International business 7e czinkota moffett ch04

Chapter 4
Politics and Law

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Learning Objectives

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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A Look at Three Segments
The Home-Country
Perspective
Host Country
Political and Legal

Environment
International
Relations and Laws
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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

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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 high-tech
products

The speed of
change and the
rapid dissemination
of information and
innovation around
the world
The issue of
equipment size

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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 firm’s 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
country’s 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.

Code Law: Based on a comprehensive
set of written statutes.

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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

Litigation:

Often involves
extensive delays and is very costly

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