The thirteen largest oil companies (as measured by the reserves they control) in the world are all state-run and all are bigger than ExxonMobil, which is the worlds largest private oil company. In the past thirty years, governments have increasingly privatized a number of industries. Legal Differences Learning Outcomes Describe the impact of legal differences on global trade Governments around the world maintain laws that regulate business practices. Totalitarianism, a more extreme form of authoritarianism, occurs when an authoritarian leadership is motivated by a distinct ideology, such as communism. In China, it is heavily encouraged and accepted as it is part of the growing relationship that is so sought after in business. Sharia has clear guidelines for aspects of life. National security issues can impact both the import and exports of a country, as some governments may not want advanced technological information to be sold to unfriendly foreign interests. Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. Governments intervene in trade to protect their nations economy and industry, as well as promote and preserve their social, cultural, political, and economic structures and philosophies. There are three main types of legal systems: (1) civil law, (2) common law, and (3) religious law. Each political systems philosophy impacts the policies that govern the local economy and business environment. The most commonly known example of religious law is Islamic law, also known as Sharia. A political system is basically the system of politics and government in a country. January 08, 2020 Summary. Reading: Political and Economic Differences | Introduction to Business This raises two interesting characteristics of international law. Before we can evaluate the impact on business, lets first look at the different political and legal systems. Businesses in industries, such as commodities and oil, have found more authoritarian governments to be predictable partners for long-term access and investment for these commodities. 5 Common Challenges of International Business | HBS Online For the purpose of this discussion, the main relevant difference is in ideology. Legal system - the rules that regulate behavior along with the processes by which the laws are enforced and through which redress for grievances is obtained the system in a country is influenced by the prevailing political system Legal systems are important for business because they define how business transactions are executed Despite the advances in democracy in recent decades, more than one third the worlds population still lives under authoritarian rule. Before we can evaluate the impact on business, lets first look at the different political and legal systems. Many business analysts mention these issues in discussions of global business ethics and the role and responsibility of companies in different political environments. 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What businesses must focus on is how a countrys political system impacts the economy as well as the particular firm and industry. Its leaders see the economy as a tool to preserving the states power, which in turn is essential to maintaining stability and growth and ensuring the long-term viability of the Communist Party.Jason Dean, Andrew Browne, and Shai Oster, Chinas State Capitalism Sparks Global Backlash, Wall Street Journal, November 16, 2010, accessed December 22, 2010, http://online.wsj.com/article/SB10001424052748703514904575602731006315198.html. Governments intervene in trade for a combination of political, economic, social, and cultural reasons. To begin with, despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. How Corporate Cultures Differ Around the World - Harvard Business Review Authoritarian governments centralize all control in the hands of one strong leader or a small group of leaders, who have full authority. Governments intervene in trade for a combination of political, economic, social, and cultural reasons. For example, whether the company plans to only sell or buy products in the international markets or it also wants to produce and manufacture products in such markets. These leaders are not democratically elected and are not politically, economically, or socially accountable to the people in the country. The legal/political aspect is very important in global marketing. 3.3 The Global Business Environment - Exploring Business Whereas, in the U.S., this type of practice is often considered to be unethical and controversial. Governments intervene in trade to protect their nations economy and industry, as well as promote and preserve their social, cultural, political, and economic structures and philosophies. For the purpose of this discussion, the main relevant difference is in ideology. State companies, like their private sector counterparts, get to keep the profits from oil production, creating a significant incentive for governments to either maintain or regain control of this very lucrative industry. China is both an emerging market and a rising superpower. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. It might seem straightforward to assume that businesses prefer to operate only in democratic, capitalist countries where there is little or no government involvement or intervention. However, in defense, power generation, telecoms, metals, minerals, aviation, and other sectors, a growing number of emerging-market governments, not content with simply regulating markets, are moving to dominate them.Ian Bremmer, The Long Shadow of the Visible Hand, Wall Street Journal, May 22, 2010, accessed December 21, 2010, http://online.wsj.com/article/SB10001424052748704852004575258541875590852.html. National Differences in Political, Economic, and Legal Systems. Democratic governments derive their power from the people of the country, either by direct referendum (called a direct democracy) or by means of elected representatives of the people (a representative democracy). They may want to protect young industries or to preserve access to local consumer markets for domestic firms. Some governments use trade as a retaliatory measure if another country is politically or economically unfair. This combination is called pluralism, which asserts that both public and private groups are important in a well-functioning political system. For example, the Chinese government owns almost all the major banks, the three largest oil companies, the three telecommunications carriers, and almost all of the media. Governments have several key policy areas that can be used to create rules and regulations to control and manage trade. As you might expect, established democracies, such as those found in the United States, Canada, Western Europe, Japan, and Australia, offer a high level of political stability. International Business Chapter 6: The Global Trade and Investment Environment; International Business Chapter 4: National Differences; International Business Chapter 2: National Differences in Political, Economic, and Legal Systems; International Business Chapter 1: Introduction; Chapter 11 Assignment - N/A; Chapter 15 Assignment - N/A Economic systems are explored in terms of market characteristics: market economies, command economies, and mixed economies. Half of the worlds population lives in a democracy of some sort, although only some 14 percent reside in full democracies. Chinese government control on the Internet, for example, has helped propel homegrown, Baidu, a Chinese search engine, which earns more than 73 percent of the Chinese search-engine revenues. A pro-development and growth driven will provide a more conducive environment for businesses to operate in. Governments have long intervened in international trade through a variety of mechanisms. Political differences are described along two dimensions: collectivist vs. individualist and democratic vs. totalitarian. Democracy can be seen as a set of practices and principles that institutionalise and thus ultimately protect freedom. Many are permitted to engage in sale-buyback or leaseback of an asset. Direct interference in a foreign company's business - expropriation, confiscation, nationalization 2. The most direct impact on business can be observed in Islamic lawwhich is a moral, rather than a commercial, legal system. Some banks will charge a large up-front fee. Democracy is the most common form of government today. The other extreme is totalitarianism, which contends that every aspect of an individuals life should be controlled and dictated by a strong central government. (AACSB: Reflective Thinking, Analytical Skills). Informal differences are also critical to understand. A closer look at the solar industry in China illustrates the governments ability to create new industries and companies based on its objectives. To lower their overall cost structure. 24 February, 2015 - 17:30. CONTENT What businesses must focus on is how a country's political system impacts the economy as well as the particular firm and industry. Source: Energy Intelligence Group, Petroleum Intelligence Weekly Ranks Worlds Top 50 Oil Companies (2009), news release, December 1, 2008, accessed December 21, 2010, http://www.energyintel.com/documentdetail.asp?document_id=245527. International Business - Chapter 1 Flashcards | Quizlet