The Political and Legal Environment: A Critical Concern

1. The Political and Legal Environment: A Critical Concern Chapter 6

2. Chapter Learning Objectives How different governmental types, political parties, nationalism, target fear/animosity and trade disputes can affect the environment for marketing in foreign countries The political risks of global business and the factors that affect stability The importance of the political system to international marketing and its effect on foreign investments The impact of political and social activists, violence and terrorism on international business How to assess and reduce the effect of political vulnerability How and why governments encourage foreign investment

3. Chapter Learning Objectives (cont.) The four heritages of today’s legal systems The important factors in jurisdiction of legal disputes Issues associated with jurisdiction of legal disputes and the various methods of dispute resolution The unique problems of protecting intellectual property rights internationally How to protect against piracy and counterfeiting How the legal differences between countries and how the differences can affect international marketing plans

4. Global Perspective: How APEC Attempts to Combat Corruption APEC’s statement on ‘fighting corruption through improved international legal cooperation’ provides a strong foundation for its commitment to strengthen cooperation on extradition, prosecution, mutual legal assistance and recovery of proceeds of corruption. Governments control and restrict company’s activities by encouraging and offering support of by discouraging and banning or restricting its activities. International law recognises the sovereign right of a nation to grant or withhold permission to do business within its political boundaries and to control where its citizens conduct business.

5. Stability of Government Policies Governments are not always stable and friendly. Even if they start out this way, they may change which can have an effect on multinational firms. Issues that can affect the stability of a government: Radical shifts in government philosophy when an opposing political party ascends to power. Pressure from nationalist and self-interest groups. Weakened economic conditions. Bias against foreign investment. Conflicts between governments .

6. Forms of Government Three basic types of government in use today: Rule by one (monarchy or dictatorship) Rule by few (aristocracy – or oligarchy) Rule by many (democracy) The form of government shapes the economy as they propose, introduce, adjust and implement various types of policies to secure economic and social goals.

7. A Sampling of Government Types

8. Political Parties Changes in political parties can have a major effect on trade conditions. Therefore, must understand the parties’ prevailing attitudes towards business. Great Britain The Labour Party Vs. The Conservative Party A current assessment of political philosophy and attitudes within a country is important in gauging the stability and attractiveness of a government in terms of market potential.

9. Nationalism Nationalism is an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. National interest and security are more important than international relations. The more a country feels threatened by some outside force or as the domestic economy declines, the more nationalistic it becomes in protecting itself against intrusions. Nationalism comes and goes as conditions and attitudes change, and foreign companies welcomed today may be harassed tomorrow and vice versa.

10. Trade Disputes • Disputes between trading nations may entail a risk to markets in general or to trading relations and negotiations. • China

11. Political Risks Confiscation – the seizing of a company’s assets without payment. Expropriation – where the government seizes an investment but some reimbursement for the assets is made. Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating: Transfer of ownership, either whole or partially to nationals. Large number of nationals be promoted into managerial positions. Control of decision-making be in the hands of nationals. Majority of the products must be locally produced. There be specific export regulations for participation in world markets.

12. Factors Influencing the Risk Reduction Process in International Marketing

13. Economic Risks Exchange controls Stem from shortages of foreign exchange held by a country. Local-content laws Countries often require a portion of any product sold within the country to have local content. Import restrictions Selective restrictions on the import of raw materials , machines and spare parts to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry.

14. Economic Risks (cont.) Tax controls A political risk when used as a means of controlling foreign investments. May be raised without warning and in violation of formal arrangements. Price controls Essential products that command considerable public interest Pharmaceuticals Food Petrol Cars Labour problems Labour unions have strong government support that they use effectively in obtaining special concessions from business.

15. Political Sanctions One nation or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. U.S. boycotts of trade with Cuba/Iran History indicates that sanctions are often unsuccessful in reaching desired goals, particularly when other major nations’ traders ignore them.

