Chapter 4

Politics and Law

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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Learning Objectives

A Look at Three Segments

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

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

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

Focus of export controls on the Third World A loosening of mutual bonds among allied nations The increased foreign availability of hightech products The speed of change and the rapid dissemination of information and innovation around the world The issue of equipment size

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. written statutes.

Code Law: Based on a comprehensive set of

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International Relations and Laws

International Politics:The 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 Law:Plays 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 delays and is very costly

Litigation: Often involves extensive

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