Deck 6: Political and Legal Systems in National Environments

Question 1

Describe country risk and discuss how political and legal systems contribute to country risk. Explain the differences between political systems and legal systems in your answer.

Answer 1

Country risk is exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments. Also referred to as political risk, it is one of four major types of international business risks. While the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments. Government intervention, protectionism, and barriers to trade and investment are particularly notable in international business. Mismanagement or failure of the national economy can lead to financial crises, recessions, market downturns, currency crises, and inflation. Such events usually arise from business cycles, poor monetary or fiscal policies, a defective regulatory environment, or imbalances in the underlying economic fundamentals of the host country.
Political or legislative actions can inadvertently harm business interests, such as laws that are unexpectedly strict or result in unintended consequences. Many laws favor host-country interests-that is, interests in foreign countries where the firm has direct operations.
A political system is a set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The principal functions of a political system are to provide protection from external threats, establish stability based on laws, and govern the allocation of valued resources among the members of a society. A political system also defines how these groups interact with each other.
Each country's political system is unique, having evolved within a particular historical, economic, and cultural context. Political systems are also constantly evolving in response to constituent demands and the evolution of the national and international environment. Constituents are the people and organizations that support the political system and receive government resources.
A legal system is a system for interpreting and enforcing laws. Laws, regulations, and rules establish norms for conduct. A legal system incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as taxing economic output and protecting intellectual property and other company assets. Political and legal systems are dynamic and constantly changing. The two systems are interdependent-changes in one affect the other. Adverse developments in political and legal systems give rise to country risk. They can result from installation of a new government, shifting values or priorities in political parties, initiatives developed by special interest groups, and the creation of new laws or regulations. Gradual change is easier for the firm to accommodate, while sudden change is harder to deal with and poses greater risk to the firm.
Unfavorable developments give rise to new conditions that may threaten the firm's products, services, or business activities. For example, a new import tariff may increase the cost of a key component used to manufacture a product. A modification in labor law may alter the hours the firm's employees are allowed to work. The installation of a new political leader may lead to government takeover of corporate assets.
Country risk is always present, but its nature and intensity vary over time and from country to country.

Question 2

An individual from a country with a high degree of political risk would most likely be from ________.

A)Canada
B)Singapore
C)Iraq
D)Japan

Answer 2

C

Question 3

________ are the people and organizations that support the political system and receive government resources.

A)Subsidiaries
B)Regional trade blocs
C)Constituents
D)Shell corporations

Answer 3

C

Question 4

Country risk is considered similar to ________.

A)political risk
B)commercial risk
C)currency risk
D)cross-cultural risk

Question 5

Describe how the political and legal systems of a host country can both harm and benefit a foreign firm.

Question 6

The three major types of current political systems are ________.

A)totalitarianism, socialism, and democracy
B)socialism, democracy, and monarchy
C)totalitarianism, liberalism, and fascism
D)democracy, republicanism, and oligarchy

Question 7

A ________ government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry.

A)democratic
B)socialistic
C)mixed
D)totalitarian

Question 8

An individual from a country with a low degree of political risk would most likely be from ________.

A)Venezuela
B)Canada
C)Zimbabwe
D)Iraq

Question 9

The immediate cause of country risk is a legal or political factor.

Question 10

Which of the following statements is true of country risk?

A)Its nature remains constant over time and across nations.
B)Its intensity seldom varies over time and across nations.
C)It is present only in poor nations.
D)It is always present.

Question 11

Which of the following is the underlying principle of socialism?

A)The welfare of individuals far outweighs the welfare of society.
B)Collective welfare of people outweighs the welfare of the individual.
C)Capital and wealth should be vested in the hands of few and used primarily as a means of profit.
D)The state should protect itself from individual and group interests.

Question 12

Which of the following terms indicates potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments.

A)commercial risk
B)currency risk
C)cross-cultural risk
D)country risk

Question 13

Religion-based totalitarian states are called ________.

A)theocratic
B)secular
C)socialistic
D)atheistic

Question 14

________ fundamental tenet is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit.

A)Socialism's
B)Democracy's
C)Totalitarianism's
D)Theocracy's

Question 15

Which of the following characterizes country risk?

A)The political and legal systems of adjacent nations greatly impact the country risk of nations that host foreign firms.
B)Country risk will change only after the creation of laws and regulations that affect foreign firms.
C)A nation's country risk level remains fairly constant until the election and installation of a new political leader.
D)Country risk is always present, but its nature and intensity vary over time and from country to country.

