AUTHORITARIANISM

Authoritarianism is a political system in which power is concentrated in the hands of a single leader or small elite, whose decisions are taken without regard for the will of the people. It can also be described as the blind submission to authority and the repression of individual freedom of thought and action. [5] In authoritarian states, activities of the individual that are not directed toward achieving the goal of the state are not tolerated. [6] Authoritarianism differs from totalitarianism in that authoritarian regimes usually do not have a highly developed guiding ideology and lack the power to mobilize the entire population to achieve national goals. [7]

An example of a very severe form of an authoritarian or totalitarian system is North Korea, where the country's wealth and political power are concentrated among a few elite families. [8] Even in Europe, the president of Belarus, Alexander G. Lukashenko, is considered an authoritarian leader who represses opposition forces within the country. [9]

The V-Dem Institute's Democracy Report 2022 which we can see in the left chart below uses the Liberal Democracy Index (LDI) to show that on the one hand the number of autocratizing countries has increased but on the other hand the number of democratizing countries has decreased drastically in the past 10 years across the world. The right chart illustrates the fact that almost 45% of the world's population which equals 2,6 billion people, now live in nations undergoing autrocatization while less than 2% of the people currently live under a democratic political system.The Liberal Democracy Index takes into account electoral aspects as well as the separation of powers and civil liberties. Within the European Union, Hungary is classified by the Institute as an authoritarian regime. [10] Authoritarian countries tend to be insecure in their political and legal environment of international business. [11]

The V-Dem Institute Gothenburg shows in the Democracy Report 2022 that especially in South America, but also in the United States and Eastern Europe, democracy is on the decline, as measured by the Liberal Democracy Index (LDI). [10]

SOCIALISM

Socialism can be considered as a worldview or a social and economical doctrine that was the leading ideology in the former communist countries of the 20th century, such as the German Democratic Republic or the Soviet Union. [19] In contrast to capitalism, which is based on private ownership of the means of production, socialism calls for public ownership and control over property and natural resources. Therefore, in a free market, entrepreneurs do not have free choice over how goods and services should be distributed. [20]

Today, socialism takes the form of social democracies in many parts of the world. In social democracies, economic and social interventions are promoted to ensure social justice through democratic means. Social democracies intervene in the private sector and economic activity and often have a highly developed welfare system. Social democracies exist in Western Europe or in large countries such as India or Brazil. [21]

In the European Union, social democrats govern in nine of the 27 member states. Considering that the majority of opposition forces and conservative or liberal leaders do not want to abolish the welfare state and social interventions in general, it is not only social democracies that aspire towards social democracies. [22]

European Union

The history of the EU began in 1950 with French Foreign Minister Robert Schuman's plan to create a Coal and Steel Community. Seeking closer economic, social, and political ties to achieve economic growth and military security, Belgium, the Netherlands, Luxembourg, and Italy joined the Coal and Steel Community the following year. They founded the European Coal and Steel Community (ECSC), which began operations in 1952. With an emphasis on macroeconomic cooperation, the European Economic Community (EEC) and the European Atomic Energy Community (Euratom) were established in Rome a few years later, in 1957. The EEC allowed for the elimination of most barriers to the movement of goods, services, capital, and labor; the prohibition of most public policies or private agreements that impede market competition; a common agricultural policy; and a common foreign trade policy. [23] It requested common rules for anti-competitive and monopolistic behavior, as well as common standards for land transport and regulation. In 1987, the Single European Act defined the concept of the internal market for the first time. Lastly, in 1993, the Treaty of Maastricht established the European Union. In 2009, the Treaty of Lisbon dissolved the European Communities and integrated them into the European Union. [24]

Since the departure of the UK in 2020 the European Union consists of 27 countries. The UK is the only country that has left the union so far. The most recent country to join the EU was Croatia in 2013. Joining the EU can take years of negotiations with the member countries. To join the EU a country has to meet the standards of EU membership. To meet the standards there needs to be respect for human rights, a functioning market economy, and democracy. Before joining, the new member country has to adopt all EU laws. Countries that are candidates for joining are; Albania, Bosnia and Herzegovina, Moldova, Montenegro, North Macedonia, Serbia, Türkiye, and Ukraine. Furthest in the process, but not expected to be joining before 2025, are Serbia and Montenegro. [25]

Within the European Union, four legislative institutions shape the legal climate, laws, and policies. These are the Commission, Parliament, Council, and Council of the EU. [24]

The EU Institutions 

EUROPEAN COMMISSION

The European Commission is the executive body of the EU, consisting of 27 members and chaired by a president. It takes decisions on the political and strategic direction of the Union. The Commission helps shape the EU's overall strategy, proposes new EU laws and policies, monitors their implementation, and manages the EU budget. It also plays an important role in supporting international development and providing aid. [26] It is the European Union's supervisory authority: it can issue warnings, fine companies, and take cases to the European Court of Justice when EU states violate adopted rules. Along with the Council and the Parliament, it is one of the three important bodies of the European Union. Commissioners are not representatives of their home country and are not bound by its instructions. Their task is to represent the European cause. Therefore, the European Commission is also called the "guardian of the treaties". [27]

