What is a country's legal system?

Why is it important to
international businesses?

A legal system is the mechanism for creating, interpreting, and

enforcing the laws in a specified jurisdiction. Legal systems differ from
county to country, primarily because of differences in tradition,
precedent, usage, custom, or religious precepts. Even so, the purpose
of every legal system is to establish a comprehensive legal network to
regulate social activities. When it’s functioning well, a legal system
ensures that a society can pursue economic and social development
and, when disagreements arise, resolve them without collapsing into
anarchy.

Modern Legal systems share three components :

- A system of constitutional law designed to guarantee an open

and just political order

- A system of criminal law designed to safeguard the social order

- A system of civil and commercial laws designed to ensure

fairness and efficiency in business transactions [ Textbook ]

Following are two important points to be considered for any legal

system,

“First, bad rules — that keep people from using the legal system
because they prohibit, or fail to support — legitimate market activity,
need to be abolished.

Second, the new rules should to the extent possible follow business
practice, thereby enabling private parties to continue their business
activities but to rely on courts rather than crime to resolve
disputes.”[MOSTLY ECONOMICS, January 7,2008]
Legal system is one of the most important factors consider by the
companies while taking the international investment decisions.
Protection of creditors is very important which is done by the legal
system. Better the legal system implies better protection to investors.
Different countries have different legal systems so same company may
adequate different strategies while investing in different countries. In
today’s era of globalization it is very important for every country to
enforce a better and transparent legal system to attract the foreign
investment and business.

What is meant by political risk and why businesses be

concerned with it?

Political risk is the possibility that political decisions, events, or

conditions will affect a country’s business environment in ways that
will cost investors some or all of the value of their investment or force
them to accept lower than projected rates of return. Primary types of
political risk, from least to most disruptive, are systemic, procedural,
distributive, catastrophic. [Textbook]

For multinational companies, political risk refers to the risk that a host
country will make political decisions that will prove to have adverse
effects on the multinational's profits and/or goals. Adverse political
actions can range from very detrimental, such as widespread
destruction due to revolution, to those of a more financial nature, such
as the creation of laws that prevent the movement of capital.
[ Investopedia, October 2010]
Political risk needs to be considered carefully specially with emerging
markets because the governments in the emerging markets are not
stable and sometimes their decisions may put foreign companies in
dangerous situations.
Companies need to be very care full with investing internationally due
to the different attitudes of governments, sometimes it also happens
that when political situation changes after the investment of the
company which affects adversely to the business of companies.
“The one political risk that business most often confront is that of
foreign exchange availibilty, some times referred to as “transfer risk”.
Transfer risk occurs when appropriate government authority fails to
transfer buyers’ qualifying local currency deposits into the US dollars”.
[International Trade Issues by Steven Hardix]

Political risk is also referd to as Soverign risk. It can also be divided into
two parts, one is the ability of any government to return the money
and other is the willingness of any government to return the money.
Higher the political instability higher the political risk. So, There are
various aspects companies need to evalute related to political risk
before taking decision about entering into any new market and this
aspects vary from country to country.

Explain the product life cycle theory and how would affect a
company’s decision making on older product line. Page 241

Product life cycle (PLC) theory of trade states that the location o
production of certain kinds of products shifts as they go through their
life cycles, which consist of four stages: introduction, growth, maturity,
and decline.

Companies develop new products primarily because there is an

observed need and market for them nearby. This means a U.S.
company is most apt to develop a new product for the U.S. market, a
French company for the French market, and so on. At the same time,
almost all new technology that results in new products and production
methods originates in developed countries. They have most of the
resources to develop new products and most of the income to buy
them.

According to the PLC theory of trade, the production location for many
products moves from one country to another depending on the stage
in the product’s life cycle. [Textbook]

There are various factors affect the life cycle of any product.
Sometimes due to the technological development the lifecycle of a
product may change. Sometimes due to the innovation of new
products some products’ demand may increase while some may
become obsolete. It becomes important for companies to deal with the
products on older product line. Companies need to take important
decisions about the location of production unit and the market to which
they are targeting. Some products may have good market in certain
countries but those countries may not be favorable for the production
of those products, so companies may decide to produce in one country
and sell into other countries.

