CHAPTER 5
THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS
OF GLOBAL MARKETING
SUMMARY
The political environment of global marketing is the set of governmental institutions, political parties, and organizations that are the expression of the people in the nations of the world. In particular, anyone engaged in global marketing should have an overall understanding of the importance of sovereignty to national governments. The political environment varies from country to country, and political risk assessment is crucial. It is also important to understand a particular government’s actions with respect to taxes and seizure of assets. Historically, the latter have taken the form of expropriation, confiscation, and nationalization.
The legal environment consists of laws, courts, attorneys, legal customs, and practices. International law is comprised of the rules and principles that nation-states consider binding upon themselves. The countries of the world can be broadly categorized in terms of common-lawlegal systems or civil-law legal system. The United States and Canada and many former British colonies are common law countries; most other countries arecivil-law. A third system, Islamic law, predominates in the Middle East. Some of the most important legal issues pertain to jurisdiction, antitrust, and licensing. In addition, briberyis pervasive in many parts of the world; the Foreign Corrupt Practice Act (FCPA) applies to American companies operating abroad. Intellectual property protection is another critical issue. Counterfeiting is a major problem in global marketing; it often involves infringementof a company’s copyright or trademark ownership. When legal conflicts arise, companies can pursue the matter in court or use arbitration.
The regulatory environmentconsists of agencies, both governmental and non-governmental, that enforce laws or set guidelines for conducting business. Global marketing activities can be affected by a number of international or regional economic organizations; in Europe, for example, the European Union makes laws governing member states. The World Trade Organization will have a broad impact on global marketing activities in the years to come. Although all three environments are complex, astute marketers plan ahead to avoid situations that might result in conflict, misunderstanding, or outright violation of national laws.
OVERVIEW
Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access of outside enterprises to national resources.
Every country has its own unique legal and regulatory system that affects the operations and activities of the global enterprise, including the global marketer’s ability to address market opportunities and threats.
Laws and regulations constrain the cross-border movement of products, services, people, money, and know-how. The global marketer must attempt to comply with each set of national constraints. The fact that laws and regulations are frequently ambiguous and continually changing hamper these efforts.
In this chapter, we consider the basic elements of the political, legal, and regulatory environments of global marketing, including the most pressing current issues and some suggested approaches for dealing with those issues.
Some specific topics, such as rules for exporting and importing industrial and consumer products, standards for health and safety, and regulations regarding packaging, labeling, advertising, and promotion, are covered in later chapters devoted to individual marketing mix elements.
ANNOTATED LECTURE/OUTLINE
THE POLITICAL ENVIRONMENT
Global marketing takes place within the political environment of governmental institutions, political parties, and organizations through which a country’s people and rulers exercise power.
- What is the purpose of a ‘political culture’?
A political culture reflects the importance of the government and legal system.
It provides a context for understanding the relationship between individuals and corporations and the political system.
Any company doing business outside its home country should carefully study the political culture in the target country and analyze salient issues arising from the political environment. These include the governing party’s attitude toward sovereignty, political risk, taxes, the threat of equity dilution, and expropriation.
Nation-States and Sovereignty
Sovereignty is defined as the supreme and independent political authority.
Government actions taken in the name of sovereignty occur in the context of two important criteria:
- A country’s stage of development
- The political and economic system.
the economies of individual nations may be classified as industrialized, newly industrializing, or developing. Governments in developing countries control economic development by passing protectionist laws to encourage their nation’s economic development.
Nations with advanced stages of economic development declare that any practice that restrains free trade is illegal. Antitrust laws and regulations promote fair competition.
Most economies combine elements of market and non-market systems. Sovereign politicalpower in a non-market economy reaches far into the economic life of a country. For example, a French law passed in 1996 requires that at least 40 percent of the songs played by popular radio stations must be French.
Most of the world’s economies combine elements of market and nonmarket systems. The sovereign political power of a government in a predominantly nonmarket economy reaches quite far into the economic life of a county. In a capitalist, market-oriented democracy, power is more constrained.
Non-market and market structures currently have privatization, which reduces government involvement as a supplier of goods and services.
A current global phenomenon in both nonmarket and market structures is the trend toward privatization. Privatization moves a nation’s economy in the free-market direction (e.g., Mexico has partially privatized banks, airlines, etc.)
Some believe that global market integration erodes economic sovereignty. Nations give up sovereignty in return for something of value (e.g., EU countries gave up their currencies inexchange for improved market access).
Political risk
- Define ‘political risk.’
Political risk is the possibility of a change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably.
