Chapter 4 - Political and Legal systems in National Environments

Question 1

What is country risk?

Answer 1

• potential loss or adverse affects on a company operations/profitability
• political/legal systems that pose challenges for company performance

Question 2

What is a political system?

Answer 2

• formal institutions that constitute a government
  -Totalitarianism, Socialism, Democracy

Question 3

Totalitarianism

Answer 3

• gov. controls all matters
• either religion based or secular
• led by a dictator; power through secret police, propaganda, regulating freedom

Question 4

Socialism

Answer 4

• group welfare > individual welfare
• gov. role = control production, distribution and commercial activity

Question 5

Democracy

Answer 5

• limited gov: performs essential
  functions (maintaining law &
  order, foreign relations, and providing basic
  infrastructure)
• individuals accumulating private wealth including land, buildings, stocks, contracts & patents

Question 6

Democracy = openness which is associated with …

Answer 6

• successful market entry
• increased market demand
• competition on quality which also leads to efficiency and lower prices

Question 7

Functions of political systems

Answer 7

• provide protection
• ensure stability with laws
• govern the allocation of resources
• define how society should interact

Question 8

What are the four major types of legal systems?

Answer 8

1) Common Law
2) Civil Law
3) Religious law
4) Mixed systems

Question 9

Common Law

Answer 9

• tradition, past practices, and legal
  precedents set by courts
• judges can interpret the law based on circumstances (flexible law)

Question 10

Civil Law

Answer 10

• system of laws that have been “codified” (clearly written by leg. bodies)
• not strongly subject to interpretation by courts

Question 11

Religious law

Answer 11

• influenced by religious beliefs, ethical codes, and moral values
• based on Hindu, Jewish, and Islamic law.

Question 12

Mixed Systems

Answer 12

• two or more legal systems operating together
• civil and common often work together (democracy)

Question 13

Actors/figures within political and legal systems

Answer 13

1) government - operates national & local levels
2) International orgs. - WTO, UN, World Bank
3) Regional economic blocs - EU, NAFTA
4) Special interest groups - labor unions and environmental advocates
5) competing firms - oppose foreign firms

Question 14

Gov. takeover of corporate assets

Answer 14

Confiscation - seizure of corporate assets without compensation Expropriation - Asset seizure with compensation
Nationalization - A takeover of an entire industry, with or without compensation

Question 15

What are sanctions?

Answer 15

• bans on international trade
• usually initiated by countries that feel their peace has been jeopardized

Question 16

What are Embargoes?

Answer 16

• bans on exports or imports that forbid trade within specific countries

Question 17

Boycotts against Firms and Nations

Answer 17

• Voluntary refusal to engage in commercial dealings with a nation or a company

Question 18

War and insurrection

Answer 18

Indirect effects can be disastrous for company activities

Question 19

Terrorism

Answer 19

threat or actual use of force or
violence to attain a political goal through fear and intimidation

Question 20

Country risks arising from the host country’s legal environment

Answer 20

1) Foreign investment laws
2) Controls on operating forms and practices - laws and regulations on how firms can conduct
production, marketing, and distribution
3) Marketing and distribution laws -regulate practices in advertising, promotion, and distribution
4) Laws regarding income repatriation - limit the amount of
net income or dividends that firms bring back into country
5) Environmental laws - aim to preserve natural
resources, combat pollution, and ensure safety
6) Inadequate or underdeveloped legal systems - poor enforcement of existing laws
7) Internet and e-commerce regulations

Question 21

What is Extraterritoriality?

Answer 21

application of home-country
laws to other countries

Question 22

Foreign Corrupt Practices Act

Answer 22

• made it illegal to offer bribes to foreign parties
• foreign competitors are
  usually not so constrained, therefore harms US

Question 23

Antiboycott regulations

Answer 23

prevent companies from
participating in restrictive trade practices

Question 24

Transparency in financial reporting

Answer 24

degree to which firms regularly reveal substantial financial and accounting information (varies worldwide)

Question 25

Proactive environmental scanning

Answer 25

Management should develop a comprehensive understanding of
the political and legal environment in target countries

Question 26

Strict adherence to ethical standards

Answer 26

Firms that engage in questionable practices or operate outside
the law can get reprimanded by the gov. of host countries

Question 27

Alliances with qualified local partners

Answer 27

firms often enter China and Russia by partnering with local firms who assist in navigating the complex legal and political landscape.

Question 28

What are the three approaches for resolving contract disputes?

Answer 28

1) Conciliation -the formal process of negotiation whose objective is to resolve differences in a friendly manner
2) arbitration - neutral third party hears both sides of a
case and decides in favor of one party or the other (based on facts)
3) Litigation - occurs when one party files a lawsuit against another (common in US)