16. Political and Social Activists Not usually officially sanctioned by the government. Can interrupt the normal flow of trade. Can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change.. Worldwide boycott of Nestle products Free Burma Campaign (FBC)

17. Violence and Terrorism The US State Department reported 3,200 terrorist incidents worldwide in 2004. Goals of terrorism: To embarrass a government and its relationship with firms by targeting multinationals. To generate funds by kidnapping executives to finance terrorist goals. To use multinationals as pawns in political or social disputes not specifically directed at them. To inflict terror within a country as did September 11. Reasons to expect that businesses will become increasingly attractive to terrorists because they are less well defended than government targets and because of what they symbolise.

18. Cyberterrorism and Cybercrime The internet is a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. It is hard to determine if a cyber attack has been launched by a rogue state, a terrorist, or by a hacker as a prank. Tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a country’s infrastructure.

19. Politically Sensitive Products and Issues Products that have or are perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people and that are publicly visible or subject to public debate, are more likely to be politically sensitive. Fast-food restaurants Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern. Australian controversy over genetically modified (GM) foods

20. Forecasting Political Risk Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions. The greatest risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets. Risk assessment is used to estimate the level of risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept. A necessary part of a market analysis is an assessment of the probable consequences of a marketing plan as some marketing activities are more susceptible to political considerations than others.

21. Top 20 States in Danger of Failing (Ranked)

22. Reducing Political Vulnerability Relations between governments and MNCs are generally positive if the investment: Improves the balance of payments by increasing exports or reducing imports through import substitution. Uses locally produced resources Transfers capital, technology, and/or skills Create jobs Make tax contributions Political parties seeking publicity or scapegoats for their failure often serve their own interests by focusing public opinion on the negative aspects of MNCs whether true or false.

23. Reducing Political Vulnerability (cont.) Strategies that MNCs use to minimise political vulnerability and risk: Joint ventures Expanding the investment base Licensing Planned domestication Political bargaining Political payoffs

24. Bases for Legal Systems Four heritages form the bases for the majority of the legal systems of the world. Common law – derived from English law. Civil or code law – derived from Roman law. Islamic law – derived from interpretation of the Koran. Marxist-socialist law – derived from Marxist-socialist economies. Even though a country’s laws may be based on the doctrine of one of the four legal systems, its individual interpretation may vary significantly.

25. Common and Code Law Common law seeks “interpretation through the past decisions of higher courts which interpret the same statues or apply established and customary principles of law to a similar set of facts.” Under code law the legal system is generally divided into three separate codes: Commercial Civil Criminal Common law is recognised as not being all-inclusive, whereas code law is considered complete as a result of catchall provisions found in most code-law systems. Under common law, ownership is established by use; under code law, ownership is determined by registration.

26. Islamic Law The basis for the Shari’ah (Islamic) law is interpretation of the Koran. Islamic law defines a complete system that prescribes specific patterns of social and economic behavior for all individuals. Property rights Economic decision making Types of economic freedom Among the unique aspects of Islamic law is the prohibition against the payment of interest. The Islamic system places emphasis on the ethical, moral, social, and religious dimensions to enhance equality and fairness for the good of society.

27. Marxist-Socialist Tenets Marxist-socialist legal systems revolve around the key areas of economic, political and socialist policies of the state. Under the premise that law is strictly subordinate to prevailing economic conditions, such fundamental propositions as private ownership, contracts, due process, and other legal mechanisms have had to be developed.

28. Jurisdiction in International Legal Disputes No confirmed judicial body exists to address legal commercial problems arising between citizens of different countries. Legal disputes can arise in three situations: Between governments Between a company and a government Between two companies Jurisdiction is generally determined in one of three ways: On the basis of jurisdictional clauses included in contracts. On the basis of where a contract was entered into. On the basis of where the provisions of the contract were performed. The most clear-cut decisions can be made when the contracts or legal documents supporting a business transaction include a jurisdictional clause.

29. International Dispute Resolution: Conciliation Conciliation is a nonbinding agreement between parties to resolve disputes by asking a third party to mediate differences. Conciliation sessions are private and all conferences between parties and the mediator are confidential. Although conciliation may be the friendly route to resolving disputes it is not legally binding; thus an arbitration clause should be included in all conciliation agreements.

