The Political and Legal Environments Facing Business
By: AISHA NUR ARINA
The rules and regulations were able to directly enforced based on their political and legal philosophies by the government. With the advancement of existing technology, seller and buyers have easier to do their own business. However, countries still have the ability to regulate or strong-arm companies into abiding by their rules and regulations. As a result, the political and legal climate in countries in which they currently operate or hope to operate in the future which monitored and evaluated by it ‘s global business. China is one of the more visible examples, with its strong government and limited individual rights. However, in the past two decades, China has pursued a new balance of how much the state plans and manages the national economy. While the government still remains the dominant force by controlling more than a third of the economy, more private businesses have emerged. China has successfully combined state intervention with private investment to develop a robust, market-driven economy—all within a communist form of government.
A political system is basically the system of politics and government in a country. It governs a complete set of rules, regulations, institutions, and attitudes. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. The local economy and business environment governed by the policies which is affected from those political system’s philosophy. There are more than thirteen major types of government, each of which consists of multiple variations.
Since the reform and opening-up policy was introduced in 1978, especially in the past ten years, the People’s Republic of China has undergone significant changes. China is a growth engine for the worldwide economy, trading relationships with other nations as well as greater contributions from domestic consumption and fueling global expansion via higher output. Over last nine months of 2011, China has already attracted contractual inbound foreign direct investment more than USD 100 billion. Notwithstanding China’s status as one of the world’s largest economies, and the massive amounts of foreign money invested in China, for those who want to invest in China or are accustomed to laws of their countries, the basic laws and rules in China governing foreign investment seems mysterious.
The Chinese government has a goal of quadrupling the gross domestic product (GDP) by 2020 and more than doubling the per capita GDP. The China’s government fosters a dual economic structure that has evolved from a socialist, centrally planned economy to a socialist market economic system, or a market economy with socialist characteristics.
What businesses must focus on is how a country’s political system impacts the economy as well as the particular firm and industry. To determine how local policies, rules, and regulations will affect their business firms need to assess the balance. Depending on how long a company expects to operate in a country and how easy it is for it to enter and exit, a firm may also assess the country’s political risk and stability. In fact, to attract foreign investment to their country government should make efforts for political stability. Businesses need to assess if a country believes in free markets, government control, or heavy intervention in industry.
We can see how the political and economic ideologies that define countries impact their legal systems. In essence, there are three main kinds of legal systems, there are common law, civil law, and religious or theocratic law. Most countries actually have a combination of these systems, creating hybrid legal systems. The most direct impact on business can be observed in Islamic law. Sharia as an Islamic law has clear guidelines for aspects of life. For example, in Islamic law business is directly impacted by the concept of interest. According to Islamic law, banks cannot charge or benefit from interest.
Government intervene in trade politically, may seek to protect jobs or specific industries. Some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructure. Both the import and exports of a country can be affected by those national security issues, as some governments may not want advanced technological information to be sold to unfriendly foreign interests. Some governments use trade as a retaliatory measure if another country is politically or economically unfair. On the other hand, governments may influence trade to reward a country for political support on global matters.
Governments showed their intervene for its country from several key policy areas that can be used to create rules and regulations to control and manage trade. Those policies are such tariffs (taxes imposed on imports), subsidy (a form of government payment to a producer), import quotas and voluntary export restraints (two strategies to limit the amount of imports into a country), currency controls (governments may limit the convertibility of one currency usually its own into others and an effort to limit imports), local content requirements ( a certain percentage of a product or an item be manufactured or “assembled” locally), antidumping rules ( occurs when a company sells product below market price often in order to win market share and weaken a competitor), export financing (Governments provide financing to domestic companies to promote exports), free-trade zone ( designate certain geographic areas as free-trade zones to enjoy reduced tariffs, taxes, customs, procedures, or restrictions in an effort to promote trade with other countries), administrative policies ( the bureaucratic policies and procedures governments may use to deter imports by making entry or operations more difficult and time consuming).
China began entering the era of multilateral trade after entering the World Trade Organization (WTO) officially in 2005. This is an important maneuver for China, because China has fully applied the principles of market economy. But in practice, China is suspected of building a superiority to compete with the strength of the US economy. The political structure, fundamental laws, rules and regulation and practices that are implemented are reffered from political system of China and which control the state power, government, and the relationships between the state and society. Based on the worker-peasant union and practicing people’s democratic centralism show if China is a socialist country and the primary system in the country is the socialist system.
The main political structure of the People’s Republic of China is comprised of two vertically integrated, but interlocking institutions: the Chinese Communist Party, headed by the Party Politburo and its Standing Committee; and the state government apparatus, headed by the premier, who presides over the State Council, a de-facto cabinet. Throughout China, Party and government structures closely parallel one another, with Party committees and representatives present not only in government agencies, but also in most organizations and institutions, including universities and foreign owned enterprises.
Two other major institutions play roles in Chinese politics. One is the National People’s Congress. According to the PRC Constitution, the NPC of China is the highest organ of state power. Its highest officers are the president and vice president of the NPC, who are directly elected by the members of the NPC.
China is particularly hazardous with respect to political risk. The possibility of nationalization of industries needs to be considered. In fact this has already occurred in China (in 1949). Similarly, there are the risks of confiscation, expropriation, currency inconvertibility and contract repudiation. Currency devaluation and rampant inflation are possible scenarios in many countries, wreaking disaster on the adequacy of insurance limits, as one of many potential problems. There is also risk to company employees of personal harm or kidnapping, and risk to the firm of extortion attempts. A unique form of political risk occurs in China, and this is the constant battle between the country’s central government and the provincial and local governments over applicable law, and observance or non-observance of it. This makes it difficult for companies operating in China to know exactly what the rules are.
The China country reports in the State Department’s 2007 Human Rights Practices and International Religious Freedom Reports noted China’s well-documented and continuing abuses of human rights in violation of internationally recognized norms, stemming both from the authorities’ intolerance of dissent and the inadequacy of legal safeguards for basic freedoms. Reported abuses have included arbitrary and lengthy incommunicado detention, forced confessions, torture, and mistreatment of prisoners as well as severe restrictions on freedom of speech, the press, assembly, association, religion, privacy, worker rights, and coercive birth limitation. In 2006, China continued the monitoring, harassment, intimidation, and arrest of journalists, Internet writers, defense lawyers, religious activists, and political dissidents. The activities of non-governmental organizations (NGOs), especially those relating to the rule of law and expansion of judicial review, continue to be restricted.
Political stability of China impacted to the level of foreign business activity in China after the Tiananmen Square massacre has fallen off dramatically in many areas, including tourism and foreign investment. While companies not already involved in China are wary of committing investment to China, countries already involved in investment activities seemingly are waiting for a quiet period in which economic progress will begin again and believe that China will not expel foreign investors in the meantime. There is not much likelihood that extant joint ventures and foreign manufacturing plants will be closed under the present regime, but political stability is still a big question to foreign investors. At the same time, China’s economic growth and reform since 1978 has improved dramatically the lives of hundreds of millions of Chinese, increased social mobility, and expanded the scope of personal freedom. This has meant substantially greater freedom of travel, employment opportunity, educational and cultural pursuits, job and housing choices, and access to information. In recent years, China has also passed new criminal and civil laws that provide additional safeguards to citizens. Village elections have been carried out in over 90% of China’s one million villages.
China is also pursuing the emerging institutional and multilateral strategies outside the region to redesign regularity in political-economic field. The multilateral cooperation places the Beijing government as a central point, such as China-Africa Cooperation, the China-Caribbean Economy and Trade Cooperation Forum, as well as the China-Arab Nations Cooperation Forum. As a supporter of influence, China is even involved in providing political consultations on the Andean Community, Rio Group, and MERCOSUR. It appears that China prefers to open a new partnership rather than relying on those already built up (Sohn, 2012: 77-82). It also reflects a great mentality power and exceptionalism of China as a country that sees other countries operating under its influence, so that its foreign policy is really directed to the country (Zhang, 2013: 306-323).
The government intervene is showed by PRC has signed income tax treaties and arrangements with more than 80 countries and regions, including two special administrative regions of the PRC, Hong Kong and Macau.Under the current tax system, the PRC imposes about twenty types of taxes,one of those types is business tax. Business tax is levied on the provision of most services within the PRC, the transfer of intangible property in the PRC and the transfer of real property in the PRC. For example in services sector such as transport they charge 3% tax, banking and sale of real properties 5%, and 5% – 20% for entertainment.
Countries as a region that have the ability to regulate or strong-arm companies into abiding by their rules and regulations which were able to directly enforced based on their political and legal philosophies by the government. This political system governs a complete set of rules, regulations, institutions, and attitudes. To determine how local policies, rules, and regulations will affect their business firms need to assess the balance. A firm may also assess the country’s political risk and stability to know how long a company expects to operate in a country and how easy it is for it to enter and exit. China has fully applied the principles of market economy. But in practice, China is suspected of building a superiority to compete with the strength of the US economy. The main political structure of the People’s Republic of China is comprised of two vertically integrated, but interlocking institutions. China as one country that proves that it is quite advanced country in Asia has A unique form of political risk occurs in China, and this is the constant battle between the state’s central government and the provincial and local governments over applicable law, and observance or non-observance of it. Political stability of China impacted to the level of foreign business activity in many areas, including tourism and foreign investment. While companies not already involved in China are wary of committing investment to China, countries already involved in investment activities seemingly are waiting for a quiet period in which economic progress will begin again and believe that China will not expel foreign investors in the meantime. But at the same time, China’s economic growth and reform since 1978 has improved dramatically the lives of hundreds of millions of Chinese, increased social mobility, and expanded the scope of personal freedom. This has meant substantially greater freedom of travel, employment opportunity, educational and cultural pursuits, job and housing choices, and access to information.