How do political and legal realities impact international trade, and what do businesses need to think about as they develop their global strategy? Nations have the right to impose restriction upon foreign citizens on their rights to travel and stay, their conduct, or area of business operations. Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry. After reading this article you will learn about: 1. (d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited. The most recent one emphasizes the government’s goal for China to become a technology powerhouse by 2020 and highlights key areas such as green technology, hence the solar industry expansion. Table 2.1 The Major Global State-Owned Oil Companies. is based on traditions and precedence. Authoritarian leaders tend not to have a guiding philosophy and use more fear and corruption to maintain control. 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. Emerging economies still promise opportunity but also political risk for international businesses. Brazilian Legal System Doing Business in Brazil. The system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. Ownership is established by use in common law countries whereas it requires registration in the civil law countries. While doing business in Islamic countries, international managers need to appreciate the intertwining of religion and Islamic law and take care never to mention the Palestine-Israeli situation. The extent of separation of judicial powers between the judiciary and the public authorities varies considerably across nations. Search. Tariffs that are calculated as a percentage of the value of the product or service. Governments are also motivated by economic factors to intervene in trade. A political ideology that asserts that both public and private groups are important in a well-functioning political system. 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. The efficiency of legal framework for private businesses to settle dispute and challenge the legality of government actions or regulations also varies widely. Its leaders see the economy as a tool to preserving the state’s power, which in turn is essential to maintaining stability and growth and ensuring the long-term viability of the Communist Party.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. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them? 2. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices. The legal/political system is a minefield, with few international standards or regulations to fall back on. In Arabic, ‘Sharia’ means the clear, well-trodden path to water. Before publishing your articles on this site, please read the following pages: 1. 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. A closer look at the solar industry in China illustrates the government’s ability to create new industries and companies based on its objectives. ‘Harmonization’ and ‘unification’ of the law of international trade refer to the process through which the law facilitating international trade is created and adopted. A ‘sovereign’ state is independent and free from all external control or enjoys complete legal equality with other states. They pose a big challenge to the companies and the companies need to overcome the factors to become successful in the international stage. Civil lawA legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. This contrasts with more authoritarian governments, where democracy is either not in effect or simply a token process. Although they in many ways they have kept to this reserved approach, globalisation has had its effect on Japan, like every other country. For instance, after the disaster of Union Carbide’s pesticide plant located at Bhopal in India, the New York Court of Appeals sent back the case to India for resolution. It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. Businesses in industries, such as commodities and oil, have found more authoritarian governments to be predictable partners for long-term access and investment for these commodities. (b) Gharar, the transaction involving fundamental uncertainty or speculation is prohibited. 3. In practice, countries use a combination of one or more of these systems and often adapt them to suit the local values and culture. In reality, neither extreme exists in its purest form. Content Guidelines 2. 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. With its huge population, China is in constant need of energy to meet the needs of its people and businesses. The level of judicial independence and efficiency differs widely among countries. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. It governs a complete set of rules, regulations, institutions, and attitudes. At the other extreme is totalitarianismA political ideology that contends that every aspect of an individual’s life should be controlled and dictated by a strong central government., which contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. Understand government-business trade relations and how political and legal factors impact international business. Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware. How political and legal systems affect International Business Introduction Political and legal systems play a major role in the International businesses for the companies that source, produce, market and export products in foreign countries. Political and legal risk in international business . The legal framework to protect small and medium enterprises (SMEs), mainly to achieve social objectives, adversely influences the expansion of manufacturing capacities and achieving economies of scale in certain countries. In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. Most countries actually have a combination of these systems, creating hybrid legal systems. Differences in legal systems can affect the attractiveness of a country as market or investment site. 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. Learn vocabulary, terms, and more with flashcards, games, and other study tools. 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. 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 POLITICAL ENVIRONMENT (CH. Every nation has jurisdiction over conduct that adversely affects its national security even if such behaviour occurs outside the country. 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. A legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. 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. Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,”. International managers need to be aware of such situations. Legal Systems 4. Several things stand out in the 2008 index. In other words, the damages to property will be actual sums relating to repair and replacement of the property. Major similarities between the Sharia and secular law are that in both: 2. Chapters 6-7Chapters 6-7 INTERNATIONALINTERNATIONAL POLITICAL AND LEGALPOLITICAL AND LEGAL ENVIROMENTENVIROMENT 2. Principles of International Law 5. Trade Embargos and Sanctions 4. On the other hand, Japan is considered to be a ‘non-contractual’ society where contracts signed represent general understanding and are subject to change depending upon the circumstance. It might seem straightforward to assume that businesses prefer to operate only in democratic, capitalist countries where there is little or no government involvement or intervention. To further illustrate the complexity of the definition of a democracy, the Economist Intelligence Unit’s 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 world’s independent states (27 micro states are excluded) [as of 2008)].”Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. Available under Creative Commons-ShareAlike 4.0 International License. The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 by the UN General Assembly (Fig. Unlike in other countries, PRC law requires that only one person, to represent the company on its behalf. A political systemThe system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. 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. However, change can occur very quickly. Free trade advocates perceive this government-directed intervention as an unfair tilt against the global private sector. A recent report exposed Brazil’s slow economic growth and rising inflation. 8.3) with a score of 6.5 on a 7 point scale whereas Netherlands and Australia had a score of 6.4, the UK (6.0), Singapore (5.6), Japan and South Africa (5.5), India (5.3), the US (5.1), and UAE (5.0). Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. 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. besides the laws of individual countries. Taxes or tariffs that are levied as a fixed charge, regardless of the value of the product or service. As political systems in different areas vary, the political impact differs. Is there a risk of expropriation or nationalization of business assets? A political system is basically the system of politics and government in a country. is one in which the government or state directs and controls the economy, including the means and decision making for production. Political system and Legal systems: Indonesia today is Southeast Asia’s most vibrant democracy. Instead, most countries have a combination of both. Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on operations. The country’s population democratically elects open government system. There are more than thirteen major types of government, each of which consists of multiple variations. Terrorism, Crime, and Violence. As a result, there are a variety of institutions, including the Economist, which analyze and rate countries based on their openness and adherence to democratic principles. The study of political systems is extensive and complex. The distinction between the common law and civil law is more in theory rather than in practice. How involved is the government in the private sector? Learn vocabulary, terms, and more with flashcards, games, and other study tools. The efficiency of enforcement of legal system is also lax in many low-income countries. Legal Systems in International Business: The major types of legal systems are briefly mentioned here. madison_mainman. Every country has the right of jurisdiction within its own legal territory. There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. The loss of opportunity for cost of money is not compensated under the Sharia. As a result of rise in terrorism during the last decade, the US and many European countries have imposed restrictions on foreigners. Governments and politics play a large role in international business. First, let’s briefly discuss some of the reasons behind these interventions. After independence from erstwhile colonial rulers, most Islamic countries have grappled with the problem of replacing colonial legal systems with the Sharia. The program promotes domestic production as well as exports and is funded by the state. It governs a complete set of rules, regulations, institutions, and attitudes. Only two Asian countries are represented: Japan and South Korea. If a new party comes into power, will the rules of business change dramatically? Image Guidelines 5. A legal system based on traditions and precedence. Government-business trade relations are the relationships between national governments and global businesses. (c) Interest on money is prohibited but allows management fees and services. Neither extreme exists in its purest form in the real world. 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. The elaborate legislative codes embody the main rules of the law, spelling out every circumstance. A country may also refuse entry to foreign citizens or restrict their travel. Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,”, Ian Bremmer, “The Long Shadow of the Visible Hand,”. The legal system in a number of Islamic countries, including Saudi Arabia, and Iran is integrated with Sharia. Democracy is the most common form of government today. The major types of legal systems are briefly mentioned here. In general, Japanese corporate law supports inward facing investment. There are generally two legal regimes – the Civil law and the Common law systems. China’s different set of political and legal guidelines made Google choose to discontinue its mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong version. Political Stability - Is there a risk of political overturn, war, etc., that could disrupt business operations. Therefore, a foreign firm involved in illegal business practices in India can be sued under Indian law. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document? In this system, judges interpret the law and judicial rulings can set precedent. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. Theocratic law is the legal system based on religious doctrine, precepts, and beliefs. 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. International law is less coherent compared to domestic law since it embodies a multiplicity of treaties (bilateral, multilateral, or universal) and conventions (such as the Vienna Convention on Diplomatic Security, Geneva Convention on Human Rights, etc.) The history of the oil industry shows how various governments have, on occasion, protected their national companies’ access to oil through political force. 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).