Political risk can deter a company from investing abroad; to put it another way, when a country’s political environment is characterized by a high level of uncertainty, it may have difficulty in attracting foreign investment.
Managers often omit political risk assessment in global strategic planning because they think it is too expensive or too unreliable.
Political forces can drastically change the business environment with little advance notice.
Commercial sources vary in the criteria that constitute political risk (e.g., BERI assesses societal and system attributes, whereas PRS assesses government actions and economic functions). For example, BERI is concerned with societal and system attributes, whereas PRS Group focuses more directly on government actions and economic functions (see Table 5-1).
Companies can purchase insurance to offset potential risks arising from the political environment.
Taxes
- How do taxation policies frequently motivate companies and individuals to profit by not paying taxes?
Governments rely on tax revenues to generate funds for social services, the military and other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes.
- How is it possible for global companies to profit from illegal smuggling practices?
Ironically, global companies can still profit from the smuggling practice; it has been estimated, for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip Morris, this means annual sales of $100 million to distributors in Hong Kong, who then smuggle the smokes across the border.
High excise and VAT taxes encourage legal cross-border shopping as consumers go abroad in search of good values (e.g., Great Britain estimates that cars returning from France have an average 80 bottles of wine).
- Political risk in Russia is high. Why?
Corporate taxation is another issue. High political risk in Russia is due to high taxes on business operations. High taxes encourage off-the-books cash and sheltered from the eyes of tax authorities.
This, in turn, creates a liquidity squeeze that prevents companies from paying employees, and unpaid, disgruntled workers contribute to political instability.
Diverse geographical activity requires special attention to tax laws. Companies minimize their tax liability by shifting the location of income (e.g., foreign companies in the U.S. cost the government $3 billion a year in lost revenue). For example: using the concept of“earnings stripping,” foreign companies reduce earnings by making loans to U.S. affiliates rather than using direct investment to finance U.S. activities. The U.S. subsidiary can deduct the interest it pays on such loans and thereby reduce its tax burden.
Seizure of Assets
The ultimate threat of a government can pose is seizing assets.
- What is ‘expropriation’?
Expropriation refers to governmental action to dispossess a foreign company or investor.
Compensation is generally provided, although not often in a “prompt, effective and adequate” manner.
- How does ‘expropriation’ differ from ‘confiscation’?
If no compensation is provided, the action is referred to as confiscation. International law prohibits a government to take foreign property without compensation.
Nationalizationis typically broader in scope than expropriation and occurs when the government takes control of some or all of the enterprises in a particular industry.
International law is generally interpreted as prohibiting any act by a government to take foreign owned property without compensation. Nationalization is generally broader in scope than expropriation; it occurs when the government takes control of some or all of the enterprises in a particular industry. International law recognizes nationalization as a legitimate exercise of government power, if it satisfies a “public purpose” and is accompanied by “adequate payment.”
In 1959, Castro nationalized the property of American sugar producers to retaliate for American import quotas, yet Cuban-owned production was not nationalized.
Castro offered compensation in the form of Cuban government bonds, which was adequate under Cuban law, but the U.S. viewed this particular act of nationalization as discriminatory because of the low compensation.
South Korea nationalized Kia, the nation’s number three automaker, in the wake of the Asian currency crisis. Additionally, some industry observers believe that the needed reform of Japan’s banking system will require nationalization.
Short of outright expropriation or nationalization, thephrase creeping expropriation applies to limits on economic activities of foreign firms in particular countries. These have included limitations on repatriation of profits, dividends, royalties, and technical assistance fees from local investments or technology arrangements.
Other issues include increased local content requirements, quotas for hiring local nationals, price controls, and other restrictions affecting return on investment.
Global companies suffer discriminatory tariffs and nontariff barriers that limit market entry, patents and trademarks, and intellectual property.
For example, intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products.
When governments expropriate foreign property, there are impediments to reclaiming that property (e.g., if a foreign state is involved, U.S. courtswill not get involved).
Representatives of expropriated companies seek recourse at the World Bank Investment Dispute Settlement Center or buy expropriation insurance from a government agency such as OPIC.
International Law
International lawmay be defined as the rules and principles that nation-states consider binding upon themselves.
International law pertains to property, trade, immigration, and other areas traditionally under the jurisdiction of individual nations.
International law applies only to the extent that countries are willing to assume all rights and obligations.
The law originally dealt only with nations as entities, but a growing body of law rejected the idea that only nations can be subject to international law.
Paralleling the expanding body of international case law in the twentieth century, new international judiciary organizations have contributed to the creation of an established rule of international law.