Question 16

Trade unions are part of a country's legal system.

Question 17

Country risk is present in select nations.

Question 18

Which of the following best explains why India was once characterized by high country risk?

A)taxes and financial incentives benefited Indian businesses over foreign firms
B)Indian business leaders distrusted most European corporations
C)political leaders enacted laws that targeted foreign firms for harassment
D)Indian leaders feared the modern influences of American firms

Question 19

Which of the following countries is considered primarily socialist?

A)Germany
B)Canada
C)India
D)Libya

Question 20

Describe the two elements which contribute to country risk. Provide examples of countries with high and low country risk, and explain the reasons for these two distinctions.

Question 21

In a market economy, the government may intervene to address the inequalities that market economies sometimes produce.

Question 22

Democracy is characterized by limited governmental interference.

Question 23

Democracy is closely associated with openness.

Question 24

Provide an overview of totalitarianism, socialism and democracy. Provide examples of nations which adhere to each system.

Question 25

Explain the connection between democracy and economic freedom. What are some of the characteristics associated with political and economic freedom?

Question 26

Which form of government is characterized by private property rights and limited government?

A)autocratic
B)democratic
C)socialist
D)totalitarian

Question 27

Explain command economies. Provide examples of nations that exhibit characteristics of command economies and why command economies are no longer common today.

Question 28

Socialism is based on a collectivist ideology which assumes that the collective welfare of people outweighs the welfare of the individual.

Question 29

Representative C is most likely from ________.

A)Canada
B)Sudan
C)North Korea
D)Zimbabwe

Question 30

A democratic government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry.

Question 31

Which of the following pairs of nations are on opposite ends of the political freedom scale?

A)New Zealand and Chile
B)China and Vietnam
C)Japan and South Korea
D)Cuba and Sweden

Question 32

Representative B is most likely from ________.

A)New Zealand
B)North Korea
C)Russia
D)Canada

Question 33

Which of the following countries would Representative A most likely be from?

A)Denmark
B)Zimbabwe
C)Sweden
D)Australia

Question 34

What has been the impact of social democracy on international business relations in some European countries?

A)Regulations have forced foreign firms to invest elsewhere.
B)Politically conscious foreign firms have begun investing in socialist nations.
C)Low income tax rates have encouraged an influx of FDI.
D)Political stability has decreased the country risk of socialist nations.

Question 35

Which of the following countries is considered a mixed economy?

A)Norway
B)Russia
C)Vietnam
D)China

Question 36

Which of the following is an element of socialism often found in democratic societies?

A)government subsidies for foreign firms
B)government sponsored businesses
C)government intervention in the affairs of individuals and firms
D)government control of information technology

Question 37

A market economy is also called a centrally planned economy.

Question 38

Totalitarianism's fundamental tenet is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit.

Question 39

Most democracies include elements of socialism.

Question 40

Which of the following is characteristic of an effective legal system?

A)a stable and rigid framework of rules and norms across nations
B)systematically enforced laws and regulations
C)political involvement in business transactions
D)universal emphasis on religious law over common and civil law

Question 41

Common law is more flexible than the other legal systems.

Question 42

Common law is also known as code law.

Question 43

Common law can best be described as a system ________.

A)designed from political and legislative regulations
B)derived from religious beliefs and moral values
C)based on an all-inclusive system of laws that have been codified
D)based on legal precedents set by the nation's courts

Question 44

Unlike other legal systems, Islamic law evolves very little over time .

Question 45

Both common law and civil law systems originated in ________.

A)eastern Europe
B)western Europe
C)western Asia
D)eastern Asia

Question 46

Which of the following supports Country A over Country B?

A)contractual noncompliance provisions are broader in scope
B)contracts are so detailed that they are expensive to draft
C)higher flexibility compared to other legal systems
D)judges confer with legislators on international business issues

Question 47

Describe the similarities and differences of common law and civil law, and explain how inadequate or underdeveloped legal systems pose a risk for international businesses.

Question 48

Which of the following statements supports Country B over Country A?

A)Rules and principles form the starting point for legal reasoning and administering justice.
B)The flexibility of common law allows for judicial interpretation in unique cases.
C)Common law nations administer justice based on a structured set of rules.
D)Laws are primarily legislative in origin and based on laws passed by national and local legislatures.

Question 49

Which of the following statements is most likely applicable to Country B?

