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In contrast a planned economy is one in which the government or state directs and controls the economy. In Arabic, ‘Sharia’ means the clear, well-trodden path to water. Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry. (d) Business involving forbidden products or activity, such as alcohol, pork, or gambling is prohibited. In reality, neither extreme exists in its purest form. Effects of Politics onInternational business..... 2. However, change can occur very quickly. Courts can dismiss cases at their discretion, brought before them by foreigners. In ‘civil law’ countries, judges have to strictly follow the ‘letter of the law’, giving them low flexibility in judicial decisions whereas in common-law countries, greater reliance is placed on the previous rulings and interpretations by other judges in similar cases. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. Create . A political ideology that asserts that both public and private groups are important in a well-functioning political system. The Christian Canon system is observed in the Vatican City. If a new party comes into power, will the rules of business change dramatically? Although Japan is the world’s third larges economy, historically they have steered clear of international business. Prohibited Content 3. Facing a shortage in 2007, growing domestic demand, and high prices from foreign companies that dominated production, China declared the development of domestic polysilicon supplies a priority. Is there a risk of expropriation or nationalization of business assets? The commission is composed of 60 member states elected by the General Assembly. form of government: totalitarianism/autocracy/democracy or other type of political system. A cross­-country comparison on a 7.0 point scale as shown in Fig. Judicial Independence and Efficiency 3. The legal representative is the person with the greatest individual authority in a company in China. The loss of opportunity for cost of money is not compensated under the Sharia. Political And Legal Systems: Impact On Business The Japanese political and legal system presents a complex picture. Domestic Chinese manufacturers received quick loans with favorable terms as well as speedy approvals. Why should businesses care about the different political and legal systems around the world? A recent report exposed Brazil’s slow economic growth and rising inflation. At one end of the extremes of political philosophies, or ideologies, is anarchismA political ideology that contends that individuals should control political activities and public government is both unnecessary and unwanted., which contends that individuals should control political activities and public government is both unnecessary and unwanted. A political system is basically the system of politics and government in a country. The other extreme is totalitarianism, which contends that every aspect of an individual’s life should be controlled and dictated by a strong central government. In general, the greater the level of economic development of a country, the more elaborate is its legislative framework. For example, the Chinese government owns almost all the major banks, the three largest oil companies, the three telecommunications carriers, and almost all of the media. Political system and Legal systems: Indonesia today is Southeast Asia’s most vibrant democracy. Under international law, there are three basic types of jurisdictional principles. The interest-bearing accounts and loans, which fall under the strict ribamles, most futures and options, which are considered speculative and gharar, and insurance, because the outcome of the contract can no way be determined beforehand , are all haram. 2. (a) Contracts should be fair to all parties. Political, Economic, and Legal Systems. The two major categories of prosecution under the national government are drug importation and those related to infringement of social security laws. According to Islamic law, banks cannot charge or benefit from interest. 24 February, 2015 - 17:30 . In Islam, Sharia is used to refer to the matters of religion that God has legislated for His Servants. International law is less coherent compared to domestic law since it embodies a multiplicity of treaties (bilateral, multilateral, or universal) and conventions (such as the Vienna Convention on Diplomatic Security, Geneva Convention on Human Rights, etc.) Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. This also implies that courts of a sovereign country cannot be used to rectify its injustices on other countries. That was the reason for early writers of Economics preferred to caption their work as Political Economy. Introduction to International Legal Environment: United Nations Commission on International Trade Law (UNCITRAL). Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, Classic Sharia manuals are divided in four parts: laws related to personal acts of worship, laws related to commercial dealings, laws related to marriage and divorce, and penal laws. Written contracts have a sanctity and legitimacy of their own. In this lesson, you'll learn about the political environment in international business, some of its key factors, and its impact. Some governments use trade as a retaliatory measure if another country is politically or economically unfair. In essence, there are three main kinds of legal systems—common law, civil law, and religious or theocratic law. is the most common form of government around the world today. For example China worked a serious restructuration on their politics and regulations with the international companies, which include better conditions of work for the local employees. As a result, global businesses monitor and evaluate the political and legal climate in countries in which they currently operate or hope to operate in the future. This provides investors with a comparable investable portfolio while adopting explicit investment criteria defined by the Sharia. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware. International law recognizes the sovereign right of anation to allow or deny foreign firms to conduct. Unlike the countries dominated by Christianity, Hinduism, and Buddhism where either common or civil law is followed, a large number of Islamic countries integrate their legal system based on the Sharia. How involved is the government in the private sector? China’s Communist Party outlines its goals in five-year plans. Theocratic law is the legal system based on religious doctrine, precepts, and beliefs. Foreign court systems have varying methods of enforcing ones rights. A hostile takeover could overthrow a government, for instance. International Business Chapter 3: Governmental and Legal Systems. Religious lawAlso known as theocratic law; this legal system is based on religious guidelines. Politically, a country’s government may seek to protect jobs or specific industries. This new combination has also posed more questions for businesses that are encountering new issues—such as privacy, individual rights, and intellectual rights protections—as they try to do business with China, now the second-largest economy in the world behind the United States. Tariffs that are calculated as a percentage of the value of the product or service. Firms operating internationally face major challenges in conforming to different laws, regulations, and legal systems in different countries. Copyright 10. Businesses in industries, such as commodities and oil, have found more authoritarian governments to be predictable partners for long-term access and investment for these commodities. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. Introduction to International Legal Environment 2. Content Filtrations 6. (f) Compassion is required when a business is in trouble. DemocracyA form of government that derives its power from the people. Business Law 3 of China’s Business Law Trends For Expatriates to Beware of: 1) The legal representative of a company gets to make decisions. Pressure groups tend to change government policies. The national government enforces it own laws. Some examples of these practices include forming joint-ventures, expanding your investment base, licensing your products/services, or political bargaining through lobbying. This combination is called pluralismA political ideology that asserts that both public and private groups are important in a well-functioning political system., which asserts that both public and private groups are important in a well-functioning political system. Despite the advances in democracy in recent decades, more than one third the world’s population still lives under authoritarian rule. 8.4 indicates that Denmark (6.5) had the highest level of efficiency of legal framework followed by Germany (6.3) and Switzerland (6.1) whereas it was considerably efficient in Singapore (6.0), Australia (5.9), the UK (5.8), Japan (5.6), South Africa (5.4), the US (4.9), and India (4.8). THE POLITICAL ENVIRONMENT (CH. The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 by the UN General Assembly (Fig. As a part of international customs and traditions, there must be mutual respect for the laws, institutions, and the government system of other countries in the matter of jurisdiction over their own citizens. There is no consensus on how to measure democracy, definitions of democracy are contested and there is an ongoing lively debate on the subject. First, let’s briefly discuss some of the reasons behind these interventions. As you might expect, established democracies, such as those found in the United States, Canada, Western Europe, Japan, and Australia, offer a high level of political stability. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest. How did this happen so fast? Taxes or tariffs that are levied as a fixed charge, regardless of the value of the product or service. This contrasts with more authoritarian governments, where democracy is either not in effect or simply a token process. The burden of proof is on the plaintiff. International managers need to understand the basic principles that govern the conduct of international law. In other words, the damages to property will be actual sums relating to repair and replacement of the property. Major similarities between the Sharia and secular law are that in both: 2. These are cultural, political and legal environments and the role each one plays. The country’s view on capitalism is also a factor for business consideration. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. The implications of Islamic law vary in terms of degree among the Islamic countries. A fair judicial system also reduces political risks in overseas markets. How political and legal systems affect International Business Introduction Political and legal systems play a major role in the International businesses for the companies that source, produce, market and export products in foreign countries. A form of government that derives its power from the people. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices. As a result of rise in terrorism during the last decade, the US and many European countries have imposed restrictions on foreigners. Central to China’s approach are policies that champion state-owned firms and other so-called national champions, seek aggressively to obtain advanced technology, and manage its exchange rate to benefit exporters. madison_mainman. is an economic system in which the means of production are owned and controlled privately. Even if a consensus on precise definitions has proved elusive, most observers today would agree that, at a minimum, the fundamental features of a democracy include government based on majority rule and the consent of the governed, the existence of free and fair elections, the protection of minorities and respect for basic human rights. Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,”, Ian Bremmer, “The Long Shadow of the Visible Hand,”. They pose a big challenge to the companies and the companies need to overcome the factors to become successful in the international stage. Before we can evaluate the impact on business, let’s first look at the different political and legal systems. After independence from erstwhile colonial rulers, most Islamic countries have grappled with the problem of replacing colonial legal systems with the Sharia. This system is commonly referred to as “a socialist market economy with Chinese characteristics.” The Chinese are eager to portray their version of combining an authoritarian form of government with a market-oriented economy as a better alternative model for fledging economies, such as those in Africa. (i) Common Law: It is based on traditions, past practices, and legal precedents set by the courts through interpretation of statutes, legal legislations, and past rulings. In the past thirty years, governments have increasingly privatized a number of industries. What is a planned economy? To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. PLAY. Clearly, many global businesses and investment banks are finding creative ways to do business with these Islamic banks so that they can comply with Islamic law while earning a profit. Chinese government control on the Internet, for example, has helped propel homegrown, Baidu, a Chinese search engine, which earns more than 73 percent of the Chinese search-engine revenues. China is both an emerging market and a rising superpower. The Political Environment. Companies that operate globally have an enormous challenge in conducting business in countries with varying political and economic systems. Although there is significant overlapping in practice under the two systems, laws are much more rigid in the countries with civil-law system compared to common-law systems. Table 2.1 The Major Global State-Owned Oil Companies. Half of the world’s population lives in a democracy of some sort, although only some 14 percent reside in full democracies. Nevertheless, countries still have the ability to regulate or strong-arm companies into abiding by their rules and regulations. With its huge population, China is in constant need of energy to meet the needs of its people and businesses. What are three policy areas in which governments can create rules and regulations in order to control, manage, and intervene in trade. A political ideology that contends that individuals should control political activities and public government is both unnecessary and unwanted. International managers need to develop basic understanding of the types of legal systems followed in the countries of their operations before entering into legal contracts. A legal system based on traditions and precedence. In this system, judges interpret the law and judicial rulings can set precedent. Political and legal risk in international business . For instance, foreign governments have right to impose restrictions related to financial repatriation to other countries. Figure 2: Political system of Indonesia. There are three main types of legal systems: (1) civil law, (2) common law, and (3) religious law. What is capitalism? Despite the movement toward privatizing industry and free trade, government interests in their most valuable commodity, oil, remains constant. Governments intervene in trade for a combination of political, economic, social, and cultural reasons. The major types of legal systems are briefly mentioned here. Contrary to the approach of much of the world, which is moving more control to the private sector, China has steadfastly maintained its state control. Unlike in other countries, PRC law requires that only one person, to represent the company on its behalf. Sullivan 3-1 fChapter 3 The Political and Legal Environments Facing Business Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall 3-2 fLearning Objectives Brazilian Legal System Doing Business in Brazil. Start studying International Business Chapter 3: Governmental and Legal Systems. Search. The present improved political system now encourages freedom and equality for the people of Indonesia. Bureaucracy 5. State Capitalism: Governments Seeking to Control Key Industries. Democracy presupposes equality before the law, due process and political pluralism.