THE EUROPEAN COUNCIL

The European Council sets the general policy direction and priorities of the European Union by adopting conclusions. [28] It is composed of the heads of state and government of the EU member states, the president of the European Council, and the president of the European Commission. Outwardly, it functions as a “collective head of state.” The conclusions adopted at each European Council meeting at the EU Summit, identify specific issues of concern to the EU and define actions or goals to be accomplished, including setting a deadline for reaching an agreement on specific points. Whilst the European Commission remains the sole initiator of legislation, the European Council can provide impetus to steer legislative policy. Still, while not having legislative power, the European Council is a strategic crisis management body that provides general policy guidance and priorities for the Union and acts as a collective presidency within the EU. [29]

THE EUROPEAN PARLIAMENT 

The European Parliament is a directly elected EU body with legislative, supervisory, and budgetary powers. It consists of 705 members and is the EU's legislative body, whose members are directly elected by EU voters every five years. [30] Currently, the next elections will be held in 2024. It has the power to enact and amend legislation and decides on the annual EU budget at the same level as the Council. It oversees the work of the Commission and other EU bodies and cooperates with the national parliaments of EU countries to seek their input. It can pass or reject legislation and also make amendments. Together with the Council of the European Union, it adopts European legislation based on proposals from the European Commission. The Commission submits a legislative proposal to the European Parliament and the Council of the European Union, which must approve it in order for the proposal to become EU law. [31]

THE COUNCIL OF THE EUROPEAN UNION

Ministers from each EU country form the Council of the European Union.  Amending and adopting laws, and coordinate policies are discussed in meetings and ministers have the authority to commit their governments to decisions. Council meets in different configurations depending on which matter is being discussed, for example regarding financial or environmental decisions. The Council of the European Union is negotiating EU laws, and adopting the annual EU budget in cooperation with the European Parliament. [32]  

THE EUROPEAN CENTRAL BANK (ECB)

The ECB, established in 1998, is the central bank of the European Union countries that use the currency of the euro. 20 out of 27 EU member countries are using the euro as their official currency. These countries form the euro area or “Eurozone”. Its mission statement is: "We keep prices stable and your money safe". Its headquarters are in Frankfurt am Main. The Central Bank Council, which consists of the Executive Board and the governors of the central banks of the eurozone countries, is its supreme body. A representative of the Council and a representative of the European Commission also participate without voting rights. The European Central Bank Council makes the main monetary policy decisions for the euro area. These are then implemented by the Executive Board, which conducts day-to-day operations.[33] Examples of what the ECB does; sets interest rates of loans to commercial banks in the euro area, manages the euro area’s foreign currency reserves, produces euro banknotes, and makes sure that financial markets and institutions are well supervised by authorities. [34]

European Union's Trade Policy 

International trade and investment relations with non-EU countries have always been a priority of the European Union's trade policy. The responsibility for the EU's trade and investment policy towards non-EU countries lies exclusively with the EU and not with its member states. In other words, the EU institutions legislate on trade issues as well as negotiate and conclude international trade agreements. However, EU member states must ratify and sign the agreements. Trade agreements enable European companies to gain easier and cheaper access to the raw materials and other means of production they require, to compete more effectively in foreign markets, and to export more to non-EU regions. [35] The EU is one of the largest players in international trade, along with the United States and China, with EU exports now accounting for about 15% of global exports. [36] Trade agreements boost member states' economies, make companies based there competitive, and create new jobs. [37] The EU also has rules to protect European companies from unfair trade practices, which can include dumping or subsidies to keep prices artificially low compared to European products. European products may also be subject to tariff barriers or quotas. A trade war may result, if trade disputes cannot be resolved. [38]

EUROPEAN UNION & EXPORT

More than 36 million jobs in the EU depend on exports, and every €1billion  exported to non-EU countries supports about 13,000 jobs in the EU.[39] In 2020, EU trade was hit hard by the COVID-19 pandemic, with a significant fall observed for both exports and imports which luckily recovered strongly in 2021. Most companies prefer exporting as a primary strategy for entering foreign markets due to its low risk, low cost, and low knowledge requirements about foreign markets and transactions. [40] Exports also support small and medium-sized enterprises (SMEs) in Europe, and export opportunities are critical in industries undergoing structural change, such as agri-food. [41] The increasing interdependence of services with goods production also requires a greater focus on the liberalization of services, both within the EU and in trade with the rest of the world, particularly because over 60% of the EU's direct investment abroad is related to trade in services. [42]

EU'S OBJECTIVES

Joint action by member states gives the EU greater negotiating power, and joint action allows issues such as human rights, working conditions, and environmental protection to be included in negotiations. One of the EU's goals is to ensure that economic growth goes hand in hand with social justice, respect for human rights, high labor, and environmental standards, as well as health and safety. [43] In a May 2019 Kantar survey of EU member states, more than half of respondents said they believe EU trade policy also takes into account social, environmental, and human rights impacts [44], and six out of ten Europeans trust the EU to be open and transparent in its trade policies. [45] Indeed, this is important because a lack of transparency undermines the legitimacy of EU trade policy and public trust. [46] Europe has also opened its markets to trade with the Global South, helping to ensure that developing countries benefit from global trade. [47]

EU TRADE AGREEMENTS

The European Union seeks preferential trade agreements with both developing and developed countries, with negotiations with developed countries focusing primarily on regulatory and normative issues such as intellectual property or labor and environmental standards. [48] For consumers, the EU's trade agreements lead, among other things, to a wider choice of products at lower prices. [49] The EU currently has 41 trade agreements with 72 countries. [50] Trade agreements are divided into Economic Partnership Agreements (EPAs), Free Trade Agreements (FTAs), Association Agreements (AAs), and Partnership and Cooperation Agreements (PCAs), depending on their content. [51] FTAs facilitate reciprocal market opening with industrialized and emerging economies by providing preferential market access. EPAs are a special form of FTA, i.e., preferential agreements that include a component of development. (e.g., with trading partners from African, Caribbean, and Pacific countries). AAs support broader political agreements (agreements with Ukraine and Georgia) aimed at deepening political relations and bolstering economic ties. [52]

