THE POLITICAL AND LEGAL ENVIRONMENT

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THE POLITICAL AND LEGAL ENVIRONMENT

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By: sinclairsonic (19 month(s) ago)

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THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS: 

THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS

OBJECTIVES: 

OBJECTIVES To discuss the goals and functions of a political system To profile trends in the emergence and diffusion of contemporary political systems To explain the idea of political risk and describe approaches to manage it To understand how political and legal systems affect the conduct of business

OBJECTIVES CONTD….: 

OBJECTIVES CONTD…. To describe trends in the evolution and diffusion of contemporary legal systems To discuss the issue of the rule of law versus the rule of man To explain legal issues facing international companies To explain the idea of intellectual property and to discuss areas of concern and controversy

INTRODUCTION TO THE CASE: 

INTRODUCTION TO THE CASE Upto 1970’s, prohibition on foreign investment and restricted foreign trade. This was due to the notion that contact with foreigners would corrupt the political structure and cultural life. By 1978, realizing it was economically lagging behind much of the world. It took various measures like Law on Joint Ventures using Chinese and Foreign investment.

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The economy has since then witnessed step-by-step liberalization & gradual entry into the world of foreign trade & investment. Though the Communist Party maintains an absolute monopoly on political power, the country’s economy is shaped by free market principles. China is now the world’s 2 nd largest economy, which along with US accounted for 60% of all global growth

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By the 1 st quarter of 2007, the $12.5 trillion US economy was sputtering while the $2.5 trillion Chinese economy was expanding at a rate of 11 % pa. If this continues, China will replace the US as the world’s largest economy, both in nominal & real terms, within the next two decades.

CHINA - A LAND OF OPPORTUNITIES: 

CHINA - A LAND OF OPPORTUNITIES Total FDI in China, representing more than 600,000 ventures set up by companies from around the world, exceeded $800 billion. Reasons :- Market Potential Market Performance Infrastructure Resources Strategic Positioning

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Market Potential -With a population of over 1.3 billion & economic growth lifting many into the middle class, the scope is vast. Market Performance -Rapid economic growth has increased consumer spending. Infrastructure -In a multiyear program to build its infrastructure, it will invest trillions of dollars on highways, airports, seaports, dams, power plants, and communication networks.

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Resources -With a well-educated population and an immense pool of productive labour with lower wage rates-about 1/3 rd of the Mexican and 1/25 th of the US rate. Strategic Positioning - More and more companies consider investment and operation in China as fundamental elements of their global strategies.

MARKET REALITIES: 

MARKET REALITIES China’s attractiveness as a business destination continues to suffer due to many political and legal complications. The western ideas does not automatically work in China. For e.g., in the West, you can form a corporation “for any valid business purpose”. This does not exist in China.

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Incorporation in China requires providing excruciating details such as who you are, what you want to do, and of course how much you intend to invest. Next is official approval which is characterized by a tough political & legal systems foster time-consuming busy work, stacking odds against foreigners who have to face elaborate bureaucracy, fledging legal system, and pervasive corruption.

POLITICS & BUREAUCRACY: 

POLITICS & BUREAUCRACY China’s treacherous business terrain depending on a bureaucratic system relying heavily on political agendas rather than legal statutes as a regulating business activity. Westerners have become accustomed to the principle of the “rule of law,” China has long relied on the “rule of man” The legal rights derive from the will of the individual who has the power to enforce them.

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In the 1940s, with the rise of Communist Party, a new centralized leadership took over an already complicated civil service system and proceeded to add a further layer of bureaucratic authority by superimposing the hierarchy of the Communist Party. The result was a complicated and daunting regulatory system.

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File an application- with multiple government ministries-detailing your investment and business plans & details. You must seek approval of the Ministry of Foreign Trade and Economic Cooperation(MOFTEC), which prioritizes those industries according to those it encourages, restricts or prohibits.

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3) Finally, either MOFTEC or some provincial level authority reviews each foreign investment application to determine whether its in the best interest of China. Chinese officials typically subject each application to stringent criteria applied through a lengthy review prevailing political goals and legal conditions.

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Typically, foreign investors endure long bouts of negotiation before their applications reach a government agency with the power to make a decision. MOFTEC has quite narrow criteria for determining what offers sufficient benefits to China.

