Welcome to class of political and legal forces

byDr. Satyendra Singh

University of WinnipegCanada

Learning Objectives Ideological forces that affect business Governments own businesses/privatization Government stability and policy continuity Risk assessment by international businesses International legal forces Importance of foreign law Protection of intellectual properties Accounting law Antitrust law

Objectives:

Ideological Forces… Communism The belief that the government should own all the major factors of production Production in these countries is at state-owned factories and farms (some exceptions) Labor unions are government-controlled

Expropriation and Confiscation Government seizure of property within its borders owned by foreigners, followed by prompt, adequate, and

effective compensation to the former owners Generally expropriated becomes confiscation (no compensation)

Ideological Forces…

Capitalism An economic system in which the means of production

and distribution are for the most part privately owned and operated for private profit

Government restricted to functions that the private sector cannot perform

– National defense– Police, fire, and other public services– Government-to-government international relations

Ideological Forces Socialism

Government typically owns and controls most of the factors of production

Many European countries have practiced socialism: Great Britain, France, Spain, Greece, Germany

Socialism in Developing Countries Shortages of capital, technology, and skilled

management and labor are characteristic Many of the educated citizens connected with

government

Ideological Forces…

Conservative A person, group, or party that wishes to minimize government

activities and maximize private ownership and business

Liberal A person, group, or party that urges greater government

involvement in business and other aspects of human activities

Government Ownership of Business

Why firms are nationalized– To extract more money from the firms– To increase the firm’s profitability – For ideological reasons– To preserve jobs– To follow previous government support (control follows

money)

Unfair Competition?

Private-owned companies complain that government owned companies – Can cut prices unfairly– Get cheaper financing– Get government contracts– Get export assistance– Can hold down wages with government assistance

Privatization…

The transfer of public sector assets to the private sector, the transfer of management of state activities through contracts and leases, and the contraction out of activities previously conducted by the state

Airports, garbage, postal services frequent examples

Trend all over the world India, Brazil, China…

Privatization

Not always ownership transfer from government to private entities Activities previously conducted by the state may be contracted

out Governments may lease state-owned plants to private entities Governments may combine a joint venture with a management

contract with a private group to run a previously government-operated business

Government Stability

Stable Government Maintains itself in power and whose fiscal, monetary and

political policies are predictable and not subject to sudden, radical changes

Unstable Government Cannot maintain itself in power or makes sudden,

unpredictable, or radical policy changes

Country Risk Assessment

An evaluation that assesses the country’s economic situation and policies and its politics to determine how much risk exists of losing an asset or not being paid

Types of Country Risks Political Wars, revolutions, coups Economic Financial, BOP deficits Labor Low productivity, militant unions Legal Laws may be changed

ICs and Political Forces

International Companies (ICs) Make decisions about where to invest, where to

conduct research and development, and where to manufacture products

The financial size of many ICs provides them with a strong negotiating position

Legal Forces

International Legal Forces

• Rule of law allows foreign businesses to know interests will be protected

• The most important source is found in bilateral and multilateral treaties between nations

• United Nation’s International Court of Justice creates law when it decides disputes

Performance of Contracts…• United Nations Solution

– Many countries have ratified the UN Convention on Contracts for International Sales of Goods (CISG)

– CISG established uniform legal rules to govern international sales contracts and the rights and obligations of the buyer and seller

– CISG is automatically applied to all contracts

Enforcement of Foreign Arbitration Awards

• The UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards

– Most UN member-countries have ratified this convention

– Binds ratifying countries to compel arbitration when the parties have so agreed in their contract and to enforce the resulting awards

Intellectual Property Patents

European Patent Organization (EPO) World Intellectual Property Organization (WIPO)

Trademarks Madrid Agreement of 1891

Trade names Convention for the Protection of Industrial Property

Copyrights– Berne Convention of 1886 adhered to by 77 countries– Universal Copyright Convention of 1954 adopted by 92

countries

Legal System: Europe vs. USA Europe

Legislation is rarely amended and regulations are rarely revised

Courts are not as often asked to give their interpretations If they are, the decisions are rarely appealed

United States Laws and regulations are constantly being amended or

revised by legislatures and the agencies

Legal System: England vs. U.S.

England has a split legal profession with barristers and solicitors

England has no jury for civil court actions Contingency fees less common in England Award of costs to the winner in civil litigation standard

in England Pretrial discovery differs

Standardizing Laws• Many attempts have been made to standardize

laws among various countries• International business flows much better with a

uniform set of rules• Attempts include

– Tax conventions and treaties– Antitrust cooperation– International Center for Settlement of Investment

Disputes– UN Convention on International Sale of Goods– International Organization for Standardization (ISO)– International Electrotechnical Commission (IEC)

Taxation

Tax Treaties or Conventions– Treaties between countries that bind the

governments to share information about taxpayers and cooperate in tax law enforcement, often called tax conventions

– The U.S. has tax treaties with over 50 countries

Accounting Law

• Sarbanes-Oxley Act (SOX)– Brings major changes to the regulation of corporate

governance and financial practice• New reporting requirements• Officer and director responsibilities• Auditor independence

– Applies to any company, domestic or foreign, that has securities registered or is required to file reports under the Securities Exchange Act of 1934

Antitrust Laws

• Antitrust laws – Laws to prevent price fixing, market sharing, and

business monopolies

• Competition policy– The European Union equivalent of antitrust laws

• The U.S. and the EU have attempted to enforce their antitrust laws extraterritorially

• Japan’s Fair Trade Commission – Japanese companies are incorporating antitrust

thinking into strategy

Torts

Product Liability– Standard that holds a company and its officers and directors

liable and possibly subject to fines or imprisonment when their product causes death, injury, or damage

Strict Liability– Standard that holds the designer or manufacturer liable for

damages caused by a product without the need for a plaintiff to prove negligence in the product’s design or manufacture