EU FREE TRADE AGREEMENTS

Free trade agreements, such as the European Free Trade Association (EFTA), refer in the traditional sense to the abolition of tariffs and border controls on cross-border trade in goods [53] and follow the principle of liberalism since the prosperity of all countries is greatest when all government restrictions on international trade are removed. [54] Accordingly, the concept of free trade has been greatly expanded since the mid-1980s to include such areas as trade in services, investment rights, government procurement rules, and so-called intellectual property protection. [55] Only completely unhindered trade and free competition could lead to an optimal division of labor between the individual economies with optimal production and the greatest possible prosperity for all countries involved. [56] Compared to regular trade agreements, cooperation and association agreements have a broader scope and usually include a political and foreign policy dimension. [57]

Recent Changes in the political environment in the EU 

THE RISE OF POPULISM 

There was a major shift within the European Union to preserve the ethics of the European internal market and the EU state even with the threats that occurred during the fiscal crisis which led to the financial crisis of 2008 and the economic crisis, as well as the migration disaster around 2010. Since 2010 the number of populist parties in Europe is rising. Even though the shift faded away a bit during the second half of 2010, with the COVID-19 pandemic it unfolded quickly again. [118]

THE ECONOMIC GOVERNANCE OF THE EU AND ITS MAJOR SHIFT 

We can observe 3 different phases of how the economic governance of the EU changed over the early- and late-pandemic era and it starts with the founding of the brand-new College of Commissioners of the European Commission and starting the new period for the legislation since the elections of the European Parliament in May 2019. [118] 

The first step was the discussion about the launching of a profitable surveillance structure during February- March 2020. The second important step was the loosening of budget rules, which was represented in March 2020.  [118] 

The third phase took place over the months April-July 2020 and it was the major governance shift. It allowed the EU primary to simultaneously take from the financial markets on a major scale and with that support the commercial recovery of the EU, targeting the big investments to countries that have been most affected by the COVID-19 pandemic. [118] 

Country risks refer to the potential exposure of international business to the political and legal environment within a country. These risks can significantly impact the operations and decisions of internationally acting companies. The situation in foreign policy can affect trading conditions between two countries, impacting international business operations. Furthermore, business decisions based on evaluating country risks are interconnected with the reigning government and the political system. [58]

In the following we will be focusing on specific risks concerning the political and legal environment, general political situation as well as trade bans. All of which influence business decisions and operations within a country. [58]

General Political Situation

BOYCOTT

Definition

A boycott is a strategic and conscious decision made by individuals or groups to abstain from engaging in commercial activities or purchasing goods and services from a particular country or company. It serves as a powerful tool for expressing political discontent or opposition, as well as for exerting economic pressure to influence the behavior or policies of the targeted entity. [70]

Case

An example of a boycott is the one that took place in France in August 1999 against "McDonald's". At that time, the European Union (EU) was rejecting the import of American beef due to non-compliance with European food standards. In response, the United States imposed punitive tariffs on European products, including French cheese. French farmers protested outside "McDonald's" restaurants, as a representative symbolizing American trade and foreign policy. The peak of the demonstration was the demolition of a "McDonald's" restaurant by French farmers. [71] 

Another notable boycott occurred in Russia in 2022. Following Russian President Vladimir V. Putin's order to invade Ukraine on February 24, multinational companies faced pressure from investors and consumers. Many Western companies began reassessing their connections with Russia. They implemented measures such as unwinding investments, closing stores, and temporarily suspending sales. Some companies eventually decided to completely withdraw from the country. Three significant examples are "H&M", "McDonald's", and "Netflix". [72]

"H&M" closed down all its stores in Russia, which amounted to approximately 170 locations. In March, they temporarily paused all sales and described the process as a "winding down" phase. They briefly reopened stores to sell remaining inventory before completely exiting the country. [72]

"McDonald's" sold its Russian business to a local licensee, including all 850 restaurants. Initially, the company stated they were temporarily closing and halting operations in Russia. However, selling the restaurants to a licensee resulted in a complete exit from the market. [72] 

WARS

Definition

Armed conflicts, insurrections, and various manifestations of violence possess both immediate and indirect ramifications for international businesses. These events can disrupt economic stability and hinder the operations of companies operating in affected regions. [73]

Case

A recent illustration of such consequences occurred in Afghanistan during 2021, as the ascent and subsequent takeover by the Taliban resulted in severe economic turmoil. [74]

A more recent and poignant example of these dynamics unfolded on the 24th of February 2022, when Russia undertook an unprovoked invasion of Ukraine, culminating in the illegal annexation of Ukrainian territories, namely Donetsk, Luhansk, Zaporizhzhia, and Kherson. Such actions not only engender political tensions but also unleash far-reaching economic consequences for international businesses operating in the region. [74]

