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Chapter 3 – The Political and Legal Environments Facing Business

Multiple Choice Questions

4.      A key element of _______________ is freedom in the areas of political rights and civil liberties.

a.       totalitarianism

b.       fascism

c.       communism

d.      democracy

6.      Which of the following is NOT a form of totalitarianism?

a.       fascism

b.      democracy 

c.       authoritarianism

d.       communism

18.    In a _______________ state, a single party, individual, or group of individuals monopolizes political power and neither recognizes nor permits opposition. Only a few individuals participate in decision making.

a.       democratic

b.      totalitarian

c.       representative democratic

d.       theocratic democratic

23.    Political actions that may affect company operations adversely include all of the following EXCEPT:

a.       governmental takeovers of property, with or without compensation

b.       operational restrictions that impede the company’s ability to take certain actions

c.       earthquakes which cause a decrease in the supply of raw materials

d.       agitation that disrupts sales or causes damage to property or personnel

25.    Governmental takeovers of property, with or without compensation is:

a.       a cause of political risk. 

b.       not a cause of political risk.

c.       common in democratic political systems

d.       not common in totalitarian political systems

54.    What is meant by political risk?

        

Answer

         Political risk is when international companies fear that the political climate in a foreign country will change in such a way that their operating position will deteriorate.  Although political risks can occur in democratic as well as totalitarian political regimes, they tend to be more prevalent in totalitarian regimes.

        

55.    In a short essay, discuss micro and macro political risk, citing specific examples of how each can be applied to international business.

         Answer

a.     If political actions are aimed only at specific foreign investments, they are known as micro political risks. For example, after NATO forces accidentally bombed the Chinese embassy in Belgrade, Yugoslavia on May 7, 1999, demonstrators trashed KFC stores in China but did not touch Pizza Hut stores, even though both were owned by Tricon Global Restaurants, a U.S.-based company. The Chinese, who were demonstrating primarily against the United States, targeted KFC, a well-known U.S. company, but left Pizza Hut untouched because they thought it was Italian-owned. Companies most likely to be affected by micro political risk are those that may have a considerable and visible impact on a given country because of their size, monopoly position, importance to their home country’s national defense, and dependence of other industries on them.

b.     If political actions affect a broad spectrum of foreign investors, they are macro political risks. For example, after the communist revolution in Cuba, the takeover of property was aimed at all foreign investors regardless of industry, nationality, or whether or not the investors’ past behavior had been socially responsive.

        

59.    In a short essay, discuss the various sources on which Islamic law is based.

         Answer

         Islamic law, which is found in Muslim countries, is based on the following sources.

a.     the Koran, the sacred text

b.     the Sunnah, or decisions and sayings of the Prophet Muhammad

c.     the writings of Islamic scholars, who derive rules by analogy from the principles established in the Koran and the Sunnah

d.     the consensus of Muslim countries’ legal communities

61.    In a short essay, discuss the effects of national laws on international business.

         Answer

         Some national laws on local business activity influence both domestic and foreign companies, especially in the areas of health and safety standards, employment practices, antitrust prohibitions, contractual relationships, environmental practices, and patents and trademarks. Laws also exist that govern cross-border activities, such as the investment of capital, the payment of dividends to foreign investors, and customs duties on imports. International laws, such as treaties governing the cross-border transfer of hazardous waste, can also determine how a firm operates in transporting shipments across borders.