I. The Home-Country PerspectiveCHAPTER 4POLITICS AND LAWSChapter Objectives- To understand the importance of the political and legal environments in both the home and host countries tothe international business executive- To learn how governments affect business through legislation and regulations- To see how the political actions of countries expose firms to international risks- To examine the differing laws regulating international trade found in different countries- To understand how international political relations, agreements, and treaties can affect international businessOpening CaseCorruption, Guns, and TerrorismSummary:This case describes how Afghanistan and Pakistan relied on illegal trade of contraband and drugs for mutual benefit and how Afghan warlords took control of this trade to deal with political chaos after the September 11 attack on the U.S. President Mugabe of Zimbabwe confiscated white-owned farms for redistribution, but corruption has resulted in idle land and caused a disruption of farming an increase in unemployment and inflation. The Mugabe administration also refuses to devalue its currency making economic management impossible. This situation threatens the peace, stability, and prosperity of the region.Chapter OutlineI. THE HOME-COUNTRY PERSPECTIVEA. Many laws and regulations have a major impact on international business even though not intended to do so1. Minimum wage laws2. Domestic safety regulationsB. Some laws and regulations are designed to help domestic firmsC. Nations attempt extra-territoriality—setting policy outside territorial limitsD. Embargoes and Sanctions1. Government actions that distort free flows in goods, services, or ideas for adversarial an political purposes2. Sanctions—specific coercive trade measuresa. Incorporated into law under the League of Nations and then the United Nationsb. Not always enforceablec. Rarely successfuld. Means significant loss to businesses3. Embargoes—prohibit trade entirelya. Often used in times of warb. Used as tools of foreign policyE. Export Controls—to deny or delay the acquisition of strategically important goods by adversaries1. Controlled by export licenses issued by Department of Commerce compared with the critical commodities list2. Most items in international business are done under NLR (No License Required) conditionsF. A New Environment for Export Controls1. With increased terrorism came tighter controls on the Third World2. Loosening of mutual bonds among allied nations3. Changes due to increased foreign availability of high technology products and the increased pace of their development and dissemination4. Miniaturization of technology makes control more difficult5. Disagreements over what constitutes military-use items6. With the growth of economic unions (EU and NAFTA) implementation is more difficultFocus on PoliticsSpace Secrets Sold!Summary:This vignette tells how Hughes Electronics (and Boeing who bought that company) reached a settlement to pay a fine and improve its internal program of prevention for providing controlled rocket launching technology to the Chinese. This company as well as Loral Space & Communications Company (who settled with a lesser fine earlier) was responding to pressure in China to transfer technology to help in its program of launching satellites that U.S. firms are allowed to use for satellite launches. To improve the success of rockets launching satellites and to satisfy investigates of insurance companies faced with claims for failures, Hughes provided technical information. Rather than face stiffer fines and more export restrictions, the company agreed to pay a fine and spend money on improving its controls.G. Regulating International Business Behavior1. Countries regulate international behavior within moral and ethical boundaries considered appropriate by that country2. What is considered appropriate may vary from one country to another3. Boycotts of products from unfriendly nations may be organized4. Antitrust laws may be applied internationally5. Laws against bribery and corruption such as the Foreign Corrupt Practices Act passed in the U.s. in 19776. General standards of behavior and ethics varies from one country to anotherFocus on PoliticsWhaddaya Mean “French”?Summary:This is a description of an effort to terminate U.S. military contracts with Sodexho, a French-owned catering firm. One problem with that is that this U.S. subsidiary employs 110,000 Americans. Making official reprisals against private companies for the political positions of their home countries is not a desirable action. The CEO of Sodexho made a statement of support for U.S. troops.II. Host Country Political and Legal EnvironmentA. Political Action and Risk1. Depends on the stability of the country2. Ownership risk—exposes property and life3. Operating risk—interference with ongoing operations4. Transfer risk—attempts to transfer funds between countries (Figure 4.2, page 113)5. Coups d’état—results in drastic changes in government6. Expropriation—transfer of ownership by host government to a domestic entity with payment of compensation (which may not be the full value)7. Confiscation—transfer of ownership without compensation8. Domestication—transfer of ownership and management responsibility by impose localcontent regulations, changing labor laws, patent protection, and tax regulationa. Poor cooperation and communication can resultb. Can increase costsc. Can decrease competition with foreign firms9. Intellectual property right (IPR) protection needed to keep competitive edgeB. Economic Risk1. Exchange Controls—to limit the flow of foreign currency out of a country2. Tax Policy—to control multinational corporations and their capital and raise revenue3. Price Controls—to limit price fro consumers of important items politically viewedC. Managing the Risk1. Demonstrate concern with host country’s society and become a part of the country, not an exploiter of it2. Closely monitor political developments3. Purchase insurance to cover lossesD. Legal Differences and Restraints1. The way laws are used varies by country and culture2. Theocracy—law according to God, scripture, prophetic utterances and practices, and scholarly interpretations3. Common law—based on tradition, precedent, and custom more than written statues and codes (England and U.S.)4. Code law—based on comprehensive set of written statutesE. The Influence of Politics and