Chapter 4 The Political, Legal, and Regulatory Environments of Global Marketing © 2005 Prentice Hall

The Political Environment Political cultures provide context Governing party’s attitude toward Sovereignty Political risk Taxes Threat of equity dilution Expropriation Global marketing activities take place within the political environment of governmental institutions, political parties, and organizations through which a country’s people and rulers exercise power. Each nation also has a political culture, which reflects the relative importance of the government and legal system and provides a context within which individuals and corporations understand their relationship to the political system. Any company doing business outside its home country should carefully study the political culture in the target country and analyze salient issues arising from the political environment. These include the governing party’s attitude toward sovereignty, political risk, taxes, the threat of equity dilution, and expropriation. © 2005 Prentice Hall

Nation-States and Sovereignty “Every sovereign state is bound to respect the independence of every other sovereign state, and the courts in one country will not sit in judgment on the acts of government of another done within its territory.” - U.S. Supreme Court Chief Justice Fuller © 2005 Prentice Hall

Nation-States and Sovereignty Stage of Development Protectionist laws -lesser developed Free trade – advanced development Political and economic Cronyism Market vs. Non-market The ultimate resource of a government is power, and we’ve seen repeatedly that the willpower of governments can be overcome by persistent attacks from the marketplace. - Neal Soss As organizations do business in foreign countries they need to take into account the stage of economic development and the overall political and economic system. At earlier stages of development countries tend to have laws that will protect national industries and resources where as later stages of development there is a movement to encourage free trade. Also in lesser developed countries organizations should expect to see political leaders engage in the practice cronyism, rewarding friends and family with favors. The economic system is also important because a non-market economy will be controlled by the government and the organization will have less freedom. In the end there has been a noticeable trend where governments are willing to cede some of their sovereignty for the possibility of economic growth. © 2005 Prentice Hall

Political Risk Risk of change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably When perceived political risk is high, a country will have a difficult time attracting foreign direct investment © 2005 Prentice Hall

Categories of Political Risk War Fractionalization of the political spectrum political turmoil probability Social unrest Fractionalization by language, ethnic, and/or religious groups Equity restrictions Orderly political transfer Restrictive/coercive measures required to retain power local operations restrictions Politically motivated violence Mentality (xenophobia, nationalism, corruption, nepotism) Taxation discrimination A number of organizations such as the Economist Intelligence Unit (EIU; www.eiu.com), the Geneva-based Business Environment Risk Intelligence (BERI SA; www.beri.com), and the PRS Group (www.prsgroup.com) specialize in providing up-to-date political risk reports on individual country markets. These commercial sources, however, vary somewhat in the criteria that constitute political risk. For example, BERI is concerned with societal and system attributes, whereas PRS Group focuses more directly on government actions and economic functions. The EIU analyzes political risk in terms of five subcategories of political stability, and five subcategories of political effectiveness. Political risk, in turn, is one of four components in an overall country risk rating. © 2005 Prentice Hall

Causes of Political Risk Tension between aspirations and reality Primarily occurs in lower and lower-middle income countries Indonesia and economic crisis When political risk occurs in high income countries, it is generally due to a long-standing conflict Northern Ireland © 2005 Prentice Hall

Expressions and Symptoms of Political Risk The less developed a country the greater the risk Increased economic uncertainty increases risk © 2005 Prentice Hall

Expressions and Symptoms of Political Risk High Triad Countries Income Russia, Indonesia, China This slide illustrates how income can affect political risk in a country. Low Risk High © 2005 Prentice Hall

Taxes Government taxation policies Corporate taxation High taxation can lead to growth in a black market Corporate taxation Companies attempt to limit tax liability by shifting location of income Governments rely on tax revenues to generate funds necessary for social services, the military, and other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate for companies and individuals to profit by not paying taxes. In China, for example, most imports are subject to high duties, plus a 17 percent value-added tax. As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. Corporate taxation is another issue. The high level of political risk currently evident in Russia can be attributed in part to excessively high taxes on business operations. High taxes encourage many enterprises to engage in cash or barter transactions that are off the books and sheltered from the eyes of tax authorities. This, in turn, has created a liquidity squeeze that prevents companies from paying wages to employees. © 2005 Prentice Hall

