Chapter 3: Political and Legal Environments

Question 1

Political and legal systems are the product of…?

Answer 1

CULTURE!

Question 2

Why study the political environment?

Answer 2

The political environment establishes the “rules of the game” so to speak, to gauge the level of stability and risk

Question 3

Describe the Argentina example?

Answer 3

In 1999, Argentina was the strongest economy in Latin America, the currency was very stable (1-1 with US dollar) but it began to spiral economically and politically which led to many countries no longer wanting to do business there -> further economic downfall

Question 4

Political Economy

Answer 4

Stresses that the political, economic, and legal systems are interdependent

Question 5

How do you evaluate a political system?

Answer 5

Degree to which they emphasize collectivism or individualism, degree to which democratic or totalitarian

Question 6

What does an individualist government look like?

Answer 6

Individual freedom, self-expression, focus on the good of the individual, society based on freedoms

Question 7

What does a collectivist government look like?

Answer 7

Collective goals are more important than individual goals, individual rights sacrificed for the good of the majority, expressed through socialism or communism

Question 8

Why is gun control such a controversial issue in America?

Answer 8

This is a law that protects individual freedoms rather than the group, essentially trying to change individualism in America

Question 9

Features of democratic (freedom) systems

Answer 9

• Freedom of opinion
• citizens have access to the decision-making process
• Equality before the law
• Majority rule with individual rights
• Fair and independent court systems

Question 10

What are examples of low-not free countries? What does this imply?

Answer 10

Cuba, North Korea, China, Saudi Arabia. This gauges investment opportunities

Question 11

Can a country change its political freedom scenario?

Answer 11

Yes, for example Mexico has been gaining political freedom, it is possible to change this over time

Question 12

Are there more gains or declines in freedoms yearly?

Answer 12

Prior to 2007 there were always more gains than declines, however in 2010 there was a huge decline worldwide and since there have been more declines than gains in terms of freedom

Question 13

What will be the outcome of the clash of civilization?

Answer 13

Economics & security is what is driving it. If democratic systems provide economic progress, then that is the direction.

Question 14

What are the 2 models of development in the clash of civilizations?

Answer 14

1) Washington consensus (democracy, rule of law, freedom guides the system)
2) Beijing consensus (model of benevolent authoritarianism, champion of one party system, economic separate from politics)

Question 15

Washington Consensus Policy Reform main points

Answer 15

1) Avoid large fiscal deficits
2) Investment in infrastructure
3) Tax reform (stray from informal business)
4) Market determined interest rates
5) Competitive exchange rates
6) Trade liberalization
7) Privitization (only very basic activities owned by the government)
8) Deregulation ( easy to set up a business)

Question 16

Should investors choose democratic or totalitarian?

Answer 16

Companies want stability, so dictatorships can be attractive to investors (however the risk of overthrowing is there). Although democracy offers more economic freedom, there is also a lot of risk and uncertainty to investors. For this reason, it is unclear which is better

Question 17

What is political risk?

Answer 17

The potential loss arising from a change in government policy

Question 18

Systematic risk

Answer 18

Risks that impact all firms (hyperinflation, currency convertibility)

Question 19

Procedural risk

Answer 19

processes that hinder implementation or increase costs (permits, clearances, bribes)

Question 20

Distributive risk

Answer 20

attempts to get a greater share of the benefits (taxation)

Question 21

Catastrophic risk

Answer 21

random political developments affecting all firms (ethnic conflicts, civil disorder)

Question 22

Who conducts risk assessments?

Answer 22

Companies, outside consulting firms, expert individuals, publishing firms

Question 23

What is a legal system?

Answer 23

The mechanism for creating, interpreting, and enforcing the laws of a particular jurisdiction

Question 24

What are the 3 components of most legal systems?

Answer 24

Constitutional law (guarantee just political order), criminal law (to protect the social order), and civil and commercial law (to ensure fairness and efficiency of business transactions)

Question 25

What is common law and examples?

Answer 25

Tradition or precedent based. Examples are United States and the United Kingdom

Question 26

What is civil law and examples?

Answer 26

Established rules of business are part of the country’s code. Examples: Germany, France, Japan, Louisiana (French influence)

Question 27

Theocratic law systems and examples?

Answer 27

Law system based on religious precepts. Examples: Taliban, Iran, Pakistan, Isis (harsh theocratic law)

Question 28

Rule of Man

Answer 28

The ruler and the rule are synonymous, whether the rule is an individual or a single party. Not usually subject to checks and balances to power.

Question 29

Rule of Law

Answer 29

Governmental authority is legitimately exercised in accordance with the enforced and established law. The government is not thought to be above the law, orderly transitions of power

Question 30

Operation and strategic concerns from the legal environment

Answer 30

Starting a business, contracts, local worker relations, marketplace, product safety

Question 31

What type of legal and political environments do managers prefer?

Answer 31

Overall freedom, transparency, freedom from corruption, stability, rule of law