© 2005 Prentice Hall5-1 Chapter 5 The Political, Legal, and Regulatory Environments of Global Marketing

© 2005 Prentice Hall5-2 The Political Environment Political cultures provide context –Governing party’s attitude toward Sovereignty Political risk Taxes Threat of equity dilution Expropriation

© 2005 Prentice Hall5-3 Nation-States and Sovereignty The right of each state to govern all activities within its borders without interference from other states e.g. Iran & nuclear power The degree of governance varies from socialist, planned economies to free-market capitalist economies States may trade sovereignty for greater prosperity; e.g. the EU countries

© 2005 Prentice Hall5-4 Nation-States and Sovereignty Stage of Development –LDCs Protectionist laws Nationalization (India in the fifties and sixties) Cronyism (Pres. Suharto; Gandhi family, Marcos in Philippines) –Free trade in Developed countries Fair competition, consumer protection laws Privatization (Water under Margaret Thatcher)

© 2005 Prentice Hall5-5 Political Risk Risk of change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably (e.g. Enron in India) When perceived political risk is high, a country will have a difficult time attracting foreign direct investment (e.g. Iran during and after the Shah’s time – 1970s)

© 2005 Prentice Hall5-6 Categories of Political Risk EIU Economic Intelligence Unit BERI Business Environment Risk Intelligence PRS Group World Political Risk Forecasts War Fractionalization of the political spectrum political turmoil probability Social unrest Fractionalization by language, ethnic, and/or religious groups Equity restrictions Orderly political transfer Restrictive/coercive measures required to retain power local operations restrictions Politically motivated violence Mentality (xenophobia, nationalism, corruption, nepotism) Taxation discrimination

© 2005 Prentice Hall5-7 Causes of Political Risk Tension between aspirations and reality –E.g. Indonesia Primarily occurs in lower and lower-middle income countries –Indonesia and economic crisis When political risk occurs in high income countries, it is generally due to a long-standing conflict –Protestants and Catholics in Northern Ireland

© 2005 Prentice Hall5-8 Expressions and Symptoms of Political Risk The less developed a country the greater the risk Increased economic uncertainty increases risk Political risk insurance

© 2005 Prentice Hall5-9 Expressions and Symptoms of Political Risk Low High Risk Income Triad Countries Russia, Indonesia, China

© 2005 Prentice Hall5-10 Taxes Government taxation policies –High direct taxation can lead to growth in a black market (e.g. India, Vietnam) –High Indirect taxation can lead to a huge grey market (e.g. China) Corporate taxation –Companies attempt to limit tax liability by shifting location of income (e.g. companies incorporated in tax- havens like Bahamas, Macau, etc.) –Foreign companies make loans instead of direct investments

© 2005 Prentice Hall5-11 Seizure of Assets Expropriation – governmental action to dispossess a foreign company or investor –Compensation should be provided in a “prompt, effective, and adequate manner” –When no compensation is provided, it is called confiscation

© 2005 Prentice Hall5-12 Seizure of Assets Nationalization - a government takes control of some or all of the enterprises in an entire industry (e.g. Indian banks in 1950s) –Acceptable according to international law if Satisfies public purpose Includes compensation

© 2005 Prentice Hall5-13 International Law The rules and principles that nation-states consider binding among themselves Disputes between nations are issues of public international law –Judicial arm of the United Nations –World Court or International Court of Justice (ICJ) Disputes between businesses of different countries are issues of private international law

© 2005 Prentice Hall5-14 Common Law vs. Civil Law Common Law country –Disputes are decided by reliance on the authority of past judicial decisions –Companies are legally incorporated by state authority –USA, GB, India, Malaysia, Canada Civil Law country –Legal system reflects the structural concepts and principles of the Roman Empire –Companies are formed by contract between two ore more parties who are fully liable for the actions of the company –Continental Europe, Japan, Korea, Thailand, China, etc.

© 2005 Prentice Hall5-15 Islamic Law Legal system in many Middle Eastern countries Based on the sharia - a comprehensive code governing Muslim conduct in all areas of life (sourced from the Koran and Hadith) The Hadith Based on life, sayings, and practices of Muhammad Identifies forbidden practices “haram” –E.g. alcohol advertising is forbidden on billboards and newspapers –Charging interest on loans is forbidden

© 2005 Prentice Hall5-16 Sidestepping Legal Issues Get expert legal help Preventing conflicts –Establish jurisdiction –Protecting intellectual property –Avoid bribery

© 2005 Prentice Hall5-17 Jurisdiction Refers to a Court’s authority to rule on particular types of controversies arising outside of a nation’s borders or to exercise power over individuals or entities from different countries. Employees of foreign companies should understand the extent to which they are subject to jurisdiction of host-country courts Courts have jurisdiction if it can be demonstrated that the company is doing business in the state the court sits

© 2005 Prentice Hall5-18 Intellectual Property Intellectual property must be registered in each country where business is conducted –Patent – gives an inventor exclusive right to make, use, and sell an invention for a specified period of time e.g. The Segway transporter –Trademark – distinctive mark used to distinguish it from competing products e.g. brand logos –Copyright – establishes ownership of a written, recorded, performed, or filmed creative work e.g. music, films, etc.

© 2005 Prentice Hall5-19 Infringement of Intellectual Property Counterfeiting – unauthorized copying and production of a product Associative Counterfeit/Imitation – product name differs slightly from a well-known brand Piracy – unauthorized publication or reproduction of copyrighted work

© 2005 Prentice Hall5-20 Protecting Intellectual Property Apply for protection in each country of business In Europe apply in Munich for EU countries Single applications for several countries are in the works

© 2005 Prentice Hall5-21 Licensing and Trade Secrets Contractual agreements in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology, and other intangible assets in return for royalty payments or other forms of compensation Important considerations –What assets may be licensed –How to price assets –The rights granted

© 2005 Prentice Hall5-22 Licensing and Trade Secrets Trade secrets are confidential information or knowledge that has commercial value and is not in the public domain and for which steps have been taken to keep it secret To prevent disclosure –Use confidentiality contracts

© 2005 Prentice Hall5-23 Bribery and Corruption Foreign Corrupt Practices Act –Requires publicly held companies to institute internal accounting controls that would record all transactions –Makes it a crime for a US corporation to bribe an official of a foreign government or political party to obtain or retain business –Prohibits payments to third parties when there is reason to believe it may be channeled to foreign officials

© 2005 Prentice Hall Corruption Perceptions Index 7 ‘cleanest’ countries 1. Iceland Finland New Zealand Denmark Singapore Sweden Switzerland most corrupt countries 1.Bangladesh Chad Turkmenistan Myanmar Haiti Nigeria Equatorial Guinea 1.9

© 2005 Prentice Hall Bribe Payers Index Countries with lowest propensity to bribe –Australia 8.5 –Sweden 8.4 –Switzerland 8.4 –Austria 8.2 –Canada 8.1 –Netherlands 7.8 –Belgium 7.8 Countries with highest propensity to bribe –Russia 3.2 –China 3.5 –Taiwan 3.8 –South Korea 3.9 –Italy 4.1 –Hong Kong 4.3 –Malaysia 4.3

© 2005 Prentice Hall5-26 Conflict Resolution CountryLawyers per 100,000 people USA290 Australia242 United Kingdom141 France80 Germany79 Hungary79 Japan11 Korea3