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Political, Legal, and Economic Environment


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Political, Legal, and Economic Environment.
Managers must establish strategies to manage both the internal environment of the firm -- managers, employees, shareholde

rs, and the external environment of the firm market and non-market.
?

The market environment - individuals or households, and other customers, other firms (competitors). The non-market environment - political environment – public institutions (government) and non-public institutions (interest groups).

?

The Political Environment:
? The

political system is designed to unify parts of a society into a viable, functioning unit. Political system is influenced by forces from within and outside a country - e.g. super power rivalries, regional conflicts, the nature of the population, size and influence of corporations, political parties, unions, students, military, etc.

? The

? Remember

Poland, N. Ireland, Korea, Indonesia, Egypt, Former Yugoslavia, Former Soviet Union, Iran, Iraq, Vietnam, Ethiopia, Sudan, …. Process Functions are: – Interest Articulation – Interest Aggregation – Policy Making – Policy Implementation – Policy Adjudication

? Political

Basic Political Ideologies Definition
?A

political ideology is the systematic and integrated body of constructs, theories, and aims that constitutes a sociopolitical program.
doctrines, opinions, or way of thinking of an individual or class -- the body of ideas on which a political, economic or social system is based.

? The

? Most

modern societies are pluralistic, i.e. different ideologies coexist with the society because there is no “official” ideology accepted by every one.
(China, North Korea, Cuba may be exceptions)

? Remember

Yugoslavia, South Africa, Mexico, China, Rwanda, Burundi, Somalia, Liberia, Iraq, Cyprus, Hong Kong, Taiwan, Korea, Soviet Union, Ethiopia, Vietnam, N. Ireland, ...

A Political Spectrum:
?
? ?

Two extremes on the political spectrum are DEMOCRACY and TOTALITARIANISM Democratic System involves wide participation by citizens in the decision-making process. In a representative democracy, majority rule is achieved through periodic elections.

Contemporary democratic system features:
Freedom of opinion, expression, press, assembly... ? Freedom to choose representatives. ? Limited terms for elected officials/representatives. ? Independent court system ? Relatively nonpolitical bureaucracy and defense infrastructure
?

?A

key element of democracy is freedom in the areas of political rights and civil liberties.

Political Rights Include:
? Fair

and competitive election ? Ability of voters to endow elected representatives with real power ? Freedom to organize into political parties. ? Existence of safeguards on the rights of minorities or “disadvantaged” or “challenged” groups

Civil Liberties Include:
? Freedom ? Equality ? Personal

of the press under the law for all individuals

(Read “Animal Farm” by G. Orwell)

social freedom ? Freedom from governmental indifference, corruption or intimidation. ? Relative freedom of privacy
Exhibit: List of countries by level of freedom:
Classifications: Free, Partly Free, Not Free

Forms of Democracy
Parliamentary System - the majority party forms the government e.g. United Kingdom ? Presidential System - frequently separates the executive, judicial, and legislative branches, e.g. US. At the Extremes: ? Mexico used to have a single-dominant-party democracy. ? Hong Kong was(is) a quasi-democracy Democracies differ not only in the level of citizen participation, but also in the degree of centralized control. ? In Canada: The provinces have significant political control, the central government is relatively weak. ? In the US: The Federal government is much stronger and the states less powerful. ? In France & Japan: The political and legal systems are more highly centralized.
?

Forms of Totalitarianism
In the totalitarian system, decision making is restricted to a few privileged individuals, and opposition is neither recognized nor tolerated.
Totalitarianism is either THEOCRATIC or SECULAR (worldly) Theocratic totalitarianism is where religious leaders are the political leaders. e.g. Iran, Saudi Arabia, etc. ? In secular totalitarianism, control is often enforced through military power at one time or the other in - Egypt, Korea, Nigeria, Uganda, Iraq ... Absolute power, ruling is by decree. ? Sometimes laws are made to take retroactive effects!
?

