PART 2
THE ENVIRONMENT OF INTERNATIONAL BUSINESS
CHAPTER 6
POLITICAL AND LEGAL SYSTEMS IN NATIONAL ENVIRONMENTS
Instructor’s Manual by Marta Szabo White, Ph.D.
I. LECTURE STARTER/LAUNCHER
Who knows the difference between common law and civil law?
■ There are four major legal systems: Common Law, Civil Law, Religious Law, and
Mixed Systems. The rule of law implies a legal system in which laws are clear,
understood, respected, and fairly enforced.
Common law (also known as case law) is a legal system that originated in England and
spread to Australia, Canada, the United States, and former members of the British
Commonwealth.
■ The basis of common law is tradition, past practices, and legal precedents set by the
nation’s courts through interpretation of statutes, legislation, and past rulings.
■ Common law is open to interpretation by courts- it is more flexible than other legal
systems.
■ Judges have substantial power to interpret laws based on the unique circumstances
of individual cases.
Civil law, (also known as code law), is found in France, Germany, Italy, Japan, Turkey,
Mexico, and in Latin America.
■ Its origins go back to Roman law and the Napoleonic Code- based on an all-inclusive
system of laws that have been “codified”—clearly written and accessible.
■ Civil law divides the legal system into three separate codes: commercial, civil, and
criminal.
■ Rules and principles form the starting point- the codified rules emerge as specific laws
and codes of conduct produced by a legislative body or some other supreme authority.
■ Both common law and civil law systems originated in western Europe and both
represent the common values of western Europeans.
■ A key difference is that common law is primarily judicial in origin and based on court
decisions, whereas civil law is primarily legislative in origin and is based on laws passed
by national and local legislatures.
[1] TED TALK
Eric X. Li: A Tale of Two Political Systems
Published on June 2013
It’s a standard assumption in the West: As a society progresses, it eventually becomes
a capitalist, multi-party democracy. Right? Eric X. Li, a Chinese investor and political
scientist, begs to differ. In this provocative, boundary-pushing talk, he asks his audience
to consider that there’s more than one way to run a successful modern nation.
http://www.ted.com/talks/eric_x_li_a_tale_of_two_political_systems?
language=en#t-7939
20.33 Minutes
[2] TED BLOG
Why democracy still wins: A critique of Eric X. Li’s “A tale of two political
systems”
By Yasheng Huang
Published on July 1, 2013
Yasheng Huang is a Professor of Political Economy and International Management at
the MIT Sloan School of Management and is the Founder of both the China Lab and
India Lab at MIT Sloan.
http://blog.ted.com/why-democracy-still-wins-a-critique-of-eric-x-lis-a-tale-of-two-political
-systems/
[3] TED TALK
Yasheng Huang: Does democracy stifle economic growth?
Published on July 2011
Economist Yasheng Huang compares China to India, and asks how China’s
authoritarian rule contributed to its astonishing economic growth — leading to a big
question: Is democracy actually holding India back? Huang’s answer may surprise you.
https://www.ted.com/talks/yasheng_huang?language=en
18.44 Minutes
[4] TED TALK
Dambisa Moyo: Is China the new idol for emerging economies?
Published on June 2013
The developed world holds up the ideals of capitalism, democracy and political rights
for all. Those in emerging markets often don’t have that luxury. In this powerful talk,
economist Dambisa Moyo makes the case that the west can’t afford to rest on its laurels
and imagine others will blindly follow. Instead, a different model, embodied by China, is
increasingly appealing. A call for open-minded political and economic cooperation in the
name of transforming the world.
https://www.ted.com/talks/dambisa_moyo_is_china_the_new_idol_for_emerging_econo
mies?language=en
16.19 Minutes
[5] TED TALK
Some thoughts on Eric Lee’s TED speech – A tale of two political systems
Published on March 21, 2014
By Aaron Zeng
https://yazeng.wordpress.com/2014/03/21/some-thoughts-about-eric-lees-ted-speech-a-
tale-of-two-political-systems/
[6] TED TALK
Dan Ariely: How equal do we want the world to be? You’d be surprised
Published on March 2015
By Dan Ariely, Behavioral economist
The news of society’s growing inequality makes all of us uneasy. But why? Dan Ariely
reveals some new, surprising research on what we think is fair, as far as how wealth is
distributed over societies … then shows how it stacks up to the real stats.
http://www.ted.com/talks/dan_ariely_how_equal_do_we_want_the_world_to_be_you_d
_be_surprised
8.54 Minutes
[7] TED TALK
Michael Green: What the Social Progress Index can reveal about your country
Published on October 2014
By Michael Green, Social progress expert
The term Gross Domestic Product is often talked about as if it were “handed down from
god on tablets of stone.” But this concept was invented by an economist in the 1930s.
