978-0134129945 Chapter 5 Lecture Note Part 2

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Innovation, Entrepreneurship, and the Global Startup

Travis Kalanick and Uber

Travis Kalanick is an entrepreneur. He developed an innovative product, created a brand, and

started a company to market it. As is true with many entrepreneurs, Kalanick’s idea was based

on recognition of his own needs and wants.

Garret Camp and Kalanick launched Uber, the ride-sharing service in San Francisco in 2010.

By the end of 2014, Uber had raised venture capital that valued the company at nearly $ 40

billion! The service was available in more than 250 cities worldwide. Uber’s rapid growth was

another example the “sharing economy”, also know as “collaborative consumption” was gaining

traction.

However, Uber encountered resistance as its popularity has grown.

There have been calls for the EU to revamp its approach to antitrust issues, but any proposed

changes will pit modernists against traditionalists.

The interstate trade clause of the Treaty of Rome applies to trade with third countries, so that a

company must be aware of the conduct of its affiliates.

Individual country laws in Europe can apply to specific marketing mix elements (e.g., some

countries permit selective or exclusive distribution). However, EC law can take precedence.

In some instances, companies or entire industries have been able to secure exemption from

antitrust rules (e.g., KLM and Northwestern airlines were exempted by the U.S. and share

computer codes and set prices jointly).

The European Commission permitted United International Pictures (UIP), a joint venture

between Paramount, Universal, and MGM/UA, to cut costs by collaborating on motion picture

distribution in Europe. But, in 1998, the commission reversed itself and notified the three studios

that they must distribute their films independently in Europe.

In the U.S., most cartels are illegal although major shipping lines enjoy exemption from anti-

trust laws.

Licensing and trade agreements

Licensing is a contractual agreement in which a licensor allows a licensee to use patents,

trademarks, trade secrets, technology, or intangible assets in return for royalty payments or other

compensation.

U.S. laws do not regulate this process as do technology transfer laws in the European Union,

Australia, Japan, and many developing countries.

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To prevent the licensee from using the licensed technology to compete directly with the licensor,

the latter may try to limit the licensee to selling only in its home country.

Licensing agreements can come under antitrust scrutiny (e.g., the Justice Department said that

Bayer/Johnson arrangement was unacceptable in a highly concentrated market).

Licensing is potentially dangerous because it may create a competitor.

Trade secrets are confidential information with commercial value and for which steps have been

taken to keep it secret; including manufacturing processes, designs, and customer lists.

The 1990s have seen improvements in laws pertaining to trade secrets (e.g., NAFTA marked the

first international trade agreement with provisions for protecting trade secrets).

Despite formal legal developments, enforcement is the key issue.

Companies transferring trade secrets across borders should apprise themselves not only of the

existence of legal protection but also of the risks associated with lax enforcement.

Bribery and Corruption: Legal and Ethical Issues

Western companies have opportunities in Eastern Europe, in the Middle East and other parts of

the world, where bribery is a way of life and corruption is widespread.

Bribery is the corrupt business practice of demanding or offering some type of consideration—

typically cash payment—when negotiating a cross-border deal.

Transparency International ranks countries in the Corruption Perceptions Index. The “cleanest”

score is 10. Table 5-4 shows the 2014 top 10 and bottom ten countries.

In the United States, the Foreign Corrupt Practices Act (FCPA) made it a crime for U.S.

corporations to bribe an official of a foreign government or political party to obtain or retain

business.

Payments to third parties are also prohibited when the company has reason to believe that part or

all of the money would be channeled to foreign officials. Subsequent FCPA changes exclude

“grease” payments to low-level officials to cut red tape in clearing shipments through customs,

securing permits, or getting clearance to leave a country.

Some critics of the FCPA decry it as a regrettable display of moral imperialism, imposing U.S.

laws, standards, values, and mores on American companies and citizens worldwide.

