978-0134129945 Chapter 5 Lecture Note Part 1

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CHAPTER 5

THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS

SUMMARY

A. The political environment of global marketing is the set of governmental institutions,

political parties, and organizations that are the expression of the people in the nations of

the world. In particular, anyone engaged in global marketing should have an overall

understanding of the importance of sovereignty to national governments. The political

environment varies from country to country, and political risk assessment is crucial. It is

also important to understand a particular government’s actions with respect to taxes and

seizure of assets. Historically, the latter have taken the form of expropriation,

confiscation, and nationalization.

B. The legal environment consists of laws, courts, attorneys, legal customs, and practices.

International law is comprised of the rules and principles that nation-states consider

binding upon themselves. The countries of the world can be broadly categorized in terms

of common-law legal systems or civil-law legal system. The United States and Canada

and many former British colonies are common law countries; most other countries are

civil-law. A third system, Islamic law, predominates in the Middle East. Some of the

most important legal issues pertain to jurisdiction, antitrust, and licensing. In addition,

bribery is pervasive in many parts of the world; the Foreign Corrupt Practice Act

(FCPA) applies to American companies operating abroad. Intellectual property protection

is another critical issue. Counterfeiting is a major problem in global marketing; it often

involves infringement of a company’s copyright, patent, or trademark ownership.

When legal conflicts arise, companies can pursue the matter in court or use arbitration.

C. The regulatory environment consists of agencies, both governmental and non-

governmental, that enforce laws or set guidelines for conducting business. Global

marketing activities can be affected by a number of international or regional economic

organizations; in Europe, for example, the European Union makes laws governing

member states. The World Trade Organization will have a broad impact on global

marketing activities in the years to come. Although all three environments are complex,

astute marketers plan ahead to avoid situations that might result in conflict,

misunderstanding, or outright violation of national laws.

LEARNING OBJECTIVES

1 Understand the elements of a country’s political environment that can impact global marketing

activities

2 Define international law and describe the main types of legal systems found in different parts

of the world

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3 Understand the most important business issues that can lead to legal problems for global

marketers

4 Describe the available alternatives for conflict resolution and dispute settlement when doing

business outside the home country

5 In general terms, outline the regulatory environment in the European Union

OVERVIEW

Each of the world’s national governments regulates trade and commerce with other countries and

attempts to control the access of outside enterprises to national resources.

Every country has its own unique legal and regulatory system that affects the operations and

activities of the global enterprise, including the global marketer’s ability to address market

opportunities and threats.

Laws and regulations constrain the cross-border movement of products, services, people, money,

and know-how. The global marketer must attempt to comply with each set of national

constraints. The fact that laws and regulations are frequently ambiguous and continually

changing hamper these efforts.

In this chapter, we consider the basic elements of the political, legal, and regulatory

environments of global marketing, including the most pressing current issues and some

suggested approaches for dealing with those issues.

Some specific topics, such as rules for exporting and importing industrial and consumer

products, standards for health and safety, and regulations regarding packaging, labeling,

advertising, and promotion, are covered in later chapters devoted to individual marketing mix

elements.

ANNOTATED LECTURE/OUTLINE

THE POLITICAL ENVIRONMENT

(Learning Objective #1)

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 has a political culture that reflects the importance of the government and legal

system.

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It provides a context for understanding the relationship between individuals and corporations and

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.

Nation-States and Sovereignty

Sovereignty can be defined as supreme and independent political authority.

Government actions taken in the name of sovereignty occur in the context of two important

criteria:

1. A country’s stage of development

2. The political and economic systems in place in the country

The economies of individual nations may be classified as industrialized, newly industrializing, or

developing. Governments in developing countries control economic development by passing

protectionist laws to encourage their nation’s economic development.

Nations with advanced stages of economic development declare that any practice that restrains

free trade is illegal. Antitrust laws and regulations promote fair competition.

Advanced-country laws often define and preserve a nation’s social order. For example, a French

law passed in 1996 requires that at least 40 percent of the songs played by popular radio stations

must be French.

Most of the world’s economies combine elements of market and nonmarket systems. The

sovereign political power of a government in a predominantly nonmarket economy reaches quite

far into the economic life of a county. In a capitalist, market-oriented democracy, power is more

constrained.

Non-market and market structures currently have privatization, which reduces government

involvement as a supplier of goods and services. Privatization moves a nation’s economy in the

free-market direction.

Some observers believe that global market integration is eroding national economic sovereignty.

Nations may be willing to give up sovereignty in return for something of value (e.g., EU

countries gave up their currencies in exchange for improved market access).

Political risk

Political risk is the possibility of a change in a country’s political environment or government

policy that would adversely affect a company’s ability to operate effectively and profitably.