We need a more effective measurement tool to match 21st century needs, says Michael
Green: the Social Progress Index. With charm and wit, he shows how this tool
measures societies across the three dimensions that actually matter. And reveals the
dramatic reordering of nations that occurs when you use it.
http://www.ted.com/talks/michael_green_what_the_social_progress_index_can_reveal_
about_your_country
14.56 Minutes
[8] TED TALK
Yochai Benkler – Open-Source Economics
Published in 2015
Law professor Yochai Benkler explains how collaborative projects like Wikipedia and
Linux represent the next stage of human organization. By disrupting traditional
economic production, copyright law and established competition, they’re paving the way
for a new set of economic laws, where empowered individuals are put on a level playing
field with industry giants.
http://collectivelyconscious.net/ted-talks/ted-talks-yochai-benkler-open-source-economic
s/
17.52 Minutes
II. LEARNING OBJECTIVES AND THE OPENING VIGNETTE
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
6.1 Distinguish political and legal environments in international business
6.2 Understand political systems
6.3 Understand legal systems
6.4 Know the participants in political and legal systems
6.5 Identify the types of country risk produced by political systems
6.6 Identify the types of country risk produced by legal systems
6.7 Know about managing country risk
Key Themes
■ In this chapter, there are seven themes:
[1] Political and Legal Environments in International Business
[2] Political Systems
[3] Legal Systems
[4] Participants in Political and Legal Systems
[5] Types of Country Risk Produced by Political Systems
[6] Types of Country Risk Produced by Legal Systems
[7] Managing Country Risk
■ The focus of this chapter is on political and legal systems in national environments,
and how they frame the international business environment.
■ This is examined via the drivers of country risk, the three major political systems
(totalitarianism, socialism, and democracy), the four major legal systems: Common Law,
Civil Law, Religious Law, and Mixed Systems, the actors in political and legal systems,
the types of country risk produced by political and legal systems, the importance of
corporate citizenship, and managing country risk (intellectual property rights- huge)
■ To take advantage of the opportunities and minimize the risks, managers must
develop an understanding of all facets of the host community- the government, political,
legal and especially social forces that shape the business landscape of the countries
that businesses are conducted in.
Teaching Tips
■ Consider the strong legal and egalitarian political systems that exist in the United
States, Canada, Britain, and other advanced economies, and that these may be linked
to Chapter 3, and the discussions centered on individualism and collectivism. The basic
tenet of the U.S. system is preservation of individual rights. The protection of life, liberty
and the pursuit of happiness is the foundation of the Bill of Rights. Notice the individual
prominence. Perhaps this is grounded in America’s passion with individualism; the U.S.
did score the highest on Hofstede’s individualistic culture score. General characteristics
of individualistic vs. collectivist cultures follow:
Individualistic Cultures:
•Responsibility for decisions rests with the individual.
•Individual freedoms and achievement are valued.
•Decisions- quick and individual.
•Nurture close family.
•Higher status- venture into business alone.
Collectivist Cultures:
•Responsibility for decisions is shared among the group.
•Extended families and group priorities are valued.
•Decisions- slow, consensual and consultative.
•Group nurtures individual.
•Higher status- venture into business collectively.
As you read through this chapter, think about the evolution of the political and legal
systems in countries that you are familiar with, and how these systems are embedded in
the social and cultural characteristics indigenous to each nation. Russian, Chinese and
Indian cultures tend to be more collectivist and thus employ more totalitarian political
systems and planned economic systems. The U.S., U.K. and France (social democracy)
tend to be more individualistic cultures, and thus employ more democratic political
systems and free-market economic systems. The transformation of some of the
traditionally totalitarian/planned systems to more democratic/free-market systems is
especially interesting and underscores the fundamental changes driven by globalization
and technology.
