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CHAPTER 5
THE POLITICAL AND LEGAL ENVIRONMENT
Chapter Outline
A. Home-Country Political and Legal Environment
1. Embargoes and Sanctions
B. Host-Country Political and Legal Environment
1. Political Action and Risk
C. International Relationships
1. International Politics
D. Ethical Issues
1. Corporate Governance and Responsibility
Chapter Objectives
This chapter starts by appreciating the importance of politics and laws for an international firm. It
emphasizes the effects of government regulations and legislation on international firms. It
addresses the conflicts between a home- and host-country’s legal conditions and then evaluates
the link between different actions and different levels of risks. It ends with a discussion on how to
be more alert to the nefarious effects of terrorism.
Suggestions for Teaching
What has worked well for us is setting different criteria for the invocation of embargoes or
sanctions can vary in terms of the countries that are concerned (e.g., Libya vs. Canada or the
The bribery issue always has a lot of room for lively in–class discussion. Students need to
understand that it is not a question of amount, but of ethical behavior. Nevertheless, the
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The issue of legal differences is best understood by evaluating the effects and the cost of
litigation. Students can explore the major effects these activities can have on a firm. It is also
helpful to ask students if business or service providers in their community have had to close down
or alter their method of operation due to the threat of litigation and the lack of insurance coverage
(e.g., obstetricians, horseback riding).
Chapter Summary
A. Home-Country Political and Legal Environment
Wherever a firm is located, it will be affected by government policies and the legal system.
Another area in which governments may attempt to aid and protect the international
marketing efforts of companies is gray market activities. Gray market goods are products
that enter markets in ways not desired by their manufacturers.
• Regulation of international business behavior
1. Embargoes and Sanctions
The terms trade sanctions and embargoes refer to governmental actions that distort the
free flow of trade in goods, services, or ideas for decidedly adversarial and political,
rather than strictly economic, purposes. Advocates of sanctions regard them as an
important weapon of foreign policy.
The apparent strength of the United Nations enforcement system soon turned out to be
flawed. Stalemates in the Security Council and vetoes by permanent members often
led to a shift of emphasis to the General Assembly, which does not have the power to
enforce. As a result, sanctions have frequently been imposed unilaterally in the hope
of changing a particular country’s government, or at least its policies. Unilateral
imposition, however, tends to have major negative effects on the firms in the country
that is exercising sanctions because the only result is often a simple shift in trade.
2. Export Controls
Many nations have export control systems, which are designed to deny or at least
delay the acquisition of strategically important goods by adversaries. Most of these
systems make controls the exception rather than the rule, with exports taking place
independently from politics.
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The U.S. export control system is based on the Export Administration Act,
administered by the Department of Commerce, and the Arms Export Control Act,
administered by the Department of State. The Commerce Department focuses on
exports in general, while the State Department covers products designed or modified
for military use, even if such products have commercial applicability. The
determinants for controls are national security, foreign policy, short supply, and
nuclear nonproliferation.
• In order for any export from the United States to take place, the exporter needs to
obtain an export license.
This process does not apply in equal measure to all exports. Most international
business activities can be carried out under no license required (NLR) conditions.
NLR provides blanket permission to export. Products can be freely shipped to most
3. A New Environment for Export Controls
Today’s international environment continues to highlight the importance of export
controls. Restricting the flow of materials can be crucial in avoiding the proliferation
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Major change has also resulted from the increased foreign availability of high-
technology products. In the past decade, the number of participants in the international
trade field has grown rapidly.
The question arises as to how much of the latest technology is required for a country
to engage in “dangerous” activity. From a control perspective, there is also the issue of
equipment size.
4. Import Controls
In many countries, either all imports or imports of particular products are controlled
through tariff and nontariff mechanisms:
Policymakers are faced with several problems when trying to administer import
controls:
• First, most of the time such controls exact a huge price from domestic consumers.
Even though the wide distribution of the burden among many consumers may
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5. Regulation of International Business Behavior
Home countries may implement special laws and regulations to ensure that the
international business behavior of their firms is conducted within the legal, moral, and
ethical boundaries considered appropriate. The definition of appropriateness may vary
from country to country and from government to government.
Boycott measures put firms in a difficult position. Caught in a web of governmental
activity, they may be forced to either lose business or pay fines.
The second area of regulatory activity affecting international marketing efforts of
firms is antitrust laws. These can apply to the international operations of firms as well
as to domestic business.
B. Host-Country Political and Legal Environment
1. Political Action and Risk
Firms usually prefer to conduct business in a country with a stable and friendly
operations.