? Communism

is a form of secular totalitarianism under which political and economic systems are virtually inseparable: centralized authoritarian control over the political and social processes. Communism founded by Karl Marx.

? Theoretical ? Real

World Communism differs markedly, e.g. Former Soviet Union, China, Vietnam, Cuba.

**An Acid Test of a political system -- name two communist countries that can be classified as economically developed.

: Impact of Political System on Management Decisions.

Managers must understand the critical functions that a democratic government performs in the economy: – Protect Liberty of Citizens – Promote Welfare of Citizens – Provide Public Goods - national defense Transportation and Communication Systems Water Supplies? – Handle Market Defects - entry barriers, consumer knowledge. – Deal with Externalities - pollution, contamination, natural disasters, etc.

? The political process also affects international

business through laws regulating business activities at the international level. ? Regulation of cross-border transactions can be on a unilateral basis or through treaties and conventions. ? Government actions are not always consistent because multiple agencies often share responsibility.

Formulating and Implementing Political Strategies
? Often

more difficult to formulate political strategies than competitive market strategies. Why? components of political strategies are implemented in public view. logic of political action is different from market action.

? Important

? The

Towards Appropriate Political Strategy
? Identify the issue - protectionism, environmental, workers’ right... ? Clearly define the politics of the issue ? Assess the political action of other companies and interest groups. ? Identify important institutions - Legislators, Agencies, Courts, Personalities, ... ? Formulate strategies ? Select most appropriate strategy and implement

? Lobbyists educate (mislead?) and persuade

(influence?) decision-makers
? Foreign companies / countries often enlist the support of consumers to combat government restrictions on trade

The Legal Environment
? Both

democratic and totalitarian regimes have legal systems, but the independence of the judiciary from political control varies markedly. Some totalitarian systems are not well equipped to deal with the legal aspects of market economies.

Types of Legal systems: ? The rule of law, the role of lawyers, the burden of proof and the laws themselves differ from country to country for historical, cultural, political and religious reasons.
?

Legal systems fall into one of the following categories:

Common Law
?
?

Common law is the foundation of legal system in the UK and its former colonies.
Common law is based on tradition, precedent, and custom and usage and the courts fulfill an important role in interpreting the law.

?

Common law has evolved differently in each common law country- for example manufacturers of defective products are more vulnerable to lawsuits in the US than the UK.

In addition, evolutionary pattern vary in statutory laws those enacted by legislative action - among common law countries, e.g.

?Official Secret Act in UK shields many business transactions between firms and the government. ?Freedom of Information Act in the US makes information about transactions with the government publicly available.

Civil Law
? Civil

law, the world’s most common form of legal system, is law based on codification, or detailed listing, of what is and is not permissible. ? The civil law system can be traced to the Romans, in Biblical times, who spread it throughout the western world.
– In a common law system the Judge serves as a neutral referee, ruling on various motions by the opposing parties’ lawyers. – In a civil law system, the Judge takes on many of the tasks of the lawyers, determining the scope of evidence to be collected and presented.

Religious Law
? Religious

law is based on officially established rules governing the faith and practice of a particular religion. ? In a theocracy, religious laws apply to civil and criminal conduct. * In Islamic countries, for example, a group of MULLAHS, (Holy men) determine the legality through their interpretation of the Koran, the holy book of Islam. * Religious laws can create interesting situations for business - charging of interest on loans is viewed as unfair exploitation of the poor!

Bureaucratic Law
?

The legal system in communist countries and in dictatorships is often described as bureaucratic law. Bureaucratic law is whatever the country’s bureaucrats say it is regardless of the formal law of the land. Protections that may appear in the constitution may be ignored if government officials find them inconvenient, e.g. ? Idi Amin’s regime in Uganda ? Joseph Stalin’s regime in the Soviet Union.

?

?

?

