The political and legal environment of IB (topic 5) Flashcards
PESTLE
Political Economic Social Technological Legal Environmental factors
Political system
A country’s system of politics and government. The fundamental goal of a political system is to integrate elements of a society.
Failure = instability, insurrection, national disintegration.
Democratic
A democracy calls for participation by citizens in a fair and just decision-making process.
Republic
rule by law
Anarchic
no rules
Democracy
rule by majority
Representative democracy
Protects individual freedoms; elected representatives act in the peoples’ interests.
E.g. USA, Japan.
Multiparty democracy
Three or more parties govern either separately or in a coalition.
E.g. Canada, Germany.
Parliamentary democracy
Representatives are elected into parliament.
E.g. India, Australia.
Social democracy
Applies democratic means to guide the transition from capitalism to socialism.
E.g. Norway, Sweden.
Pure democracy
based on the belief that citizens should be directly involved in decision-making.
Representative democracy
Citizens periodically elect individuals to represent them.
Totalitarianism
A totalitarian system consolidates power in a single agent who then controls political, economic, and social activities.
Communist totalitarianism
Communist party monopolises power.
Theocratic totalitarianism
Power is monopolised by a party, group, individual that governs according to religious principles.
Tribal totalitarianism
Found in states where a political party that represents the interests of a particular tribe monopolises power.
Right-wing totalitarianism
Permits some individual economic freedom, but restricts individual political freedom.
Authoritairanism
No deviation from state ideology.
E.g. North Korea.
Facism
A single-party state that controls through force and indoctrination.
Secular
Single-party government controls elections and grants limited individual freedoms.
E.g. China.
Institutional theory
Seeks to make sense of organisations as part of complex social systems. Institutions establish the ‘rules of the game’ when working, buying, and selling in a country.
Formal rules (regulative)
Created, communicated, and enforced through official channels (e.g. courts, bureaucracies, constitutions). Formal institutions include the government (e.g. laws, regulations, rules).
Informal restraints (cognitive and normative)
Socially shared customs, codes, traditions - usually unwritten and are communicated, created and enforced outside of official channels (e.g. culture, norms, ethics).
‘Good’ institutions
Promote economic and social progress by providing the incentive structure for an economy.
‘Bad’ institutions
Hamper economic and social progress by reducing incentives in an economy.
Globalisation
Has caused a trend towards centralisation and concentration of power; and towards more open and free political systems.
Two trends in the political/legal environment have emerged since the late 1980s:
- Democratic revolution (1980s-1990s)
2. A move away from centrally-planned to mixed economies (towards a market-based model)
Free country
Somewhere where there is broad scope for open political competition; a climate of respect for civil liberties; significant independent civil life; and independent media.
Political risk
The risk that political decisions/events in a country negatively affect the sustainability or profitability of an investment - causes uncertainty, volatility.
Systematic risks
Impact all firms who operate under a particular political system.
Procedural risk
Each move within the global market creates a procedural transaction - political frictions can interfere with these transactions.
Distributive risk
As a business grows, officials may question the ‘distributive justice’ - are they receiving their fair share of the growing profits?
Catastrophic risk
Includes random political developments that adversely affect the operations of every company in a country.
Macro-political risks
Affect all firms in a country.
Micro-political risks
Affect only certain firms or industries in a country.
Mitigating risk
Insurance;
Recruiting local partners;
Integration;
Hedging.
Grease payments
Facilitating or expediting payments (not illegal).
Rule of man
Holds that the ruler commands authority that is above the law.
E.g. China.
Rule of law
No individual is above laws that are clearly specified, commonly understood, and fairly enforced.
Common law systems
Based on case law or precedent; derived from the principle that it is unfair to treat similar facts differently on different occasions.
Civil law systems
Where core principles are codified into a referable system which serves as the primary source of law.
International laws and regulations
International treaties; international codes of practice; EU legislation.
Contract
A document that specifies the conditions under which an exchange is to occur.
Contract law
The body of law that governs contract enforcement.
Common law = detailed, specific contracts.
Civil law = shorter and less specific.
Legal activities involved in starting a business
Registering its name; choosing the appropriate tax structure; getting licenses and permits; arranging credit; securing insurance.
Operational concerns
Getting started
Making and enforcing contracts
Hiring and firing workers
Closing down the business
