Ch 5. The Political, Legal, and Regulatory Environment Sovereignty Causes of Political Risk – See Table 5-1 Taxes Seizure of Assets International Law Patents, Trademarks, and Copyrights Issues Antitrust Licensing and Trade Secrets Bribery and Corruption Conflict Resolution The Regulatory Environment

Sovereignty Sovereignty can be defined as supreme and independent political authority. Some feel that global market integration is eroding national economic sovereignty. In Europe, the individual EU countries are giving up the right to have their own currencies.

Causes of Political Risk Gap between aspirations and reality Political maneuverings of politicians The level of political risk is inversely related to the stage of economic development. Companies can purchase insurance to offset potential political risks (e.g., OPIC)

Taxes In China, most imports are subject to high duties plus a 17% value-added tax. Foreign companies reduce earnings by making loans to U.S. affiliates than using direct investment so that the affiliate can deduct the interest it pays on the loan to reduce tax burden.

Seizure of Assets Expropriation – Some Compensation Confiscation – No compensation Nationalization – Government takes control

International Law Common-law (Judgments based on the past cases) – USA Civil- law (judgments based on code law) – France Islamic Law (Judgments based on Koran and Haddith) – Saudi Arabia Others

Patents, Trademarks, and Copyrights Patent – Valid for 20 years Copyright – Valid for 50 years Trademark International Conventions – e.g., Paris Convention

Bribery and Corruption FCPA 1977

Conflict Resolution Alternatives to Litigation

The Regulatory Environment Governmental and non-governmental regulations