“Liberty and Justice for Some,” Economist, August 22, 2007, accessed December 21, 2010, In fact, political stability is a key part of government efforts to attract foreign investment to their country. In countries, such as Japan, the reliance on courts for conflict resolution is much lower compared to the US which is considered to be one of the most litigious societies in the world. Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on operations. Report a Violation, Multiplicity of Legal Environments: Domestic, Foreign, and International, 3 Kinds of Legal Systems that exist in Different Countries across the world. A country’s law regulate business practices, defines business policies, rights and obligations involved in business transactions. In some countries, the government controls more aspects of daily life than in others. One entrepreneur, Zhu Gongshan, received $1 billion in funding, including a sizeable investment from China’s sovereign wealth fund, in record time, enabling his firm GCL-Poly Energy Holding to become one of the world’s biggest in less than three years. Free trade advocates perceive this government-directed intervention as an unfair tilt against the global private sector. Instead, most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. Firms need to assess the balance to determine how local policies, rules, and regulations will affect their business. Common lawA legal system based on traditions and precedence. Every country has the right of jurisdiction within its own legal territory. Plagiarism Prevention 4. A company may ask several questions regarding a prospective country’s government to assess possible risks: While any country can, in theory, pose a risk in all of these factors, some countries offer a more stable business environment than others. The Chinese model of an authoritarian government and a market-oriented economy has, at times, tilted favor toward companies, usually Chinese, who understand how to navigate the nuances of this new system. It is extremely important for certain agreements in civil law countries to get registered, in order to be enforceable, whereas in common law countries, as long as the proof of the agreement can be established, an agreement is binding. Political risk in international business refers to political factors that have an impact on the company's value and can affect how the company operates and stays profitable. 4. Business Law. Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. The legal system may be difficult to navigate or unavailable to foreigners. Civil lawA legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. The history of the oil industry shows how various governments have, on occasion, protected their national companies’ access to oil through political force. Source: Indonesia 2009: An official handbook Authoritarian leaders tend not to have a guiding philosophy and use more fear and corruption to maintain control. China’s different set of political and legal guidelines made Google choose to discontinue its mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong version. All S&P indices constituents are monitored on a daily basis to ensure that the indices maintain strict Sharia compliance. Sharia has clear guidelines for aspects of life. How transparent is the government’s political, legal, and economic decision-making process? Common law originated from England and it is followed in most of the former British colonies, such as India, UK, the US, Canada, Australia, and New Zealand. On the one hand, as evident in the powerful Ministry of International Trade and Industry, better Anyone planning on doing business in Japan should bear in mind that prefectures and municipalities may create laws and ... Retrieve Full Source. Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. Let’s focus on the overarching modern political philosophies. Principles of International Law 5. Its general mandate is to harmonize and unify the laws of international trade. Its leaders see the economy as a tool to preserving the state’s power, which in turn is essential to maintaining stability and growth and ensuring the long-term viability of the Communist Party.Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,” Wall Street Journal, November 16, 2010, accessed December 22, 2010, Baidu self-censors and, as a result, has seen its revenues soar after Google limited its operations in the country.Rolfe Winkler, “Internet Plus China Equals Screaming Baidu,” Wall Street Journal, November 9, 2010, accessed December 21, 2010, China’s expanding solar-energy industry is dependent on polycrystalline silicon, the main raw material for solar panels. Political Stability - Is there a risk of political overturn, war, etc., that could disrupt business operations. It governs a complete set of rules, regulations, institutions, and attitudes. Also known as theocratic law; this legal system is based on religious guidelines. State-owned companies control more than 75 percent of all crude oil production, in contrast with only 10 percent for private multinational oil firms.Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010,; “Really Big Oil,” Economist, August 10, 2006, accessed December 21, 2010, Gambling is not liked in Islamic countries, but futures and currency hedging also involves speculation. Examples include changes in interest rates, civil unrest, government actions and issues with importing or exporting goods. A legal system based on a detailed set of laws that constitute a code and on how the law is applied to the facts. In the broadest sense, capitalismAn economic system in which the means of production are owned and controlled privately. Every country has jurisdiction over its citizens, irrespective of their locations. In the Persian Gulf region alone, there are twenty-two Sharia-compliant, Islamic banks, which in 2008 had approximately $300 billion in assets.Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,” Arabian Business, February 20, 2008, accessed December 21, 2010, However, courts are bound to examine issues, such as the place from where evidence must be collected, location of the property under restitution, and the plaintiff. The system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. Laws concerning employment and labor affect managing of workforce in international markets. The legal/political system is a minefield, with few international standards or regulations to fall back on. In general, Japanese corporate law supports inward facing investment. 6)THE POLITICAL ENVIRONMENT (CH. Understand government-business trade relations and how political and legal factors impact international business. is also known as theocratic law and is based on religious guidelines. TOS 7. The legal framework was the least efficient in Venezuela (1.5) and had relatively low level of efficiency in Russian Federation (2.8), Brazil (2.9), China (3.6), Tanzania (3.7), and Thailand (4.4). The Sharia regulates all human actions and places them in five categories, i.e., obligatory, recommended, permitted, disliked, or forbidden. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. Every nation has jurisdiction over conduct that adversely affects its national security even if such behaviour occurs outside the country. The independence of a country’s judicial system from political influences of the members of governments, citizens, or firms is crucial for the fair treatment a firm receives in its overseas operations. Chapters 6-7Chapters 6-7 INTERNATIONALINTERNATIONAL POLITICAL AND LEGALPOLITICAL AND LEGAL ENVIROMENTENVIROMENT 2. Partnership is preferred over hierarchical claims. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document? China is one of the more visible examples, with its strong government and limited individual rights. Jason Dean, Andrew Browne, and Shai Oster, “China’s ‘State Capitalism’ Sparks Global Backlash,”,,,,,, In totalitarian systems, government’s power derives from a select group. Differences in the social, cultural, economic, legal and political conditions of the country affect international business procedures in different levels and degree depending on the countries infrastructure and relationship. The level of judicial independence and efficiency differs widely among countries. Learn vocabulary, terms, and more with flashcards, games, and other study tools. The most direct impact on business can be observed in Islamic law—which is a moral, rather than a commercial, legal system. This was reported to be considerably lower in China (3.4), Brazil (3.1), Russian Federation (2.7) and the lowest in Venezuela (1.2). This law is derived from the Marxist socialist system and continues to influence legal framework in former communist countries, such as the CIS, China, North Korea, Vietnam, and Cuba. Start studying International Business Chapter 2: National Differences in Political, Economic, and Legal Systems. Governments have long intervened in international trade through a variety of mechanisms. Therefore, a foreign firm involved in illegal business practices in India can be sued under Indian law. ...Many aspects affect the way international business is conducted. On the other hand, governments may influence trade to reward a country for political support on global matters. The Indonesians enjoy a level of political freedom. To decrease how vulnerable your business is to political conditions, it is especially important for the marketer to forecast risk and engage in business ventures that may benefit them. Why should businesses care about the different political and legal systems around the world? In totalitarianism, the ideology influences or controls the people, not just a person or party. A political systemThe system of politics and government in a country; it governs a complete set of rules, regulations, institutions, and attitudes. It governs a complete set of rules, regulations, institutions, and attitudes. The difference between the sale and buyback price functions as the interest. For the purpose of this discussion, the main relevant difference is in ideology. International managers need to be aware of such situations. International Political Systems and Ideologies 3. While the past century has seen a major shift toward free trade, many governments continue to intervene in trade. Multinationals now find themselves competing as never before with state-owned companies armed with substantial financial and political support from their governments.”Ian Bremmer, “The Long Shadow of the Visible Hand,” Wall Street Journal, May 22, 2010, accessed December 21, 2010, Instead, most countries have a combination of both. Politics changes can affect dramatically the manner that international business deal with import, export, and trade with another countries. It depends less on written statutes and codes. Let’s focus briefly on how the political and economic ideologies that define countries impact their legal systems.

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