INTERNAL

ENVIRONMENT

FOREIGN INTERNATIONAL DOMESTIC

ENVIRONMENT
BUSINESS ENVIRONMENT

GLOBAL ENVIRONMENT
POLITICAL ENVIRONMENT
 Refers to influence of Government in a nation on
international business.
 Type and structure of Govt. prevailing in a country
decides, promotes, fosters , encourages, shelters,
directs and controls the business of that country. A
political system that is honest , stable, efficient and
dynamic is a primary factor for economic
development.
Types of Government
Democracy
 Pure Democracy
 Republican form of Democracy

 Totalitarianism

 Theocratic – Afghanistan, Iran

 Secular - Combodia, South Korea, Iraq
 Tribal - Zimbabwe, Uganda, Kenya
 Levels of Political Risk
 High – Iraq, Somalia, Indonesia, Nigeria etc
 Low- US , Canada, Australia, Denmark etc
Political Risk Assessment
 Usage of experts or consultants familiar with host
country or region under consideration
 Development of their internal staff and in-house
capabilities
Political risk
 IB firms face political risks as and when there are
changes in Govt. policies and/or changes in political
parties in power.
 Confiscation – Nationalization of property without
compensation.
 Eg; Chinese Govt’s seizure of US property in 1949
when Chinese communist party took power.
 Expropriation : Nationalization of property with
compensation. Eg : Indian Govt nationalized
commercial banks with compensation in 1969.
 Nationalization : Process of shifting the ownership of
private property from private individuals or
institutions to the Govt. Eg : Burma nationalized
entire foreign trade. Poland and Czech communists
nationalized 100% of their economy. Peru
nationalized its copper mines.
 Domestication : Foreign business firms relinquish
(voluntarily cease to keep or claim) control and
ownership in favour of domestic investors either partly
or fully. Eg : Pepsi, General Motors in south Africa.
 General Instability Risk : These risks are due to
social, political, religious unrest in the host country
like the recent coup(a sudden, violent, and illegal
seizure of power from a government) in Fiji and
problems due to Muslim rebels in Philippines.
 Operation Risk : These risks are due to the
imposition of controls on the foreign business (like
production levels, Marketing, finance and human
resource) by the host govt.
eg. In 1955 a number of Arab Countries have
boycotted firms with branches in Israel.
Miscellaneous : Repatriation of profits, campaign
against foreign goods, mandatory labour laws, civil
wars etc.
Eg US decision to tax textile imports
Indicators of Political Instability
 Corruption
 Social unrest ( Christian – Muslim Conflicts in
Lebanon, Hindu- Muslim Conflicts in India, White-
Black Conflict in USA etc)
 Attitudes of nationals (Negative attitude due to
exploitation, employment to foreigners etc)
 Policies of Host Government ( BJP party asked
Coca-Cola to leave the country in 1977) (Dispute
between Argentina and Chile, made Argentina to
restrict exports to Chile).
Types of risks
 Macro Political Risks – affects all international
businesses in the same way
 Expropriation, confiscation, Political boycott, Civil
wars, inflation, currency devaluation, natural
calamities, poverty etc
 Micro Political Risk – Affects specific foreign
businesses
 Industry regulations, taxes, kidnapping, terrorist
threats etc.
Another Categorization
 Firm Specific risks –
 Business Risks
 Foreign Exchange Risks
 Governance Risks
 Country Specific Risks – Macro risks
 Transfer risks – Blocked
 Cultural & Institutional Risks –
 HR Norms, Religious heritage, Protectionism, ownership
structure etc.
 Global Specific Risks – Terrorism & war, cyber attacks,
Poverty, envt. concerns etc.
Political Rights and Civil Liberties
FREE COUNTRIES(81) PARTLY FREE (57) NOT FREE
COUNTRIES(53)
India Russia Afghanistan
US Mexico Myanmar
Canada Brazil China
Denmark Tanzania Saudi Arabia
Australia, Brazil North Korea
 Minimizing Political Risk
1. Avoiding Investment
2.Adaptation
 Employment to Nationals
 Local debt & Equity - Sharing Ownership (Ford choose to
merge its automobile operations in South Africa with Anglo
American by reducing its share to 40%)
 Development Assistance - Being Civic Minded ( DU pont
supplied 1.4 million water jug filters to 8 African countries,
IBM donated computer equipment and expertise worth $60,000
to Costa rica. In Mayanmar US oil company Unocal and
France’s Total spent $6 million ce
 Political Neutrality (Brazilian companies do not involve in
political activities of Central American Countries)
 Insurance – Overeas Private Investment Corporation
(OPIC)
 Multilateral Investment Guarantee Agency (MIGA)
3. Threat
4.Lobbying
5. Terrorist Consultants
6.Others
Multilateral & bilateral agreements
Avoiding high visibility acquisitions
Accelerating profit repatriation
LEGAL ENVIRONMENT
 Country’s laws regulate business practices, define the
manner in which business transactions are to be
carried out and set down the rights and obligations of
those involved in business deals.
1. No single, uniform international 2. International marketers must
commercial law governing comply with the laws of each
foreign business transactions country within which it operate
exists