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Political risk can deter a company from investing abroad; to put it another way, when a country’s

political environment is characterized by a high level of uncertainty, it may have difficulty in

attracting foreign investment.

Political forces can drastically change the business environment with little advance notice.

Commercial sources vary 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 (see Table 5-1).

The political maneuverings of the Russian government create a high level of political risk.

The current political climate in the rest of Central and Eastern Europe is still characterized by

varying degrees of uncertainty.

Companies can purchase insurance to offset potential risks arising from the political

environment.

MAKING IN GLOBAL MARKETING

Taxes

Governments rely on tax revenues to generate funds 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.

Ironically, global companies can still profit from the smuggling practice; it has been estimated,

for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip

Morris, this means annual sales of $100 million to distributors in Hong Kong, who then smuggle

the smokes across the border.

High excise and VAT taxes encourage legal cross-border shopping as consumers go abroad in

search of good values (e.g., Great Britain estimates that cars returning from France have an

average 80 bottles of wine).

Corporate taxation is another issue. The high level of political risk in Russia can be attributed in

part to excessively high taxes on business operations. High taxes encourage off-the-books cash

transactions and sheltered from the eyes of tax authorities.

This, in turn, creates a liquidity squeeze that prevents companies from paying employees, and

unpaid, disgruntled workers can contribute to political instability.

Diverse geographical activity requires special attention to tax laws. Many companies make

efforts to minimize their tax liability by shifting the location of income (e.g., foreign companies

in the U.S. cost the government billions of dollars a year in lost revenue). For example: using the

concept of “earnings stripping,” foreign companies reduce earnings by making loans to U.S.

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affiliates rather than using direct investment to finance U.S. activities. The U.S. subsidiary can

deduct the interest it pays on such loans and thereby reduce its tax burden.

TURAL CONTEXT

The Cultural Context

Europe Says “No” to GMOs

As prices soared, politicians in all parts of the world looked for solutions. Some countries banned

food exports to ensure adequate domestic supply. In Asian countries, authorities battled rice

hoarding in the face of surging prices. What else could be done? Officials at Bayer, DuPont,

Syngenta, Monsanto, and other companies that market seeds and other agricultural products

believe that the answer is, in part, plant biotechnology, including genetic engineering. Plants that

have been genetically modified are known as genetically modified organisms, or GMOs. The

first generation of GMO crops—primarily corn, cotton, soybeans, and canola—demonstrated

increased resistance to insect pests and weeds. A new generation of GMOs currently under

development could offer different benefits, such as drought tolerance or flood resistance. The

problem, however, is that a growing number of consumers around the world are deeply

concerned about food products that have not been produced naturally.

As a result, many are skeptical about GMOs and the benefits of eating food products that

incorporate genetically engineered ingredients. As one French citizen noted, “We have a very

risk-averse society that has been completely traumatized by food scares.”

In Europe, a number of activist groups, including Greenpeace and Friends of the Earth (FoE),

have taken up the fight against GMOs (see Exhibit 5-3). They claim that GMOs pose threats to

both people and the environment; terms such as Frankenfoods have been used to put the point

across.

The general public, already cynical thanks to perceived governmental mishandling of the “mad

cow” scare, has been receptive. Monsanto and other biotech companies have begun to work more

closely with government regulators. The companies had already been supplying regulatory

agencies with their research; now the companies are advocating certain changes in the U.S. Food

and Drug Administration’s policies concerning GMOs. The agribusiness companies are hoping

that the FDA can help reassure consumers so that mandatory labeling along the lines of the

European model won’t be required. American companies are also frustrated by lengthy

regulatory delays in Europe, where all EU governments are involved in the process of approving

new food products for sale to the public. At the European Commission itself, five separate

directorates are involved in biotechnology issues, and two—DG Sanco and DG Environment

Seizure of Assets

The ultimate threat a government can pose is seizing its assets.

Expropriation refers to governmental action to dispossess a foreign company or investor.

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Compensation is generally provided, although not often in a “prompt, effective and adequate”

manner provided for by international standards.

If no compensation is provided, the action is referred to as confiscation. International law is

generally interpreted as prohibiting a government to take foreign property without compensation.

Nationalization is typically broader in scope than expropriation and occurs when the

government takes control of some or all of the enterprises in a particular industry.

In 1959, Castro nationalized the property of American sugar producers to retaliate for American

import quotas, yet Cuban-owned production was not nationalized.

Castro offered compensation in the form of Cuban government bonds, which was adequate under

Cuban law, but the U.S. viewed this particular act of nationalization as discriminatory and the

compensation offered as inadequate.

