the political environment trevor hunter king’s university college

The Political Environment

Trevor HunterKing’s University College

What is the political environment

The political environment comprises institutions that:• influence the political environment through

their policies • pass laws and establish regulations • implement and enforce laws and regulations

2

Levels of Decision Making

Decisions affecting the political environment are made at the:

•international level – EU, UN•national level – federal governments•regional level – provincial or state•local level - municipal

3

National Decision-Making

Unitary systems: • decision-making power is centralized in hands

of central government - the regions have little or no autonomy

Federal systems:• power is shared between the centre and the

regions

4

Political and Legal Institutions

Countries usually have institutions, backed up by coercion that make decisions that implement rules to enforce or support the society’s norms and values: •Legislative branch: comes up with laws•Executive branch: implements laws and advises on policy•Judicial branch: interprets and applies laws

5

Different Political Systems

• Liberal democracy (less than half of 191 UN members)

• Authoritarian or absolutist (Burma; Saudi Arabia)

• Communist (China; Cuba; Vietnam; N. Korea)

• Theocratic (Iran; Vatican)

6

Liberal democracy

Characteristics:• Right of citizens to elect governments to

represent their interests• Governmental institutions based on majority

rule • Members drawn from a variety of political

parties • Free elections

7

• a permanent, skilled and impartial public/civil service responsible to government applies and enforces laws

• the right to personal freedom and to express views freely

• state institutions which are constrained in their powers by other institutions e.g. an independent judiciary

Liberal democracy

8

Checks, balance and conflict:• In liberal democracies conflict can occur

between different branches of the state:–Politicians and judiciary–Politicians and bureaucrats

• Conflicts are resolved via rule of law, the court system or compromise – not violence or illegal activities

Liberal democracy

9

Authoritarian and Absolutist Systems

• Characteristics:– Restrictions on operations of political

parties– Power in hands of one or a few people– No checks or balances on those holding

power– Power retained through patronage

10

Authoritarian and Absolutist Systems

• Characteristics:– Citizens unable to elect governments – if

there are elections they are rigged– Governmental institutions based on whim

and maintaining power for those who rule– Members drawn from rulers’ political party– Limited (if any) rights to citizens– No free speech

11

Theocratic Systems

• Characteristics:– Religion/faith plays the dominant role– Religious leaders and political rulers are the same

people – Political decisions derived from principles of the

dominant religion – Tend to be sexist and misogynistic– Low tolerance for non-believers– Limited (if any) citizens’ rights– No tolerance for dissent

12

Communism

• Characteristics:– Means of production owned by the State– Domination by one political party – The party controls the legislative, executive

and judicial branches of the State as well as trade unions and the media

– Limited citizens’ rights– No private ownership– Distribution of wealth– Not “true” Marxist communism

13

Functions of the State

The State performs some very important functions with major implications for business:•Establishes the legal framework•Regulator and deregulator•Public expenditure and taxation•International negotiator •Internal and external security•Arbitrator/judge•Currency and taxation

14

State as ArbitratorApple versus Samsung

Companies sometimes look to the judicial system to act as arbitrator in business disputes.

In 2011• Apple sued Samsung for infringing its

patents in courts in the US, S.Korea, Japan, Germany and Australia

• Samsung responded by suing Apple in Germany, France, Japan and S. Korea for patent infringement

15

Functions of the State

The State also plays a role in the business environment of a given country as a:•Subsidiser•Competitor•Customer and supplier

16

How Business Influences the Political Environment

• The relative comparative advantage of a country can be influenced by firms - done to make their situation better than that of competitors:– Pressure group – lobbying– Promises or threats – State consultation with business– Representation on government bodies– Giving money or gifts – Employment and exchange of personnel

17

The Socio-cultural and Legal Environment


The Socio-cultural Framework

• Businesses operating internationally face environments where social characteristics, structures, and institutions may differ greatly

• To be successful, businesses need to be aware of the differences that can affect the country’s relative comparative advantage

19

Culture

Culture is a system of shared:•Beliefs•Values•Customs•Behaviours prevalent in a society that are transmitted from generation to generation•“The collective programming of the mind which distinguishes the members of one category of people from another” Hofstede

20

Culture

• Values – including moral/religious beliefs • Norms – rules of behaviour • Sanctions – to enforce the norms• Language• Diet• Dress • Institutions – transmit the norms and values• Dynamic – changes over time and due to

outside or inside influences

21

Hofstede

Lessons for MNCs trying to harness national comparative advantage:•Cultural norms and values very powerful in the workplace •Organizational culture less influential than national cultures•Successful management in one culture no guarantee of success in another•Business may need to adopt a different managerial approach in different national contexts•Countries may not have a single national culture

