© 2005 Prentice Hall5-1 Chapter 5 The Political, Legal, and Regulatory Environments of Global Marketing

© 2005 Prentice Hall 5-1

Chapter 5The Political, Legal, and Regulatory Environments

of Global Marketing


The Political Environment

Political cultures provide context– Governing party’s attitude toward

• Sovereignty• Political risk• Taxes• Threat of equity dilution• Expropriation


Nation-States and Sovereignty

The right of each state to govern all activities within its borders without interference from other states e.g. Iran & nuclear power

The degree of governance varies from socialist, planned economies to free-market capitalist economies

States may trade sovereignty for greater prosperity; e.g. the EU countries


Nation-States and Sovereignty

Stage of Development– LDCs

• Protectionist laws

• Nationalization (India in the fifties and sixties)

• Cronyism (Pres. Suharto; Gandhi family, Marcos in Philippines)

– Free trade in Developed countries• Fair competition, consumer protection laws

• Privatization (Water under Margaret Thatcher)


Political Risk

Risk of change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably (e.g. Enron in India)

When perceived political risk is high, a country will have a difficult time attracting foreign direct investment (e.g. Iran during and after the Shah’s time – 1970s)


Categories of Political RiskEIU

Economic Intelligence Unit

BERIBusiness Environment

Risk Intelligence

PRS Group World Political Risk Forecasts

WarFractionalization of

the political spectrumpolitical turmoil

probability

Social unrest

Fractionalization by language, ethnic, and/or religious

groupsEquity

restrictions

Orderly political transfer

Restrictive/coercive measures required to

retain powerlocal operations

restrictions

Politically motivated violence

Mentality (xenophobia, nationalism,

corruption, nepotism)Taxation

discrimination


Causes of Political Risk

Tension between aspirations and reality– E.g. Indonesia

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– Protestants and Catholics in Northern Ireland


Expressions and Symptoms of Political Risk

The less developed a country the greater the riskIncreased economic uncertainty increases riskPolitical risk insurance


Expressions and Symptoms of Political Risk

Low

High

HighRisk

Inco

me Triad

CountriesRussia,

Indonesia, China


Taxes

Government taxation policies– High direct taxation can lead to growth in a black

market (e.g. India, Vietnam)– High Indirect taxation can lead to a huge grey market

(e.g. China)Corporate taxation – Companies attempt to limit tax liability by shifting

location of income (e.g. companies incorporated in tax-havens like Bahamas, Macau, etc.)

– Foreign companies make loans instead of direct investments


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


Seizure of Assets

Nationalization - a government takes control of some or all of the enterprises in an entire industry (e.g. Indian banks in 1950s)– Acceptable according to international law

if • Satisfies public purpose• Includes compensation


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)

Disputes between businesses of different countries are issues of private international law


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

– USA, GB, India, Malaysia, Canada

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

– Continental Europe, Japan, Korea, Thailand, China, etc.


Islamic Law

Legal system in many Middle Eastern countries

Based on the sharia - a comprehensive code governing Muslim conduct in all areas of life (sourced from the Koran and Hadith)

The Hadith• Based on life, sayings, and practices of Muhammad

• Identifies forbidden practices “haram”– E.g. alcohol advertising is forbidden on billboards and

newspapers

– Charging interest on loans is forbidden


Sidestepping Legal Issues

Get expert legal help

Preventing conflicts– Establish jurisdiction

– Protecting intellectual property

– Avoid bribery


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 courtsCourts have jurisdiction if it can be demonstrated that the company is doing business in the state the court sits


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 e.g. The Segway transporter

– Trademark – distinctive mark used to distinguish it from competing products e.g. brand logos

– Copyright – establishes ownership of a written, recorded, performed, or filmed creative work e.g. music, films, etc.


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


Protecting Intellectual Property

Apply for protection in each country of business

In Europe apply in Munich for EU countries

Single applications for several countries are in the works


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


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


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 Corruption Perceptions Index

7 ‘cleanest’ countries

1. Iceland 9.7

2. Finland 9.6

3. New Zealand 9.6

4. Denmark 9.5

5. Singapore 9.4

6. Sweden 9.2

7. Switzerland 9.1

7 most corrupt countries

1. Bangladesh 1.7

2. Chad 1.7

3. Turkmenistan 1.8

4. Myanmar 1.8

5. Haiti 1.8

6. Nigeria 1.9

7. Equatorial Guinea 1.9


2005 Bribe Payers Index

Countries with lowest propensity to bribe– Australia 8.5

– Sweden 8.4

– Switzerland 8.4

– Austria 8.2

– Canada 8.1

– Netherlands 7.8

– Belgium 7.8

Countries with highest propensity to bribe– Russia 3.2

– China 3.5

– Taiwan 3.8

– South Korea 3.9

– Italy 4.1

– Hong Kong 4.3

– Malaysia 4.3


Conflict Resolution

Country Lawyers per 100,000 people

USA 290

Australia 242

United Kingdom 141

France 80

Germany 79

Hungary 79

Japan 11

Korea 3

Documents

© 2005 Prentice Hall5-1 Chapter 5 The Political, Legal, and Regulatory Environments of Global Marketing