Political and Legal Environments & Associated Risks

Question 1

What is a political system?

Answer 1

– a set of formal institutions that constitutes a government (legislative bodies, political parties, lobbying groups, & trade unions)

• Provide protection from external threats;
• Ensure stability based on laws;
• Govern the allocation of valued resources;
• Define how a society’s members interact with each other

Question 2

Economic systems

Command vs. Market vs. Mixed

Answer 2

Command economy: it makes the state a dominant force in the production and distribution of goods and services (usually associated with totalitarianism)
Market economy: the interaction of supply and demand- determine prices in a market economy (usually associated with democracy)
Mixed economies: it combines state intervention and market mechanisms for organising production and distribution (usually associated with socialism)

Question 3

What is a legal system?

Answer 3

a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organisation and provide punishments for those who violate these rules and norms

Question 4

Why are legal systems important for business?

Answer 4

• define how business transactions are executed

- identify the rights and obligations of parties involved in business transactions

Question 5

National differences are reflected in:

Answer 5

• Contract law
• property rights and corruption
• product safety

Question 6

What Are The Implications Of Political Economy Differences For Managers?

Answer 6

• are the necessary supporting business and infrastructure in place?
• Government intervention, protectionism and barriers to trade
• social and political unrest and instability
• bureaucracy and red tape

Question 7

Ownership risk (political risks from the view of the firm)

Answer 7

Government policies or actions that inhibit ownership or control of local operations.

• Confiscation (Taking of private property without Compensation)
• Expropriation (Taking of private property with Compensation)
• Nationalisation (To seize an entire industry, with or without compensation)
• Foreign-ownership limitations
• Pressure for local participation

Question 8

Operation risks (political risks from the view of the firm)

Answer 8

Government policies and procedures that directly constrain management and performance of local operations.

• Price controls
• Financing restrictions
• Export commitments
• Taxes
• Local sourcing requirements

Question 9

Transfer Risks (political risks from the view of the firm)

Answer 9

Government policies that limit the transfer of capital, payments, production, people, and technology in and out of the country.

• Tariffs on exports and imports
• Restrictions on exports
• Dividend remittance
• Capital repatriation

Question 10

Proactive Environmental Scanning (how to assess political risk)

Answer 10

Management should develop a comprehensive understanding of the political and legal environment in target countries. Scanning – ongoing assessment of potential risks and threats to the firm, via intelligence sources such as:

• Employees working in the host country
• Embassy and trade association officials
• Consulting firms

Question 11

Other ways to measure political risk (3)

Answer 11

1. Scenario analysis
2. Qualitative analysis (external and internal)
3. Quantitative techniques that inform political risk indices

Question 12

Defensive approach to managing countries risk (Buckley, et al 2018)

Answer 12

• to minimise the adverse effects of political events on a company’s activities

Question 13

Indirect Defensive approach to managing countries risk (Buckley, et al 2018)

Answer 13

Mitigate the costs of the event rather than the probability of it occurring

• Political risk insurance (provided by public source such as the multilateral investment guarantee agency or private insurance company)
• Contingency planning
• The pressure of home country (diplomatic pressure & economic sanction)

Question 14

Direct Defensive approach to managing countries risk (Buckley, et al 2018)

Answer 14

• Legal action

- Splitting operations (to spread operations within the host country)

Question 15

Integrative approach to managing countries risk (Buckley, et al 2018)

Answer 15

To discourage adverse political impacts by emphasising the significant contribution made by the business
Indirect Integrative
- Lobbying and public relations
Direct Integrative
- Regional agreement
-Local partners
-Contribution to host-country goals

Question 16

Political, Legal and Ethical dilemmas in the pharmaceutical industry

Answer 16

• Dominated globally by 10 firms e.g. GSK and Pfizer all in developed countries
• the high cost of RandD means firms are keen to gather the cost back and be protected by patent protection laws thus reluctant to release to developing economies where protection is weak
• competition from generic brands - much lower prices and can take over patent
• weak intellectual property rights have led to little incentive for the industry to supply which has led to international dispute over the ethics of premium pricing drugs e.g. AIDs drugs

Question 17

Political example: Libya

Answer 17

• huge oil reserves
• one of Africa’s wealthiest countries
• a state-dominated economy which hinders investment from abroad
• recent political unrest overshadows the well-educated workforce and opportunities present

Question 18

risks arising from host country legal environment

Answer 18

inadequacies in legal systems - worldwide property protection may exist in theory but hardly enforceable
- e.g. Russian law is weak and inconsistent
even in developed economies i.e. The US where the 2008 financial crisis was caused by weak regulation in the financial sector BUT some argue it is not more regulation needed but smarter regulation