Short of outright expropriation or nationalization, the phrase creeping expropriation applies to

limits on economic activities of foreign firms in particular countries. These have included

limitations on repatriation of profits, dividends, royalties, and technical assistance fees from local

investments or technology arrangements.

Other issues include increased local content requirements, quotas for hiring local nationals, price

controls, and other restrictions affecting return on investment.

Global companies suffer discriminatory tariffs and nontariff barriers that limit market entry, as

well as discriminatory laws on patents and trademarks.

Intellectual property restrictions have had the practical effect of eliminating or drastically

reducing protection of pharmaceutical products.

When governments expropriate foreign property, there are impediments to reclaiming that

property (e.g., if a foreign state is involved, U.S. courts will not get involved).

Representatives of expropriated companies seek recourse at the World Bank Investment Dispute

Settlement Center or buy expropriation insurance from a government agency such as OPIC.

INTERNATIONAL LAW

(Learning Objective #2)

International law may be defined as the rules and principles that nation-states consider binding

upon themselves.

International law pertains to property, trade, immigration, and other areas traditionally under the

jurisdiction of individual nations.

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International law applies only to the extent that countries are willing to assume all rights and

obligations.

The law originally dealt only with nations as entities, but a growing body of law rejected the idea

that only nations can be subject to international law.

Paralleling the expanding body of international case law in the twentieth and twenty-first

centuries, new international judiciary organizations have contributed to the creation of an

established rule of international law.

Disputes arising between nations are issues of public international law and may be taken before

the International Court of Justice, also known as the World Court.

Other sources of modern international law include treaties, international custom, judicial case

decisions in the courts of law of various nations, and scholarly writings.

What happens if a nation has allowed a case against it to be brought before the International

Court of Justice and then refuses to accept a judgment against it? The plaintiff nation can seek

recourse through the United Nations Security Council.

Common Law versus Civil Law

Private international law is the body of the law that applies to disputes arising from commercial

transactions between companies of different nations.

Law in the Western world can be traced to two sources: Rome, from which the continental

European civil law tradition originated, and English common law, from which the U.S. legal

system originated.

A civil-law country is one in which the legal system reflects the structural concepts and

principles of the Roman Empire in the sixth century.

In common-law countries, many disputes are decided by reliance on the authority of past

judicial decisions (cases). A common-law legal system is based on the concept of precedent,

sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular

issue are binding on a court when that same issue is presented later. Precedent and stare decisis

represent the fundamental principle of common law decision making. In American and English

law, the law inferred from past judicial decisions equals the law set down in codes.

The Uniform Commercial Code (UCC), fully adopted by 49 U.S. states, codifies a body of

specifically designed rules covering commercial conduct. In common-law countries, companies

are legally incorporated by state authority. In civil-law countries, a contract between two or more

parties, who are fully liable for the actions of the company, forms a company. The host country’s

legal system directly affects the form a legal business entity will take.

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Former British colonies founded their systems on common law. Roman law influenced

Continental Europe. Asian countries use both. Scandinavian legal systems are mixed.

In Eastern and Central Europe in the post-Communist era, consultants representing both

common- and civil- law countries try to influence the process.

In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German

civil-law tradition prevails.

In Eastern Europe (particularly Russia), the U.S. has greater influence, and Germany accuses the

U.S. of promoting a system so complex that it requires lawyers. The U.S. says that the German

system is outdated.

Islamic law

The legal system in many Middle Eastern countries is identified with the laws of Islam, which

are associated with “the one and only God, the Almighty.” In Islamic law, the sharia is a

comprehensive code governing Muslim conduct in all areas of life, including business.

The code is derived from two sources:

1. The Koran, the Holy Book written in Arabic that is a record of the revelations made to the

Prophet Mohammed by Allah.

2. The Hadith, which is based on the life, sayings and practices of Muhammad.

The orders and instructions found in the Koran are analogous to code laws; the guidelines of the

Hadith correspond to common law. 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.

SIDESTEPPING LEGAL PROBLEMS: IMPORTANT BUSINESS ISSUES

(Learning Objective #3)

Clearly, the global legal environment is very dynamic and complex. Therefore, the best course

to follow is to get expert legal help.

This helps prevent conflicts concerning establishment, jurisdiction, patents and trademarks,

antitrust, licensing and trade secrets, bribery, and advertising and promotion.

Jurisdiction

Company personnel working abroad should understand the extent to which they are subject to

the jurisdiction of host-country courts. Jurisdiction pertains to global marketing insofar as it

concerns 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.

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Employees of foreign companies working in the United States must understand that U.S. courts

have jurisdiction to the extent that the company can be demonstrated to be doing business in the

state in which the court sits.