TERRORISM

Definition

Terrorism refers to the deliberate use of violence for political purposes, aiming to create fear within a population and advance specific objectives. Its impact on the business environment can be seen in two main ways: direct economic destruction and market uncertainties, especially in the tourism sector. As terrorism becomes more prevalent and widespread, it can lead to a general decline in economic growth. The repercussions of terrorism extend beyond immediate physical damage, reverberating throughout the business landscape. The occurrence of terrorist incidents creates an atmosphere of insecurity, leading to diminished consumer confidence, altered investment patterns, and disrupted market dynamics. [75]

Case

For instance, Northern Ireland experienced troubles and terrorist attacks that resulted in a decline in private sector employment and a significant drop in tourism. Furthermore, acts of terrorism by foreign groups, particularly those associated with Islamist ideologies, can fuel xenophobia and impose constraints on foreign direct investments (FDIs). [76]

Trade Bans

SANCTIONS

Definition

Sanctions are penalties imposed on trade, which can take the form of trade barriers, tariffs, or import duties. They are typically implemented when two or more countries are in conflict over trade policies or foreign politics. Sanctions serve as a means to impose penalties on countries engaged in objectionable actions, aiming to influence their behavior and uphold international norms. Sanctions involve a range of measures designed to apply pressure and deter further undesirable actions, with the goal of promoting peace, stability, and adherence to international laws and agreements. [77]

Case

In the case of Russia, the European Union (EU) has imposed sanctions since the annexation of Crimea in 2013. These sanctions encompass financial measures, individual-related sanctions, and trade embargoes. Furthermore, the EU has imposed additional sanctions on Russia in response to its invasion of Ukraine. These measures build upon existing sanctions implemented since 2014, following the annexation of Crimea and the failure to implement the Minsk agreements. The sanctions consist of targeted restrictive measures against individuals, economic sanctions, and visa-related measures. [78]

In addition to Russia, the EU has also adopted sanctions against Belarus for its involvement in the invasion of Ukraine and against Iran in connection with the use of Iranian drones in Russia's aggression against Ukraine. [78]

EMBARGO

Definition

Embargoes are restrictions on importing or exporting goods between countries. Trade embargoes ban all commerce, while strategic embargoes target trade that affects a country's military power. They are employed as a tool in economic warfare to induce political change. Embargoes are generally stricter and broader than sanctions. [77]

Case

In 2021, China imposed a trade ban on Lithuania due to Lithuania's support for Taiwan opening an embassy in Vilnius. The European Union is now working to mediate between the two countries. [79]

Relevance in EU Context

More recently, the EU implemented import and export restrictions as part of economic sanctions on Russia during the ongoing war. These measures prohibit certain products from being sold to Russia by European entities (export restrictions) and restrict certain products from being sold to the EU by Russian entities (import restrictions). The bans aim to impact the Russian economy while minimizing consequences for EU businesses and citizens. Embargoes are enforced by the EU's customs authorities. Additionally, the EU, in collaboration with like-minded partners, has reserved the right to reconsider Russia's favored-nation status within the World Trade Organization. They have implemented restrictive measures, including bans on specific goods, and suspended efforts related to Belarus' WTO accession. [80]

Measures taken before conflict

There are two approaches for resolving disputes before a conflict has occured, namely Scanning and Relying on qualified local partners.

SCANNING

Scanning means continuously assessing the potential risks and threats to the firm via different sources. The indicator “Doing Business” [98] shows how easy it is to conduct operations in a country. On the website, it is possible to select countries and to find out for example how easily it is to pay taxes, to enforce contracts or even deal with construction permits in a specific country. This ease of doing business depends partially on political and legal decisions taken by the EU as well as by countries, since public authorities have the power to regulate some aspects of economic activities. [99]

If a company wants to have more statistical information about the EU and its countries, looking at the Eurostat (European Statistical Office) data is also useful. This organ of the EU provides statistical data on many aspects of economic life in the EU, for example about the labour market or the population’s purchasing power. [99]

Those pieces of information are very precious for companies, they should be considered before taking the decision to enter a market but also after entering the market in order to monitor potential changes. [99]

RELYING ON QUALIFIED LOCAL PARTNERS

Foreign companies which enter a new market have a disadvantage due to the fact they don’t know the country as well as their own, and also because the country’s population and companies don’t know very well the foreign companies either. This phenomenon is described as the liability of foreignness. In order to mitigate it, companies can make an alliance with qualified local partners, which assist in navigating the complex legal and political landscape. Those local firms have knowledge and experience about the country, as well as networks. [100]

For instance, "Vodafone", a British company, bought in 2000 the German company "Mannesmann". "Vodafone" is now the largest provider of mobile phone services in Germany, so it really consolidated "Vodafone's" position in Europe. In addition to the fact that it highlights acquisition as an entry strategy, it shows that local partners can be a big help in order to successfully start operations in a foreign country. Taking such a big part of the market would have been impossible if not for the existing equipment, employees, knowledge and experience of "Mannesmann". In some ways, the acquisition was also a purchase of culture and skills. [101] 

Measures taken after conflict 

When operating in a foreign market, companies can encounter disagreements with stakeholders such as other companies, customers or public authorities. These disagreements can sometimes lead to legal procedures or be solved in a more friendly manner. There are three approaches for resolving disputes after a conflict has occured, namely Litigation, Arbitration and Conciliation.

LITIGATION

Litigation occurs when one party files a lawsuit against another.

