1 chapter 3 Legal, Technological, Accounting, and Political Environments 2 Chapter Objectives Describe the major types of legal systems confronting international businesses Explain how domestic laws affect the ability of firms to conduct international business List the ways firms can resolve international business disputes 3-2 3 Chapter Objectives (continued) 4 The Legal Environment While domestic firms must follow laws and customs of the home country, international businesses must obey laws of the home country and all host countries. Laws affect the markets firms may serve, the prices they can charge, and the costs of necessary inputs such as labor, raw materials, and technology. National legal systems vary dramatically for historical, cultural, political, and religious reasons. The rule of law, the role of lawyers, the burden of proof, the right to judicial review, and the laws themselves differ from country to country. 3-4 5 Legal Systems Common Law Civil Law Religious Law Bureaucratic Law 6 Common Law Based on wisdom of judges’ decisions on individual cases through history Cases create legal precedents Common law is the foundation of the legal systems in the United Kingdom and its former colonies, including the United States, Canada, Australia, India, New Zealand, Barbados, Saint Kitts and Nevis, and Malaysia. Common law is based on the cumulative wisdom of judges’ decisions on individual cases through history. These cases create legal precedents which other judges use to decide similar cases. Common law has evolved differently in each common law country. In addition to differences in case law, statutory laws, which are laws enacted by legislative action, vary among common law countries. 7 Countries Using Common Law 8 Civil Law Based on codification of what is and is not permissible 9 Religious Law Based on the officially established rules governing faith and practice of a particular religion A country that applies religious law to civil and criminal conduct is called a theocracy Iran is an example of a theocracy. A group of mullahs, or holy men, determine legality through their interpretation of the Koran. Countries relying upon religious law often have other features such as an absence of due process and appeals procedures. 3-9 10 Bureaucratic Law Bureaucratic law is the legal system in communist countries and in dictatorships. Bureaucratic law is whatever the country’s bureaucrats say it is, regardless of the formal law of the land. Contracts can be made or broken at the whim of those in power. In countries relying on bureaucratic law, the ability of an international business to manage its operations is compromised by bureaucrats. International managers are often confronted with arbitrary rules. This is frequently a complaint for businesses operating in China. 3-10 11 Laws Affecting International Business Transactions 12 Laws Directed Against Foreign Firms 13 Economic and Political Impacts of MNCs on Host Countries 14 Cultural Impacts of MNCs on Host Countries 15 Dispute Resolution Which country’s law applies? 16 Principle of Comity A country will honor and enforce within its own territory the judgments of foreign courts Conditions of the principle: Reciprocity is extended Defendant is given proper notice Judgment does not violate domestic statutes or treaty obligations Whether a foreign court order is enforced is determined by the principle of comity. The principle of comity provides that a country will honor and enforce within its own territory the judgments and decisions of foreign courts, with certain limitations. For the principle to apply, countries commonly require three conditions to be met. 1. Reciprocity is extended between the countries; that is, country A and country B mutually agree to honor each other’s court decisions. 2. The defendant is given proper notice. 3. The foreign court judgment does not violate domestic statutes or treaty obligations. 3-16 17 Arbitration Arbitration is the process by which both parties to a conflict agree to submit their cases to a private individual or body whose decision they will honor. Because of the costs and uncertainties of litigation, many international businesses seek less expensive means of settling disputes over international transactions. Often, business conflicts will be resolved through alternative dispute resolution techniques, such as arbitration. Because of the speed, privacy, and informality of such proceedings, disputes can often be resolved more cheaply than through the court system. 3-17 18 The Technological Environment 19 Intellectual Property 20 International Treaties Protecting Intellectual Property Rights 21 The Accounting Environment 22 Figure 3.1 Influences on a Country's’ Accounting System 23 The Accounting Environment 24 The Accounting Environment (continued) 25 The Accounting Environment (concluded) 26 The Political Environment 27 Table 3.2 Examples of Political Risks 28 Levels of Political Risk 29 Firms Need to Answer These Questions 30 Map 3.3 Countries Relative to Political Riskiness, 2008 31 Insurance Against Political Risks |