■ Alternative teaching tip- this chapter shifts from macro (environment) to micro
(managers) perspectives. To enable students to better understand the big picture, start
off with a model of the:
1] External environment forces [Macro]
● Political
● Legal
● Economic
● Social/Cultural
● Technological
● Demographics
● Global
2] Industry environment forces
● Threat of new entrants
● Power of suppliers
● Power of buyers
● Product substitutes
● Intensity of rivalry
3] Firm environment forces [Micro]
● Organization’s ability to understand and react to all facets of the environment,
i.e. to leverage opportunities and minimize risks
Commentary on the Opening Vignette:
RISKS IN RUSSIA’S POLITICAL AND LEGAL SYSTEMS
Key message
■ This vignette illustrates how counterfeiting, bribery and corruption have permeated
Russian businesses, and most Russians consider paying bribes a normal cost of doing
business.
■ Vendors in the Moscow sell all types of pirated software, music, and movies.
■ Russian police officers are aware of such products and usually do nothing.
■ Corrupt officers may even get a cut of the vendor’s total sales.
■ The Transparency International Corruption Index ranks Russia among the highest in
terms of questionable business practices.
■ Due to a weak and inconsistent legal environment, Russian small and medium-sized
enterprises spend about one-fifth of their net income on bribes- some bribes exceed
US $100,000, enough to buy a small flat in Moscow .
■ Business ventures are subject to vague and overlapping regulations, dozens of
required government licenses, incessant bribery, criminal raids, seizure of independent
businesses and government interference.
■ Government bureaucrats are often the most corrupt.
■ Example– seizure of independent business and government interference
◘ Yukos – (Oil Company) once controlled by Russian industrialist Mikhail
Khodorkovsky, who was imprisoned by the government for alleged tax evasion
◘ Alleging that Yukos owed back taxes, Russia’s government sold part of the firm
and kept the $9.3 billion in proceeds.
◘ Yukos’ buyer was Baikal Finance Group, which happened to have the same
address as a grocery store in a small town. This prompted many to question Baikal’s
existence, which led a state-owned firm known as Rosneft to announce that it had
purchased Yukos for an undisclosed sum.
◘ Yukos’ original buyer no longer exists, and perhaps never did. The
government’s plan was to convert privatized energy firms into a patchwork of state
enterprises.
■ Example- Organized crime
◘ The deputy chairman of Russia’s central bank was shot dead in Moscow.
◘ He had spearheaded the country’s effort to reform its corrupt banking system
and had closed dozens of banks linked to organized crime, making dangerous enemies
in the process.
◘ Numerous other contract killings have taken place, as criminal organizations
attempt to maintain their stronghold on much of Russia’s economy.
◘ Foreign MNEs routinely perform background checks on employees and
contractors in an effort to identify people linked to organized crime.
◘ Foreign companies provide for the security of staff and facilities.
■ Rampant corruption and crime have raised doubts about Russia’s evolving legal
system and its commitment to market economics.
Uniqueness of the situation described
■ Russia is transitioning from a command economy to a market economy, creating
much uncertainty for foreign firms.
■ The political and legal environments characteristic of transition economies,
(particularly Russia) – ambiguous regulations, inadequate laws, capricious enforcement,
rudimentary court system, and the remnants of a totalitarian government.
■ Instability in Russia’s legal environment has triggered much capital flight.
■ Not all risk is avoidable.
■ Russia is trying to improve its legal system, clarifying business
transactions/commercial law, and officials have taken tougher stances on organized
crime.
■ Numerous firms, from Boeing to IKEA, have invested billions in Russia.
■ Challenges are numerous, rewards are long-term.
Classroom discussion
■ Most of us expect a familiar business landscape when we conduct business at home.
But foreign markets differ in terms of political and legal systems, as well as business
norms.
■ Bribery is commonplace in Russia. Why is this not the case in the U.S.? Here you can
discuss the strong legal framework in place in America, meaning that the U.S. has one
of the most advanced legal systems and stringent processes in place to protect
intellectual property rights, as well as the importance of navigating difficult regulations
and practices abroad and avoiding unethical or questionable conduct.
■ Political and legal context may also present opportunities for firms. Preferential
subsidies, government incentives, and protection from competition reduce business
costs and influence strategic decision making. Many governments encourage domestic
investment from foreign MNEs by offering tax holidays and cash incentives to employ
local workers.
■ Ask your students if they can bribe someone in Russia to secure a business contract,
if every other business competing for the same bid is participating in bribery. The
answer is of course NO. The 1977 Foreign Corrupt Practices Act forbids any firm
incorporated in the U.S. to engage in bribery- anywhere in the world- even if it is
common practice in that culture. Some U.S. businesses protest arguing that this places
them at a competitive disadvantage. Ask your students what they think. You might
assign this as homework or extra credit- look up this act and summarize it for the class.
Is it a good law? Is it a fair law?