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3-1
chapter 3
Legal, Technological, Accounting, and
Political Environments
International Business, 6th E
dition
Griffin & Pustay
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-2
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
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-3
Chapter Objectives (continued)
• Describe the impact of the host country’s technological environment on international business
• Identify the factors that influence national accounting systems
• Explain how firms can protect themselves from political risk
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-4
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.
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-5
Legal Systems
Common Law Civil Law
Religious Law Bureaucratic Law
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3-6
Common Law
• Based on wisdom of judges’ decisions on individual cases through history
• Cases create legal precedents
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3-7
Countries Using Common Law
• United States
• Canada
• Australia
• India
• New Zealand
• Barbados
• Saint Kitts
• Nevis
• Malaysia
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-8
Civil Law
• Based on codification of what is and is not permissible
• Originated in biblical times with the Romans
• Reinforced by French Napoleonic code
• Judge determines scope of evidence collected and presented
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3-9
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
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3-10
Bureaucratic Law
Bureaucratic law is the legal system in communist countries and in dictatorships.
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Laws Affecting International Business Transactions
Sanction
Embargo
Extraterritoriality
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3-12
Laws Directed Against Foreign Firms
Nationalization Expropriation
Confiscation Privatization
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3-13
Economic and Political Impacts of MNCs on Host Countries
• Advantages
– Greater selection
– Higher standards
– Job creation
– Tax benefits
– Technology transfers
• Disadvantages
– Competition
– Job loss
– Dependency on economic health of MNC
– Political power
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-14
Cultural Impacts of MNCs on Host Countries
• Advantages– Improved standard
of living
– Introduction of new products
– Better health care
– More sanitary food products
• Disadvantages– Abuse of less
developed policies in the areas of safety and environmental concerns
– Negligent product offerings
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-15
Dispute Resolution
• Which country’s law applies?
• In which country should the issue be resolved?
• Which technique should be used to resolve the conflict?
• How will the settlement be enforced?
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-16
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
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
3-17
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.
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3-18
The Technological Environment
Resources
Agriculturalland
Richnatural
resources
Skilledlabor
Low-costlabor
Infrastructure
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3-19
Intellectual Property
• Patents
• Copyrights
• Trademarks
• Brand names
Intellectual property often forms the basis of a firm’s competitive advantage!
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3-20
International Treaties Protecting Intellectual Property Rights
• International Convention for the Protection of Industrial Property Rights (i.e., the Paris Convention)
• Berne Convention for the Protection of Literary and Artistic Works
• Universal Copyright Convention
• Trade-Related Intellectual Property Rights Agreement
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3-21
The Accounting Environment
The Roots of National Differences
• GAAP - Generally Accepted Accounting Principles
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3-22
Figure 3.1 Influences on a Country's’ Accounting System
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3-23
The Accounting Environment
Differences in Accounting Practices
• Valuation and Revaluation of Assets
• Valuation of Inventories
• Dealing with Tax Authorities
• Use of Accounting Reserves
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The Accounting Environment (continued)
Other Differences
• Capitalization of Financial Leases
• Preparation of Consolidated Financial Statements
• Capitalization of Research and Development expenses
• Treatment of Goodwill
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3-25
The Accounting Environment (concluded)
Impact of Capital Markets
• International Financial Reporting Standards
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3-26
The Political Environment
Ownershiprisk
Transferrisk
Operatingrisk
Political Risk
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3-27
Table 3.2 Examples of Political Risks
• Expropriation
• Confiscation
• Campaigns against foreign goods
• Mandatory labor benefits legislation
• Civil wars
• Inflation
• Kidnappings, terrorist threats
• Repatriation
• Currency devaluations
• Increased taxation
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3-28
Levels of Political Risk
Macropoliticalrisk
Micropoliticalrisk
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3-29
Firms Need to Answer These Questions
• Is the country a democracy or dictatorship?
• Does the country rely on free market or government controls?
• Does the government view foreign firms as a positive influence?
• Are the firm’s customers private or public?
• Does the government act arbitrarily?
• Is the existing government stable?
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3-30
Map 3.3 Countries Relative to Political Riskiness, 2008
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3-31
Insurance Against Political Risks
• Overseas Private Investment Corporation (OPIC)
• Multilateral Investment Guarantee Agency (MIGA)
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in
any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United
States of America.
Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall