Professional Documents
Culture Documents
LATIN
AMERICA
Argentina Ecuador
Bolivia El Salvador
Brazil Guatemala
Colombia Mexico
Costa Rica Venezuela
....
overly polycentric firm is less receptive to the idea of risking such innovation in an unfa-
miliar market, it may rely too heavily on imitation of proven host-country practices and,
in the process, lose the innovative edge it has honed at home.
Ethnocentrism Ethnocentrism reflects the conviction that one's own culture is superior
to that of other countries. In international business, the term is usually applied to a
company (or individual) strongly committed to the principle that what works at home
will work abroad- so strongly committed that its overseas practices tend to ignore
differences in cultures and markets.
Generally speaking, ethnocentrism may lead managers to adopt three different sets of
0 e'--
prachces:
1. Managers overlook important cultural factors because they've become accus-
tomed to certain cause-and-effect relationships in the home country. Thus the
British sales reps in our opening case wrongly assumed that by moving aggres-
sively they could make the same number of calls and sales in Saudi Arabia as they
made in Britain.
s?
SUB
I
Namibia
South Africa*
2.P
c
0
p
0
3.P
ii
Bt
inapf
fact '
avera!
comp
has st
could
sion.
mino:
indiv
Nigeria Zambia
Namibia
South Africa'"
'South Africa reflects both
bbckandwhiteculruralnorms.
CHAPTER 2 The Cultural Environments Facing Business
-3'!*
Qatar
Turkey
SOUTHERN
ASIA
India Malaysia
Indonesia Phil ippines
Iran Thailand
v 2000 mi
""
2000 km
Singapore
Souch Korea
Taiwan
. ..
.
2. Although it recognizes environmental differences, a firm still focuses on home-
country objectives rather than those that fit with foreign-country or worldwide
conditions. Because it doesn't perform as well as local competitors- and because it's
probably encountering opposition to its practices in overseas markets- long-term
competitiveness may suffer.
3. Although recognizing differences, a firm underestimates the complexity of introduc-
ing new management methods, products, or marketing means.
Before we go any further, we should point out that ethnocentrism isn't entirely an
inappropriate way of looking at things. Obviously, much of what works at home will in
fact work abroad. Recall also that concentrating on national differences in terms of
averages overlooks specific variations within countries. By engaging in a focus strategy, a
company may be able to sell to outliers even though the average consumer in the country
has strong cultural biases against the product. Pursuing such a strategy, for example, you
could sell meat products to the minority of Indians who eat meat regularly or on occg-
sion. Likewise, a ~ o m p a n y may identify partners, suppliers, and employees among the
minority of population whose attitudes don't fit the cultural average (there are always
individualists in even the most collectivist societies).
73
74 PART 2 Comparative Environmental Frameworks
CRN
Case Review N ote
Geocent ric management
often uses business practices
t hat are hybrids of home and
foreign norms. Because
people do not necessarily
accept change readily, the
management of change is
important.
Geocentrism Between the extremes of polycentrism and ethnocentrism, there is an
approach to international business practices called geocentrism that integrates company
practices, host-country practices, and some entirely new practices.
67
In our opening case,
both Saks Fifth Avenue and Harvey Nichols, for example, have adjusted to Saudi
customs (for instance, by setting aside women-only floors). At the same time, they've
introduced home-country merchandising practices (such as what they sell) along with
entirely new practices (such as providing drivers' lounges for the chauffeurs of female
customers).
Geocentrism requires companies to balance informed knowledge of their own organi-
zational cultures with both home- and host-country needs, capabilities, and constraints.
"" Because it encourages innovation and improves the likelihood of success, geocentrism is
the preferred approach for companies to succeed in foreign cultures and markets.
STRATEGIES FOR INSTITUTING CHANGE
As we've seen, when companies want to establish competitive advantages in foreign mar-
kets, they may need to develop new products (such as veggie burgers in India) or adjust
their operating methods (separate workstations for male and female employees in Saudi
Arabia). Inevitably, however, they'll introduce some degree of change into the foreign
markets in which they operate. Thus they need to bear in mind that people don't normally
accept change very readily, in either the home- or host-country market. The methods that
companies choose for managing such changes are important for ensuring success.
Fortunately, we can gain a lot of insight by examining the international experiences of
both for-profit and not-for-profit organizations. In addition, a great deal of material is
available on potential methods and so-called change agents- people or processes
that intentionally cause or accelerate social, cultural, or behavioral change- much of it
dealing with overcoming resistance to change in the international arena. In the following
sections, we discuss both experiences with and approaches to successful change. In par-
ticular, we focus on strategies in eight different areas:
Value systems
Cost-benefit analysis of change
Resistance to too much change
Participation
Reward sharing
Opinion leadership
Timing
Learning abroad
We conclude with a discussion on the importance of learning as a two-way
process- one in which companies transfer knowledge to and from both domestic and
foreign markets.
Value Systems The more something contradicts our value system, the more difficulty
we have accepting it. In Eritrea, for example, people eat a small amount of seafood
compared with people in a lot of other countries. This is noteworthy because Eritrea has
suffered several periods of agricultural famine in recent years but boasts a long coastline
rich in seafood. In trying to persuade Eritrean adults to eat more seafood, however, the
Eritrean government and the United Nations World Food Program have faced
formidable opposition. There are religious taboos against eating fish without scales and
insect-like sea creatures (including shrimp and crayfish), and most Eritreans have grown
up believing that seafood has a foul taste. Among schoolchildren, however, whose value
systems and habits were still flexible, officials faced little opposition.7
3
s
i
2
)
t
y
e
e
a
h.
s
s
tl
e
)-
't
y
s
g
lf
e
e
:s
l-
:e
d
CHAPTER 3 The Political and Legal Environments Facing Business
replaced. They assess whether the rule of law or the rule of man prevails in the legal
sytem. They gauge whether freedom is a practical ideal or a wishful abstraction.
10
And,
on the basis of these insights, they forecast business scenarios. Engaging these issues-
admittedly difficult and oftentimes puzzling- prepares managers to qualify the return
on investments in terms of the riskiness of the political system.
No matter whether they target Afghanistan or Zimbabwe, managers begin the process
of analysis by focusing on the nature of a country's political system- specifically, the
structural dimensions and power dynamics of its prevailing government. The poltical
system defines the institutions, organizations, and interest groups along with the politi-
cal norms and rules that govern the activities of political actors. The purpose of any
political system is straightforward: integrate different groups into a functioning, self-
sustaining, and self-governing society. Correspondingly, the test of any political system
is its ability to unite a society in the face of divisive viewpoints. Success supports peace
and prosperity. Failure leads to instability, insurrection, and, ultimately, national
disintegration.
INDIVIDUALISM VERSUS COLLECTIVISM
Political systems across countries share similarities and demonstrate differences.
Explaining the rhyme and reason of these characteristics has intrigued a long line of
philosophers, beginning with Plato and Confucius and moving on to such thinkers as
Machiavelli, Adam Smith, Jean-Jacques Rousseau, John Stuart Mill, and Milton
Friedman. Although they span time and place, each has wrestled with enduring ques-
tions: How should society balance individual rights versus the needs of the community
to develop a rational, righteous, and harmonious system? Should society guarantee indi-
vidual freedom in the pursuit of economic self-interest? Does society fare better when
individual rights are subordinated to collective goals? Should society champion equality
or accept hierarchy? Are individual rights inalienable or conferred by the collective?
Engaging these questions anchors interpretation of the political systems in terms
individualism versus collectivism.
Individualism This doctrine emphasizes the primacy of individual freedom, self-
expression, and personal independence- the principle that all men have "certain
unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.''
11
Individualism champions the exercise of one's ambitions and desires, while opposing
most of the external interference posed by the political system that constrain individual
choice. Furthermore, individualism presumes that the task of the political system is to
develop a form of government that protects the liberty of individuals to act as they wish,
as long their actions do not infringe on the liberties of others.
The business implications of individualism hold that each person commands the
right to make economic decisions largely free of rules and regulations. Countries with
an individualist orientation shape their marketplace with the idea of laissez-faire.
Literally meaning "leave things alone," laissez-faire holds that government should not
interfere in business affairs. Instead, agents behave and the market operates according
to the neoliberal principles of market fundamentalism. Individuals are presumed to be
self-regulating in promoting economic prosperity and growth, acting fairly and justly to
maximize personal performance without threatening the welfare of society. Countries
with individualistic orientation include the United States, Australia, the United
Kingdom, Canada, Netherlands, and New Zealand.
Gaps between philosophical ideals and opporturtistic behaviors often fan an adversarial
relationship between governments and business in individualistic societies. Recent events
dramatize this circumstance. The global economic crisis revealed that financial companies
had opportunistically maximized their interests at the expense of society's welfare.
Companies' support of deregulation, privatization, and trade liberalization- advocated
93
The fundamental goal of a
political system is to integrate
the elements of society.
I
The test of a political system:
uniting a society in the face of
divisive viewpoints.
Chapter 2 showed that culture
moderates the practices of
international business. Many
points of interpretation, both
from an academic and
managerial perspective,
followed from the degree to
which a country engages a
collectivist or individualistic
orientation.
Individualism refers to the
primacy of the rights and role
of the individual. Collectivism
refers to the primacy of the
rights and role of the group.
94 PART 2 Comparative Environmental Frameworks
Collecti vism stresses human
interdependence and t he
pri macy of t he group.
A politi cal ideology
encapsul ates the doctri ne of
politi cal behavior and change
and outlines the procedures
for converting ideas into
actions.
In principle, plurali sm holds
the belief t hat there are
multipl e opini ons about an
issue, each of whi ch contains
part of the t ruth, but none t hat
cont ain the ent ire truth.
with the goal of enhancing individual choice-destabilized the marketplace and jeopard-
ized system sustainability. As a recourse, national governments worldwide instituted laws
and regulations that addressed market inefficiencies (such as insufficient consumer knowl-
edge or excessive producer power) that had distorted fair and just competition. In other
words, the global credit crisis spurred governments to rein in the individualism of market
fundamentalism in order to protect the welfare of the collective.
Collectivism This doctrine emphasizes the primacy of the collective-whether it is a
group, party, class, society, nation, race, etc.- over the interest of the individual. No
matter the importance of the individuals that comprise the group, ultimately the group
as a whole is greater than the sum of its parts. Collectivism endorses the priority of the
goals of the group; individuals, sometimes from birth, sometimes by subsequent
socialization, define their identity accordingly. Collectivism integrates individuals into
cohesive societies that accept the principle that, as Ayn Rand noted, "Collectivism
requires self-sacrifice, the subordination of one's interests to those of others." Countries
with a collectivistic orientation include Argentina, China, Vietnam, Japan, North Korea,
Egypt, Brazil, and Mexico.
Collectivism in the business world holds that the ownership of assets, the structure of
industries, the conduct of companies, and the actions of managers must improve the wel-
fare of society. Business decisions are made by the group and, therefore, group members
assume joint responsibility. Systems that feature a collectivist orientation hold that gov-
ernment intervenes in market situations to ensure that business practices benefit society-
as our earlier reference to the implications of the global economic crisis exemplified. In
many cases, governments in collectivist societies, such as Sweden, take actions that pro-
mote social equality, labor rights, balanced income distribution, and workplace democ-
racy. In extreme cases, such as those of Venezuela or North Korea, political leaders may
overrun personal privacy, control mass media, and profess the ideologies of harmony,
consensus, and equality in their efforts to control the economy.
POLITICAL IDEOLOGY
Translating the implications of individualism and collectivism to the political system
directs our attention to the construct of political ideology. In theory, an ideology is an
integrated vision that defines a holistic conception of an abstract ideal and its normative
thought processes. For example, the ideal of freedom carries with it several philosophical
presumptions about corollary principles, doctrines, goals, practices, and symbols.
As such, a political ideology is the system of ideas that expresses the goals, theories,
and aims of a sociopolitical program, thereby stipulating how society ought to function
and outlining the methods by which it will work. In the United States, for example, the
liberal principles of the Democratic Party and the conservative doctrine of the
Republican Party define their respective political ideologies. In Japan, we find a similar
situation with the two largest parties-the Liberal Democratic Party, defined by a conser-
vative ideology, and the Democratic Party of Japan, championing social liberalism. In
both countries, a particular party promotes an ideology that offers an integrated collec-
tion of political, economic, and cultural ideas for a certain social order based on its ideal-
ized sense of how society should work. Furthermore, beyond merely elucidating a vision
of a better, brighter future, a political ideology specifies the means for achieving that
ideal order.
In Japan and the United States, as in many other countries, there are other active polit
ical parties that list smaller memberships than the main factions. Consequently, most
societies are pluralistic systems in which different groups champion competing political
ideologies. Pluralism is not restricted to institutional demographics; it also arises when
two or more groups in a country differ in terms of language (Belgium), class structure
(the United Kingdom), ethnic background (South Africa), tribal legacy (Afghanistan), or
Democracy call s for wi de
parti cipat ion by cit izens in a
fair and j ust decision-making
process.
Democracy and indi viduali sm
are intrinsicall y related and
mutuall y dependent; a
democracy legitimat es
st andards of individuali sm and
indivi dualism support s
st andards of democracy.
Here we have what appears t o
be an ordi nary snapshot of
grassroots democracy in
Pret ori a, Sout h Africa, for t he
2009 nat ional electi on.
However, one must be mindful
that even though t he right t o
vot e is idealized as an inalien-
able human right, billi ons
arou nd the world have no
option or, when offered the
opti on t o vote f or one candi -
dat e, no real voice. For South
Afri cans, non-whites could not
vot e in nati onal electi ons until
the aboliti on of apartheid in
1994. Hence the image of peo-
ple patientl y waiting in long
lines in a dusty field on a hot
day t o express their opini on
carries powerful meaning.
Source: Foto24/Gallo Images/ Getty
Images
Comparative Environmental Frameworks
Therefore, Figure 3.2 sets the political spectrum with democracy (and its call to safe-
guard freedom) anchoring one endpoint and totalitarianism (with its call to abolish
freedom) the other.
The ideologies that fall between these endpoints in Figure 3.2 vary in their interpreta-
tion of the ideal of freedom. Liberal political ideologies, for instance, advocate the right of
an individual to realize his or her own potential. In contrast, authoritarianism and fas-
cism endorse collectivist ideals that call for subordinating individual freedoms to the
welfare of society. Similar examples can be cited, but they would essentially reinforce the
central point: Freedom is the distinguishing feature of political ideologies, with some
emphasizing its primacy and others opposing it. Therefore, we profile the ideals and
means of the two endpoints, democracy and totalitarianism.
Democracy In the view of Abraham Lincoln, the sixteenth President of the United
States, democracy is a government "of the people, by the people, and for the people."
Modern-day democracies translate this ideology into the normative principles that all
citizens are politically and legally equal; all are equally entitled to freedom of thought,
opinion, belief, speech, and association; and all equally enjoy sovereign power over
legislators and officials.
Practically speaking, a democracy is a political system that grants voters the power
to alter the laws and structures of government, to make decisions (either directly or
through representatives), and to participate directly in elections. These principles and
practices enable a democracy to institutionalize political freedoms and civil liberties
that, by emphasizing the role of individuals over the collective state, endorse the doc-
trine of individualism.
The scale and scope of modern society imposes limits on the practice of democracy.
Most prominently, the population of most nations makes participation by all voters in the
democratic process impossible. Therefore, many democratic countries practice various
forms of representative democracy in which citizens elect representatives to act on their
behalf. In some democracies, for instance the United States, citizens directly elect execu-
tives and lawmakers. In others, such as Japan, they vote for representatives or for a rul-
ing party; the victorious party then selects the prime minister, who functions as chief
executive of the country. There are hybrids of each form of democracy. Israel, for
CHAPTER 3 The Political and Legal Environments Facing Business
example, has a parliamentary government like that of Japan, but Israelis vote directly for
candidates running for prime minister.
Types of Democracy There are five prominent types of democracy:
In a parliamentary democracy, citizens exercise political power by electing representa-
tives to a legislative branch of government called a parliament. The executive branch
typically consists of a cabinet, headed by a prime minister who is regarded as the
head of government. There is an independent judiciary but no formal separation of
powers between the executive and legislative branches. Examples include India and
Australia.
A liberal democracy originates in a constitution that protects certain individual freedoms
(such as freedom of speech, assembly, and religion) and certain individual liberties
(such as the right to property and privacy). All citizens, both public and private, are
treated equally before the law and receive due process under it. All liberal democra-
cies, such as Japan or New Zealand, are representative democracies.
A multiparty democracy defines the political system whereby three or more political
parties, whether separately or as part of a coalition, govern. The multiparty system
prevents the leadership of a single party from setting policy without negotiating com-
promises among the opposition parties. Canada, Germany, Italy, and Israel feature
multiparty systems.
A representative democracy, such as the United States, is one in which the people's
elected representatives hold ultimate sovereignty. Representatives are charged with
the responsibility of acting in the people's interest and not merely as their proxy rep-
resentatives. In other words, officials represent voters and, while mindful of voter
preferences, still command the authority to act as they see fit.
Asocial democracy advocates the use of democratic means to achieve a gradual tran-
sition from capitalism to socialism. This view of democracy rests on the belief that
society must regulate and reform capitalism to control its intrinsic tendency
toward injustice and opportunism. The term social democracy is largely inter-
changeable with democratic socialism. Examples of social democracy are Norway
and Sweden.
Notwithstanding nuances in terms and tenets, all democratic political systems accept
the legitimacy of a relationship between a responsible citizenry and a responsive govern-
ment. That encourages participation in the political process and guarantees fundamental
freedoms and liberties. So defined, societies can then institute democratic governments
"of the people, by the people, and for the people." Table 3.llists the principal means used
to translate the democratic ideology into practice.
Assessing Democracy The fundamental element of democracy is freedom-
whether freedom of speech, freedom of association, freedom of belief, or freedom in any
other part of life. The range of political ideologies in practice today champion different
standards of political freedom. For instance, classical liberal philosophy holds that
freedom is the absence of coercion of one man by his fellow man, jurisprudence holds
that an individual has the right to determine one's own actions autonomously, and
environmentalism advocates constraints on the use of ecosystems in any definition of
freedom. Others take a more abstract approach discussing notions of positive freedom
versus negative freedom (the former referring to the right to fulfill one's own potential,
the latter referring to freedom from restraints).
This chapter follows the lead of Freedom House- a nonprofit organization
dedicated to the principles of political and economic freedom- to define freedom.
Freedom House specifies that "Freedom is possible only in democratic political systems
97
Types of democracies include:
Parliamentarian Democracy
Liberal Democracy
Multiparty Democracy
Representative Democracy
Social Democracy
The defining feature of
democracy is freedom.
Factors for evaluating
freedom include political
rights and civil liberties.
CHAPTER 3 The Political and Legal Environments Facing Business
A partly free country exhibits limited political rights and civil liberties. This sort of
nation is characterized by political corruption, violence and terrorism, one-party
dominance, and military influence on politics; elections are unfair, and the govern-
ment practices censorship and political terror, frustrates free association, and discrim-
inates against minorities.
A not free country represses or denies basic rights and civil liberties through a political
system ruled by autocrats, military juntas, one-party dictatorships, or religious hier-
archies. The government allows minimal to no exercise of political rights, relies on the
rule of man as the basis of law, severely constrains religious and social freedoms, and
controls most if not all business activity.
Totalitarianism A totalitarian system subordinates the individual to the interests of the
collective. A single agent in whatever form-such as an individual, an assembly, a
committee, a junta, or a party-monopolizes political power. The agent uses this power
to regulate many, if not all, aspects of public and private life-including an individual's
occupation, income level, personal interests, religion, and even family structure.l
5
The
ideological standards of totalitarianism require that the government eliminate dissent
within the state. Ensuring unquestioning support for the official ideology is dependent
on indoctrination, persecution, surveillance, propaganda, censorship, and violence.
A totalitarian system, by default, tolerates no ideas, interests, or activities that run
counter to the ideology of the state. In extreme situations, personal survival is linked to
the survival of the ruling regime- a condition that forcibly merges the interests of
individuals with those of the state. Totalitarian states fall into Freedom House's "Partly
Free" and "Not Free" categories.
The dynamics of change in a totalitarian state help elaborate the means it uses to
enforce its ideology. Totalitarianism rejects the existing form of society (prior to its
replacement, or alternative, as practiced in other countries) as corrupt, immoral, and
beyond reform or redemption. Instead, a single leader advocates a new society where
wrongs will be corrected, injustice will be redressed, and harmony will prevail. The state
then brings to bear propaganda, indoctrination, and incarceration to institute conformity
by citizens. Control of the media enables the state to filter information; control of educa-
tion enables the state to filter ideas; and control of the police enables the state to suppress
dissent. The cumulative result is a "virtual mind prison" in which the leader and the state
fuse together.
16
Types of Totalitarianism The term totalitarianism is a catchall for several forms of
political systems, including the following.
Authoritarianism: In an authoritarian form of government, the regime tolerates no
deviation from state ideology. Day-to-day life reflects obedience to state authority.
Resistance incurs punishment. Unlike a totalitarian system that regulates the politi-
cal, economic, and social structure of society, an authoritarian regime confines itself to
political control of the state.
Fascism: "The Fascist conception of the state," according to Benito Mussolini, a past
fascist dictator of Italy, "is all-embracing; outside of it no human or spiritual value
may exist, much less have any value." Thus understood, "Fascism is totalitarian and
the Fascist State, as a synthesis and a unit which includes all values, interprets, devel-
ops, and lends additional power to the whole life of a people."
17
The fascist ideal is
the control of people's minds, souls, and daily existence.
Secular totalitarianism: In this system, a single political party forms a government in
which only party members hold office, elections are controlled through unfair laws,
dissent is tolerated as long as it does not challenge the state, and organized religions
99
Conca t Check . . . .
Recall our discussion in
Chapter 2 of "Behavioral
Factors Affecting Business":
It is important to remember
that these variables change as
peopl e change-or as some
authority aims to influence
them. In an effort to shape
people's behavior to support
the interests of the state,
totalitarian syste ms
manipulate behavioral norms
governing work moti vati on,
ri sk taking, communicati on
practi ces, and consumption
preferences.
A totalitarian system
consolidates power in a single
agent who then controls
politi cal , economic, and social
acti vities of the country.
Types of totalitarian systems
include:
Authoritarianism
Fascism
Secular totalitarianism
Theocracy
100 PART 2 Comparative Environmental Frameworks
Conce t Check
Religion exerts a strong
infl uence on people's values.
In Chapter 2, we note how it
functions as a stabilizer of a
count ry's culture. Simi lar
forces are at play when
countries mix religion and
polit ics. The elements of
religion that st abilize culture
also regiment t he politi cal
process.
Conce t Check/
In profil ing " The Forces
Dri ving Gl obalizati on " in
Chapter 1, we not e the power
of changing poli t ical
situations. In particular, t he
past few decades have
witnessed t he spread of t he
ideology of democracy and
the corresponding decli ne in
t ot al itarianism. The accept ance
of democracy and its
advocacy of freedom have
accelerated t he pace of
international business.
are suppressed. In China, an example of this situation, the Communist Party wields
sole power, permitting eight other parties to participate in state affairs but only
under its recognized leadership and subject to its direction. Similar conditions
prevail in Vietnam and Singapore. Usually, the secular totalitarian state does not
prescribe an all-encompassing ideology; it grants individual freedoms so long as
ensuing activities do not challenge its authority. The Communist Party insists that its
approximately 74 million members (roughly 5 percent of the total population) be
atheists, thereby preempting a competing ideology as well as reinforcing its secular
orientation.
Theocratic totalitarianism: Under this system, government is an expression of the pre-
ferred deity, with leaders often claiming to represent the deity's interests on earth.
Procedurally, the theocratic state follows ancient dogma in place of modern political
or legal principles. Examples of religious leadership, such as the Taliban Party in
Afghanistan and clergy in Iran, determine political processes and legal practices
based on their interpretation of the Koran. Strict social regulation and gender regi-
mentation typically ensue.
TRENDS IN POLITICAL SYSTEMS
The latter half of the twentieth century and the early twenty-first century have seen a
steady expansion of nations instituting democratic political systems. The number of
democratic countries grew from 22 of 154 (14 percent) in 1950 to 90 of 193
(47 percent) in 2008. The number of nations that made the transition from nondemo-
cratic to democratic political systems, particularly during the 1970s and 1980s, gave
rise to the so-called third wave of democratization.
18
Highlighted by the fall of the
Berlin wall in 1989 and the ensuing collapse of the Communist Bloc, the swelling
third wave of democratization gave rise to the notion of the so-called "end of
history." This notion held that the democratic ideology, reinforced by the market fun-
damentalism of capitalism, represented the final stage of social development. Or, as
its author reasoned, "What we may be witnessing is not just the end of the Cold War,
or the passing of a particular period of post-war history, but the end of history
as such: that is, the end point of mankind's ideological evolution and
the universalization of Western liberal democracy as the final form of human
government. "
19
The third wave of democratization was worldwide: Countries from Africa, Asia,
Latin America, South America, and Eastern Europe abandoned totalitarian political sys-
tems. In their place emerged democracies based on greater individual freedoms and
expanded civil liberties. Societies began building fairer civic institutions, independent
media, objective judiciaries, and stronger property rights.
20
Today, as a result of the third
wave of democratization, more people live in countries with elected democratic govern-
ments than at any time in history.
Engines of Democracy Several engines powered the third wave of democratization.
Most notably:
1. The failure of totalitarian regimes to deliver economic progress led to deepening
legitimacy problems. Aggrieved citizens contested the right of political officials to
govern. The fall of the Berlin Wall punctuated this epic c h a n g ~ . As formerly
Communist countries adopted democratic principles and practices, they weakened
the links between new political practices and old economic habits.
2. Improved communications technology eroded totalitarian states' control of infor-
mation. Democracy benefits from an informed public with easy access to media.
CHAPTER 3 The Political and Legal Environments Facing Business
POLITICAL RISK
Discussion so far highlights the dynamism of the political environment. Complicating this
tendency is the range of choices available to officials and voters in structuring the political
system. Consequently, managers face unpredictability in the political environment.
Furthermore, investing overseas exposes companies to the risks that arise from the political
quirks of nations. This class of risk is commonly referred to as political risk and is defined as
the potential loss arising from a change in government policy. More precisely, political risk is
the likelihood that political decisions, events, or conditions will affect a country's business
environment in ways that will cost investors some or all of the value of their investment or
force them to accept lower rates of return. Table 3.2 identifies leading causes of political risks.
The global economic crisis has increased political risk in the world. The previous
three decades or so had seen principles of globalization standardize the inconsistencies
of politics across markets. Certainly, countries developed at different paces, but as each
developed in terms of the apparent inevitability of globalization, managers could safely
presume that laws of economics, not the quirks of politics, would shape local markets.
The financial crisis has reset the equation; now, politics and political motivations influ-
ence the performance of global markets and the actions of international companies on a
scale we have not seen in decades. If the global financial crisis continues to shake faith in
democracy and free markets, politics and politicians will create complicated sets of polit-
ical risks for foreign companies.
The evaluation of political risk often relies upon a macro-micro criterion.
Macropolitical risks affect all participants in a given country, while micropolitical risks
are project specific and usually affect specific companies. We follow this logic but refine it
by distilling the macro-micro criterion into systemic, procedural, distributive, and
catastrophic forms of political risks. We now profile each.
Systemic Political Risk As a rule, a country's political processes do not treat foreign
operations unfairly. If they did, few companies would hazard the investment. More
often, the risks faced by investors- both domestic and foreign-result from shifts in
TABLE 3.2 Types and Outcomes of Political Risk
Type
Expropriation or nationalization
International war or civil strife
Unilateral breach of contract
Destructive government actions
Harmful action against people
Restrictions on repatriation of profit
Differing points of view
Discriminatory taxation policies
Outcome
A government or political faction seizes a company's local assets.
Compensation-if there is any-is usually trivial. More common
in the 1960s and 1970s, expropriation is increasing in tandem with
resurgent totalitarian political systems.
Military action damages or destroys a company's local assets.
A government repudiates a contract negotiated with a foreign
company. The company's profits are often reallocated to the host
country. The foreign company also suffers when a government
approves a local firm's repudiation of a contract.
By imposing unilateral trade barriers, say, in the form of revised
local-content requirements, a government interferes with the
transfer of goods or the distribution of goods to local consumers.
Action on the part of local agents say, kidnapping, extortion, or
terrorist activities, targets local employees of a foreign company.
The host government arbitrarily limits the amount of gross profit
that a foreign company can remit from its local operations.
A government's interpretations of such issues as labor rights or
environmental obligations create problems for a foreign company
in its home market.
A foreign company is saddled with a higher tax burden than a
local competitor or other foreign firm that is treated favorably
because of its nationality.
~ o n c e t Ched<:
In Chapter 1, we note that
interest groups in some
countries fear that the
globalization of the local
business environment
105
wi ll weaken national
sovereignty-that is, a nation's
freedom from external control
and right to act in its own
interests. Here, we observe
that this attitude itself con-
tributes to political risk:
Foreign companies and
investors face greater
problems when a host
government becomes
increasingly sensitive to
aspects of its national
sovereignty.
Pol iti cal risk: the risk that
political decisions or events in
a country will negatively affect
the profitability or sustain-
ability of an investment .
The primary types of political
risk, from least to most
disruptive, are
Systemic
Procedural
Distributive
Catastrophic
106 PART 2 Comparative Environmental Frameworks
Systemic political risks impact
al l firms.
C RN
Case R eview N ote
The dynami c of di stri butive
political risk is creeping
expropriat ion, a gradual
eliminat ion of foreign
companies' local propert y
rights.
Catastrophic political risk can
devastate companies and
countri es.
public policy. New political leadership, for instance, may adopt policies that differ from
its predecessor's- say, reducing the individual benefit of business activity by increasing
tax rates in order to fund polices that support the welfare of society. In that case, new
regulations will alter the macrobusiness environment for all companies.
At other times, a government may target public policy initiatives toward an economic
sector that it sees dominated by foreign interests. In an effort to install what he calls a system
of "Bolivarian socialism," for example, President Hugo Chavez of Venezuela has initiated a
program to nationalize the local operations of foreign companies.
38
In both situations, polit-
ically driven change of macroeconomic and social policies creates systemic risks- risks that
impact all firms that operate in the particular political system.
Systemic changes do not necessarily create political risks that reduce potential profits. In
fact, elections and policy shifts can create opportunities for foreign investors. In the 1990s,
for example, a newly elected government in Argentina initiated a radical program to dereg-
ulate and privatize the country's state-centered economy. Investors who accepted the risk
and pursued the resulting opportunities prospered as freer markets emerged in Argentina.
Our opening case traces a similar market pattern and profit potential in China.
Political change geared toward free market standards reduced the riskiness of the
business environment, and moreover, change created opportunities. Still taking
advantage of such opportunities, whether in China or many other countries, entails
taking risks in environments where political and legal complications pose roadblocks
to profitability.
Procedural Political Risk Each day, people, products, and funds move from point to
point in the global market. Each move creates a procedural transaction between the units
involved, whether units of a company or units of a country. Political actions sometimes
create frictions that interfere with these transactions. The repercussions, for example, of
government corruption or a partisan judicial system can raise the costs of business. More
specifically, corrupt officials might pressure a foreign firm to pay for special assistance to
clear goods through customs or obtain a permit to open a factory. These sorts of
politically motivated interference escalate expenses, thereby lowering rates of return.
Distributive Political Risk Many countries see foreign investors as agents of prosperity.
As foreign investors generate more profits in the local economy, the host country may
begin to question the distributive justice of the rewards of operating in its market. In other
words, as the business grows more successful, officials may question whether they are
receiving their "fair" share of the growing profits. Far more often than not, political
officials demand a greater share. Some then launch a campaign of creeping expropriation,
whose goal is to appropriate gradually a greater share of the rewards-typically in ways
that do not provoke the investor to depart. The tools of creeping expropriation takes
various forms, including increases in tax rates on profits or increasing barriers to
transferring personnel into or profits out of the country. Underlying the means of
creeping expropriation is the gradual elimination of foreign companies' property rights.
A foreign firm may feel the pressure of distributive risk in subtle ways. Few people,
for instance, think of the United States as a hotbed of distributive political risk. If you're
in the cigarette business, however, you know that the United States has perhaps the high-
est degree of political risk in the world. The U.S. government has long battled cigarette
makers (both domestic and foreign) on matters of taxation, regulation, business practice,
and liability. In the process, it has imposed compliance costs and punitive fees in the hun-
dreds of billions of dollars.
Catastrophic Political Risk Catastrophic political risk includes random political
developments that adversely affect the operations of every company in a country. Typically,
it arises from flash points, such as ethnic discord, illegal regime change, civil disorder, or
insurrection. It disrupts the business environment in a way that affects every firm in the
country. If such disruptions spiral out of control, they devastate companies and countries.
CHAPTER 3 The Political and Legal Environments Facing Business 107
Counterpoint
Should Political Risk Management Be an Active Strategy?
Yes I think we can agree on a few points.
First, it's no secret that the actions of the host
government can have a huge effect on the success of com-
panies. Second, this means that every company doing busi-
ness overseas faces political risk, and that's why companies
must develop strategies for political risk management.
Third, these strategies can take one of two approaches:
active or passive. Naturally, those who advocate active
political risk management believe it's the better way to go,
and in my opinion, they're right. The more they consult
experts who help them predict political problems, the better
they are going to manage the corresponding risks.
Now, there's no denying that you may expose yourself
to political risk whenever you take an active approach to
managing overseas operations. This is why experienced
overseas managers rely on not one, but two battle-tested
tactics: They turn to statistical modeling to quantify the
precise degree of political risk they're facing and they
solicit the judgment of local experts to estimate the gen-
eral degree of political risk they'll have to deal with in a
given country.
Relying on either of these approaches endorses the
assumption that neither positive nor negative political
events in any country are independent or random events:
They unfold in observable patterns that let managers make
reasonable estimates of the odds of future events. That 's
why rigorous quantitative analysis and modeling aim to
detect, measure, and predict future events that may pose
political risk.
If you support active political risk management, you're
assuming that if you measure the right set of discrete
events, then you should be able not only to calculate the
degree of political risk in a given country but also to estimate
your odds of facing politically risky disruptions-civil strife,
contract repudiation, financial control, regime change, eth-
nic tension, terrorism, and the like. Granted, this approach
requires identifying valid indicators of political risk that can
be measured reliably-for example, the number of generals
in political power, the pace of urbanization, the frequency
and nature of government crises, the degree of literacy, or
ethno-lingual fractionalization. But once you have collected
the data for the right set of measures, you can objectively
estimate your exposure to political risk within a given coun-
try as well as across countries.
Political risk indicators have helped global companies
monitor developments in individual countries as well as
regional markets. Moreover, managers apply data they've
collected in one country to benchmark analysis in another
country that is experiencing similar processes of political
.. ij.J!!hil.t.Uhl No Your. risk-manage-
ment pos1t1on falls to observe that
many companies refrain from managing political risk
directly-for all the right reasons. Instead, they treat politi-
cal risk as an unpredictable hazard, reasoning that no
model, regardless of how systematically it's been
specified, can predict the degree of political risk in a coun-
try. Granted, models can extrapolate from economic, polit-
ical , and social reports to generate meaningful insights
about who may take office, what polices may be passed,
and how these sorts of political events could affect the
business environment. Ultimately, these insights make the
political system and its risks understandable but by no
means predictable.
These insights do not qualify as predictions precisely
because of the intrinsic impossibility of reliably measuring
uncertain situations. The political world is complex, its
inalienable feature is ambiguity, and its tendency to change
is high. Compounding these challenges is the range of vari-
ables that affect a country's political environment and, more
difficultly, the many linkages among them. This situation
becomes more difficult as companies head into emerging
markets, each marked by its own political peculiarities.
Collectively, no matter how powerful the spreadsheet or
insightful the expert, the dimensions and evolving dynamic
of a political environment defy specification. Rather, manag-
ing responsibly with politics and its risks in a foreign market
demands resetting cognitive models so that one can deal
with the conditions of unpredictable hazards.
Rejecting the hypothesis that one can predict political
risk demands that managers find a cost-effective way to
hedge their exposure. An approach based on risk manage-
ment, not risk prediction, becomes the basis for protection.
Typically, companies that favor passive risk management
outsource the political risk-management process, largely
because they reason that they're shielding themselves from
political risk by buying political risk insurance. Consider the
flexibility they give themselves through this approach. First,
they have options to purchase coverage that protects oper-
ations from a wide array of political risks, including (but not
limited to) government expropriation, involuntary abandon-
ment, and damage to assets due to political violence.
Second, they can purchase their political risk insurance from
a variety of providers-government agencies, international
organizations, and private companies. Here's a short list of
leading insurers:
Overseas Private Investment Corporation (OPIC) encour-
ages U.S. investment projects overseas by offering politi-
cal risk insurance, all-risk guarantees, and direct loans.
108 PART 2 Comparative Environmental Frameworks
change. In sum, estimating political risk by means of
cross-country, highly aggregated data is a powerful tool.
Still, we don't go so far as. to say that there are no limita-
tions to what you can do with it. That's why some compa-
nies complement quantitative measures with in-depth,
country-specific qualitative indicators of political risks.
How does this approach work? One tactic entails
polling country experts to tap their judgments and
insights. Of course, these people consider quantitative
factors when assessing a nation's political conditions.
The best ones, however, bring something personal to the
table. They enrich analyses by adding their own
expertise-their sense of how things work in the targeted
host country-which involves certain subjective ele-
ments. Simply put, spreadsheet estimation, no matter
how rigorous, no matter how extensive, can only carry
analysis so far. Enriching interpretation requires perspec-
tives and perceptions that intuitively understand the polit-
ical drama and a country in ways that numbers may tap
but never fully represent.
If you want to integrate this tactic into your overall
risk-assessment strategy, you could begin by running
standardized interviews with experts to identify and
evaluate key factors in a country's political environment.
A useful starting point is the Internet; entering the
search string "political risk management" quickly
generates leads to several resources. Consulting these
then supports projecting likely scenarios and prudently
assigning probabilities to outcomes and their
implications-the hallmarks of effective political risk
management. li>-
OPIC insurance protects U.S. overseas investment ven-
tures against civil strife and other forms of violence,
expropriation, and inconvertibility of currency. Recentl y,
having reduced its role in the political insurance end of the
business, OPIC now focuses on investments in emerging
markets that fit U.S. foreign policy priorities.
Multilateral development banks (MOBs) are international
financial institutions (such as the African Development
Bank, the Asian Development Bank, and the World Bank
Group) that are funded and owned by member govern-
ments. Their goal is to promote progress in developing
member countries by providing financial incentives,
such as long-term below-market rates. By reducing the
amount of company capital at risk, these financial incen-
tives encourage firms to expand into politically risky
environments.
Several private insurance companies underwrite political
risk protection-for a price. Many insurers cover "routine"
political risks that involve property and income, such
as contract repudiation and currency inconvertibility.
Private insurers are reluctant to cover the risk of extraordi-
nary circumstances such as political violence in the form
of war or insurrection, as well as the risk of nationalization
and expropriation of assets.
We have no quarrel with the notion that prediction and
control are touchstones of competent management. Still ,
politics are anything but predictable and controllable.
Hence, all things considered, it just makes better sense to
avoid the delusion of active management and opt for the
practicality of passivly managing political risk. ~
The Legal Environment
A legal system is the
mechanism for creating,
interpreting, and enforcing
the laws in a specified
jurisdiction.
Businesspeople champion consistency in laws from country to country. A uniform set
of laws makes it easier to plan where to invest and, once there, how to run operations
to comply with regulations. However, just as political ideologies differ from country to
country, so do the principles and practices of the prevailing legal system.
Consequently, how a country develops, interprets, and enforces its laws is a key aspect
of the business environment. Done legitimately, consumers and companies can make
lawful decisions that support peace and prosperity. Done arbitrarily, all suffer because
"to distrust the judiciary," said Honore de Balzac, "marks the beginning of the end of
society."
LEGAL SYSTEMS
The legal system specifies the rules that regulate behavior of individuals and companies,
the processes by which the laws of a country are enforced, and the procedures used to
resolve grievances. Legal systems differ across countries due to variations in tradition,
precedent, usage, custom, or religious precepts. Ceteris paribus, legal systems aim to
CHAPTER 3 The Political and Legal Environments Facing Business
establish a comprehensive set of rules that support business formation, regulate transac-
tions, and stabilize relationships. A functioning legal system ensures that a society can
pursue economic development and, when disagreements arise, resolve them without
resorting to lawlessness.
Modern legal systems share three components:
A system of constitutional law translates the constitution of the country into an open
and just lega'l_ystem. Constitutional law sets the framework for the system of gov-
ernment and defines the authority and procedure of political bodies to establish laws
and regulations.
A system of criminal law safeguards society by specifying what conduct is criminal
and prescribing punishment to those who breach these standards.
A system of civil and commercial laws ensures fairness and efficiency in business trans-
actions. It speaks to private rights imd remedies in dealing with relations and conduct
between individuals and/or organizations.
Aspects of each component influence companies' actions in the host country. Consider,
for instance, the legal concept of due diligence, which requires that the statements in a
firm's security-registration forms be true and omit no material facts. Companies rely on
due diligence to manage the risk of cross-border acquisitions; it enacts a legally binding
process during which a potential buyer evaluates the assets and liabilities of a company.
Hence, due diligence is often the difference between success and failure-provided the
local legal codes permit the full examination of operations and management and the ver-
ification of material facts. However, in the European Union, data protection rules can
interfere with assessing important elements of a potential acquisition, such as the physi-
cal condition or mental health of managers, patterns of trade union membership, and
criminal histories.
Hence, prudent companies considering cross-border acquisitions pinpoint issues, the
country or countries involved, and the citizenship and identity of people involved from
the pre-due-diligence phase to the close of the deal. These decisions inevitably touch on
aspects of constitutional law (i.e., what philosophies anchor ownership rights?), criminal
law (i.e., what are the procedures and penalties for malfeasance?), and civil/ commercial
law (i.e., do regulations restrain disclosure and verification of information?). In sum-
mary, no matter the issue, a country's legal system influences managers' actions and
companies' behavior.
Our opening case illustrates the importance of legal traditions and practices in a
nation's ability to develop a legal system that attracts and retains foreign investment.
Western investors are accustomed to clearly specified and fairly enforced bankruptcy
laws that protect creditors. In China, however, this investment-oriented tradition has yet
to take hold, and legal tradition protects debtors.
TYPES OF LEGAL SYSTEMS
The type of legal system in a country determines the conduct of business transac-
tions, who has what rights and obligations in the transaction, and the sorts of legal
redress open to those who believe they've been wronged. Understanding the nuances
of the legal system spurs managers to study several issues. Specifically, are laws
based on abstractions or practicality? Do judges or juries pass judgment? Is justice
the matter of man or the province of divinity? Peculiar as these questions sound,
international business puts managers into situations where these issues anchor the
legality of action.
Map 3.3 profiles the world in terms of the legal systems that prevail in countries and
regions. Presently, managers face five types of legal systems: common law, civil law, theo-
cratic law, customary law, or mixed legal systems.
109
Modern legal systems exhibit
elements of constitutional law,
criminal law, and civil and
commercial laws.
C RN
Case Review Note
Presently managers face
five types of legal systems
Common law
Civillaw
Theocratic law
Customary law
Mixed
110 PART 2 Comparat ive Environmental Frameworks
MAP 3.3 The Wide World of Legal Systems
The globalization of business practices has spurred the standardization of laws, regulations, and policies across countries. Still, enduring
philosophical outlooks contribute to significant disparity in the types of legal systems worldwide.
Source: University of Ottawa, "World Legal Systems," at http:/ /www.juriglobe.ca/eng/ index.php (accessed June 2009).
.....
1111 Civil Law
- Common Law
Muslim Law
Customary Law
i:r:J Mixed System
I
Common law is a legal syst em
of jurisprudence based on
judicial precedents.
I
Ci vil law is a legal system
of jurisprudence based on
statutory laws.
I
Theocratic law is a legal
system of jurisprudence based
on religious teachings.
~ - - - - - ~ -
~ ...
~ .. .,..
...... <\ .
)
Common Law A common law system is based on tradition, judge-made precedent,
and usage. It gives preeminece to existing case law in guiding dispute resolution.
Judicial officials refer to statutory codes and legislation, but only after considering the
rules of the court, custom, judicial reasoning, prior court decisions, and principles of
equity. Indeed, the doctrine of stare decisis (or precedent) by courts is the major difference
between a common law and a civil law system. The common law system has Anglo-
American legacies; it prevails in countries such as Canada, the United States (excluding
Louisiana), India, Hong Kong, England, New Zealand, and Australia.
Civil Law A civil law system is based on the systematic codification of laws and codes.
Civil law systems charge political officials-not government-employed judges-with
responsibility for specifying accessible, detailed, and written law that applies to all
citizens. Rather than create law, as they do in the common law system, judges in the civil
law system apply existing legal and procedural codes to resolve disputes. More than
70 countries, including Germany, France, Mexico, and Japan, have civil law systems.
Theocratic Law A theocratic law system relies on religious doctrine, precepts, and
beliefs to define the legal environment. Ultimate legal authority is vested in religious
leaders, who apply religious law to regulate business transactions and social relations.
Unlike civil and common systems, theocratic laws see no separation of church and state.
The theocracy regulates public and private matters and, as a result, government, law,
and religion are one. The most prevalent theocratic system, Muslim or Islamic law (or
Shari'a ), is based on: the Koran-the sacred text of Islam; the Sunnah-decisions and
sayings of the Prophet Muhammad; the writings of Islamic scholars, who derive rules by
analogy from the principles established in the Koran and the Sunnah; and the consensus
CHAPTER 3 The Political and Legal Environments Facing Business
of legal communities in M ~ s l i m countries.
39
Muslim law prevails in the Middle East,
notably in Saudi Arabia and Iran, and Northern Africa, notably Libya and Morocco.
Customary law A customary law system is anchored in the wisdom of daily
experience or, in more elegant terms, local spiritual legacies and philosophical traditions.
Customary laws play important roles in many indigenous, local, and other traditional
communities. These laws define the rights and responsibilities of community members
in many matters. The legitimacy of customary law follows not from the power of a
powerful individual or institution but from individuals recognizing the benefits of
behaving in line with the expectation of fellow individuals. In customary law, offenses
are treated as torts-private wrongs or injuries rather than crimes against the state or
society. At the country level, few nations in the world today operate under a legal system
that is wholly customary. Still, in many countries with mixed legal systems, customary
law plays a significant role.
40
This type of legal system prevails in many developing
countries, particularly those in Africa.
Mixed System A mixed legal system emerges when a nation uses two or more of the
preceding legal systems. Map 3.3 shows that the majority of mixed legal systems are in
Africa and Asia. For example, Nigeria has a mixed legal system comprised of common
law, Islamic law, and customary law. Similarly, Pakistan has a common law system, a
legacy of British colonial influence, and also incorporates theocratic law. Similarly,
theocratic law influences the civil law system of Indonesia. Although the legal system of
the United States is categorized as a common law system, technically it is a mixed
system. Unlike the 49 states that practice common law, Louisiana has a civil law system.
TRENDS IN LEGAL SYSTEMS
Earlier sections highlighted the evolution of democracy around the world. Presently, the
freedom stagnation threatens to devolve into a pushback against democracy. Managers
struggle to pinpoint the implications of this trend to legal systems. We see agreement on
several points.
First, the pushback against democracy powers a rise in totalitarianism. This poltical ide-
ology emphasizes collective order at the expense of individual freedoms. Government in a
totalitarian state uses the legal system to regulate business activity so that it supports the
regime. There is no separation of law and state. Law is controlled, ruled, and regulated by
the state, and the state controls all public and private matters. Bluntly put, justice is no
longer blind but arbitary, oppressive, and state-serving. For example, recall earlier observa-
tions regarding justice in two totalitarian states. In Russia, doing business means you had
better be "big enough to defend yourself against bureaucratic attacks [and] ... ready to
hold your nose when elections are rigged and political opposition is crushed."
41
In China,
doing business means dealing with "a society that had no rules; or more accurately, plenty
of rules, but they were seldom enforced. China appeared to be run by masterful showmen:
appearances mattered more than substance, rules were there to be distorted."
42
Second, the emergence of developing countries, like Brazil, India, and China, is resetting
how managers interpret the legal environments of international business. Most notably, the
scale and scope of the market performance of these emerging economies requires reassess-
ing the philosophical basis of law. Emerging markets, once consigned to the periphery of the
global economy, increasingly command center stage. The rise of these countries, along with
their fundamentally different conception of legality, requires managers to ask: What is the
basis of rule in a given country- is it the rule of man or the rule of law?
The Rule of Man The rule of man holds that ultimate power resides in a person. His
word and whim, no matter how unfair or unjust, is law. The rule of man has prevailed for
centuries in countries throughout the world. Indeed, for much of history, rulers and law
111
I
Customary law is based on
norms of behavior practiced
over a long period.
Conce t Check
As we see in Chapter 1, every
company's competitive
environment varies by
company, industry, and
country. Granted, there are
points of convergence in all
three areas, but conducting
international business means
recognizing the existence of
fundamental differences
across countries. Here, we
stress the importance of legal
differences and the importance
of complying with local laws.
Conce t Check
As developed in the context
of Chapter 2, the prevailing
principles in a country's legal
environment, including
religious practices and other
behavioral norms, are strongly
influenced by its cultural
orientation toward standards
of accountability, equity, and
fairness.
112 PART 2 Comparative Environmental Frameworks
FIGURE 3.4
It's Good to be King
While seen as an inalienable right by
some, individual freedom and
democratic processes are
discret ionary to many more.
Source: The New Yorker Collection
from Cartoonbank.corn
The rule of man The principl e
that every member of a
society, except for the ruler,
must follow a system of law
that is arbitrarily specified and
inconsistentl y enforced.
Totalitarian countries base
their legal systems on the rule
of man.
The rule of law holds that no
individual is above laws that
are clearly specified,
commonly understood, and
fairly enforced.
~ . , _ _
"My goodness, if I'd known how badly you wanted
democracy I'd have given it to you ages ago."
were synonymous-the law was the will of the ruler, whether called king, queen, emperor,
empress, shogun, czar, raj, chief, or caliph. Today, these titles have given way to others like
the party, chairman, generalissimo, dictator, supreme leader, or (in the case of North
Korea) "Dear Leader." No matter the title, the rule of man defines a legal system in which
the actions of the man, in whatever form and with whatever title, are not restricted by a
constitution, regulated by laws, or open to opposition-as we see in the irony of Figure 3.4.
The rule of man is an instrumental device of totalitarianism. Organizing a legal system
in terms of this doctrine frees the government to invoke the means necessary to suppress
threats to, or reward support for, state authority. Constitutional issues are discretionary,
criminal law is arbitrary, and commercial/ civil matters are tainted by opportunism. The
law is an apparatus of the state; rather than deficient, justice is absent.