A)local and national legislatures pass laws
B)ethics and morality are the underlying tenets
C)an all-inclusive system of law that has been codified
D)detailed contracts that clearly state all potential contingencies

Question 50

Which of the following terms refers to the existence of a legal system based on clear rules and fair enforcement?

A)conciliation
B)arbitration
C)culture of law
D)rule of law

Question 51

Compare and contrast common law with civil law specifically as the two systems relate to international business.

Question 52

Common law is primarily judicial in origin and based on court decisions.

Question 53

Common law originated in the United States.

Question 54

Which of the following legal systems is based on legal precedents and past practices set by the nation's courts through interpretation of statutes, legislation, and past rulings?

A)common
B)religious
C)socialist
D)civil

Question 55

Which of the following legal systems is largely practiced in the Middle East?

A)religious
B)socialist
C)civil
D)common

Question 56

Market forces and free trade are encouraged in democracies.

Question 57

Civil law is primarily legislative in origin and based on laws passed by national and local legislatures.

Question 58

The U.S. Securities and Exchange Act encourages confidence in business transactions by ________.

A)protecting public companies from government scrutiny
B)evaluating the inner workings of privately owned firms
C)requiring public companies to frequently disclose their financial indicators to investors
D)shielding investors from bankruptcy and excessive taxation

Question 59

The most widespread form of religious law is ________ law.

A)Hindu
B)Jewish
C)Islamic
D)Catholic

Question 60

Islamic law is based on the ________.

A)Bible
B)Bhagavad Gita
C)Tanakh
D)Qur'an

Question 61

The European Union impacts international trade and business because of its ability to enact and enforce laws and regulations.

Question 62

A(n)________ is a type of trade penalty imposed on one or more countries by one or more other countries.

A)confiscation
B)expropriation
C)subsidy
D)sanction

Question 63

Expropriation is the term used to describe a host-country government seizing the assets of a foreign corporation and providing no compensation in return.

Question 64

Special interest groups serve the interests of particular countries, industries, or causes.

Question 65

Government agencies, institutions, and public officials influence the manner in which foreign firms conduct business.

Question 66

A(n)________ is a voluntary refusal to engage in commercial dealings with a nation or a company.

A)expropriation
B)sanction
C)boycott
D)confiscation

Question 67

Which of the following types of organizations would wield the greatest power over a firm attempting to do business in Canada?

A)Canada's Ministry of Foreign Affairs
B)World Trade Organization
C)North American Free Trade Agreement
D)Public Works and Government Services Canada

Question 68

Nationalization describes government seizure of an entire industry, with or without compensation.

Question 69

The World Bank is classified as a(n)________.

A)international organization
B)regional economic bloc
C)special interest group
D)competing firm

Question 70

The European Union is classified as a(n)________.

A)international organization
B)regional trade organization
C)special interest group
D)competing firm

Question 71

________ is seizure of corporate assets with compensation.

A)Confiscation
B)Expropriation
C)Embargo
D)Sanction

Question 72

________ is the seizure of corporate assets without compensation.

A)Confiscation
B)Expropriation
C)Embargo
D)Sanction

Question 73

Boycotts and protests have the potential to harm businesses by ________.

A)preventing businesses from shipping their products to foreign markets
B)lost sales and increased costs for public relations activities
C)destroying the ability of all local firms to carry on normal business operations
D)raising concerns about a firm's foreign operations by initiating lawsuits

Question 74

A(n)________ is an official ban on exports to or imports from a particular country, in order to isolate it and punish its government.

A)embargo
B)confiscation
C)expropriation
D)sanction

Question 75

The Organisation for Economic Co-operation and Development (OECD)is classified as a(n)________.

A)international organization
B)regional trade organization
C)special interest group
D)competing firm

Question 76

Explain the purpose of special interest groups. How do these organizations affect international business? Provide examples to support your answer.

Question 77

Of the five types of participants that are active in transforming political and legal systems, the public sector is the most important.

Question 78

Confiscation is the seizure of assets with compensation.

Question 79

An embargo is an official ban on exports to or imports from a particular country.

Question 80

Which of the following is a typical complaint of host-country competitors against foreign firms?

A)Foreign firms burden the host-country with infrastructure requirements.
B)Foreign firms do not have to obey host-country laws and regulations.
C)Foreign firms receive financial support from host-country governments.
D)Foreign firms lure host-country workers to the home-country businesses.