22

Six Dimensions of Culture

• Acceptance of power inequality• Avoidance of uncertainty• Individualism versus collectivism• Materialism versus quality of life• Long-term versus short-term orientation• Indulgence versus restraint

23


Individualism versus collectivism:• Degree to which people act as individuals

vs. acting as a group• Which is more important - rights of the

individual vs. those of the group?• USA, France vs. Asian, African nations

24


Avoidance of uncertainty:• Extent to which people prefer structured

to unstructured situations• Uncertainty tolerance = few rules, little

attempt to control outcomes• Africa, Germany low tolerance, China,

UK high tolerance

25


Materialism versus quality of life (masculinity/femininity):

• Extent to which certain material/competitive activities/behaviours are valued vs. those more related to quality of life and relationships

• USA, Japan high, Nordic, African low

26


Power distance:• Degree of inequality accepted in society• High hierarchy and social class• Low equality and egalitarianism• Arabic, Latin American high• USA, Nordic low

27


Long-term versus short-term orientation:• Extent to which cultures make decisions

based on long-term thinking• Brazil, China long-term• USA, UK short-term

28


Indulgence versus restraint:• The extent to which a society allows

relatively free gratification of basic and natural human drives related to enjoying life and having fun vs. suppressing and regulating them by means of strict social norms.

29


Implications for business:• Cultural differences must be taken into

account when entering new markets• ME: Does what we sell “fit” cultural

norms?• Eff: Is what we need to do in this country

culturally acceptable?

30


Implications for business:• Similarities make it easier to enter for

both purposes• Differences can make it very difficult to

succeed and reduce, if not even eliminate any comparative advantage

31

Influences on Culture

Culture is not static and can be influenced a number of ways:•Globalization – contact and exchanges with other cultures

•Changes in political, economic, social and technological forces within society

•MNCs can affect these

32

Social Environment

Social characteristics vary from country to country:

•The nature and extent of divisions in societies:–income and wealth –social class–Tribe–ethnic group–gender

33

Social Environment

Social characteristics vary from country to country:•Different models of welfare provision•Demography – population size, growth and structure•Education – levels of literacy and educational achievement•Health – infant & maternal mortality, life expectancy, incidence of diseases

34

Social Models

•In different countries the state takes on different levels of responsibility for the welfare of its citizens (i.e. healthcare, education etc.) – some are more involved than others•Welfare policies differ in terms of their aims, amount spent, priorities, target groups etc.

35

Social Models

There are four predominant social models:1.The Liberal Social Model2.The Corporatist Model3.The Social Democratic Model4.The East Asia Model

36

The Liberal Social Model

• Based upon a clear distinction between the deserving and undeserving poor

• Limits to the type and levels of benefits• Commitment to low taxes and full

employment• Relatively low level of welfare provision• Belief that people can better themselves

through their own efforts• Canada, USA, Australia

37

The Corporatist Model

• High levels of social expenditure • Generous welfare benefits based on individual

contributions• Poverty is inevitable or due to social injustice• Emphasizes the importance of work • Values dialogue amongst the social partners • Gives important role to voluntary

organizations in welfare provision• Western Europe

38

The Social Democratic Model

• Relatively high levels of social expenditure

• Generous and universal welfare benefits• Redistributive tax and spending policies• Help for those wishing to work• Dialogue between the social partners• Scandinavian countries

39

East Asia Model

• Priority given to economic growth• Low levels of most social expenditure• Strong emphasis on education• Relatively low welfare benefits• Belief that family has a greater

responsibility in welfare assurance

40

The Ten most Populous Countries 2010 millions

41

Importance of the Legal Environment

The legal environment can influence:• Choice of production techniques• Product characteristics• Packaging and labelling• Advertising and sales promotion

42

Importance of the Legal Environment

The legal environment can influence:• Terms and conditions of trade • The way competition is conducted • Ownership of assets• Financial reporting• The treatment of employees

All of which can influence relative comparative advantage (depending upon why you want to enter the country)

43

Different Legal Systems

Four major systems in the world

Civil Law: • Most widespread• Primary source – legislation/legal codes• Judges apply and interpret laws• Good for businesses because codified laws

are much easier to interpret and follow

44


Four major systems in the world

Common Law:• Operates in e.g. UK, US, Canada, Australia, India• Source of rules from interpretations of principles

and judgements in prior cases – precedents – allows for changes that respond to societal changes

