Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University
CHAPTER 04 THE POLITICAL,
The global marketer must attempt to comply with
each nation’s laws and regulations with respect to the cross-border movement of services, people, money, and know-how.
Laws and regulations that change frequently or are
ambiguous can hamper the company’s activities. 
 
International Institutions and their Political Role
Summary
 
for global marketing activities
systems
framework on global company activities
Learning about opportunities of dispute settlement
in international litigations. 
 
Global marketing activities influenced and made up of governmental institutions, political parties, and organizations that rulers and people use
to wield power
Each nation’s political culture reflects the importance of the government
and legal system.
Issues for foreign investors include the governing party’s view on sovereignty, political risk, taxes, equity dilution, and expropriation.
Environment determines attitude towards Sovereignty Political risk Taxes Dilution of equity control Expropriation
 
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 Justice Fuller
 
Many governments in developing countries exercise control over their nations’ economic development by passing protectionist laws and regulations.
Countries in advanced stages of economic development establish antitrust laws and regulations because they do not want to restrict free trade.
Advanced countries’ laws may extend to political, cultural, and even intellectual activities and social conduct.
Privatization of industry is a global trend and reduces government involvement as a supplier of goods and services.
 
Is decision making authority of last resort in its territory
Is independent from other nation-states
Nation-state activities governed by
 
Nation-State and Sovereignty
In France, laws forbid use of foreign words such as le weekend or le marketing in official documents. Forty percent of songs played by popular radio stations must be in French.
Example: Mexican government controlled more than 1,000 “parastatals” at one time. By the early 1990s, the Mexican president had presided over the sale of full or partial stakes in enterprises worth $23 billion, including airlines, mines, and banks.
 
Political Risk (1) Risk of change in political
environment or government policy that would adversely affect a company’s ability to operate effectively and profitably.
A lower level of political risk tends to attract higher investments
 
Political Risk (2) (International Examples)
Former Russian president Boris Yeltsin’s political maneuverings created a high level of political risk. His successor, Vladimir Putin, is enacting reforms and strengthening intellectual and property law in an effort to gain membership into the WTO and attract foreign investment. Still, Russia is viewed as having high political risk.
Companies can buy insurance to protect against political risk. The U.S. government agency the Overseas Private Investment Corp. (OPIC; http://www.opic.gov) offers insurance to companies doing business abroad. Japan, Germany, France, Canada, Britain offer similar protection.
 
Political Risk (3)
Executives often fail to understand political risk because they have not studied political science.
Businesspeople need to study the political environment through reading publications such as The Economist or Financial Times or by consulting web-based sources like: the Business Environment Risk
Intelligence (http://www.beri.com) or
the PRS Group (http://www.prs.com).
Some examples of political risk include: War Social unrest Politically motivated violence Transparency Social conditions (population
density and wealth distribution)
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 companies and individuals to profit by not paying taxes.
In China, for example, even though import duties have dropped since it joined the WTO, many imports are subject to double-digit duties plus a 17 % value-added tax. As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. It is estimated that 90 % of cigarettes are smuggled into China. Companies can still profit. For Philip Morris, this means annual sales of $100 million to Hong Kong distributors! Cross-border shopping can be spurred on by high excise and VAT taxes. It is estimated that British citizens who travel to France by car return home with 80 bottles of wine.
 
Taxes (2)
Government taxation policies High taxation can lead to black market growth and cross-border
shopping
Corporate taxation Companies attempt to limit tax liability by shifting location of income
Many companies make efforts to minimise tax liability by shifting locations of income
Example “earnings stripping”  Foreign company reduces earnings by making loans to U.S. affiliates rather
than using direct investment to finance U.S. activities U.S. subsidiary deducts the interest paid on these loans, thereby reducing its
tax burden. It is estimated that tax minimization costs the U.S. government $3 billion a year.
A variety of international and bilateral treaties apply.
 
4-15
Seizure of Assets (1) Expropriation=governmental action to dispossess or control a foreign company or
investor’s ownership 
Compensation should be provided in a “prompt, effective, and adequate manner” 
Confiscation = nationalisation without compensation
Limits on repatriation of profits, dividends, or royalties
Technical assistance fees
Price controls
Discriminatory laws on patents and trademarks
Nationalization=host government takes control of some or all of the enterprises in an entire industry
Acceptable according to international law if
Satisfies public purpose
Seizure of Assets (2) (Int. Cases)
In the mid-1970s, Johnson & Johnson and other foreign investors in India had to submit to a host of government regulations to retain majority equity positions in companies already established. Many of these rules were copied by Malaysia, Indonesia, the Philippines, Nigeria, and Brazil. By the late 1980s, after a “lost decade” in Latin America characterized by debt crises and low GNP growth, lawmakers reversed many of these restrictive and discriminatory laws. The end of the Cold War contributed significantly to these changes.
It is difficult to reclaim expropriated property. U.S. courts will not get involved if foreign governments are involved. Companies can seek recourse through the World Bank Investment Dispute Settlement Center.
Fidel Castro’s Cuban government nationalized property of American sugar companies. The government offered Cuban bonds for compensation, which was all that was required under Cuban law.
 