30. International Dispute Resolution: Arbitration Most arbitration is conducted under the auspices of one of the more formal domestic and international arbitration groups organized specifically to facilitate the resolution of commercial disputes. The popularity of arbitration has led to a proliferation of arbitral centers established by countries, organisations, and institutions. Contracts and other legal documents should include clauses specifying the use of arbitration to settle disputes.

31. International Dispute Resolution: Litigation The best advice is to seek settlement. Deterrents to litigation: Fear of creating a poor image and damaging public relations. Fear of unfair treatment in a foreign court. Difficulty in collecting a judgment that may otherwise have been collected in a mutually agreed settlement through arbitration. The relatively high cost and time required when bringing legal action. Loss of confidentiality.

32. Counterfeiting and Piracy Estimated by ICC that total value of counterfeit and pirated goods globally amount to more than US$600 billion. The piracy industry has grown so sophisticated that many counterfeit goods are almost impossible to distinguish from the original. Counterfeit and pirated goods come from a wide range of industries including: Apparel Automotive parts Agricultural chemicals Pharmaceuticals Books, record and film Computer software

33. Piracy Rates for Computer Software, Top and Bottom 20

34. Inadequate Protection There have been many cases where companies have legally lost the rights to trademarks and have had to buy back these rights or pay royalties for their use. McDonald’s in Japan Many businesses fail to take proper steps to legally protect their intellectual property. The failure to protect intellectual property rights adequately in the world marketplace can lead to the legal loss of rights in potentially profitable markets.

35. Prior Use versus Registration Prior Use – whoever can establish first use is typically considered the rightful owner. Registration – the first to register a trademark or other property right is considered the rightful owner. A company that believes it can always establish ownership in another country by proving it used the trademark or brand name first is wrong and risks the loss of these assets.

36. International Conventions Three major international conventions: The Paris Convention for the Protection of Industrial Property The Inter-American Convention The Madrid Arrangement World Intellectual Property Organisation (WIPO) Responsible for the promotion of the protection of intellectual property and for the administration of the various multilateral treaties through cooperation among its member states. Patent Cooperation Treaty (PCT) European Patent Convention (EPC) The Trade-Related Aspects of Intellectual Property Rights (TRIPs)

37. Marketing Laws All countries have laws regulating marketing activities. Promotion Product development Labelling Pricing Channels of distribution Usually the discrepancies across markets cause problems for trade negotiators, but particularly for managers and their firms. Banning or restricting advertising to children. There often are vast differences in enforcement and interpretation among countries having laws covering the same activities. Laws governing sales promotions in the European community. Product comparison laws. Packaging and labelling laws.

38. Green Marketing Legislation Green marketing laws focus on environmentally friendly products and on product packaging and its effect on solid waste management. Antitrust With the exception of the U.S., antitrust laws were either nonexistent or not enforced in most of the world’s countries for the better part of the 20th century.

39. Summary The foreign firm must strive to make its activities politically acceptable or it may be subjected to a variety of politically condoned harassment. The foreign marketer frequently faces the problem of uncertainty of continuity in government policy. As governments change political philosophies, a marketing firm accepted under one administration might find its activities undesirable under another. An unfamiliar or hostile political environment does not necessarily preclude success for a foreign marketer if the company becomes a local economic asset and responds creatively to the issues raised by political and social activities. If a company is considered vital to achieving national economic goals, the host country often provides an umbrella of protection not extended to others.

40. Summary (cont.) Businesses face a multitude of problems in their efforts to develop successful marketing programs. Varying legal systems of the world and their effect on business transactions. Just as political climate, cultural differences, local geography, different business customs, and the stage of economic development must be taken into account, so must such legal questions as jurisdictional and legal recourse in disputes, protection of intellectual property rights, and legislation of foreign governments. The Internet creates a new set of legal entanglements, many of which have yet to be properly addressed. The freedom that now exists on the World Wide Web will only be a faint memory before long.