Political Risk

Political Ideology

It is the collection of ideas, that expresses the goals, theories and aims that constitute a sociopolitical program.

Definition: A body of constructs (complex ideas), theories and aims that constitute a socio political program.

Eg: Liberal principles of democratic party and the conservative doctrine of the republican party in US.

Pluralism

It is the coexistence of different ideologies. Pluralism arises because groups within countries can differ from each other in language (belgium), class structure(UK), Ethnic background (SA), tribal groups (Afganistan) or religion (India).

Individualism/Collectivism

In individualism, the govt feels that businesses should be left alone with free market economy and the market mechanism will lead to right allocation of resources.

Eg: US, UK

Individualism refers to the primacy of the rights and role of the individual. Political officials and and agencies have a limited role in an individualistic society. Individualistic countries typically apply commercial regulations to correct market inefficiencies. Individualistic countries encourage businesses to support the good of teh greater community by promoting fair and just competition.

In collectivism govt must take collective responsibility and hence control on business and resources.

Eg. China

Collectivism refers to the primacy of the rights and role of the community. Political officials and agencies have an extreme role in a collectivist society. Govt in a collectivist society is highly connected to and interdependent with business.

Types of Government

The two extremes of the political spectrum are democracy and totalitarianism.

Democracy : Democratic systems involve wide participation by citizens in the decision making process.

Features of Contemporary Democratic political system:

• Freedom of opinion, expression, press and freedom to organize
• Elections in which voters decide who is to represent them
• limited terms for elected officials
• An independent and fair court system, with high regard for individual rights and property.
• A nonpolitical bureaucracy and defence infrastructure.
• citizen accessibility to the decision making process.

The defining feature of democracy is freedom.

Factors of evaluating Freedom:

1. Political Rights

• right to elect a government and should happen on a regular basis
• power must go to the elected representatives
• protection of minority: Everybody's interest must be taken into consideration.
• freedom to join any party.

2. Civil liberties.

• bounded labor
• social freedom
• individual freedom
• freedom of speech

In terms of political freedom, a country is rated as either

• Free in that it has a high degree of political rights and civil liberties.
• Partly free in that it has tolerable degrees of political rights and civil liberties.
• Not free in that it has low degrees of political rights and civil liberties

Totalitarianism:

A totalitarian system is one in which a single agent, whether an individual , group or party, monopolizes all political power. In a totalitarian system, decision making is restricted to a few individuals.

Authoritarianism:

One person or a small group has absolute control over all others.

Eg. Chile.

Facism :

Extreme form of nationalism that calls for the supremacy of the state.

Eg. Germany under Adolf hitler.

Secular Totalitarianism

Here control is enforced through military power.

Eg: Cuba, China.

Theocratic Totalitarianism

Religious leaders are the political leaders. Eg. Taliban in Afganistan.

Key Drivers or Trend towards Democracy:

• Breakdown of totalitarian regimes.
• improved communication technology
• higher standards of living.

Transition from state controlled economies to market based approaches has also stabilized operating conditions for companies worldwide and supported common rules for international competition.

Factors that powered democratization of the world :

• Many totalitarian regimes failed to deliver economic progress to the vast majority of their populations. In recourse, citizens challenged the right of the state to govern, perhaps most dramatically highlighted by the fall of the berlin wall and disintegration of the soviet bloc.
• improved communication technology, largely via internet. The internet by liberating communication constrained govts capability to regulate information flows within and across countries.
• many people who championed democracy did so in the belief that greater political freedom would lead to economic freedom that in turn, would then lead to higher standards of living and greater wealth accumulation.

Legal Environment

1. Legal System

A legal system is the mechanism for creating , interpreting and enforcing the laws in a specified jurisdiction.

• legal systems differ from country to country.
• a country's legal system is the means and methods that it uses to regulate business practices, define how companies conduct business transactions, specify the rights and obligations of those engaged in business transactions and spell out the methods of legal redress to those who believed thay have been wronged.
• differences in the structure of law influence the attractiveness of a country as an investment site.
• From MNE's perspective, to what extent is the judiciary, free from political control/influences.
• MNEs perceive that judiciary in India is relatively free from political interference.

2. Types of Legal Systems

A. Common Law:

A common law system is based on tradition, precedent, custom and usage and interpretation by the courts. Courts assign a preeminent position to existing case law to guide dispute resolution. A common law looks to the rules of the court, custom, judicial reasoning, prior court decisions and principles of equity.

Eg: Canada US, England.

B. Civil Law

A civil law system is based on a ststematic and extensive codification of laws. It judges rather than create law, apply existing legal and procedural codes to resolve disputes.

Eg. German y, France, Japan

C. Theocratic Law

A theocratic law system relies on religious and spiritual principles to define the legal environment.

Eg. Islamic law-Indonesia.

D. Customary Law

A customary legal system follwos the wisdom of daily experience.

E. Mixed Legal System.

A mixed legal system combines elements of other systems.

Eg. majority of countries in Africa and Asia.

Legal Aspects/contingecies affecting MNE strategies.

Strategic concerns are

• Product safety and liability
• marketplace behaviour
• product origin
• legal jurisdiction
• arbitration

Successful companies develop strategic plans that describe their business goals and objectives in the effort to create long term value. Many legal issues affect the process of value creation, ranging from where a company makes a product to how it tries to market it. National laws determine permissible practices on pricing, distribution, advertising and promotion of products and services.

Product Safety and Liability

INternational companies often must customize products to comply with local standards if they are to do business in a particular country. Sometiems these legal standards are higher in their home market and sometimes they are just different.

product liability laws are particularly stringent in US, EU and many healthy countries and huge penalties are imposed.

Market Place Behaviour

Eg. Germany does not allow comparative ads.

Certain items are universally not allowed to advertise. Eg Tobacco.

Product Origin

• National laws shape the flow of products across borders
• countries devise laws that use the origin of the product to determine the charge to the provider for the right to bring it into the legal market
• countries measure product origin to determine the proportion of the product that is made in the local market.
• Local procurement/local vendor development
• local industries get encouragement
• local employment and local suppliers.

Local content is important to all nations, and most use this sort of law to push foreign companies to make a greater shape of the product in the local market.

Legal Jurisdiction

• Each country specifies which law should apply and where litigations should occur.
• A nation's courts have final decision on jurisdiction
• Usually a company will push the court in its home country to claim jurisdiction, believing it will then receive more favorable treatment.
• companies must make sure that contracts include a choice of law clause and a choice of forum clause that specifies which law will govern in the event of a dispute.

companies will resort to arbitration to resolve disputes.

Arbitration:

A smaller number of complaints against governments are heard through the international centre for settlement of investment disputes.

Arbitrators are appointed from both sides.

-Time invloved

-Cost

-Bitterness comes in.