It becomes important for companies to decide about the continuation

of certain old products based on the current market situation and
expected market situation. Companies need to adjust product line
according to the market condition to remain competitive and get an
edge over competitors.

Discuss the reasons for the growth in FDI over the last 30
years.

International business market has observed enormous growth in FDI in

last three decades. More companies are involved and more countries
are explored for FDI. Growth in FDI cannot be accomplished with one
factors, there are various factors due to which growth in FDI has taken
place. Few basic factors can be considered the technological
development and ease of transportation. Technological development
has helped entrepreneur to monitor and run business in any place of
the world from any place of the world. Development in transportation
has connected almost all parts of the world to one another in a
cheaper way. Thus overall accessibility to different parts of the world
have made world very small and easily accessible to everyone.
Government regulations have also played an important role. All
governments have understood that development of any country is not
possible without foreign investments, so most of the governments
have loosen the regulation about foreign investments try to attract
more and more foreign investments. The innovations and development
in financial markets have also helped the development in FDI. Financial
markets have helped companies to transfer money easily from one
country to other and one currency to other. Financial markets have
also helped companies in managing their risk in cheap and better way.

The effort to create favorable investment environments has led many

countries to replace obstacles to FDI with incentives for FDI. The
growing prevalence of FDI requires a better understanding of the views
of home and host countries. In both home and host countries,
government policies can either restrict or foster the FDI policies of
MNEs. In both countries, for example, a variety of groups work to
regulate the impact of giant companies, which can exercise
considerable power in negotiating the terms of FDI allocation.

Foreign companies began to pour into Singapore, with cumulative

investment in manufacturing rising from S$157 million in 1963 to
S$995 million in 1970, and reaching S$3054 in 1974.[17] Although the
rate of foreign investment plateaued during 1974-1977 due to the
effects of the oil shock, this was only a temporary phenomenon. By
1984, cumulative foreign investment in manufacturing had reached
over S$12,000 million. The impact on unemployment in Singapore was
nearly as dramatic, falling from 9% in 1965, down to less than 4% in
1974.[18] In fact, because of a shortage of skilled workers, Singapore
had to start to import labour, mainly from Malaysia. What FDI has done
for Singapore is to assist in the creation of a nation with one of the
highest per capita incomes in the world, for what that is worth.
Singapore could be said to be wealthy in the same way that ancient
Athens was said to be democratic. In both cases, a huge, anonymous
underclass of cheap labour supported the superstructure; in the case
of Singapore, Malaysians (of every race, not just Malays) and other
Southeast Asians, who are offered only the barest of legislative
protection by the government. [The role of FDI in development of
Singapore, Gary Dean, April 2000]

From an economic standpoint, why do production factors move

from one country to another?

Location of production factors depends on many aspects, majority of

them are economic aspects. Companies are always in search of cheap
production factors to cut costs and maximize profits. Overtime we
have seen many shifts in the production factors from one country to
other country. It used to be the tendency of the firms to produce goods
in their home country and sell them in the domestic markets then
companies started to sell products in foreign markets to increase the
market share and gain exposure to international markets. Now the
time has come where companies have started production in different
countries to gain the cost advantage. Companies get location
advantage, skill labor, cheap labor and advantage of developed
infrastructure.

Individual investors also play an important role in the movement of the

production factors. The most important is the movement of Capital, as
people find better investment opportunities in other countries they
move their capital to the more profitable country. People are also
internationally mobile but less so than capital. People generally move
for better job opportunities. Recently we have seen many people
moving from developed countries to developing countries and
emerging markets due to better job opportunities. Mobility of people
have increased with time. Political factors also play important role in
the movement of production factors. Many people and capital moves
due political instability in those countries. People prefer to stay and
invest their money in the countries with political stability.

Capital and labor move internationally to gain more income and flee
adverse political situations. Globalization has increased mobility in
both capital and people.”Despite the fact that it is part of the economic
freedoms on which the European integration project is said to be built,
free movement of capital has never attracted the attention it deserves
– at least as far as the English literature is concerned.” [European
Journal of International Law, 2010]

So there are various factors that influence the movements of

production factors majority of them related to economic stand point
and are increasing with time and globalization.