 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. GovernmentBusiness Trade Relations: The Impact of Political and Legal Factors on International Trade, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf, http://online.wsj.com/article/SB10001424052748703514904575602781130437538.html, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html, http://www.energyintel.com/documentdetail.asp?document_id=245527, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. As shown in the opening case study, China is using its economic might to invest in Africa. At one end of the extremes of political philosophies, or ideologies, is anarchism, which contends that individuals should control political activities and public government is both unnecessary and unwanted. Government-business trade relations are the relationships between national governments and global businesses. Legal Differences | Introduction to Business - Lumen Learning Choice of structure: It is paramount to consider the structure of the company and the objectives which it wants to pursue. The study of political systems is extensive and complex. Many are permitted to engage in sale-buyback or leaseback of an asset. How involved is the government in the private sector? Ukraine's Zelenskiy Signs Law Banning Import of Books From Russia At the other extreme is totalitarianism, which contends that every aspect of an individuals life should be controlled and dictated by a strong central government. This provision has generated an entire set of financial products and strategies to simulate interestor a gainfor an Islamic bank, while not technically being classified as interest. Understanding the balance between Chinas government structure and its ideology is essential to doing business in this complex country. Lets focus briefly on how the political and economic ideologies that define countries impact their legal systems. Legal & Cultural Issues of Marketing in a Foreign Country Most countries actually have a combination of these systems, creating hybrid legal systems. Within reason, in democracies, businesses understand that most rules survive changes in government. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. Political and Legal Nuances The international business environment is highly influenced by political and legal nuances and foreign relations. There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. The first, and perhaps most obvious, is an. Most countries actually have a combination of these systems, creating hybrid legal systems. Half of the worlds population lives in a democracy of some sort, although only some 14 percent reside in full democracies. The Global Business Environment - Lardbucket.org The LibreTexts libraries arePowered by NICE CXone Expertand are supported by the Department of Education Open Textbook Pilot Project, the UC Davis Office of the Provost, the UC Davis Library, the California State University Affordable Learning Solutions Program, and Merlot. Capitalism is an economic system in which the means of production are owned and controlled privately. Understand government-business trade relations and how political and legal factors impact international business. How transparent is the governments political, legal, and economic decision-making process? Political Legal Environment of International Business - Talentedge While the common usage treats totalitarian and authoritarian as synonyms, there is a distinct difference. Instead, most countries have a combination of both. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them? 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. Instead, most countries have a combination of both, the balance of which is often a reflection of the countrys history, culture, and religion. The history of the oil industry shows how various governments have, on occasion, protected their national companies access to oil through political force. 5 Common Challenges of International Business | HBS Online Understand government-business trade relations and how political and legal factors impact international business. Accessibility StatementFor more information contact us atinfo@libretexts.org. International Business Chapter 4: National Differences; International Business Chapter 1: Introduction; Related documents. In totalitarianism, the ideology influences or controls the people, not just a person or party. In practice, countries use a combination of one or more of these systems and often adapt them to suit the local values and culture. The failed crypto company is in initial discussions with investors about relaunching its international exchange. Some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructurefor example, a government may be concerned about who owns the ports within its country. Challenges in International Business | Thunderbird Introduction to International Business (Remix), { "3.01:_Chapter_Introductions" : "property get [Map MindTouch.Deki.Logic.ExtensionProcessorQueryProvider+<>c__DisplayClass230_0.