Jurisdiction was an issue in a trade dispute that pitted Revlon and United Overseas Limited

(UOL) in U.S. District Court for the Southern District of New York, charging the British

company with breach of contract. UOL asked the court to dismiss the complaint; Revlon cited

the presence of a UOL sign about the entrance to its New York offices. The court rejected UOL’s

motion to dismiss.

Intellectual Property: Patents, Trademarks, and Copyrights

Patents and trademarks that are protected in one country are not necessarily protected in another,

so global marketers must ensure that patents and trademarks are registered in

each country where business is conducted.

A patent is a formal legal document that gives an inventor the exclusive right to make, use, and

sell an invention for a specified period of time.

A trademark is defined as a distinctive mark, motto, device or emblem that a manufacturer

affixes to a particular product or package to distinguish it from goods produced by other

manufacturers (Exhibit 5–6, 5–7, and 5-8).

A copyright establishes ownership of a written, recorded, performed, or filmed creative work.

Counterfeiting is the unauthorized copying and production of a product.

An associative counterfeit, or imitation, uses a product name that differs slightly from a well-

known brand but is close enough that consumers will mistake it with the genuine product

(Exhibit 5-9).

Piracy is the unauthorized publication or reproduction of copyrighted work.

Counterfeiting and piracy are particularly important in industries such as motion pictures,

recorded music, computer software, and textbook publishing.

In the United States, patents, trademarks, and copyrights are registered with the Federal Patent

Office, the patent holder retains all rights for the life of the patent even if the product is not

produced or sold.

Patent and trademark protection in the United States is very good, and U.S. law relies on

precedent for guidance.

To register a patent in Europe, a company has the option of filing on a country-by country basis

or applying to the European Patent Office in Munich for patent registration in a specific number

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of countries. A third option will soon be available: The Community Patent Convention will

make it possible for an inventor to file a patent that is effective in the 27 signatory nations.

Currently, patent procedures in Europe are quite expensive, in part because of the cost of

translating technical documents into all the languages of the EU countries.

In July 1997, in response to complaints, the European Patent Office instituted a 19 percent

reduction in the average cost of an eight-country patent registration. The United States recently

joined the World Intellectual Property Organization (WIPO). The system allows trademark

owners to seek protection in as many as 74 countries with a single application and fee (see

Exhibit 5-10).

Two important agreements govern intellectual property issues:

The International Convention for the Protection of Industrial Property.

Also known as the Paris Union or Paris Convention. Nearly 100 countries now honor this

treaty. 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 International Union for the Protection of Literary and Artistic Property.

Also known as the Berne Convention, this was a landmark agreement on copyright

protection.

Two other treaties of importance are:

The Patent Cooperation Treaty (PCT).

This treaty has more than 100 members, including Australia, Brazil, France, Germany,

Japan, North Korea, South Korea, the Netherlands, Switzerland, the Russian Federation,

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 Convention

The European Patent Office administers applications for the Convention, which is

effective in the EU and Switzerland.

In recent years, the U.S. has devoted considerable diplomatic effort to improving the worldwide

environment for intellectual property protection.

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Effective June 7, 1995, in accordance with GATT, new U.S. patents are granted for a period of

20 years from the filing date. Now, U.S. patent laws harmonize with those in the EU as well as

Japan.

However, patents in Japan are narrower than those in the United States. As a result, companies

such as Caterpillar have been unable to protect critical innovations in Japan because products

very similar to those made by U.S. companies can be patented without fear of infringement.

Another key issue is global patent protection for software. Although copyright laws protect the

computer code, it does not apply to the idea embodied in the software. Beginning in 1981, the

U.S. Patent and Trademark Office extended patent protection to software.

Table 5-2 represents the companies receiving the most U.S. Patents in 2013.

Antitrust

Antitrust laws in the United States and other countries are designed to combat restrictive

business practices and to encourage competition.

A recent rash of antitrust actions brought in the United States against foreign companies has

raised concerns that the United States is violating international law as well as the sovereignty of

other nations.

The U.S. laws are a legacy of the 19th century trust-busting era and are intended to maintain free

competition by limiting the concentration of economic power.

The Sherman Act of 1890 prohibits certain restrictive business practices, including fixing prices,

limiting production, allocating markets, or any scheme designed to limit or avoid competition.

The law applies to the activities of U.S. companies outside the U.S. boundaries as well as to

foreign companies conducting business in the U.S. (e.g., Nippon Paper Industries was found

guilty in a federal appeals court of conspiring with other Japanese companies to raise U.S. fax

paper prices).

For the past four decades, the competition authority of the European Commission has had the

power to prohibit agreements that prevent, restrict, and distort competition. Beginning in the

mid-1990s the commission has taken an increasingly activist approach

EMERGING MARKETS BRIEFING BOOK

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