Regardless of the legal system, the practice of law can be divided into CRIMINAL & CIVIL.

Business issues are more commonly considered in the context of civil law.
?

The US has the most lawyers of any country in the world and one of the highest lawyers per capita
– – – –

? Almost

unique to US legal system are Lawyers that take contingency fees Class action lawsuits Pretrial discovery Juries, rather than judges decide cases and set damages/penalties

Legal Issues in International Business
National laws affect all local business activity ? National laws also affect cross-border activities ? International treaties and conventions govern cross-border transactions ? Trade and investment regulation ? Intellectual property Rights ? Financial flows regulation / repatriation ? Taxation ? Financial reporting requirements ? Ownership regulation - nationalization, expropriation, confiscation, privatization (indigenization) ? Contractual relationships ? International treaties ? Dispute resolution
?

Economic Environment: The Economic Strategy of Nation States
Classifying Economic Systems:
?

?
? ? ? ? ?

Usual classification - capitalist, socialist, mixed. Possible classification - private or public property ownership Possible classification - market or command economy In a market economy, resources are allocated and controlled by market forces through consumer demand. In a command economy, resources are allocated and controlled by governmental decision. Individuals own the resources with private ownership The government owns the resources with public ownership.

Exhibit:

Most countries lie somewhere in the mixed ownership range.

The Market Economy:
The market economy involves the interrelationship of supply and demand which determine prices. Labor is supplied by individuals in return for wages ? Products are consumed on the bases of quality and prices.
?
?

Companies pay for labor on the bases of quality and quantity.

?

Resources are allocated on the bases of rewards available.

Key Factors in a Market Economy:
? Consumer

sovereignty - the freedom of consumers to influence production by exercising their power of choice regarding purchase. of the enterprise to operate in the market
.

? Freedom

? Predominance
? Competitive

of privately owned production factors

markets

? Strong

currencies

?Institutional resource intermediation ?Well-functioning infrastructure ?Investment opportunities for individuals However, a perfect market economy does not exist because of large corporations, labor unions, government policies. Define a perfect market!!

The Centrally Planned Economy:
The government coordinates/controls the activities of the different economic sectors.
? Goals

are set for every enterprise in the country

? Government ? Most

decides what, how much, by whom, for whom to produce. centrally planned economies are becoming “Historically Planned Economies” as these nations experiment with the free market concepts.

Name a few remaining “command economies”

The Mixed Economy
?

?

?

Characterized by different mixtures of market and centralplanning control, or pubic and private ownership of resources. Government intervention can vary from government ownership of the means of production to government influence in economic decision making. In many Industrial economies e.g. Germany & Sweden, there are low levels of government ownership but a tradition of social welfare supported by taxes. The UK has a social welfare system with greater corporate ownership. The “welfare state” is diminishing in the US. The Japanese government strongly influences economic decision making- setting targets and using fiscal incentives to direct the flow of investment. The Ministry of International Trade and Industry (MITI) was organized to guide industrial development.

Models of Market Economies
? Social

welfare - characterized by heavy government spending and high taxation to support social services e.g. UK, Germany.
- involves minimal government participation and the promotion of growth through mobility of production factors e.g. US. guided - requires considerable cooperation among government, management and workers, e.g. Japan.

? Consumer-directed

? Administratively

Political-Economic Synthesis
Democratic governments typically feature private ownership and control of resources. ? Democratic socialists believe that elected governments should own resources and control the economic system
?

Classifying Countries
First World - High Income Industrial countries ? Second World - Former centrally planned economies now turning market economies but are still developing ? Third World - Countries located in Africa, Asia, and Latin America
?

Some Economic Indicators
? Per

Capital Income: By World Bank standard.

? Quality

of life- life expectancy, educational standard, TVs, radios, newspapers, etc. Power = individual’s command of PP on goods and services. GDP from Agriculture versus Industry: High for developing countries, Low for advanced countries. Expectancy: High for developed countries, low for les developed countries.