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There is political risk in every nation, but the range of risks varies widely from
country to country. Political risk is defined as the risk of loss when investing in a
Political risk can be the result of government action, but it can also be outside the
control of government. The types of actions and their effects are classified in Exhibit
5.4.
An important governmental action is expropriation, which is the seizure of foreign
assets by a government with payment of compensation to the owners. Expropriation
has appealed to some countries because it demonstrated nationalism and immediately
transferred a certain amount of wealth and resources from foreign companies to the
host country. It did have costs to the host country, however, to the extent that it made
other firms more hesitant to invest in the country. Expropriation does provide
compensation to the former owners. However, compensation negotiations are often
protracted and result in settlements that are frequently unsatisfactory to the owners.
The use of expropriation as a policy tool has sharply decreased over time. Apparently,
governments have come to recognize that the damage inflicted on themselves through
expropriation exceeds the benefits.
of reasons:
• If a firm is forced to hire nationals as managers, it can result in poor cooperation
and communication.
• If the domestication is imposed within a very short time span, corporate
Most businesses operating abroad face a number of other risks that are less dangerous,
but probably more common, than the drastic ones. Host governments that face a
shortage of foreign currency sometimes will impose controls on the movement of
capital in and out of the country. Such controls may make it difficult for a firm to
Countries may also raise the tax rates applied to foreign investors in an effort to
control the firms and their capital. On occasion, different or stricter applications of the
The international marketing manager must also worry about price controls. In many
countries, domestic political pressures can force governments to control the prices of
imported products or services, particularly in sectors that are considered to be highly
sensitive from a political perspective, such as food or health care.
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desire for independence, and opposition to colonial remnants. If a country’s citizens
feel exploited by foreign firms, government officials are more likely to take
antiforeign action. To reduce the risk of government intervention, a firm needs to
demonstrate that it is concerned with the host country’s society and that it considers
itself an integral part of the host country rather than simply an exploitative foreign
corporation. Ways to do this include:
• Intensive local hiring and training practices
• Good pay
• Philanthropy
2. Legal Differences and Restraints
Countries differ in their laws as well as in their implementation of these laws.
Different perceptions and legal practices can lead to substantially different approaches
to communication and conflict resolution.
Over the millennia of civilization, many different laws and legal systems have
emerged. King Hammurabi of Babylon codified a series of judges’ decisions into a
Code law is based on a comprehensive set of written statutes. Countries with code law
try to spell out all possible legal rules explicitly. Code law is based on Roman law and
is found in the majority of the nations of the world. In general, countries with the code
law system have much more rigid laws than those with the common law system. In the
latter, courts adopt precedents and customs to fit the cases, allowing the marketer a
better idea of the basic judgment likely to be rendered in new situations.
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Although wide in theory, the differences between code law and common law and their
impact on the international marketer are not always as broad in practice.
Host countries may adopt a number of laws that affect a company’s ability to market:
• To begin with, there can be laws affecting the entry of goods, such as tariffs and
3. Influencing Politics and Law
To succeed in a market, the international marketer needs much more than business
know-how. He or she must also deal with the intricacies of national politics and laws.
Many areas of politics and law are not immutable. Viewpoints can be modified or
even reversed, and new laws can supersede old ones.
The international marketer has various options:
• One approach may be to simply ignore prevailing rules and expect to get away
Beyond terminology, marketers can also highlight the direct linkages and their cost
and benefit to legislators and politicians.
Developing coalitions is not an easy task. Companies often seek assistance to
influence the government decision-making process. Such assistance usually is
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Lobbying firms tend to be located in state, national, or regional capitals. Their
experience and networks can help in presenting corporate concerns to decision
makers.
C. International Relationships
1. International Politics
The effect of politics on international marketing is determined by both the bilateral
political relations between home and host countries and the multilateral agreements
governing the relations among groups of countries.
2. International Law
International law plays an important role in the conduct of international business.
Although no enforceable body of international law exists, certain treaties and
agreements respected by a number of countries profoundly influence international
business operations.
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3. International Terrorism and Marketing
Terrorism is the systematic use (or threat) of violence aimed at attaining a political
goal and conveying a political message. International terrorism seeks to do this across
national borders.
A further effect on enterprises may be the failures in power, communication, transport,
and other infrastructure due to actual physical damage incurred at the terrorists’ hands.
Indirectly, this leads to unpredictable shifts and interruption in the supply of inputs,
resources, and services. Finally, international terrorism often causes tension between
the countries whose citizens or property is involved; the deterioration of transnational
relationships can affect foreign buyer and seller attitudes and thus the marketing
activities of firms doing business abroad.