besides the laws of individual countries. An economic system in which the government or state directs and controls the economy, including the means and decision making for production. Written contracts have a sanctity and legitimacy of their own. Some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructure—for example, a government may be concerned about who owns the ports within its country. At one end of the political ideology extremes is anarchism, which contends that individuals should control political activities and public government is both unnecessary and unwanted. Legal Systems 4. The major difference between Sharia law and the Western law is the idea of reference to a precedent. Also known as code or civil law, it is based on a comprehensive set of written statutes. A political system is basically the system of politics and government in a country. After independence from erstwhile colonial rulers, most Islamic countries have grappled with the problem of replacing colonial legal systems with the Sharia. State Capitalism: Governments Seeking to Control Key Industries. DemocracyA form of government that derives its power from the people. Business Law. On the other hand, governments may influence trade to reward a country for political support on global matters. Membership is structured so as to be representative of the world’s various geographic regions and their principal economic and legal systems. Tala Malik, “Gulf Islamic Bank Assets to Hit $300bn,”, Ian Bremmer, “The Long Shadow of the Visible Hand,”. (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. Many are permitted to engage in sale-buyback or leaseback of an asset. While many countries in Asia and Latin America also are functioning democracies, their stage of development impacts the stability of their economic and trade policy, which can fluctuate with government changes. Instead, most countries have a combination of both, the balance of which is often a reflection of the country’s history, culture, and religion. The complications in a meeting out of non-performance of a business contract also vary widely among the common- and civil-law countries. (c) Interest on money is prohibited but allows management fees and services. First, let’s briefly discuss some of the reasons behind these interventions. As the index provides for benchmarking with Sharia, some of these funds may be invested as per the Sharia Indices. These are cultural, political and legal environments and the role each one plays. Democracy has a number of variations, both in theory and practice, some of which provide better representation and more freedoms for their citizens than others. The loss of opportunity for cost of money is not compensated under the Sharia. 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 Governments are also motivated by economic factors to intervene in trade. This is the national government and it has six State Governments under it. Content Guidelines 2. It may seem evident that businesses would prefer to operate in open, democratic countries; however, it can be difficult to determine which countries fit the democratic criteria. Read this article to learn about the Legal Environment for International Business. That was the reason for early writers of Economics preferred to caption their work as Political Economy. The judiciary tends to be less adversarial in civil-law countries where little significance is accorded to legal precedence and traditions compared to common-law countries. Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. At the same time, an agreement would be signed for the bank to sell back the assets to the company at a later date and at a higher price. 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). There are three main areas that a good marketing strategy program will cover when it comes to implications of doing business internationally. Taxes or tariffs that are levied as a fixed charge, regardless of the value of the product or service. This provides investors with a comparable investable portfolio while adopting explicit investment criteria defined by the Sharia. 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. How transparent is the government’s political, legal, and economic decision-making process? What is capitalism? 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. In Islam, Sharia is used to refer to the matters of religion that God has legislated for His Servants. In this system, judges interpret the law and judicial rulings can set precedent. Under the Sharia, a ruling issued by a judge is not binding on other judges or on him in later cases. Economist Intelligence Unit, “The Economist Intelligence Unit’s Index of Democracy 2008,” Economist, October 29, 2008, accessed December 21, 2010, http://graphics.eiu.com/PDF/Democracy%20Index%202008.pdf. President Rousseff started a program called Brasil Maior in order to promote industry in the nation. Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware. 8.5) with the aim to reduce obstacles in international trade. Start studying International Business Chapter 3: Governmental and Legal Systems. 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. 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. Understanding the balance between China’s government structure and its ideology is essential to doing business in this complex country. 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. Many observers note that it was the direct result of Chinese government intervention in what was deemed a key industry. In some countries, the government controls more aspects of daily life than in others. Legal Systems. Political, Economic, and Legal Systems. In contrast, a planned economyAn economic system in which the government or state directs and controls the economy, including the means and decision making for production. Politics changes can affect dramatically the manner that international business deal with import, export, and trade with another countries. Whether the motive is economic (i.e., profit) or political (i.e., state control), “foreign firms and investors find that national and local rules and regulations are increasingly designed to favor domestic firms at their expense. (e) Normally award of damages are in line with practicality but not as inflated as is often the case in the West. Under the Islamic law, western style finance is haram, or forbidden, to devout Muslims. Is there a well-established legal environment both to enforce policies and rules as well as to challenge them? In most countries, it is applied in conjunction with the common and the civil law. For example, in Islamic law, business is directly impacted by the concept of interest. 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, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html. For the purpose of this discussion, the main relevant difference is in ideology. 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. It is derived from the Roman law and is followed in most of continental Europe, Japan, and Latin America. Free trade advocates perceive this government-directed intervention as an unfair tilt against the global private sector. The legal/political system is a minefield, with few international standards or regulations to fall back on. While the government still remains the dominant force by controlling more than a third of the economy, more private businesses have emerged. Thankfully, for many agricultural products and agribusinesses like timber, fish, livestock and so on, the rules are fairly well defined. A substantial amount of oil-money is invested in Sharia-compliant funds. To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. Search. Tariffs that are calculated as a percentage of the value of the product or service. 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. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. Historically, democratic governments have supported capitalism and authoritarian regimes have tended to utilize a state-controlled approach to managing the economy. is an economic system in which the means of production are owned and controlled privately. 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. 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 main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. However, history demonstrates that, for some industries, global firms have chosen to do business with countries whose governments control that industry. Privacy Policy 8. Although almost half of the world’s countries can be considered to be democracies, the number of “full democracies” is relatively low (only 30); 50 are rated as “flawed democracies.” Of the remaining 87 states, 51 are authoritarian and 36 are considered to be “hybrid regimes.” As could be expected, the developed OECD countries dominate among full democracies, although there are two Latin American, two central European and one African country, which suggest that the level of development is not a binding constraint. 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. Is power concentrated in the hands of a few, or is it clearly outlined in a constitution or similar national legal document? China, for instance, has generally followed ‘rule by man and not by law’, the tradition of which still remains despite the country developing a model legal system. 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 legal framework to protect small and medium enterprises (SMEs), mainly to achieve social objectives, adversely influences the expansion of manufacturing capacities and achieving economies of scale in certain countries. Democracy is the most common form of government today. International Business. 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 legal aspects in international markets are as follows; 1. Why should businesses care about the different political and legal systems around the world? This also implies that courts of a sovereign country cannot be used to rectify its injustices on other countries. On the other hand, Japan is considered to be a ‘non-contractual’ society where contracts signed represent general understanding and are subject to change depending upon the circumstance. is also known as theocratic law and is based on religious guidelines. They pose a big challenge to the companies and the companies need to overcome the factors to become successful in the international stage. A political ideology that contends that individuals should control political activities and public government is both unnecessary and unwanted. While doing business in Islamic countries, international managers need to appreciate the intertwining of religion and Islamic law and take care never to mention the Palestine-Israeli situation. 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. (a) Contracts should be fair to all parties. Laws of most countries have elements of both common and civil law. 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). It might seem straightforward to assume that businesses prefer to operate only in democratic, capitalist countries where there is little or no government involvement or intervention. All business transactions must avoid riba, i.e., excessive profit, loosely defined as interest. Governments intervene in trade to protect their nation’s economy and industry, as well as promote and preserve their social, cultural, political, and economic structures and philosophies. Several things stand out in the 2008 index. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. Judicial Independence and Efficiency 3. China is one of the more visible examples, with its strong government and limited individual rights. India is an exception as it has the most voluminous income-tax legislation (Exhibit 8.3) in the world despite its relatively much lower rank in terms of GDP.