Dilution of Equity Controls
In lower-income countries there is often political pressure for national control of foreign-owned companies
 
 
 
consider binding upon themselves
Two categories   Public law, or Law of Nations   International Commercial Law
Two fundamentally different legal systems
Code law Based on written norms (codices), supplemented by judicial decisions
E.g., trademarks must be registered
Case law Rests on tradition and precedence stemming from past jurisdiction
E.g., trademarks are established by prior use
 
 
To reduce legal uncertainty, international organisations
attempt to provide guidelines
World Court or The United Nation’s “International Court of Justice” (ICJ)
Judicial arm of the United Nations
If a nation refuses to accept a decision against it made by the World Court, it can appeal to the Security Council of the United Nations. 
 
4-21
Roots of international law can be traced to the 17th century
Peace of Westfalia. Early laws were concerned with war
and peace and political issues. As trade increased, issues of
commercial affairs grew in importance.
Code Napoleon of 1804 = prototype for the Code Law
System that predominates in Europe today.
The Napoleonic Code of 1804 drew on the Roman legal system and is the basis for continental European law today. Code law is also known as civil law.
 
Common law country Civil law country
Disputes are decided by reliance
on the authority of past judicial
decisions
Code law is used in few areas; the
U.S. Uniform Commercial Code
Legal system reflects the structural concepts and principles of the Roman Empire
Companies are formed by contract between two or more parties who are fully liable for the actions of the company
4-22
Common Law adapters: India, Pakistan, Malaysia, Singapore, and Hong Kong.
Civil-Law Jurisdictions: Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China.
Scandinavian countries use parts of both systems. The majority of countries today have civil-law systems.
In post-communist Eastern and Central Europe, consultants from both civil and common law countries are trying to influence the process.
Central Europe relies on the German civil law system.
Russia looks to the U.S. system.
Germans think that U.S. law is too complicated.
The U.S. thinks the German system is outdated.
 
Islamic Law Legal system in many Middle Eastern countries
Sharia —a comprehensive code governing Muslim conduct in all areas of life, including business Koran —holy book Hadith
Based on life, sayings, and practices of Muhammad (PBUH)
Identifies forbidden practices, “haram” 
 
Scope of legal regulations
Jurisdiction
Specify which nation’s laws apply, when a transaction crosses boundaries
Intellectual Property
Ensure that patents and trademarks are registered in each country business is conducted
 
4-27
Jurisdiction
Refers to a court’s authority to rule on particular types of issues 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
 
Laws are designed to combat restrictive business practices and to
encourage competition.
prevent, restrict, and distort competition
However, in many European countries, individual country laws apply to specific marketing mix elements
Enforced by FTC in the United States, Fair Trade Commission in Japan, European Commission in European Union
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 U.S. companies outside U.S. borders
and to foreign companies operating in the United States.
 
Intellectual Property (cont.)
Beware of counterfeiting: the unauthorized copying and production of a product
Beware of piracy: the unauthorized publication or reproduction of copyrighted work
Know about international treaties, e.g.
World Intellectual Property Organization
The Patent Cooperation Treaty
 
where business is conducted.
World Intellectual Property Organization
The Patent Cooperation Treaty
 
Infringement of Intellectual Property
Patent —gives an inventor exclusive right to make, use, and sell an invention for a specified period of time
Trademark —distinctive mark, motto, device, or emblem used to distinguish it from competing products
Copyright —establishes ownership of a written, recorded, performed, or filmed creative work
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
 
Patent Office
In Europe, applicants use the European Patent Office or register country by country. European patents are expensive because of the need to translate technical
documents into all of the languages of the European Union.
Soon the Community Patent Convention will cover 25 countries
 
Governed by the Madrid Agreement and the Madrid Protocol
 
Honored by 100 countries
Patent Cooperation Treaty
European Patent Convention
2005
5. Hewlett-Packard 1,808
Licensing and Trade Secrets
Licensing is a contractual agreement 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
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
The Uniform Trade Secrets Act has been adopted by most U.S. states
 
Requires publicly held companies to institute internal accounting controls that would record all transactions
Makes it a crime for a U.S. 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
Omnibus Trade and Competitiveness Act Allows for “grease” payments to cut red tape, such as
getting shipments trough customs, getting permits
 
Institutions such as the International Chamber of
Commerce have established Courts of Arbitration that can be employed by global companies
 
Groups agree to abide by panel’s decision 
1958 United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards (New York Convention)
Most important treaty regarding international arbitration signed by 107 countries
 
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
 
European Union’s Role  Articles and directives constitute community law
European Court of Justice
Hears disputes among the member nations on trade issues (e.g., mergers, monopolies, trade barriers)
Resolves conflicts between national law and EU law
National Laws in Europe should always be consulted (may
be more strict than community law)
World Trade Organisation’s (WTO) Role  Precursor GATT, established in 1948, was based on three principles
Non-discrimination
with more decision making power
 
Political environment is influenced by governmental institutions, political parties, and organisations. Risk assessment is crucial.
Legal environment consists of laws, courts, attorneys, and legal customs and practices. Countries follow either common-law system or code-law system.
Regulators environment consists of agencies, governmental and non-governmental, that enforce laws or set guidelines for conducting businesses.