Chapter 6

A. Political and legal System in National Environments

Country risk - Exposure to potential loss or adverse effects on company operations
and profitability caused by developments in a country’s political and/or legal
environments.

Dimension of Country Risk

 Harmful or unstable political system

 Laws and regulations unfavorable to foreign firms
 Inadequate or underdeveloped legal system
 Bureaucracy and red tape
 Corruption and other ethical blunders
 Government intervention, protectionism and barriers to trade and investment
 Mismanagement of failure of the national economy
Political and Legal Environments in International Business

A political system is a set of formal institutions that constitute a government. It

includes legislative bodies, political parties, lobbying groups, and trade unions.

Function of political system

 Provide protection from external threats

 Ensure stability based on laws
 Govern the allocation of valued resources among the member of a society
 Define how society’s member interact with each other
A legal system is a system for interpreting and enforcing laws. Laws, regulations, and
rules establish norms for conduct.

 Ensure order
 Resolve disputes in civil and commercial activities
 Tax economic output
 Provide protections for private property, including intellectual property and
other company assets
Source of Country Risk

Political system:

 Government
 Political parties
 Legislative bodies
 Lobbying groups
 Trade unions
 Other political institutions
Legal system:

Laws, regulations, and rules that aim to:

 Ensure order in commercial activities

 Resolve disputes
 Protect intellectual property
 Tax economic output
B. Political and Legal System

What are Political and Legal Systems?

Political system is a set of formal institutions that constitute a government. Legal system
a system for interpreting and enforcing laws. Types of Political System Totalitarianism
government controls all economic and political matters. Socialism capital and wealth
should be vested in the state and used primarily as a means of production for use rather
than for profit. Democracy Private property rights: The ability to own property and
assets and to increase one’s asset base by accumulating private wealth. Limited
government: The government performs only essential functions that serve all citizens.
Economic system Command (Centrally Planned) Economy, the state is responsible for
making all decisions: Today many countries exhibit some characteristics of command
economies- examples- China, India, Russia, and certain countries in Central Asia,
Eastern Europe, and the Middle East. Market Economy Market forces—the
interaction of supply and demand—determine prices in a market economy. Mixed
Economies exhibits the features of both a market economy and a command economy.
Examples- France, Germany, Japan, Norway, Singapore, and Sweden,
government often works closely with business and labor interests to determine
industrial policy, regulate wage rates, and/or provide subsidies to support specific
industries.

Rule of law is a legal system in which rules are clear, publicly disclosed, fairly enforced,
and widely respected by individuals, organizations, and the government. Four basic
legal system Common law (also known as case law) based on tradition, past practices,
and legal precedents set by the nation’s courts through interpretation of statutes,
legislation, and past rulings. Civil law Based based on an all-inclusive system of laws
that have been “codified”—clearly written and accessible. Religious law is strongly
influenced by religious beliefs, ethical codes, and moral values, viewed as mandated by
a supreme being. Mixed systems- variation of two or more legal systems operating
together.

C. Participants in Political and Legal Systems

 The government, or the public sector is the most important participant,

operating at national, state, and local levels. They regulate international
business activity through a complex system of institutions, agencies, and public
officials
  International Organizations such as the World Trade Organization, the United
Nations, and the World Bank strongly influence international business.

 Regional Trade Organizations such as the European Union (EU), the North
American Free Trade Agreement (NAFTA), and the Association of Southeast
Asian Nations (ASEAN), aim to advance the economic and political interests of
their members.

 Special Interest Groups such as labor unions and environmental advocates

operate to advance the goals of a particular community. Special interest groups
engage in political activity to advance specific causes, ranging from labor rights
to environmental protection.

 Competing Firms or rival domestic firms with a strong presence in the host
country naturally have an interest in opposing the entry of foreign firms into the
local market and may lobby their government for protection.
D. Types of Country risk produced by political and legal systems.
I. Government takeover of Corporate Assets
 Government Intervention to seize the asset of corporation particularly on
natural resources, utilities and manufacturing.

In different forms such as:

 Confiscation- refers to the seizure of corporate asset without compensation.
Example: Thousands of real properties in Manila are set to be confiscated
by the local government and auctioned if their owners to fail pay taxes until
June.
 Expropriation- refers to the seizure of asset with compensation; for public
use or benefit.
Example: Don Arsenio case, own 7.5 hectares property which were part of
a 50.5 hectare along a national highway, expropriated by the government.
 Nationalization- government seizure of an entire industry with or without
compensation.
Example: Suez Canal (1956)
II. Creeping Expropriation
III. Embargoes and Sanctions Example: Philippines bans Japan’s
chocolate milk (embargoes)US companies face trade barriers in the
Philippines that includes tariff and non-tariff as the average tariffs on
agricultural products stayed flat at 11.49 percent from 2018 to 2019.(
sanctions)
IV. Boycotts Against Firms and Nations Example: Labor Group calls for
boycott of NutriAsia Products, until its labor dispute is resolved.
V. Terrorism
VI. Example: Philippines is 12th country most affected by terrorism. The
battle in Marawi this affect the economic stability of the Philippines
where there is a decline of investment from foreign country to our
country.
VII. War, Insurrection, and Violence
Examples: The Philippines ‘bloody crackdown on drugs is now
harming the country’s economy. Investors and business people inside
 and outside the country have lost faith that those conditions can be
assured.
E. Types of Country Risk Produced by Legal Systems
 Commercial Law- deals with International business
 Private Law- deals with the people and organization
1. Country risk from the Host- Country Legal Environment
 Foreign investment law
 Controls on operating forms and practices
 Marketing and distribution laws
 Laws on Income repatriation
 Environmental laws
 Contract laws
 Internet and e-commerce regulations
 Inadequate or underdeveloped legal systems
2. Country Risk Arising from the Home-Country Legal Environment
 The foreign corrupt practices act (FCPA)
 Accounting and reporting laws
 Transparency and final reporting

F. Managing Country Risk

 Proactive Environmental Scanning

 Strict Adherence to Ethical Standards

 Alliances with Qualified Local Partners

 Protection through Legal Contracts

The ability to effectively manage cross-border risk used to be considered
something a business either did not need or could not afford. The risk management
landscape has experienced a transformation over the past years, however. Traders,
investors and lenders no longer have the luxury of assuming everything will work out
or that other organizations’ international business horror stories will not happen to
them.

Country risk management is not just about considering obvious variables—such

as the health of a country’s economy and its political stability—but also evaluating its
regulatory environment, developmental issues, environmental concerns and socio-
cultural considerations. Thus, managing country risk is about creating a mosaic of risk
factors that form a unique risk profile for each transaction in a given region, whether it
involves investing, lending or trading.