53. What are the basic strategies to manage political risk?

54. How should international managers minimize the political risk?

Use extensive local debt

􀁺 Governments are less likely to harass business if it might lead to a default on local debt and put their banking system at risk.

For foreign debt, finance operations via a consortium of lenders from different countries

􀁺 Gain support of several foreign governments in protecting your business (used for very large capital projects, such as natural gas exploration and development).

Use project financing (i.e. output guarantees the loan)

􀁺 This makes nationalization less attractive because income must be used to pay down debt.

55. How does the political environment affect the economy?

Economic risk arises from such uncertainties as change in cost or demand or competition in the marketplace.

56. How does the legal environment affect international business? How should the international managers address the various legal challenges in different countries?

A domestic firm must follow the laws and customs of its home country.

An international business faces a more complex task: It must obey the laws not only of its home country but also of all the host countries in which it operates. The laws of both the home and the host countries can affect directly and indirectly the international companies and the way they conduct their business. These laws determine the markets the firms serve, the cost of goods and/or services they offer, the price they charge, and costs for labor, raw materials, and technology.

In addition to understanding the politics and laws of both home and host countries, the international manager must consider the overall international political and legal environment. International law plays an important role in the conduct of international business. Although there is no body to enforce international law, certain treaties and agreements are respected by a number of countries and influence international business operations. The World Trade Organization (WTO) is such an international agency that defines internationally acceptable economic practices for its member countries. There are many other agreements that provide some legal regulation of international commerce, including the EU, North American Free Trade

Agreement (NAFTA), and others.

57. What ways are there in resolving international disputes?

58. What are the differences between Common, Civil, and Theocratic Law? How do international managers deal with these different types of laws?

One important difference between common law and civil law systems is apparent in the role of judges and lawyers. In a common law system the judge serves as a neutral referee, ruling on various motions by the opposing parties’ lawyers. These lawyers are responsible for developing their clients’ cases and choosing which evidence to submit on their clients’ behalf. In a civil law system, the judge takes on many of the tasks of the lawyers, determining, for example, the scope of evidence to be collected and presented to the court. Common law is based on the court’s interpretation of events, whereas civil law is based on how the law is applied to facts. An example of an area in which the two systems differ in practice is contracts. In a common law country, contacts tend to be detailed, with all contingencies spelled out. In a civil law country, contracts tend to be shorter and less specific because many of the issues that a common law contract would coverare already included in the civil code. Thus, when entering into contracts abroad, it is important for the manager to understand which type of legal system will establish the contract. Civil law also tends to be less adversarial than common law because judges rely on detailed legal codes rather than on precedent when deciding cases. This is one reason why British and US law firms encounter so much resistance when they enter civil law countries. They are used to the competitive, adversarial approach that the common law system engenders.