3 The Political Environment Global marketing activities influenced by governmental institutions, political parties & organizationsEnvironment determines attitude towards:SovereigntyPolitical riskTaxesDilution of equity controlExpropriation
4 1.Nation-States & Sovereignty (p.92) Sovereignty = supreme & independent political authorityImplies that the nation-stateIs decision making authority of last resort in its territoryIs independent from other nation-statesNation-state activities governed byStage of developmentPolitical and economic systemGlobal market integration is eroding national economic sovereignty
5 2.Political Risk (p.93)The risk that a governmental policy adversely affects a company’s activitiesA lower level of political risk tends to attract higher investmentsLevel of political risk is inversely proportional to a country’s state of economic development
6 3.Taxes (p.94)Many companies minimize tax liability by shifting locations of income“earnings stripping”Foreign company reduces earnings by making loans to U.S. affiliates rather than using direct investment to finance U.S. activitiesU.S. subsidiary deducts the interest paid on these loans, thereby reducing its tax burdenMany companies have negotiated bilateral tax treaties to provide tax credits for taxes paid abroad
7 4.Dilution of Equity Control (p.94) In lower-income countries, often political pressure for national control of foreign-owned companiesGoal of national governance: protect the right of national sovereigntyIn underdeveloped countries, political pressure often causes companies to take local partners (strategic alliances, joint-ventures)
8 5.Expropriation (p.96)Expropriation = governmental action to dispossess a company or investorNationalization = ownership of property & assets istransferred to the host governmentConfiscation = nationalization without compensationCreeping expropriation = severe limitations on economic activities. (limitations on repatriation of profits, local content requirements, quotas for hiring local nationals, price controls)
9 Sidestepping Legal Problems (1) (p.98) EstablishmentCitizens of one country be treated fairly in another countryJurisdictionSpecify which nation’s laws apply, when a transaction crosses boundariesIntellectual PropertyEnsure that patents & trademarks are registered in each country business is conductedInternational treaties
10 Sidestepping Legal Problems (cont.) AntitrustAntitrust laws designed to combat restrictive business practices & to encourage competitionThe Sherman Act of 1890 prohibits certain restrictive business practices, including fixing prices, limiting production, allocating markets…and so on.European Commission prohibits agreements & practices that prevent, restrict & distort competition
11 Sidestepping Legal Problems (cont.) LicensingContractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology or other intangible assets in return for royalty paymentsTrade SecretsConfidential information or knowledge that has commercial valueEnforcement is the key issue: risks are always associated with lax enforcement
12 Sidestepping Legal Problems (cont.) Bribery & Corruption: legal & ethicalA crime for US companies to bribe an official of a foreign government to obtain or retain businessLaws & rules try to regulate international business ethics on different levelsU.S. Foreign Corrupt Practices Act (FCPA) of 1977Publicly held companies must institute internal accounting controls that record all transactions
13 Conflict Resolution, Dispute Settlement & Litigation (p.107~109) International lawsuits can be very complex, time & cost-consumingExtrajudicial, alternative approaches often provide faster, easier & less expensive ways to resolve commercial disputesInstitutions such as the International Chamber of Commerce (ICC) have established Courts of Arbitration that can be employed by global companies
14 SummaryPolitical environment is the set of governmental institutions, political parties & organizations. The political environment varies from country to country & risk assessment is crucial.Legal environment consists of laws, courts, attorneys, & legal customs & practices. Countries follow either common-law system or code-law system.
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