Section 4 - Political, Legal, and Regulatory Environments Flashcards
Risk Management Strategies: Localization
Adjusting logistics and public relations in direct response to target market needs.
Customizing the product mix. Altering product attributes to suit local tastes.
Risk Management Strategies:: Partnerships
Effective for a long-term presence. Short-term: agent or distributor.
Long-term: Joint ventures for local production.
Risk Management Strategies: Insurance
To protect against: Operational losses due to political risks such as war and terrorism, or non-payment by foreign customers.
Forms of Government
Ruled by one (monarchy or dictatorship).
Ruled by ‘the few’ (aristocracy or oligarchy).
Ruled by ‘the many’ (democracy).
Monarchy that runs as a democracy.
Dictatorship monarchy that presents itself as a democracy.
Oligarchy that presents itself as a democracy.
Political Risk
Political instability accounts for about 80% of the known variables when making the decision to expand internationally. Examples: War, social unrest, changes in government/pro-business orientation, tolerated corruption and crime, tax and tariff discrimination, repatriation restrictions.
Taxes
Excessively-high taxation leads to black market growth and promotes cross-border shopping and smuggling. They encourage many enterprises to engage in cash transactions off the books.
Expropriation and Confiscation
A government takes ownership of land and/or assets from a foreign company or investor. The government defines the compensation value. If confiscated, there is no compensation provided.
Nationalization
A government takes control of some or all of the businesses within a specific industry; foreign-owned assets are usually the first target.
Creeping Expropriation
A multi-year change in the government’s policies regarding the rules for conducting business. This action usually ends with a loss of control (or a loss of the entire business).
A government’s most effective tools include limits on returning profits to the home country, increased government business fees, tougher import rules, local content laws and local hiring quotas, discriminatory laws on technology as a requirement for getting business licenses.
Common Risk Assessment Factors
Government stability, socioeconomic conditions, investment profile, internal and external conflict, corruption, military in politics and religious conflict, law and order, ethnic tensions, and democratic accountability.
Strategies for Reducing Political Vulnerability
- Joint ventures with an established firm
- Expand the investment base through local influential investors and banks
- Licensing: A contractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology, etc. in return for royalty payments.
- Planned Domestication: a planning phasing out of ownership. A common strategic model is to surrender the equipment when it has no productive value.
- Political Contribution: really this is a bribe.
- Insurance: from foreign risks like nationalization and confiscation and the risk of political or personal violence and poor liquidity of different currencies.
Basis for Legal Systems
Common Law: basis is tradition, past practices, and legal precedents.
Civil or Code Law: a legal system based rules that have been written into books or texts by designated jurists. The primary feature is that laws struck in writing and not determined by opinions of judges based on historic customs.
Islamic Law: based on the Koran.
MAD
Mutually Assured Destruction: if both companies know the tech secrets and intellectual property of their partner, then they can both destroy each other if one breaches the contract. No enforceable judicial body to deal with legal commercial problems arising with global disputes. Use jurisdictional clause to determine which country’s legal system determines contract interpretation.
International Dispute Resolution
Conciliation (mediation): a non-bonding agreement to resolve disputes by asking a third party to mediate differences. A mediator is a communication tool, and is best when personality conflict are preventing negotiations and it is fast and inexpensive and can be done in private.
Arbitration: involves selecting an independent third party to hear the merits of the case and make a judgment. Still private.
Binding Arbitration: the two parties agree to abide by the arbitrator’s decision.
Non-Binding Arbitration: the two parties do not have to abide with the arbitrator’s decision; this is less common.
Final-Offer Selection: the arbitrator can only pick one of the two positions offered, but this creates winners and losers, so less popular.
Litigation: When all else fails, you can sue through the legal system, but in a collective culture this hurts your reputation. Deterrents: high cost and time, fear of unfair treatment in a foreign court, loss of confidentiality, fear of creating a poor image and damaging reputation, and difficulty in collecting a judgment.
