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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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