U.S. companies face difficulty vis-à-vis competitors such as Japan and Europe (e.g., 1994, bribes

offered by non-U.S. companies factored into 100 business deals valued at $45 billion).

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Bribery in world markets will not change because the U.S. Congress condemns it.

Bribery is a deductible business expense in many European countries.

The OECD is working to create so-called islands of integrity with players pledging not to bribe.

Companies operating abroad face a continuum of ethical choices. They can maintain home-

country ethics worldwide or abandon company ethics and adapt to local circumstances.

If competitors offer bribes, U.S. companies can ignore the bribery or evaluate its effect on the

purchase decision as another element of the marketing mix. The overall value of a company’s

offer must equal or exceed the competitor’s offering, bribe included.

A lower price, a better product, better distribution, or better advertising may offset the value

added by the bribe.

The best line of defense is to have a product that is clearly superior to that of the competition. In

such a case, a bribe should not sway the purchase decision.

Alternatively, clear superiority in service and in local representation may tip the scales.

CONFLICT RESOLUTION, DISPUTE SETTLEMENT, AND LITIGATION

(Learning Objective #4)

The degree of legal cooperation and harmony in the EU is unique and stems in part from the

existence of code law as a common bond.

Other regional organizations have made far less progress toward harmonization.

The U.S. has more lawyers than any other country in the world and is arguably the most litigious

nation on earth. In part, this is a reflection of the low-context nature of American culture and the

spirit of confrontational competitiveness.

Conflicts inevitably arise in business anywhere, especially when different cultures come together

to buy, sell, establish joint ventures, compete, and cooperate in global markets.

For American companies, litigation in foreign courts becomes vastly complex, partly because of

differences in language, legal systems, currencies, and traditional business customs and patterns.

In addition, problems arise from differences in procedures relating to discovery. Discovery is the

process of obtaining evidence to prove claims and determining which evidence may be

admissible in which countries under which conditions. A further complication is the fact that

judgments handed down in courts in another country may not be enforceable in the home

country. For all of these reasons, many companies prefer to pursue arbitration before proceeding

to litigate.

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Alternatives to Litigation for Dispute Settlement

Formal arbitration is one means of settling international business disputes outside the courtroom.

Arbitration is a negotiation process that the two parties have, by prior agreement, committed

themselves to using.

The most important treaty regarding international arbitration is the 1958 United Nations

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the

New York Convention.

The framework created by the New York Convention is important for several reasons:

1. When parties enter into agreements that provide for international arbitration, the

signatory countries can hold the parties to their pledge to use arbitration.

2. After arbitration has taken place and the arbitrators have made an award, the signatories

recognize and can enforce the judgment.

3. The signatories agree that there are limited grounds for challenging arbitration decisions.

By law, U.S. courts must accept an arbitrator’s decision in patent disputes; in other countries,

however, there is no general rule of acceptance.

Business arbitration is promoted through the International Court of Arbitration at the Paris-based

International Chamber of Commerce.

Overall, the ICC has gained a reputation for being slower, more expensive, and more

cumbersome than alternatives.

The American Arbitration Association (AAA) has also become recognized as an effective

institution within which to resolve disputes. In 1992, the AAA signed a cooperation agreement

with China’s Beijing Conciliation Center.

The AAA has entered into cooperation agreements with the ICC and other global organizations

to promote the use of alternative dispute resolution methods.

The Swedish Arbitration Institute is another agency for settling disputes. This agency frequently

administered disputes between Western and Eastern European countries.

An International Council for Commercial Arbitration (ICCA) was established to coordinate the

far-flung activities of arbitration organizations.

The United Nations Conference on International Trade Law is another significant force.

The growing influence of the ICCA and UNCITRAL rules, coupled with the proliferation of

regional arbitration centers, have contributed to changing attitudes in developing countries and

resulted in the increased use of arbitration around the world.

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THE REGULATORY ENVIRONMENT

(Learning Objective #5)

The regulatory environment of global marketing consists of a variety of governmental and

nongovernmental agencies that enforce laws or set guidelines for conducting business.