? Purchasing

?%

? Life

Some Economic Issues
? Economic

growth - income distribution; strong economic growth in the “Newly Emerging Economies” - is occurring in most countries that have traditionally had significant government ownership of enterprises.

? Privatization

7-1. Under a secular totalitarian government,
a. A dictatorship is established by a religious group. b. Individuals elect an elite group of leaders to make decisions for the society as a whole. c. A dictatorship is established that does not have any affiliation with religious groups or precepts. d. All resources and production are controlled by the government.

7-2. The systematic body of constructs, theories,

and aims that constitute a sociopolitical program is commonly referred to as
a. b. c. d. Ideology. Civil liberties The political system. Anthropology.

7-3. A pluralistic society is one in which

a. b.

c.
d.

There are more than two political parties competing for political power. One uniform ideology exists among a plurality of societal segments. Different ideologies are held by numerous segments of society. A plurality of ethnic groups belong to the same political party.

7-4. In a representative democracy,
a. The opportunity to participate in decisions is

restricted to a few individuals. b. There must be more than two political parties. c. All factors of production must be owned by the citizenry and not the government. d. Citizens elect individuals through periodic elections to make political decisions.

7-5. The most logical linkage of a particular

economic philosophy with a particular political philosophy would be
a. Central planning and representative democracy.

b. Central planning with communism. c. consumer-directed market economies with totalitarianism.. d. There are no logical linkages.

7-6. A theocratic totalitarian government is a

a. System under which all resources and production are controlled by the government b. Government in which many people participate in the decision-making process. c. Dictatorship that does not have any affiliation with religious groups or precepts. d. Dictatorship led a religious group

7-7. A system of law based on tradition,

precedent, custom, and usage, in which the courts interpret the law based on those conventions, is commonly referred to as
a. b. c. d. A codified legal system. An authoritative legal system. A civil law system. A common law legal system.

7-8. A system of law based on a very detailed

set of laws organized into a code is

commonly referred to as
a. An autocratic legal system.

b. Civil law system. c. A common law system. d. An administrative law system.

7-9. In a command economy, resources are

allocated and controlled by:

a. b. c. d.

Five-year plans, voted for by the general populace. Governmental decision. The consumers in general. Market forces that "command" the economy.

7-10. The economic system of the United states

would be classified as a:
a. b. c. d. Capitalist, private ownership, market economy. Socialist, public ownership, market economy. Capitalist, public ownership, command economy. Capitalist, private ownership, command economy.

7-11. Consumer sovereignty is a. Freedom granted to individuals through the right to vote b. The freedom of consumers to influence production by exercising their power of choice regarding purchases. c. An idea central to the proper functioning of command economies. d. The power of consumers to directly influence production through votes made periodically in command economies.

7-12. Historically planned economies (HPEs) are

those economies:
a. That previously used (or are currently using) central planning as their primary economic system. b. That ascribe to the principle of strict central planning c. That have historically been market economies. d. In which the resources are allocated according to the principle of consumer sovereignty

7-13. A market economy characterized by heavy

government spending and high taxation to pay for social services such as health care and education is :
a. A social market economy. b. A consumer-directed economy. c. An administratively guided market economy. d. A central command economy.

7-14. A market economy characterized by considerable co-operation among government, management and workers to achieve growth and full employment with low labor turnover on a non-mandated basis is:

a. b. c. d.

A social market economy. A consumer-directed market economy. An administratively guided market economy. A central command market economy.

7-15. The selling off of government owned

enterprise to private individuals and companies is
a. b. c. d. e. Privatization. Nationalization. Diversification. Syndication. Consolidation

7-16. A system in which the resources are allocated as a result of constant interplay between individuals and companies, between individuals and between companies, is commonly referred to as a:
a. b. c. d. e. Command economy. Socialist economy. Second world economy. Market economy. Mixed economy


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