CENTRAL Vs. LOCAL AUTHORITY: 

CENTRAL Vs. LOCAL AUTHORITY The vastness of the country means that local officials are left to govern according to their own preferences. The central govt. makes efforts to lower trade barriers and increase competition by allowing foreign firms to control local operations, only to be thwarted by local officials who fear that such initiatives will result in hometown employment and instability.

THE LEGAL SYSTEM: 

THE LEGAL SYSTEM China had no formal system whatsoever in 1978, when it launched, when it launched one of the greatest campaigns of legal reform in history. China still faces some fundamental challenges, including legislative gaps, hazy interpretation, lax enforcement, and philosophical disagreement.

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For e.g., No comprehensive bankruptcy law protects businesses; recent draft legislation favors closing down debt-ridden enterprises rather than protecting creditors. There are no effective way of resolving contract disputes. For e.g., If you challenge your local partner, you’ll end up ruining local business relationships.

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“Chinese legislation is a clock-full of ambiguities” says a Beijing based lawyer, who says it will take 10-15 years to eradicate all the problems. Other major problem is a fundamental difference in the conception of legality in the society. In China the system equates the decision of one man with the law. The authority are ceded with powers to make decisions without being subject to transparent system of checks and balances.

MATTER OF INTELLECTUAL PROPERTY: 

MATTER OF INTELLECTUAL PROPERTY Intellectual Property-general term for intangible property rights resulting from intellectual efforts and assets such as patents, trademarks, and copyrights. Western companies complain that China’s industrial surge is powered by the sophisticated theft of their Intellectual Property.

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For the past 40 years, one observer explains “All patents are owned by the government and could be shared by any company that was willing to use them.” The Chinese govt. actually encouraged this, effecting concerned companies. Aggressive estimates claim that nearly a third of the Chinese economy is pegged to traffic in counterfeit goods.

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To quote Tim Clissold, who had a long business career, “I was dealing with a society with no rules, or with plenty of rules, which were seldom enforced. China appeared to be run by masterful showmen: appearances that mattered more than substance , rules were there to be distorted, and success came through outfacing an opponent.

CORRUPTION: 

CORRUPTION Govt. role at all levels of business, underdeveloped legal system with the habit of lax enforcement and the material temptations of an emerging capitalist society, you get the recipe for corruption. China still faces many questions concerning property and procedures for which the Chinese govt. has furnished few solutions.

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Many foreign companies routinely battle bribes and attempts to steal property while struggling to establish clear titles to land and physical equipment. In addition, embezzlement flourishes, “Tunneling,” a scheme in which relatives or friends of managers of state owned enterprise do business with the firms or their subsidiaries has spilled into JVs with foreigners.

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Prudent investors heed the failures of others; for example, the Director of Subway Restaurants China operations noted his Chinese JV partner had cheated the company of $200,000 by various chicanery and misrepresentations. He warns that the lure of Chinese market led “people to leave their heads at home when they come here, forgetting about due diligence.

FUTURE: 

FUTURE Opportunities in China continue to attract foreign firms. Entrants believe the influence of external institutions will spur Chinese officials to make the country’s business environment more consistent, transparent, and fair.

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China’s membership in WTO requires it to accept a system of global trade rules - from tariffs & antidumping regulations to procedures for protecting trademarks & copyrights. It has responded to many WTO regulations, for e.g., state owned enterprises no longer officially discriminate against foreigners by giving preferential treatment.

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It has amended its legal code to conform to WTO stipulations on issues ranging from trade and investment to Intellectual property protection. In 2007, US filed complaints with the WTO for “inadequate enforcement.” arguing its failure to curb piracy not only cost billions of dollars of loss in lost sales but also make it unfairly hard for legitimate firms to operate in the Chinese market.

International Business at a glance in China: 

International Business at a glance in China Don’t Leave Common Sense at the Border Develop “Guanxi.” Understand the Role Government Plays in Day-to-Day Business Learn to Thrive in the Local Business Environment Know The Market and Your Customers Internalize Chinese Cultural Values and Ways of Thinking

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Select the Right Partners, Suppliers and Resellers Understand The Role of Contracts in Business Relationships Develop a Comprehensive “China Strategy”

CONCLUSION: 

CONCLUSION Collectively, political biases, legal shortcomings, and philosophical legacies have contributed to the weak or arbitrary enforcement of laws in China. But slowly, market forces and WTO regulations would make it a better business destination in the true sense of the term.

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Although tremendous opportunity exits, companies must be open to continuous learning and adaptability in order to manage the complex environment and the rapid pace of change.