CHAPTER 6
The Legal and Political Environment of Global Business
Chapter Outline
• Introduction
• Political Systems
• National Economic Ideologies
• Communism
• Socialism
• Capitalism
• Political Risks, Economic Risks, and Corruption
• Economic Risks
• Political Risks
• Corruption
• Public Corruption
• The Legal Environment
• Legal Systems
• Criminal Law
• Contract Law
• Tax Law
• Antitrust Law
• Product Safety Law
• Dispute Settlement Law
• Intellectual Property Protections
• Patents
• Trademarks
• Copyrights
Teaching Objectives
After covering this chapter, the student should be able to:
• Provide an overview of the different global political systems and their potential impact on
international business.
• Explain the differences among communism, capitalism, and socialism and how these
different economic ideologies affect the conduct of international business.
• Discuss the key political and economic risks and the role of corruption when conducting
global business.
• Analyze the different types of legal systems and some key principles involving criminal,
contract, tax, product safety, and dispute settlement law.
• Discuss the importance of intellectual property protections in today’s global business
environment and the major types of intellectual property protections, including patents,
trademarks, and copyrights.
COMPREHENSIVE LECTURE OUTLINE
I. Introduction. Different countries have different legal and political systems. Various
kinds of laws are stricter in some countries and more lax in others. Additionally, doing business
in some countries is fraught with legal and political risks. While the legal and political situation
in some countries is very stable, in others widespread corruption and governmental expropriation
of assets frequently occurs.
CLASS ACTIVITY: Use the Cultural Perspective case as an opportunity to allow students to
explore the impact of progressive (income linked) and fixed money systems of traffic fines on the
behavior of motorists in different countries.
II. Political Systems.
• Democracy vs. Totalitarianism. Democracy is Greek for “rule by the people.” It refers
to a form of government in which all citizens have the right to vote.
o Because it would be nearly impossible to gather all citizens to vote on all matters,
democratic nations have developed a system of electing representatives in
conducting the affairs of state. Most democracies today are representative
democracies. By definition, democracies are to some extent unstable, because
elections are held at periodic intervals and new representatives of the people come
into political power at that time.
o Some countries with strong representative democracies also have ceremonial
monarchs that serve as permanent heads of state but have no real political power.
Countries following this kind of model are known as constitutional monarchies.
o A totalitarian government is a system in which individuals govern without the
support or consent of the citizenry.
o Some countries are theocratically totalitarian, meaning that non-elected
religious leaders have considerable political control of the country.
o Many kinds of governments exist between the extremes of democracy and
totalitarianism, where rulers share some rights with citizens.
DISCUSSION STARTER: REALITY CHECK 1.
Have you ever lived in a country that was not a representative democracy? If not, find
someone who has and talk to him or her about his or her experiences.[or find some other way
to correct agreement error]
III. National Economic Ideologies. The economic ideology that prevails in a country has a
great role in business. In today’s world very few countries purely follow one economic ideology.
• Communism. Communism represents an economic ideology whereby the government or
state owns and controls all the major factors of production. Under Communist economic
ideology, individual rights give way in the extreme to collectivistic rights. The past few
decades have brought a sharp decline in communist ideology around the world.
ECONOMIC PERSPECTIVES: Family Planning in China. Beginning in 1979, the
communist government of China formally adopted a “one child” family planning policy. The
goal of the program has been to help alleviate China’s overpopulation problem. China’s one
child policy has had considerable economic impact.
Suggestion: You could ask students to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. What types of crimes do you think Chinese “bare branches” might most likely be
2. What kinds of impacts does China’s one child rule have on retirement policies in that
• Socialism. Socialism involves an economic ideology in which the government or state
plays a strong role in the economy and may own stakes in certain businesses. Unlike
communist countries, socialist economies do not aspire to be “classless.” Such economies
tend to be somewhat more collectively than individually oriented, with disparities in
income and wealth less extreme than in capitalist countries.
• Capitalism. Capitalism refers to an economic system where businesses are privately
owned with a strong individualistic profit orientation. Very little role for government
exists in a purely capitalistic or “free market” economic system. Individual gains and
losses of wealth can be very large, as the government pursuant to this ideology is
primarily uninvolved in the economic system and individual success and failure.
• While economic ideologies vary widely in countries throughout the world, many
countries have economic ideologies that are to some extent “mixed.”
DISCUSSION STARTER: REALITY CHECK 2.
What is your opinion of the United States’ economic ideology? Would you advocate a purely
capitalistic economic ideology, or one involving more government intervention and
ownership? Explain the reasons for your opinion.
IV. Economic Risks, Political Risks, and Corruption.
• Economic Risks. Economic risks include economic problems or mismanagement in a
given country that will have a meaningfully negative impact on the conduct of business
there. Examples of economic risks include restrictions on the transfer or exchange of a
given foreign country’s currency, devaluation of the currency, militant labor unions, and
inflation. There are ways companies can potentially avoid or mitigate economic risks
through careful research and planning. Also, economic risks are not independent of
political risks.