For example, "Slack" filed a claim against "Microsoft" before the European Commission in 2020, saying that the fact that "Microsoft" offers the software Teams to its Office 365 users is an anti-competitive practice, because it makes the software "Slack" harder to sell. None of those companies are European, but they are still affected by the political environment of the EU. [102]

In this framework, companies should not forget that they can be attacked for their illegal activities. For example, a Mexican human rights organization filled a lawsuit against "EDF", the main French electricity company, before French courts for activities which happened in Mexico. The plaintiffs allege that "EDF" violated the right to free, prior and informed consent (FPIC) of the local indigenous community impacted by the company's wind farm project in Mexico. They say it doesn’t respect the French Duty of Vigilance law of 2017. This example shows that the national political and legal environments of countries of the EU also matter, and that companies should be aware of the existence of such laws. [103]

Since foreign countries constitute a complex environment to navigate into, having legal knowledge specific to international trade and to the EU is a way to manage country risk. It is useful for example in order to know which court is competent, the one from the home country of the company or the one from the country in which operations take place. [103]

ARBITRATION

Arbitration occurs when a neutral third party hears both sides of a case and decides in favor of one of the parties, based on an assessment of the facts. 

One example of an arbitration mechanism in the EU is the "Online Dispute Resolution (ODR)" platform provided by the European Commission since 2016. The goal is to make cross-border disputes easier to solve and to make online shopping safer. The "ODR" platform is a free online tool on which customers can make a complaint about goods or services they bought online. It is particularly useful when the transaction involves different countries. [104] After the customer filled the complaint, the trader can answer via the platform or suggest "ADR" bodies that will handle the case and take a decision. It is mandatory for the trader to provide a contact email as well as the link to the "ODR" platform on their website. This example shows that companies operating in the EU should be aware of such mechanisms, especially when it comes with obligations to fulfill. [105]

CONCILIATION

Conciliation is a process of negotiation with the goal of resolving differences in a friendly manner. Since it is less formal than litigation and arbitration, there is no mechanism specific to the EU.

These "ADR" mechanisms are a way to manage country risk because they can resolve conflicts without tarnishing the reputation of the company. By avoiding unnecessary escalation of complaints, they can facilitate cross-border trade so companies should know how they work. [105]

CONTROL OF ABUSE OF DOMINANT POSITION

An abuse of dominant position occurs when a company is the leader of a market and uses his power to disadvantage its competitors. [107] For example, the European Commission decided that Google should pay multiple fines for this reason over the last few years. These sanctions are financial: €2.4 billion in 2017, €4.3 billion in 2018 and €1.5 billion in 2019. [108]

CONTROL OF CARTELS

A cartel occurs when supposed competitors reach an agreement on prices or on quantity, in order to increase their profits. This is also forbidden in the EU. [109] 

CONTROL OF MERGERS

Since some mergers could reduce competition in a market, the EU must approve a proposed merger in order for it to happen. This approval is necessary if the annual turnover of the combined businesses exceeds a predefined threshold. In 2019, the European Commission has prohibited "Siemens’ " proposed acquisition of Alstom, saying it would harm competition. These companies, which are German for the first one and French for the second one, are both very strong in the railway industry so a merger could create a monopolistic market and make prices rise for travelers. [110]

Legal System

A country’s legal system consists of laws, rules, and regulations that affect both individuals (e.g. employees) and legal entities (e.g. companies or associations). Controlling and enforcing compliance with the established rules is a part of the legal system. In a democratic system, the legal system is based on the rule of law. Rule of law means that the rules are clear, widely respected, publicly disclosed, and fairly enforced. It emphasizes the law referring to moral values (what is said to be “right” and “good”) as prevailing over politics. [116]

Resolving disputes in commercial activities, protecting intellectual property, and taxing economic output are parts that a legal system incorporates. Therefore, the choice for a company to move towards a state governed by the rule of law, like all the countries of the European Union (or almost if we can exclude Hungary for a few years), becomes essential. To be guaranteed to be treated fairly in case of legal problems is an important risk factor. [116]

Legal systems vary from country to country. There are four main legal systems: civil law -, common law -, customary law - and religious law systems. However, variations exist with rather mixed regimes such as in India (mixture of common law system and religious law system) or China (mixture of civil law system and customary law system), due to the history of some countries. [116]

CIVIL LAW 

As can be seen on the map above illustrating the legal systems in the world, the civil law system (countries in blue in the graph) is the most widely adopted legal system in the world. It is a comprehensive system of rules, originating from Roman law, that are clearly written and not subject to interpretation. In civil law systems there is less freedom of contract, meaning that many terms are implied into a contract by law. Contracts in a civil law system are therefore often shorter in comparison to contracts made in systems with common law. [115] 

COMMON LAW

Common law systems are present in the Anglo-Saxon world (in the United States, Australia, the United Kingdom, New Zealand, Canada, and Ireland). It originates from English law, which spread around the world because of the English colonies and later the Commonwealth. This view of the law is illustrated by the development of legal rules based on case law. It can be said to a certain extent, that the law evolves in line with individual court decisions. If a case is different from any previous actions in a courtroom, a judge can adapt the legislative basis to the new case for his verdict [80] The American writer Olivier Wendell Holmes summed up the main idea of common law in his book "The Common Law" (1881) as: "The life of the law has not been logic: it has been experience" . [81]

To avoid administrative and contractual problems a firm might encounter in a country dominated by common law, it should be aware that it is better to draft contracts diligently. A potential legal dispute can be assessed by looking at previous cases with similar conditions. The judges, being able to interpret legislation, have great power in common law systems. [81]

