Chapter 3: Political and Legal Environments Flashcards
Political and legal systems are the product of…?
CULTURE!
Why study the political environment?
The political environment establishes the “rules of the game” so to speak, to gauge the level of stability and risk
Describe the Argentina example?
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
Political Economy
Stresses that the political, economic, and legal systems are interdependent
How do you evaluate a political system?
Degree to which they emphasize collectivism or individualism, degree to which democratic or totalitarian
What does an individualist government look like?
Individual freedom, self-expression, focus on the good of the individual, society based on freedoms
What does a collectivist government look like?
Collective goals are more important than individual goals, individual rights sacrificed for the good of the majority, expressed through socialism or communism
Why is gun control such a controversial issue in America?
This is a law that protects individual freedoms rather than the group, essentially trying to change individualism in America
Features of democratic (freedom) systems
- 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
What are examples of low-not free countries? What does this imply?
Cuba, North Korea, China, Saudi Arabia. This gauges investment opportunities
Can a country change its political freedom scenario?
Yes, for example Mexico has been gaining political freedom, it is possible to change this over time
Are there more gains or declines in freedoms yearly?
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
What will be the outcome of the clash of civilization?
Economics & security is what is driving it. If democratic systems provide economic progress, then that is the direction.
What are the 2 models of development in the clash of civilizations?
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)
Washington Consensus Policy Reform main points
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)
Should investors choose democratic or totalitarian?
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
What is political risk?
The potential loss arising from a change in government policy
Systematic risk
Risks that impact all firms (hyperinflation, currency convertibility)
Procedural risk
processes that hinder implementation or increase costs (permits, clearances, bribes)
Distributive risk
attempts to get a greater share of the benefits (taxation)
Catastrophic risk
random political developments affecting all firms (ethnic conflicts, civil disorder)
Who conducts risk assessments?
Companies, outside consulting firms, expert individuals, publishing firms
What is a legal system?
The mechanism for creating, interpreting, and enforcing the laws of a particular jurisdiction
What are the 3 components of most legal systems?
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)
What is common law and examples?
Tradition or precedent based. Examples are United States and the United Kingdom
What is civil law and examples?
Established rules of business are part of the country’s code. Examples: Germany, France, Japan, Louisiana (French influence)
Theocratic law systems and examples?
Law system based on religious precepts. Examples: Taliban, Iran, Pakistan, Isis (harsh theocratic law)
Rule of Man
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.
Rule of Law
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
Operation and strategic concerns from the legal environment
Starting a business, contracts, local worker relations, marketplace, product safety
What type of legal and political environments do managers prefer?
Overall freedom, transparency, freedom from corruption, stability, rule of law