• Political Risks. Political risks are the risks that political forces or problems in a country
will have a meaningfully negative impact upon the conduct of business in that country.
▪ Macropolitical risk refers to a political risk that affects all business in a
given country.
▪ Micropolitical risk refers to a political risk that only affects a certain
industry or set of firms in a given country. Exhibit 6.1 • Most Dangerous
Countries in the World.
▪ Recently, terrorism has become a significant political risk worldwide.
Terrorism involves unlawful acts of violence threatening the physical
safety of others. The U.S. Congress passed the Terrorism Risk
Insurance Act of 2002. This law provides for U.S. government insurance
coverage for the risk of a U.S. business or property being attacked by a
“foreign person or foreign interest.”
▪ The Overseas Private Investment Corporation sells insurance that
protects businesses against political risks.
• Corruption. Corruption is a situation where businesses are able to illegally alter relevant
private and/or public decision-making through bribes, kickbacks, blackmail, and
extortion.
o Private Corruption is business corruption involving other private businesses,
individuals or groups. Private Corruption can be difficult to define. Definitions of
private corruption differ widely around the globe. Exhibit 6.2 • Transparency
International Bribe Payers Index.
o Public Corruption is the practice of making illegal payments to government
officials or engaging in blackmail, extortion, or related activities to obtain
government contracts or government approval for business activities. The
Foreign Corrupt Practices Act (1977) prohibits U.S. companies from bribing or
otherwise corrupting foreign government officials to win foreign government
contracts or obtain other foreign government assistance for their business. Not
every country has stringent laws in this regard, and if they do, such laws may not
be aggressively enforced. In many countries throughout the world bribes are an
expected part of business.
DISCUSSION STARTER: REALITY CHECK 3.
Do you know anyone who has ever paid someone else a bribe? Where would you draw the line
between business “favors” and bribery, kickbacks, or “protection money”?
V. The Legal Environment.
• Legal Systems. There are three primary kinds of legal systems throughout the world:
o A civil law legal system is a legal system based on a comprehensive listing of
legal rules in sets of written codes of law. There is little room in civil law
countries for judicial “interpretation” or changing legal regulations; the rules are
specifically and comprehensively set forth in given written codes, and only the
legislative branch of government can change these rules.
o A common law legal system is one in which legislative bodies generally enact
less specific legal rules, so that judges and courts are given considerable authority
with respect to interpreting these rules based upon precedent and other factors.
One key advantage of a common law legal approach is that judges have a fair
amount of flexibility to change their interpretations of the law based on changing
societal developments, without waiting for the legislative branch to pass new
rules.
o A theocratic law legal system is a legal system based on religious documents
and religious teachings. Islamic law is the primary example of theocratic law.
• Criminal Law establishes which violations of a nation’s laws are crimes punishable by
possible incarceration. It should be noted that actions that constitute crimes may widely
differ around the world. The definition of what constitutes a crime in a given country may
also change considerably over time as changes in a nation’s social mores and social
norms evolve.
• Contract Law is the body of law governing legally enforceable agreements between
parties to engage in economic exchange. In civil law countries, contracts tend to be
relatively short and unspecific because many of the relevant issues are already covered in
the given civil code. In common law countries, judges have more flexibility to interpret
contracts in different ways, which means that contracting parties need to have long and
very specific contractual language. Increasing numbers of contracts today have
provisions allowing them to be enforced outside the judicial process by way of alternative
dispute resolution methods such as arbitration.
• Tax Law. Tax law refers to the body of law addressing governmental levying of taxes
upon individuals and corporations. Tax rates and regulations vary widely throughout the
world and play a considerable role in decisions by global businesses when deciding
where to locate. High tax rates and highly complex tax structures in many countries have
led a number of major operations to seek out more tax-friendly locations for operations.
Companies in the U.S. and other developed countries sometimes engage in the practice of
establishing operations in tax haven countries—countries with little or no tax
transparency—as a way of attempting to illegally avoid taxes.
• Antitrust Law. Antitrust laws refer to laws designed to promote “fair competition”
among businesses. Antitrust laws typically prohibit companies from engaging in
collusion or acting in a manner that secretly thwarts competition. Antitrust laws are also
known as “anti-monopoly laws.” A monopoly is a situation where there is only a single
seller of a product in an industry, and where there are very high barriers to entry.
• Product Safety Law. Product safety law establishes the standards of product safety to
which the manufacturers and sellers of products are to be held. These standards vary
considerably: some countries place relatively lax safety standard obligations upon
product manufacturers and sellers, operating under a regime of caveat emptor or “buyer
beware.” In such jurisdictions, the burden is placed on the buyers of products to
determine their levels of safety. Other countries adopt a regime of caveat venditor, or
“seller beware.” In such countries, the burden is placed upon the manufacturers and
sellers of products to ensure the products they sell are safe or they must clearly and
explicitly warn consumers about the potential safety risks of their products.