3. The legal systems of different 4. Best to get expert legal advice

countries are very disparate when doing business in another
(Difficult to deal)and complex country
 Bases for Legal Systems
The bases for the majority of the legal systems of the world include:
(1) Common law, derived from English law and
found in England, the United States, Canada, and
other countries once under English influence
(2) Civil or code law, derived from Roman law and
found in Germany, Japan, France, and in non-
Islamic and non-Marxist countries
(3) Islamic law, derived from the interpretation of the
quran and found in Pakistan, Iran, Saudi Arabia,
and other Islamic states
(4) A commercial legal system in the Marxist-
socialist economies of Russia and the republics of
the former Soviet Union, Eastern Europe, China,
whose legal system is based on the economic,
political, and social policies of the state
 Common Law
 The basis for common law is tradition, past practices, and legal
precedents set by the courts through interpretations of statutes,
legal legislation, and past rulings
 Common law seeks “interpretation through the past decisions of
higher courts which interpret the same statutes or apply
established and customary principles of law to a similar set of
facts”
 Similar disputes should achieve similar legal results

US , Canada, England, New Zealand, India etc

 Civil/ Code Law
 Code law is based on an all-inclusive system of written rules
(codes) of law.
 Over 70 countries including Germany, France, Japan etc follow
this law.
 Civil law originated with the Romans in ancient times, who spread
it throughout the western world.

Under code law, the legal system is generally

divided into three separate codes:
(1) Commercial code
(2) Civil code, and
(3) Criminal code
 Islamic Law
 The quran forms the basis for the Shari’ah (Islamic law)
 It encompasses religious duties and obligations and patterns of
social and economic behavior for all individuals
 It includes issues such as property rights, economic decision
making, and types of economic freedom
 The overriding objective of the Islamic system is social justice
 Islamic law prohibits the payment of interest
 Islamic doctrine advocates risk sharing, individuals’ rights and
duties, property rights, and the sanctity of contract
 Emphasis placed on the ethical, moral, social, and religious
dimensions to enhance equality and fairness for the good of
society
 Prohibits investment in activities that violate the Shari’ah, e.g.,
business dealing with alcohol, gambling, and casinos
Socialistic Law
 The law evolves from the
Marxist Socialistic system and
continues to influence
regulations in former
communist countries,
particularly those from the
former soviet Union, as well as
Present day China, Vietnam,
North Korea and Cuba.
Provides state ownership of
means of production and
distribution. State ownership of
land and little tolerance of
private property rights
 Business woman was arrested in Nigeria for selling oil
without license. The penalty was death.
 Acquitted because of active intervention by the
counsel and US Congressional representatives.
 Consultant names Flynn who was assisting a US
printing company that was unable to comply with with
the contract terms with a Mexican company. Flynn
flew to Mexico to resolve the issue and was arrested
and sentenced to prison for 6 years. After 3 yrs he was
released on the ground that he had not been party to
the contract.
INTERNATIONAL DISPUTE RESOLUTION
 Between Governments – Intervention of World
court at the Hague
 International court of justice , the principle judicial
organ of UN
 Between firm and Government
 Between firms
 (Courts of the country of one of the party based on
contracts containing Jurisdictional Clauses)
Principle means
 Conciliation : Conciliation is an alternative dispute resolution
process whereby the parties to a dispute use a conciliator, who meets
with the parties both separately and together in an attempt to resolve
their differences.
 Arbitration : Arbitration is an ADR (alternative dispute resolution)
method where the disputing parties involved present their
disagreement to one arbitrator or a panel of private, independent and
qualified third party “arbitrators.” The arbitrator(s) determine the
outcome of the case
 Litigation a legal proceeding in a court; a judicial contest to determine
and enforce legal rights. Litigation is what goes on in court; it is the
name for the process of suing someone or trying them for a crime.
When families fight over their inheritance, the assets they want may
end up being tied up for decades in litigation.