Seizure of Assets Expropriation – governmental action to dispossess a foreign company or investor Compensation should be provided in a “prompt, effective, and adequate manner” When no compensation is provided, it is called confiscation © 2005 Prentice Hall

Seizure of Assets Nationalization - a government takes control of some or all of the enterprises in an entire industry Acceptable according to international law if Satisfies public purpose Includes compensation © 2005 Prentice Hall

International Law The rules and principles that nation-states consider binding among themselves Disputes between nations are issues of public international law Judicial arm of the United Nations World Court or International Court of Justice (ICJ) © 2005 Prentice Hall

Common Law vs. Civil Law Napoleon’s code of 1804 was the prototype for the code law system that predominates in Europe today. © 2005 Prentice Hall

Common Law vs. Civil Law Common Law country Civil Law country Disputes are decided by reliance on the authority of past judicial decisions Companies are legally incorporated by state authority Civil Law country Legal system reflects the structural concepts and principles of the Roman Empire Companies are formed by contract between two ore more parties who are fully liable for the actions of the company © 2005 Prentice Hall

Islamic Law Legal system in many Middle Eastern countries Based on the sharia - a comprehensive code governing Muslim conduct in all areas of life Koran–- Holy Book Hadith Based on life, sayings, and practices of Muhammad Identifies forbidden practices “haram” Any Westerner doing business in Malaysia in the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities. Brewers, for example, must refrain from advertising beer on billboards or in local-language newspapers. © 2005 Prentice Hall

Sidestepping Legal Issues Get expert legal help Preventing conflicts Establish jurisdiction Protecting intellectual property Avoid bribery © 2005 Prentice Hall

Jurisdiction Refers to a Court’s authority to rule on particular types of controversies arising outside of a nation’s borders or to exercise power over individuals or entities from different countries. Employees of foreign companies should understand the extent to which they are subject to jurisdiction of host-country courts Courts have jurisdiction if it can be demonstrated that the company is doing business in the state the court sits © 2005 Prentice Hall

Intellectual Property Intellectual property must be registered in each country where business is conducted Patent – gives an inventor exclusive right to make, use, and sell an invention for a specified period of time Trademark – distinctive mark used to distinguish it from competing products Copyright – establishes ownership of a written, recorded, performed, or filmed creative work © 2005 Prentice Hall

Infringement of Intellectual Property Counterfeiting – unauthorized copying and production of a product Associative Counterfeit/Imitation – product name differs slightly from a well-known brand Piracy – unauthorized publication or reproduction of copyrighted work © 2005 Prentice Hall

Intellectual Property © 2005 Prentice Hall

Protecting Intellectual Property International Convention for the Protection of Industrial Property Paris Convention Honored by 100 countries Facilitates multi-country patent registration, ensures that once a company files, it has a “right of priority” in other countries for 1 year from that date Patent Cooperation Treaty European Patent Convention International concern about intellectual property issues in the nineteenth century resulted in two important agreements. The first is the International Convention for the Protection of Industrial Property. Also known as the Paris Union or Paris Convention, the convention dates to 1883 and is now honored by nearly 100 countries. This treaty facilitates multi-country patent registrations by ensuring that, once a company files in a signatory country, it will be afforded a “right of priority” in other countries for 1 year from the date of the original filing. A U.S. company wishing to obtain foreign patent rights must apply to the Paris Union within 1 year of filing in the United States or risk a permanent loss of patent rights abroad. The Patent Cooperation Treaty (PCT) has 39 signatories, including Australia, Brazil, France, Germany, Japan, North Korea, South Korea, the Netherlands, Switzerland, the former Soviet Union, and the United States. The members constitute a union that provides certain technical services and cooperates in the filing, searching, and examination of patent applications in all member countries. The European Patent Office administers applications for the European Patent Convention, which is effective in the EU and Switzerland. An applicant can file a single patent application covering all of the convention states; the advantage is that the application will be subject to only one procedure of grant. Although national patent laws remain effective under this system, approved patents are effective in all member countries for a period of 20 years from the filing date. © 2005 Prentice Hall

Antitrust Designed to combat restrictive business practices and to encourage competition Enforced by FTC in the US, Fair Trade Commission in Japan, European Commission in European Union Example: The Sherman Act of 1890 prohibits certain restrictive business practices including fixing prices, limiting production, allocating markets, or any other scheme designed to limit or avoid competition. Law applies to US companies outside US borders and to foreign companies operating in the US Antitrust is taking on increasing importance in emerging country markets. For example, Colgate- Palmolive’s 1995 acquisition of Brazil’s Kolynos oral care company for $1 billion was subject to review by that country’s Administrative Council of Economic Defense (Cade). Rival Procter & Gamble instigated the review by complaining that the acquisition would give Colgate a 79 percent share of the market. Cade ruled that Colgate must either license the trademark to another company for 20 years or halt sales of Kolynos brand toothpaste in Brazil for 4 years; Colgate agreed to the latter. The Miller Brewing unit of Philip Morris also ran into antitrust problems in Brazil following its 1995 investment of $50 million in a 50/50 joint venture with Cia. Cervejaria Brahma SA. Cade ruled that the venture, which produced and distributed Miller Genuine Draft beer, deprived consumers of head-to-head competition between the two brewing companies. Cade also criticized Miller for choosing a market entry strategy that required a relatively low level of investment. Nelio Weiss, a consultant at Coopers & Lybrand’s Sao Paulo office, noted, “The message is that foreign companies shouldn’t assume that antitrust authorities will be passive.” © 2005 Prentice Hall

Licensing and Trade Secrets Contractual agreements in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology, and other intangible assets in return for royalty payments or other forms of compensation Important considerations What assets may be licensed How to price assets The rights granted © 2005 Prentice Hall

Licensing and Trade Secrets Trade secrets are confidential information or knowledge that has commercial value and is not in the public domain and for which steps have been taken to keep it secret To prevent disclosure Use confidentiality contracts © 2005 Prentice Hall

Bribery and Corruption Foreign Corrupt Practices Act Requires publicly held companies to institute internal accounting controls that would record all transactions Makes it a crime for a US corporation to bribe an official of a foreign government or political party to obtain or retain business Prohibits payments to third parties when there is reason to believe it may be channeled to foreign officials History does not record a burst of international outrage when Charles M. Schwab, head of Bethlehem steel at the beginning of the twentieth century, presented a $200,000 diamond and pearl necklace to the mistress of Czar Alexander III’s nephew.32 In return for that consideration, Bethlehem Steel won the contract to supply the rails for the Trans-Siberian railroad. Things have changed. The Foreign Corrupt Practices Act (FCPA) is a legacy of the Watergate scandal during Richard Nixon’s presidency. In the course of his investigation, the Watergate special prosecutor discovered that more than 300 American companies had made undisclosed payments to foreign officials totaling hundreds of millions of dollars. The act was unanimously passed by Congress and signed into law by President Jimmy Carter on December 17, 1977. © 2005 Prentice Hall

2003 Corruption Rankings 7 ‘cleanest’ countries 1. Finland 2. Iceland 3. Denmark 4. New Zealand 5. Singapore 6. Sweden 7. Netherlands 7 most corrupt countries Bangladesh Nigeria Haiti Paraguay Myanmar Tajikistan Georgia Transparency International (www.transparency.org) compiles an annual report ranking countries by Corruption Perceptions Index. The “cleanest” score is 10. © 2005 Prentice Hall

Conflict Resolution Litigation Formal arbitration Settles disputes outside of court Groups agree to abide by panel’s decision 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards Most important treaty regarding international arbitration The United States has more lawyers than any other country in the world and is arguably the most litigious nation on earth. In part, this is a reflection of the low-context nature of American culture and the spirit of confrontational competitiveness. Other factors can contribute to differing attitudes toward litigation. For example, in many European nations, class action lawsuits are not allowed. Also, European lawyers cannot undertake cases on a contingency fee basis. However, change is in the air, as Europe experiences a broad political shift away from the welfare state. © 2005 Prentice Hall

Conflict Resolution Country Lawyers per 100,000 people USA 290 Australia 242 United Kingdom 141 France 80 Germany 79 Hungary Japan 11 Korea 3 © 2005 Prentice Hall

The Regulatory Environment Agencies, both governmental and non-governmental, that enforce laws or set guidelines for conducting business Marketing activities affected by international and regional economic organizations EU WTO © 2005 Prentice Hall

Looking Ahead Chapter 6 Global Information Systems and Market Research © 2005 Prentice Hall