• Dispute Settlement Law. Dispute settlement law refers to the law that governs how
disputes that arise in global business will be settled. The two primary ways to resolve
disputes are the public option and the private option. The public option will resolve a case
through litigation—bringing the case to a public- or government-run court of law to
settle the dispute. Courts throughout the world have considerable backlogs. Consequently
many global businesses have chosen to resolve their disputes via private processes such
as arbitration. Arbitration is an alternative dispute resolution process agreed to by the
relevant parties, whereby a neutral private party hears the case and renders a decision.
Arbitration cases tend to be heard and decided upon rather quickly, and their decisions
are almost always deemed final and binding on the parties.
DISCUSSION STARTER: REALITY CHECK 4.
Visit a hardware store, grocery store, or discount store and read the product safety warnings
printed on the packaging of several different products. To what extent do you believe these
warnings are necessary and appropriate? If possible, talk to someone who has lived in another
country about product safety warnings in that country.
VI. Intellectual Property Protections. Intellectual property is property that is the creative
product of an individual’s intellectual, rather than physical, activity. Such property is usually
very hard to make or conceive, but relatively easy to copy. To protect the creation of intellectual
property and to encourage innovation, creativity, and investment in this domain, most nations
have laws that afford certain intellectual property special protections. Intellectual property
protections encompass limited monopoly rights legally granted by a nation to the creator of
intellectual property.
• Patents are the rights granted to the inventor of a product or process that excludes others
from selling, making or using the invention for a certain period of time. Patent rights
generally remain enforceable for 5-20 years. Typically the inventor of the product is
granted a monopoly over it for the given period of time. Monopoly rewards the inventor
for the innovation and for the often considerable research and development costs that
were involved. After the expiration of the patent, the specifications of the product
become available to the general public.
• Trademarks are distinctive phrases, names, words, pictures, symbols, or designs that
identify a given business’ service or product, and are owned by the businesses. A
genericized trademark is a trademark that has become so well known or colloquial that
it describes a general class of product or service, rather than a specific product or service
as intended by the trademark’s owner. In addition to the possible risk of trademarks
becoming genericized, trademark holders also face the constant risk of the imitation,
copying, or counterfeiting of their trademarked products or services.
ETHICAL PERSPECTIVES: Dumb Starbucks Coffee Starbucks is a well-known brand that
fights to defend its trademark globally. The owners of the recently-opened Dumb Starbucks
Coffee shop assert that their shop should be categorized as “parody art.” There is no clear
precedent for this type of trademark infringement suit, as parody cases have gone different ways
in court. Suggestion: You could ask students to do this case as individuals or in teams as a class
activity. Have the students read the case presented in the text and answer the questions at the
end of the case.
Questions:
Why is the giant Starbucks Corporation concerned about the activities of a very small coffee
To what extent do you think “Parody Art” should be exempt from trademark infringement
liability? Answer: Opinions will vary.
• Copyrights are the exclusive legal rights that authors, playwrights, publishers, artists,
composers, performers, photographers, and other creators have to publish and
disseminate their work as they see fit. Copyright law in the U.S. generally gives the
originator of a creative work the exclusive right to sell, exhibit, and publish it for her or
his lifetime plus 70 years. Over 90 countries have signed a document called the Berne
Convention, which provides international copyright protections. Yet, copyright
infringement is a major problem in the world today. The problem is particularly extreme
with respect to computer software technology.
DISCUSSION STARTER: REALITY CHECK 5.
Next time you go to the supermarket, look for some famous trademarked brands (think,
“Green Giant”). Consider the confidence consumers have in various brands, and how this
confidence would be affected if intellectual property protections did not exist.
Assignments
End-of-Chapter Discussion Questions
1. Do you think, overall, that countries in the world are becoming more
democratic, or less democratic, in nature? Why? Answer: With the fall of
2. Are there any places in the world, today, where “pure”, “free market”
capitalism exists? If so, what is it about these locations that permits this
3. What are some arguments in favor of permitting at least some level of
“corruption” in the conduct of business throughout the world? Answer:
4. Criminal laws vary widely throughout the world. What may be a “crime”
in one country, may represent permissible conduct in another locale. Why
do you think there are such vast global differences in this regard? Answer:
5. What are some steps countries can take to better enforce intellectual
Mini-Case Synopsis and Questions
Ghana is a representative democracy. Yet, many towns and regions are allowed to
have tribal chiefs that have considerable power in those locales.
Questions:
1. Why do you think the democracy of Ghana continues to permit local towns
or regions to have tribal chiefs, kings, and the like? Do you think this
tradition will continue into the future? This tradition allows parts of the
2. Would you have made the same decision as King Peggielene Bartels to
accept the royal position? Would you have waited five or six years until
retiring as a secretary in the United States to move to Ghana and become
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concept, thorough research, and
logic and critical thinking skills.