The Rule of Law The rule of law is a hallmark of a democracy; indeed, without it,
democracy cannnot exist.
43
The rule of law institutes a just political and social
environment, guarantees the enforceability of commercial contracts and business
transactions, and safeguards personal property and individual freedom. Therefore,
managers rely on the rule of law to validate laws, codes, and statutes.
The rule of law holds that governmental authority is legitimately exercised only in
accordance with written, publicly disclosed laws that have been adopted and are
enforced in accordance with established procedure. As such, no individual-public offi-
cial or private citizen-stands above the law. Perhaps the primary purpose of the legal
system is to regulate and restrain the behavior of the "man" as symbolized by govern-
ment officials. Constitutional standards are absolute, criminal law is legitimate, and com-
mercial/ civil matters are anchored in princple. The law is independent of the state;
rather than absent, justice is omnipresent.
IMPLICATIONS FOR MANAGERS
The concept of the rule of law originated in the West. Consequently, it has a negligible
legacy in the legal traditions of many long-developing, now-emerging countries.
A close look at Map 3.4 indicates that the rule of law flourishes in wealthier, westernized
countries-namely, the United States, Canada, Japan, New Zealand, Australia, and
most of Europe. In contrast, the countries that fall in the long crescent that begins in
CHAPTER 3 The Political and Legal Environments Facing Business 113
MAP 3.4 The Rule of Law
The principle of the rule of low holds that government authority is legitimate only when it is exercised according to written laws and established
enforcement procedures. The coding of the map here is based on selected dimensions of governmental practice; percentiles reflect scores falling below
the rating of a given country. So, for example, the classification of the United States at the 90th percentile indicates widespread support for the rule
of law. Conversely, North Korea's classification at below the I Oth percentile indicates its widespread support for the rule of man.
Source: World Bank, Governance Matters VI: Governance Indicators for 1996--2007, at http: //info.worldbank.org/ governance/wgi/ index.asp / and http: // info.worldbank.org/
govemance/wgi/worldmap.asp (accessed June 22, 2009).
Note: Given that this is a Mercator projection, the scale approximates east-west distance at the equator; however, the farther you move from the equator, the more the east-west
distance is distorted.
~ -
!D.
COLOR CODE
~ \ o"'
,,
II Above 90t h percentile
II 75th to 90t h percentil e
0 50th to 75t h percentile
IIJ 25t h m 50t h percentile
II I Orh ro 25th percentil e
II Below 1 Or h percentil e
II No data
U 2000 mi
~ ..
extreme northern Russia, cuts southward through China toward the Middle East, and
extends through Africa to South America show slight support for the rule of law.
Conclusion? The rule of man prevails in the legal systems of the poorer, non-Western
nations that we commonly call developing countries.
This situation is complicated by the acceptance of the rule of man in many developing
countries, given that the political ideology in many of these nations is more totalitarian
than not. Again, take a look at Map 3.4. Nearly every country that Freedom House rates
as "Partly Free" or "Not Free" falls in the "rule of man crescent." Uncertainty about the
nature of law and the goals of government in much of the world, consequently, creates a
perplexing situation for managers. Whereas operating in Western economies permits
them to rely on a consistent and systematic application of legal rules, operating in many
developing countries offers few such safeguards.
So, for example, in the United States, action taken by foreign firms against local com-
panies that counterfeit their products has proven remarkably forceful. In China, the same
sorts of legal actions have proven nearly powerless. There, as in other rule-of-man sys-
tems, writs, injunctions, and lawsuits get trapped in the slow-grinding legal machine.
Even when these procedures work, it is not unusual for the charges against the local vio-
lator to be dismissed by the court on the basis of dubious technical grounds.
44
Perhaps a bit overoptimistically, some managers expect developing countries,
especially those considered emerging economies, to follow the path of their developed
counterparts and to recognize that the rule of law is the basis of a fair and just society.
How long will they have to wait? In principle, legal theory holds that these countries
2000 km
Uncertainty about the basis
of law in a particular country
creates chall enging situations
for managers.
5
f
r
n
:I
e
CHAPTER 3 The Political and Legal Environments Facing Business
General Relationships Table 3.4 summarizes how countries' legal systems shape
features of their business environments. You might have noticed in reading the
preceding paragraphs an inverse relationship between a nation's general wealth and
its tendencies in regulating business activity. Overall, richer countries regulate less
and poorer countries regulate more. In high-income countries (e.g., the United States,
Italy, Japan), the average number of procedures to start a new business is 7; it's 10 in
upper-middle-income countries (Mexico, Poland, Malaysia), 12 in lower-middle-
income countries (Brazil, Jamaica, China), and 11 in low-income countries (Angola,
Ghana, Vietnam). In wealthier nations, furthermore, legal systems tend to regulate
operational activities more consistently than do those in poorer countries- as one
would expect, given the prevalence of the rule of law in the former and the rule of
man in the latter.
Table 3.4 identifies the top-ranked and bottom-ranked 10 countries (out of a total set
of 183 countries) that have developed a set of policies on the various dimensions that
make for the most or least supportive business environments. In terms of the former,
Singapore ranks the highest on one or two aspects, yet its government has developed a
comprehensive legal code that fosters the most favorable business environment in the
world. Likewise, the Central African Republic rates lowest on just a couple of dimen-
sions, but its comprehensively poor performance combines to create the least favorable
business environment in the world.
Looking over the list, based on our discussions thus far, confirms an important set of
relationships. Specifically, the majority of the top-ranked countries in Table 3.4 have a
democratic political system, a common or civil-law legal system, and a doctrine of the rule
of law. In contrast, the majority of the bottom-ranked countries in Table 3.4 have a totali-
tarian political system, a mixed (largely civil, customary, and theocratic) legal system, and
a doctrine of the rule of man.
STRATEGIC CONCERNS
Operating concerns focus managers' attention on day-to-day operations. Strategic
concerns shift managers' attention to long-term issues. In this realm, a country's legal
TABLE 3.4 The Ease of Doing Business: The Top and Bottom Ten Countries
The World Bank ranks the 183 economies of the world on ease of doing business-high scores signify
favorable business environments, low scores unfavorable business environments. A high ranking on the
summary measure of ease of doing business means a regulatory environment is conducive to the operation
of business. A low ranking indicates the opposite. Technically, the ease-of-business index averages the
country's percentile rankings on 10 aspects of the business environment: starting a business, dealing with
construction permits, employing workers, registering property, getting credit, protecting investors, paying
taxes, trading across borders, and enforcing contracts.
Country Ranking Country
Singapore 1 Niger
New Zealand 2 Eritrea
Hong Kong, China 3 Burundi
United States 4 Venezuela
United Kingdom 5 Chad
Denmark 6 Republic of Congo
Ireland 7 Sao Tome and Principe
Canada 8 Guinea-Bissau
Australia 9 Democratic Republic of Congo
Norway 10 Central African Republic
Ranking
174
175
177
177
178
179
180
181
182
183
Source: Doing Business 2009. The World Bank. Ranki.ngs on the 183 countries are available at http:/ /www.doingbusiness.org/
EconomyRankings/
117
It once t C h e : ~ t k .
A crucial theme of the text
so far has been the notion
of linkages and relationships
among individuals,
companies, countries, and
institutions. Here, we
emphasize the importance
of linkages and relationships
between ideas and ideals,
namely the interplay among
the type of political system,
the organizing legal
philosophy, and the prevailing
doctrine of law. Making these
connections helps put into
perspective the systemic
nature of the business
environment in a country.