In most countries, the influence of regulatory agencies is pervasive, and an understanding of how

they operate is essential to protect business interests and advance new programs.

Executives at many global companies are realizing the need to hire lobbyists to represent their

interests and to influence the direction of the regulatory process.

U.S. law firms and consulting firms also have sharply increased their presence in Brussels to

gain insight into EU politics and access to its policy makers; some have hired EU officials.

Regional Economic Organizations: The European Union Example

The Treaty of Rome established the European Community (EC), the precursor to the European

Union.

The Treaty created an institutional framework in which a council (the Council of Ministers)

serves as the main decision-making body.

The European Council (a distinct entity from the Council of Ministers) defines general political

guidelines and provides direction on integration-related issues. The 20-member EU Commission,

the administrative arm, proposes laws and policies, monitors observance of EU laws, administers

and implements EU legislation, and represents the EU to international organizations.

Commission members represent the union rather than their respective nations. Laws, regulations,

directives, and policies are submitted to the parliament and then to the council for a final

decision.

Regulations automatically become law throughout the union; directives include a time frame for

implementation by legislation in each member state.

The Single Market era is one in which many industries face new regulatory environments.

The European Court of Justice, based in Luxembourg, ensures that EU laws and treaties are

upheld throughout the EU. The Court is empowered to resolve conflicts between national law

and EU law.

National laws should always be consulted. National laws may be stricter than community law,

especially in such areas as competition and antitrust.

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TEACHING TOOLS AND EXERCISES

Activity: Students should be preparing or presenting their Cultural-Economic Analysis and

Marketing Plan for their country and product as outlined in Chapter 1.

Cases:

“International Pizza House in Brazil”, David Gertner and Dennis Guthey, June 2001,

Thunderbird School of Management.

“Coca-Cola’s Marketing Challenges in Brazil: The Tuba nas War, by Dennnis Guthery, David

Gerner, and Rosane Gertner, 2004, Thunderbird School of Management.

Out-Of-Class Reading:

George S. Yip; Audrey J.M. Bink. “Managing Global Accounts” HBR Article R0709G.

Carbone, June, and Margaret McClean. “Genetically Modified Foods: The Creation of Trust and

Access to Global Markets.” Business & Professional Ethics Journal 20, no. 3/4

(Fall/Winter 2001) pp. 79-104.

Videos:

This video discusses several topics including business in emerging countries, as well as the

government role in international business. The video is 33 minutes long, but gives several

examples of countries where issues have occurred due to legal and political differences between

different countries. There is part that is off-topic from this chapter, where he talks about how

India’s middle class tends to work in call centers and why. Although it is not directly relevant, it

is rather interesting.

Link: http://www.youtube.com/watch?v=Hghe99y0GCw&feature=related

Internet Exercise: Have students log on to the United Nations International Law website

(www.un.org/law/). Just have them peruse the wealth of data and information concerning recent

legal decisions to give them an idea of the complexity of international law.

Risk Analysis Exercise: There is commentary on China in all media, and students should be

encouraged to look at specific risk profile reports, such as those published by The Economist and

Euromoney. Both publications have websites, and both are in hard copy in the library. The point

of the exercise is to get students to focus on one country and debate or question a real example of

risk analysis.

The value of the assignment lies in the class discussions, as students are likely to disagree with

the ratings. These differences may reflect individual risk preferences or biases, but they still

should be able to argue economic and political points such as the instability of a “rule by man”

nation, the inability of China to enforce intellectual property rights, home-host country relations,

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and currency issues. Students may be able to provide comparative analysis with data or statistical

reports.

Debate: FCPA. Divide the class into two teams: Team A presents the case that the U.S. Foreign

Corrupt Practices Act (FCPA) represents an ethical way to do business worldwide. Team B

argues that the FCPA prevents the U.S. from being competitive globally. Each team has 15

minutes to prepare; the teams debate for 10-15 minutes.