© 2005 Prentice Hall5-1 Chapter 5 The Political, Legal, and Regulatory Environments of Global Marketing Power Points by Kristopher Blanchard North Central University

© 2005 Prentice Hall5-2 The Political Environment Political cultures provide context –Governing party’s attitude toward Sovereignty Political risk Taxes Threat of equity dilution Expropriation

© 2005 Prentice Hall5-3 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 Hall5-4 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

© 2005 Prentice Hall5-5 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 Hall5-6 Categories of Political Risk EIU Business Environment Risk Intelligence PRS Group World Political Risk Forecasts 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

© 2005 Prentice Hall5-7 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 Hall5-8 Expressions and Symptoms of Political Risk The less developed a country the greater the risk Increased economic uncertainty increases risk

© 2005 Prentice Hall5-9 Expressions and Symptoms of Political Risk Low High Risk Income Triad Countries Russia, Indonesia, China

© 2005 Prentice Hall5-10 Taxes Government taxation policies –High taxation can lead to growth in a black market Corporate taxation –Companies attempt to limit tax liability by shifting location of income

© 2005 Prentice Hall5-11 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 Hall5-12 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 Hall5-13 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 Hall5-14 Common Law vs. Civil Law

© 2005 Prentice Hall5-15 Common Law vs. Civil Law Common 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 Hall5-16 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”

© 2005 Prentice Hall5-17 Sidestepping Legal Issues Get expert legal help Preventing conflicts –Establish jurisdiction –Protecting intellectual property –Avoid bribery

© 2005 Prentice Hall5-18 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 Hall5-19 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 Hall5-20 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 Hall5-21 Intellectual Property

© 2005 Prentice Hall5-22 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

© 2005 Prentice Hall5-23 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

© 2005 Prentice Hall5-24 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 Hall5-25 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 Hall5-26 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

© 2005 Prentice Hall Corruption Rankings 7 ‘cleanest’ countries 1. Finland 2. Iceland 3. Denmark 4. New Zealand 5. Singapore 6. Sweden 7. Netherlands 7 most corrupt countries 1.Bangladesh 2.Nigeria 3.Haiti 4.Paraguay 5.Myanmar 6.Tajikistan 7.Georgia

© 2005 Prentice Hall5-28 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

© 2005 Prentice Hall5-29 Conflict Resolution CountryLawyers per 100,000 people USA290 Australia242 United Kingdom141 France80 Germany79 Hungary79 Japan11 Korea3

© 2005 Prentice Hall5-30 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 Hall5-31 Looking Ahead Chapter 6 Global Information Systems and Market Research