4.03 Understand the different types of political and legal systems

Political systems

Sets the laws under which businesses operate Sovereign states - what most countries consider

themselves - free from external control Protectorates - under partial control of larger

country US protectorates include Guam, US Virgin

Islands, Puerto Rico & American Samoa. Aruba - protectorate of The Netherlands. British Virgin Islands - protectorate of Great

Britain

Political systems (con’t)

Over past 30 years - strong movement toward democracy worldwide - 62% of countries have democracies

http://youtu.be/nhLysKbCoaM YouTube clip on Democracy being possible

http://www.youtube.com/watch?v=Arn8Fp1jyok

Types of political systems

Democracy - allows for direct elections by country’s citizens Practiced in ancient Athens 5th century B.C.

- only allowed direct voting by small percentage of population

Elections must be both free & fair to be democratic

Types of political systems (con’t)

Republic - citizens elect representatives who, in turn, vote on laws.

Roman empire was first republican form of government

Most democracies (such as the US) operate under this form

http://www.youtube.com/watch?v=PPR7NP7NggI YouTube clip on difference between

democracies and republics.

Types of political systems (con’t)

One-party state - allow only 1 political party. Ex) Communism in Cuba, North Korea

& Vietnam Mexico - 1 state for 70 years until

2003, & now multi-party democratic system.

http://www.youtube.com/watch?v=B3u4EFTwprM Capitalism and Socialism youtube

Types of political systems (con’t)

Theocracy - religion or faith plays dominant role in government.

Often religious leaders have direct role in controlling government actions.

Ex) Iran, Saudi Arabia & Vatican City

Political risk

Uncertainty about stability of political or legal system Change in system can result in uncertainty. Can result in voiding of contracts,

nationalization of property. Multi-party democracy proven - highly stable

form of government. One-party states & theocracies can see

business activities as threat to power. Chance for corruption increases

Political risk (con’t)

International marketers deal with political risk by increasing amount of information collected on country & leaders. Must develop contingency plans in case of

political change. Businesses should act as good corporate

citizens by following laws & customs of country

Businesses can purchase political risk insurance to protect assets or profits.

Political economy movement

General shift to democratic mixed economies China & Russia began shift after 1990 Russian citizens struggle with obtaining

wealth & many often vote to return to more command economy.

China has maintained 1- party state, but allowed for some economic reform.

Political economy movement (con’t) Activity***

Political economy movement (con’t)

Not all countries see democratic mixed economies as ideal system. Many developing countries in danger of

moving from democracies to one-party states under planned economies.

Leaders in some theocracies claim democracy & free markets = Western ideas; should not be followed

Political economy movement (con’t)

Latin American countries have some of most unequal income distributions in world.

Inequality has created political problems Voting poor in democracies elect leaders willing to

move away from free-market economies. Situations can lead to political instability & economic

uncertainty. Ex) Chavez in Venezuela & Morales in Bolivia http://www.youtube.com/watch?v=oJhqHHPiN9Q YouTube clip, Chavez’ criticizing US & Bush

http://youtu.be/2KkK50CQ2w0 YouTube clip of Morales criticizing US & capitalism

Legal systems

Creates, interprets & enforces laws of country.

International marketers concerned about nature of laws of legal system & how well laws enforced.

Statutory law- systems attempt to put every possible legal issue into specific law

Case law - based on British common law. US & other countries influenced by Great

Britain often have this system.

Legal systems (con’t) Corruption - misuse of official position for 1’s own benefit.

Countries rated on level of corruption, 10 = highly clean & 0 = highly corrupt (according to Transparency International) Sweden, Singapore, Denmark, Finland & New Zealand

rated least corrupt. Iraq, Somalia, Afghanistan & Myanmar (Burma) rated

most corrupt. US - 22nd with 7.1 rating http://www.transparency.org/policy_research/

surveys_indices/cpi/2010/results Transparency International corruption results

Major problem for international businesses in countries with weak legal systems.

Legal systems (con’t)

Contract Law Contract - any legally enforceable promise or set of

promises made by 1 party to another. Contracts lower risks of doing business by stating each

party’s responsibilities. Weak contract enforcement can hinder business

operations Transactions may need to be cash instead of credit. May be fear of selling internationally because of lack of

copyright & patent enforcement

Legal systems (con’t)

Development of free trade areas helps businesses operate internationally Trading regions unify their legal systems &

set regulations for enforcement of contracts. Ex) Business can patent product in one

European country & the patent will be enforced throughout EU.

Legal systems (con’t)

Sustainability - worldwide movement allows economic development while minimizing negative impacts on environment.http://youtu.be/B5NiTN0chj0 YouTube clip on sustainability Green laws enacted by many countries for

business conduct & sustainability Ex) Germany requires manufacturers to take

products back for recycling when product no longer used.

Ex) Company that sells computers is responsible for collecting & recycling computer when no longer needed

Legal systems (con’t) Kyoto Protocol - set of agreements on global

air pollution designed to limit global warming. Over 140 countries have signed UN sponsored

treaty. US one of lone major holdouts, refusing to sign

treaty. http://www.youtube.com/watch?v=xh8PpJOH9aw http://www.youtube.com/watch?v=6S5SAPOKrNc

Lessens impact on companies doing business in US, Any company engaged in business in another

country will have to abide by treaty.