RELIGIOUS LAW

Some countries in the world have retained a strong religious influence in their legal systems. This is the case in many Muslim countries such as Saudi Arabia, Egypt, or Algeria, Hindu countries like India or Jewish countries such as Israel. These states often have a hybrid legal system, where religious characteristics are involved in common or civil legal systems. For example, Indian law, although derived from Hindu law, is heavily influenced by its former British colonizers, who left traces of common law principles. [82] In some cases, religious law has a direct influence on cultural aspects. Religious restrictions within the Sharia law for example would forbid it for Muslims to eat pork, as that is haram. Therefore, the law itself has an influence on the cultural aspect. Such examples also exist in Christian countries, for example, a variety of European Christian states have most stores closed on a Sunday or during Christian holidays, such as Christmas or Easter. Religious beliefs, moral values, and ethical codes have a strong impact on a religious law system. [83]

CUSTOMARY LAW

Customary law is based on long-standing values, traditions and ways of life in each country.  It is mixed with common law or civil law systems. When a tradition has become so ingrained in society that the courts recognize it as an enforceable rule, it is considered to be common law. Customary laws are typically unwritten and not enforced by the government. [116] In many Sub-Saharan African countries, customary law is very dominant. EU countries still have a few customary laws, for example, the Austrian “Anerbenrecht” (Inheritance law), which in some states regulates how agricultural property can be inherited [84] 

The European Union has a legal personality, it has its own legal system, which is distinct from the national system (present in each country). Moreover, the law of the European Union prevails over the law of each member country of the Union. Thus, the European Union has been able to intervene on several occasions in matters of national and international law of certain countries. [24]

The European Union has the Court of Justice of the European Union. The Court of Justice is responsible for ensuring that EU law is applied and interpreted the same in every EU country. It has had to become involved in a number of cases between member countries, often competition- or social policy-related cases. The following examples show the impact of the Court of Justice of the European Union : [111]

• The Laval judgement (2007): the eponymous company posted Latvian workers to renovate a school in Vaxholm, Sweden in 2003-2004. It refused to sign the collective agreement and to respect Swedish legislation on working conditions and the minimum wage in the sector. It was this refusal that led the Swedish trade unions to take collective action, which was perfectly legal under Swedish law so that Latvian workers could benefit from the rights of the host country. The company retaliated by taking the case to the Swedish national courts to have the actions declared illegal. The case was eventually referred to the ECJ, which ruled that the Swedish unions' industrial action, including the blockade of a construction site, was unlawful because it was "disproportionate" and contrary to the principle of freedom to provide services. This puts Latvian and Swedish workers in competition. [111]

• The Google judgement (2017/2021): in 2017, the American company "Google" was condemned by the Court of Justice of the European Union for "abuse of a dominant position" in several European Union member states. "Google" had been accused of promoting its own product comparison software to the detriment of other companies' software on the Internet. As a result, the company was fined more than 2 billion euros. This judgment has been mostly overruled by the Court of Justice, as "Google" and "Alphabet" brought an action before the Court. [111]

These two cases depicting the role of the European Union in a legal framework show us the importance of the host country's legal system for a company that aims to enter a new market. A firm has to analyze and understand how the laws, rules, and regulations, which may impact its entry and development in a new country, work. [111]

Foreign Direct Investment (FDI) Laws

With globalization, FDI has gained momentum. It is the international movement of capital to create, develop or maintain a subsidiary abroad or to exercise control or significant influence over the management of a foreign company. They are an essential element of the multinationalisation of companies. [85]

Nevertheless, FDI has adverse effects in some countries where it is deployed, such as deplorable working conditions, considerable environmental impact, and other social problems (wages, inequalities, etc.). All this has a cost that unfortunately some countries ignore and let companies play the "social dumping" card, which is not fair in terms of competition. [85]

Some mechanisms exist to counter the negative effects of FDI. This is the case in the European Union, the world's leading destination for FDI, where policies to control the inflow of such capital into European territory are linked. Nevertheless, corporate tax policies are far from being harmonized between EU countries, as can be seen in the table below. The average corporate tax in the EU is 21.7 %, which is below the international average. Thus, companies are still arbitrating between the different taxations of the countries of the international organization. [85]

Even within the European Union, some countries practice social dumping: "RyanAir," the Irish low-cost airline, was indicted in January 2017 for concealed work. The management is suspected of not having declared, from 2011 to 2014, its employees at Marseille-Provence airport (in France) and of having applied Irish legislation to them, which enabled it to pay lower charges. [86]

[136] Figure 12: Corporate Income Tax in (2021) // Source : OECD Stat

Barriers to Market Entry

To analyze the external market, a firm might use the PESTEL framework. The framework helps assess macro environmental factors. In a PESTEL analysis, the “L” represents the legal environment of the company and “P” the political, two of the six crucial factors. [3]

In some countries, the judicial system is so weak and inefficient that it can be a barrier to entry into the same country's market for companies with an international focus. [121] Politics plays an important role in business. This is because there is a balance between systems of control and free markets. As global economics supersedes domestic economies, companies must consider numerous opportunities and threats before expanding into new regions. It also applies to firms identifying optimal areas for production or sales. Political factors may even help determine the location of corporate headquarters. This category can sometimes combine laws (from the legal group) since the government and its bills are closely linked. [2]

Political and Legal Factors in the PESTEL Framework

PROPERTY RIGHTS 

Property rights have no scientific and economic consensus, meaning that it varies from region and perception how property rights are seen [87]. Property rights define the theoretical and legal ownership of resources and how they can be used, meaning how it can be traded, used to generate income, or destroyed. They can be owned by individuals, businesses, and governments. These rights define the benefits associated with ownership of the property. [88]

In a globalized, capitalist economy such as ours, it is important for a country to put forward strong property rights policies as a way for companies to emancipate themselves in that country without worrying about what will happen to their patents or other property rights. The European Union is very serious about this issue of intellectual protection and property rights, as illustrated in Article 17 of the European Union’s Charter for Fundamental Rights: [89]

1. Everyone has the right to own, use, dispose of, and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law in so far as is necessary for the general interest.