Disputes arising between nations are issues of public international law and may be taken before the World Court or the International Court of Justice.
Other sources of modern international law include treaties, international custom, judicial case decisions in the courts of law of various nations, and scholarly writings.
What happens if a nation has allowed a case against it to be brought before the International Court of Justice and then refuses to accept a judgment against it? The plaintiff nation can seek recourse through the United Nations Security Council.
Common Law versus Civil Law
Private international law applies to disputes arising from transactions between companies of different nations.
Law in the Western world can be traced to two sources: Rome, from which the continental European civil law tradition originated, and English common law, from which the U.S. legal system originated.
- What are the primary differences between ‘civil law’ and ‘common law’?
A civil-law country is one in which the legal system reflects the structural concepts and principles of the Roman Empire in the sixth century.
In common-law countries, many disputes are decided by reliance on the authority of past judicial decisions(cases)A common-law legal system is based on the concept of precedent, sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular issue are binding on a court when that same issue is presented later. Precedent and stare decisis represent the fundamental principle of common law decision making. In American and English law, the law inferred from past judicial decisions equals the law set down in codes.
The Uniform Commercial Code (UCC), fully adopted by 49 U.S. states, codifies a body of specifically designed rules covering commercial conduct. In common-law countries, companies are legally incorporated by state authority. In civil-law countries, a contract between two or more parties, who are fully liable for the actions of the company, forms a company. The host country’s legal systemdirectly affects the form a legal business entity will take.
Former British colonies founded their systems on common law. Roman law influenced Continental Europe. Asian countries use both. Scandinavian legal systems are mixed.
Most countries have legal systems based on civil-law traditions.
In Eastern and Central Europe in the post-Communist era, consultants representing both common- and civil- law countries try to influence the process.
In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German civil-law tradition prevails.
In Eastern Europe (particularly Russia), the U.S. has greater influence, and Germany accuses the U.S. of promoting a system so complex that it requires lawyers. The U.S. says that the German system is outdated.
Islamic law
The legal system in many Middle Eastern countries, is identified with the laws of Islam, which are associated with “the one and only one God, the Almighty.” In Islamic law, the sharia is a comprehensive code governing Muslim conduct in all areas of life, including business.
The code is derived from two sources:
- The Koran, the Holy Book written in Arabic that is a record of the revelations made to the Prophet Mohammed by Allah.
- The Hadith, which is based on the life, sayings and practices of Muhammad.
The orders and instructions found in the Koran are analogous to code laws; the guidelines of the Hadith correspond to common law. Any Westerner doing business in Malaysia in the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities.
Sidestepping Legal Problems: Important Business Issues
How can the astute, proactive marketer help prevent conflicts?
Clearly, the global legal environment is very dynamic and complex. Therefore, the best course to follow is to get expert legal help.
This helps prevent conflicts concerning establishment, jurisdiction, patents and trademarks, antitrust, licensing and trade secrets, bribery, and advertising and promotion.
Jurisdiction
Company personnel working abroad should understand the extent to which they are subject to the jurisdiction of host-country courts. Jurisdiction pertains to global marketing insofar as it concerns a court’s authority to rule on particular types of issues arising outside of a nation’s borders or to exercise power over individuals or entities from different countries.
Employees of foreign companies working in the United States must understand that courts have jurisdiction to the extent that the company can be demonstrated to be doing business in the state in which the court sits.
Jurisdiction was an issue in a trade dispute that pitted Revlon and United Overseas Limited (UOL) in U.S. District Court for the Southern District of New York, charging the British company with breach of contract. UOL asked the court to dismiss the complaint; Revlon cited the presence of a UOL sign about the entrance to its New York offices. The court rejected UOL’s motion to dismiss.
Intellectual Property: Patents, Trademarks, and Copyrights
Patents and trademarks that are protected in one country are not necessarily protected in another, so global marketers must ensure that patents and trademarks are registered in each country where business is conducted.
A patent is a formal legal document that gives an inventor the exclusive right to make, use, and sell an invention for a specified period of time.
A trademark is defined as a distinctive mark, motto, device or emblem that a manufacturer affixes to a particular product or package to distinguish it from goods produced by other manufacturers. (Exhibit 5 – 7 and 5 – 8).
A copyright establishes ownership of a written, recorded, performed, or filmed creative work.
Counterfeiting is the unauthorized copying and production of a product.
An associative counterfeit, or imitation, uses a product name that differs slightly from a well-known brand but is close enough that consumers will associate it with the genuine product. (Exhibit 5-9).