Chapter 5 To learn how differing types of

Chapter 5 To learn how differing types of political system function, in terms of governmental processes, societies and business interactions. To gain a critical appreciation of democracy’s progress in differing national environments. To assess political risk, both internally and internationally. To appreciate the nature and significance of diverse national legal systems, as well as their interactions with both regional and international legal frameworks To assess legal risk for international managers, including both national and international implications.

Aims of the lecture • To learn how differing types of political system function, in terms of governmental processes, societies and business interactions. • To gain a critical appreciation of democracy’s progress in differing national environments. • To assess political risk, both internally and internationally. • To appreciate the nature and significance of diverse national legal systems, as well as their interactions with both regional and international legal frameworks. • To assess legal risk for international managers, including both national and international implications.

Comparing political systems Definition: structures and processes by which a nationstate is governed. Authoritarian government – concentration of power in an individual or small group, often military or ideologybased. Democratic government – system based on accountability of governments to the people, through free elections. Many political systems fall on a continuum between democracy and authoritarianism: – The market-oriented authoritarian or semiauthoritarian system characterizes numerous emerging economies, where the state guides economic development.

Degrees of democracy States vary in democratic accountability, participation and civil rights. Attributes of democracy include: – Free and fair elections, supported by media freedom – The rule of law, including independent judiciary (though its robustness varies between states) – Civil society – the presence of freely-functioning voluntary groups (including religious, political and labour) is a substantive indicator of genuine pluralism. Many transition economies are building democratic institutions alongside market structures; however, legacies of authoritarianism remain.

Features of authoritarianism and democracy Authoritarian government rests on rule by a political elite that has power for the time being. Such a regime usually holds on to the power by suppressing dissent, often by force. Democratic governments tend to be accountable to the people, instead, by relying on free Authoritarianism versus Democracy and fair elections. The will Constitutional framework; Power determines law; of the leadership thus domi. Rule of law equality before law constitution on paper only nates in an authoritarian regime, whereas democracy Detention without charge; Right to a fair trial; no few rights for accused; detention without charge; Civil rights relies on representative Imprisonment for torture prohibited political dissent institutions like the elected legislatures. Restrictions on association, Right to vote and stand expression and any activity contrary to the official line Political rights for office; freedom of association and expression Elections with little or no choice of the candidates Elections Regular elections; one person/one vote; monitoring for irregularities, intimidation Courts are an administrative arm of government Court system Independent judiciary; transparent process Press controlled by the state; restricted reporting Freedom of the press Editorial and reporting independent from government

From authoritarian to democratic: selected countries Source: Kekic, L. (2006) ‘A pause in democracy’s march’, The Economist: The World in 2007 data, www. theworldin. com

Branches of government Executive – carries out government functions, including finances, national security and social welfare. Legislative – law-making structures and processes; in democracies, based on a national elected assembly. Judicial – through the court system, officials administer justice and adjudicate in disputes for both individuals and organizations. Two constitutional principles underpin relations between the three branches: – Separation of powers – each is independent, but… – Checks and balances prevent domination by one branch.

Parties and politics Political activities in most countries are played out via political parties, although they are typically restricted to government-sponsored parties in authoritarian states. In democratic societies, parties represent a range of views: – Conservative (on the ‘right’), socialist (on the ‘left’), nationalist, religious and rural, among others. – Centrist parties have greater widespread appeal to electorates. In multiparty systems, a coalition government (formed by two or more parties) is a solution, but can be unstable.

Respect for institutions in Latin America (2007) Source: ‘A warning for reformers’, The Economist, 17 November 2007

Political risk Businesses value stability and predictability of government policy in assessing location strengths and weaknesses. Political risk can arise within a country or from external sources. An authoritarian regime may seem to be more stable than a multiparty democratic one, but appearances can be deceptive. Factors which can destabilize a government (to which authoritarian governments are particularly vulnerable) include: corruption , personalized power centres, factional infighting, institutional power bases (such as the army).

Internal political risks

Transparency International’s Corruption Perception Index, selected countries, 2007 Note: 0 = highly corrupt, 10 = highly clean. Rankings appear in brackets Source: Transparency International (2007) Corruption Perception Index, www. transparency. org

International political risk Insecurities in relations between countries create uncertainties which affect international business. Countries differ in their relative power – in economic, political and military respects – and their businesses often reflect these strengths (and weaknesses). Regional and cross-border conflicts give rise to risk in many parts of the world, especially affecting operations in resource-rich countries. In unstable locations and uncertain environments, MNEs must assess risks and work with stakeholders.

International risks

The role of governments in economic activities Traditional liberal market view is one of minimum intervention, but recent financial crises have prompted direct financial support by US and European governments. State-owned enterprises, especially in strategic sectors (such as energy), are limbs of the government. State-controlled enterprises have varying ownership structures – some are listed companies, although the state is the majority shareholder. State players are a growing force in the global economy, notably China and resource-rich Middle Eastern states.

Business regulation • Regulation can be advantageous for businesses, as in government small-business initiatives, but is generally perceived as burdensome and costly. • A trend has been reduction in national regulation. • Businesses may be attracted to countries with little regulation, but the downside may be weak environmental and safety regimes, as well as weak protection of property. • Competition law seeks to control anti-competitive and unfair business practices: – EU competition law targets abuse of a dominant position in the relevant market.

Business regulation in selected countries

Legal frameworks: national to international The national legal system provides the substantive law and court structure which most directly affect businesses. MNEs operating in different countries are subject to the national law in each. – Legal systems in democratic societies where the rule of law prevails tend to be more transparent than those in authoritarian countries. Regional frameworks and international law overlap with national law in several spheres, such as environmental protection.

Dimensions of the legal environment

Legal risk internationally Legal risk arises when a company needs to launch legal action (such as to enforce a contract) or when it must defend itself against legal action. In FDI and outsourcing strategies, the MNE is involved in webs of legal relations in foreign environments: Contracts with suppliers, customers, subcontractors Liability under employment law and health & safety law Liability under environmental protection law Liability for dangerous products Liability for industrial accidents

Legal risks in overseas locations

Most numerous types of litigation in the US and UK (2004) Source: Financial Times, 10 October 2005

Legal institutions in the EU The Council of Ministers is the seat of executive authority. The European Commission has both legislative and executive powers, such as issuing regulations and directives. The European Parliament acts as a check on the other institutions, but is not as influential as a national legislature. EU institutional reforms focus on reducing unwieldy structure, but face objections … From those fearful of loss of national sovereignty From those objecting to lack of democratic accountability.

International law and business implications Inter-governmental co-operation has led to a growing body of international law, in the form of conventions and treaties. There is a growing consensus internationally that in some areas, such as human rights and the environment, international law is setting the standards. For firms, compliance with international standards, rather than weaker national laws, is increasingly expected by stakeholders, consonant with CSR strategy.

Ratification of major human rights conventions Source: UNDP (2006) Human Development Report 2006 (Basingstoke: Palgrave Macmillan)

Conclusions In both operations and markets, national political and legal systems are key aspects of the environment for MNEs. Both authoritarian and democratic systems – and many in between – offer opportunities for international business, but… Political and legal risks arise in countries with authoritarian regimes and weak rule of law. Achieving corporate goals depends on managing these risks. The growing importance of international law is concentrating the minds of decisionmakers in both governments and MNEs.