2. Intellectual property shall be protected. 

However, there are variations between countries with regard to property rights. The chart from theglobaleconomy.com provides information that ranks countries according to a Property Rights Index (from 0 to 100), implying each country's ability to protect the property rights of individuals and businesses. Within the European Union, some are more inclined to issue quality property rights than others. [90]

It can be seen that northern and western European countries (Finland, The Netherlands, and Sweden) are better at protecting the property rights of companies entering their markets, while southern and eastern European countries (Greece, Poland, and Bulgaria) have a lower score in this respect. Countries in the Balkan region, for example, pursue state goals instead of seeking to strengthen property rights. [90]

The Court of Justice of the European Union has often had to deal with cases of infringement of the intellectual property of European companies by multinational companies like "Google". One example is "Constantin Film Verleih GmbH", one of Germany's largest film production and distribution companies, which stood up to "Google" and "YouTube" for putting some of its films on the video platform without its consent. "Constantin Film Verleih GmbH", therefore, requested the email addresses, phone numbers, and IP addresses of the people who viewed the films. The case is still pending. [90]

CORRUPTION 

The European Commission defines corruption as: the abuse of power for private gain. In other words, corruption is a political phenomenon that lowers the credibility of the country and its government in the eyes of citizens, international organizations, but also foreign investors. A corrupt country cannot expect as much capital inflow as a country with a more honest government. [91]

Indeed, the degree of corruption in a country is a key indicator for companies deciding to enter foreign markets. Corruption undermines a country's rule of law, and a corrupt state is often more concerned with investing in the military or restrictive policies than in infrastructure, health care, or the education and research system. Increasingly, companies are looking for countries with qualified personnel, good health and efficient road and rail infrastructure. Thus, the costs of entering markets in corrupt countries are generally much higher than in non-corrupt countries. [91]

Fortunately, there are tools available to companies, such as the Transparency International website, to assess the level of corruption in certain countries. Here is a graph showing the corruption index score of EU countries based on data from Transparency International. (The closer the score is to 100 , the less corrupted the country is.) [92]

Again, northern and western European countries (Denmark, Finland, Sweden and the Netherlands) are more likely to attract companies concerned about corruption than southern and eastern European countries (Bulgaria, Hungary and Romania). [92]

Laws for companies when they are in the country

TRANSPARENCY

From a political and legal point of view, companies are obliged to pay taxes to the governments that host them in their countries. But from a purely legal point of view, companies can be forced to be transparent about the taxes they pay, but also about their financial record. This type of law varies from country to country. [93]

The European Union wants to coordinate companies and member countries in this respect: the aim is to avoid fraud by asking companies to specify in which country they pay a certain amount of money. This concerns any company operating in the European market with revenues exceeding €750 million per year. In this way, the European Commission wants to prevent tax evasion (estimated at €50-70 million in the EU) by companies that take advantage of the different levels of taxation in the EU countries. These new directives will therefore improve competition between companies, which will all be put on the same level from a legal tax declaration point of view. [93]

CONTROLS ON OPERATING FORMS AND PRACTICES 

Production and sales standards differ between countries. Companies must be aware that these rules must be respected to operate in a market. There are standards for the protected designation of origin of products, standards for working conditions, and environmental impact, but also standards for consumer safety, which are harmonized in the European Union thanks to European competition policy and social policy. Moreover, Europe has also coordinated its data protection policy, which has led to a penalty of €57 million for Google in 2019 for not respecting the charter. [94]

In the same way, consumer protection is a central theme in European laws, whether it is medicines or foodstuffs, everything is controlled: some companies are therefore forced to update their certification. The "CE" mark is also present on non-food products that have the right to circulate on European territory: it is a quality mark that ensures the consumer that the product is in conformity with European legal requirements. [95]

From a functional point of view, the company may also have regulations on the repatriation of income: some countries refuse to see too much of the profits made on their territory go to the company's host country. From a strategic point of view, this legal feature can have an influence on companies wishing to repatriate income to the parent company. However, with a good internationalization strategy, a company can succeed in minimizing the taxes linked to the repatriation of income. It is necessary to select the countries where these taxes are lower than elsewhere. [95]

DISTRIBUTION LAWS AND MARKETING 

With the emergence of online sales in recent years, legislation on distribution issues, particularly distance/internet distribution, may have become increasingly important to business strategies. The European Union is topical in this respect and has "liberated" online sales by recently easing restrictions (lower geo-blocking, lower delivery costs for companies). The European Union is concerned about the security of its citizens' data, as mentioned in the section on controls on business practices. As a result, it has recently updated online sales contracts and is working to increase consumer rights in online markets. In 2018 EU introduced the General Data Protection Regulation (GDPR) aimed to increase data privacy and security. [96]