• Statutes take precedence over common law• Precedents state what can be done, but difficult to

find – hence the cost of legal fees and number of lawyers

45

Customary Law:• Source – life experiences, religious or

philosophical principles• Not written• Often mixed with another form• Judgement made by elders or chiefsMuslim Law:• Source – the Qur’an• Sometimes limited to personal behaviour, others,

much more extensive• Judgement made by clerics


46

Legal Systems across the World

47

Laws Affecting Business

Contract:• Legally binding agreement between buyers

and sellers of goods and services• Breaches of contract – complainant can get

redress through the courts

48

Resolving a Contract DisputeNo. of Days to Resolve the Dispute

Source: World Bank, Doing Business Database 2012

11.114.4

32.2

14.4

47.9

24.8

16.5

33.2

0

10

20

30

40

50

60

49

Ranking Getting credit, protecting investors, enforcing contracts, resolving insolvency

Source: World Bank Doing Business 2012

50


Tort Law• Involves injury to people or their assets • The aggrieved can pursue the accused

through the courts

Criminal Law• Comes into play when a crime is committed

e.g. selling dangerous products, fraudulent accounting, bribery

• Prosecution is undertaken by the State

51


International Law:• Law that applies across boundaries/in more than one country• Increasingly important for business in a globalising

world• Takes the form of treaties, codes, conventions• Facilitates international trade and investment by

reducing:– costs of disputes– uncertainty – the number of disputes with suppliers and customers

52

International Arbitration

Arbitration involves the settlement of a dispute by an impartial third party e.g. the UN, the World Bank.

Increasingly popular with business because:•The arbitrator is neutral•Confidentiality of proceedings•Flexible procedures•Decisions enforceable in different countries

53

The Technological Environment


Technology

Most global firms in the world engage in R&D (research and development) in multiple locations around the world and spend millions of dollars on that research and in the FDI that is used to set up the facilities.

55

Technology

56

Largest R&D Expenditures – 2011*

Name Country Industry Amount % of Sales

Toyota Japan Automotive $9.9 Billion 4.2

Novartis Switzerland Health $9.6 Billion 16.4

Roche Switzerland Health $9.4 Billion 19.5

Pfizer USA Health $9.1 Billion 14.4

Microsoft USA Software $9 Billion 12.8

Samsung S. Korea Electronics $9 Billion 6

Merck USA Health $8.5 Billion 16.5

Intel USA Electronics $8.4 Billion 15.5

GM USA Automotive $8.1 Billion 5.4

Nokia Finland Electronics $7.8 Billion 14.5

*Source: http://www.booz.com/global/home/what-we-think/global-innovation-1000/top-20-rd-spenders

Technology

R&D is important for firms to:• Develop new/improved products to earn

higher revenues, profits and growth• Learn new/improved processes for higher

productivity/ lower costs• Freeze out rivals –

iPod,Microsoft,Sony/Toshiba • Allow SMEs to compete with bigger rivals

57

Technology

In the global business environment, R&D is important for firms because new firms continually enter the market. Sometimes these entrances are anticipated but often not, and recently, more companies are entering from developing countries and disrupting industries (Huawei, Lonovo):

–Product obsolescence –Shortening of the product life cycle

58

Technology

The technological environment of a given country can provide it with a comparative advantage as Global firms recognize that innovation does not only come from domestic sources therefore developing countries often compete for R&D FDI through:

–Subsidies–Tax breaks

59

Technology

R&D facilities are attractive to countries because:•They create numerous high-paying jobs•They create numerous related jobs (construction, suppliers etc.)•They create spin-off effects

–New start-ups–Spread of technology–Overall infrastructure improvements

60

Technology

Sources of a technological environmental comparative advantage:

–Universities –Research institutes–Individual inventors–Infrastructure–Other firms:

•rivals•distributors•customers•suppliers

61

E-Commerce

Rapidly growing area of businessissues:• No single set of laws applicable to internet • Law lacks clarity• Difficulties applying and enforcing law on

individuals and businesses domestically and especially abroad

• Need for international law

62

Technology Protection

IP protection is a big risk globally:• Firms can protect their intellectual property

through:– Patents – exclusive right to exploit an

idea commercially– Copyright – literature, music TV, film– Trade marks and designs– Secrecy/preventing employees working

for a rival company

63

the political environment trevor hunter king’s university college

Documents

political rulers

people political decisions

state institutions

power power

rulers political party

decisionmaking power

laws executive branch

members authoritarian