Any company wishing to sell on the Internet must be aware of the standards in force. However, the Internet is not only useful for selling but also a real asset for advertising. This goes from disclaimers about certain goods like alcohol or tobacco, as we know from the EU, to special regulations in other countries. As an example, China prohibits any superlatives in its advertising market. A detailed assessment of the markets is mandatory. [97]

ENVIRONMENTAL LAWS 

Environmental laws are a key criterion for some companies, especially for companies dealing with toxic products or producing polluting products. Thus, the regulatory or fiscal policies of certain countries are to be considered when setting up in a new market. These can have strong consequences today, in a period where environmental and climate protection has never been so strong. The negative externalities of certain industries from an environmental point of view are disastrous. [112]

At the European Union level, Member States have adopted a carbon tax. More recently, Ursula Van der Leyen, President of the European Commission, launched the Green Deal. This European pact includes a carbon tax at the borders, to avoid carbon leakage so that there is fair competition with companies that are not subject to these measures (because they produce elsewhere) but which operate on the European market (where they sell their products and services). Europe is therefore acting in the interests of fairness for companies. [113]

Europe is indeed able to tax polluting companies: The European Parliament is paving the way for a carbon tax on certain imports. This tax concerns products from third countries that have lower environmental standards than in the EU. This tax should primarily concern energy-intensive products and several industrial sectors such as electricity, cement, steel, aluminum, paper, and glass. [113]

Europe is also able to subsidize and encourage companies that make an effort: it is a question of ensuring that companies move towards increasingly eco-friendly production strategies. In this sense, the LIFE program specifically supports the development and implementation of EU environmental and climate policies and legislation. It is aimed at public and private project promoters and aims to promote and finance innovative projects concerning, for example, the conservation of species and habitats, soil protection, the improvement of air or water quality, waste management, or the mitigation or adaptation to climate change and the energy transition. [114]

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Figures and Videos

[120] Video 1: Political Environment; Source: https://www.youtube.com/watch?v=eKc-OgPJu34

[121] Video 2: Forms of Government | World101; Source:  https://www.youtube.com/watch?v=LBFXD06fudM&feature=youtu.be

[122] Figure 1: Autocratizing Countries by the Liberal Democracy Index (LDI);  Source: Institute, V.-D. (2020). Democracy Report 2020. Gothenburg: V-Dem Institute Department of Political Science. 

https://www.v-dem.net/documents/29/V-dem_democracyreport2023_lowres.pdf

[123] Video 3: Democracy - A short introduction; Source: https://www.youtube.com/watch?v=u6jgWxkbR7A

[124] Figure 2: Map of Europe showing current monarchies (red) and republics (blue). Source: Commons Wikipedia

[125]  Figure 3: What are the central decision-making institutions of the European Union? (1/4) - Protect Our Winters EU;  Source: https://protectourwinters.eu/eu-climate-policy-101-what-are-the-central-legislative-institutions-of-the-european-union-1-4/

[126] Figure 4: European Union timeline; Source: https://images.app.goo.gl/pTvQCs4MwcGna2wa7 

[127] Figure 5: The European Parliament voted a motion that includes Eurochild’s amendments. (2021) Eurochild.; Source: https://www.eurochild.org/news/the-european-parliament-will-vote-a-motion-that-includes-eurochilds-amendments/

[128] Video 4: How do you shape the EU institutions?; Source: https://www.youtube.com/watch?v=L1Qk_DD4Kko&feature=youtu.be

[129] Video 5: EU Agencies Network; Source:  https://www.youtube.com/watch?v=sM1WeQ1dGZc&feature=youtu.be

[130] Figure 8: Ample liquidity puts the ECB’s independence at risk (2023). OMFIF. Source: Ample liquidity puts the ECB’s independence at risk - OMFIF

[131] Video 6: EU Trade Policy explained; Source: https://www.youtube.com/watch?v=L1Qk_DD4Kko

[132] Video 7: What is the EU single market?; Source: https://www.youtube.com/watch?v=sM1WeQ1dGZc

[133] Figure 9: Public enterprises, past or future? - Share of sectors in which the State controls at least an enterprise (variation from 1998, or 2008, to 2018); Source: Merino, A. (2021, May 31). Europe is no longer afraid of nationalising companies. Source: European Data Journalism Network: https://www.europeandatajournalism.eu/eng/News/Data-news/Europe-is-no-longer-afraid-of-nationalising-companies 

[134] Figure 10: EPRS Policy Podcasts Logo; Source: https://www.podbean.com/podcast-detail/6f5qv-42bb3/European-Parliament---EPRS-Science-and-Technology-podcasts

[135] Figure 11: Legal Systems of the World; Source:https://upload.wikimedia.org/wikipedia/commons/2/21/LegalSystemsOfTheWorldMap.png

[136] Figure 12: Corporate Income Tax in (2021) // Source : OECD Stat

[137] Figure 13: Pestel-Analyse: Ein Instrument zum Verständnis des Marktes. Source:https://blog.waalaxy.com/de/pestel-analyse/

[138] Figure 14: Property Right Index per Country in the European Union;  Source: theglobaleconomy.com

[139] Figure 15: Source: Corruption Index per Country of the European Union // Source : https://www.researchgate.net/figure/Corruption-Perceptions-Index-scores-in-European-Union-countries-2020-Source-Authors_fig1_351667608

[140] Figure 16: European Green Deal; Source: https://www.compostnetwork.info/eu-green-deal/

[141] Figure 17: Podcast Logo; Source: https://images.app.goo.gl/wGVzcfXG3o5PqjRt7