International Marketing

CHAPTER 04 THE POLITICAL,

LEGAL, AND REGULATORY
ENVIRONMENTS OF GLOBAL
MARKETING
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Prelude
The global marketer must attempt to comply with

each nations laws and regulations with respect to the

cross-border movement of services, people, money,
and know-how.
Laws and regulations that change frequently or are
ambiguous can hamper the companys activities.

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Overview
The Political Environment
International Law
Ways to Avoid Legal Problems
Conflict Resolution, Dispute Settlement &

Litigation
International Institutions and their Political Role
Summary

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Learning Objective
Knowing the importance of political environments

for global marketing activities

Understanding the consequences of different legal
systems
Knowing the influence of the political and legal
framework on global company activities
Learning about opportunities of dispute settlement
in international litigations.

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

The Political Environment

Global marketing activities influenced and made up of governmental

institutions, political parties, and organizations that rulers and people use
to wield power
Each nations political culture reflects the importance of the government

and legal system.

Issues for foreign investors include the governing partys view on

sovereignty, political risk, taxes, equity dilution, and expropriation.

Environment determines attitude towards

Sovereignty
Political risk
Taxes
Dilution of equity control
Expropriation

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Nation-States and Sovereignty

Every sovereign state is bound to respect the independence

of every other sovereign state, and the courts in one
country will not sit in judgment on the acts of government

of another done within its territory.

U.S. Supreme Court Justice Fuller

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Nation-State and Sovereignty

Sovereignty = supreme and independent political
authority.
Many governments in developing countries exercise
control over their nations economic development by
passing protectionist laws and regulations.
Countries in advanced stages of economic development

establish antitrust laws and regulations because they do

not want to restrict free trade.
Advanced countries laws may extend to political, cultural,
and even intellectual activities and social conduct.
Privatization of industry is a global trend and reduces
government involvement as a supplier of goods and
services.
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Nation-State and Sovereignty

Implies that the nation-state
Is decision making authority of last resort in its territory

Is independent from other nation-states

Nation-state activities governed by

Economic development
Political and economic system

Global market integration erodes economic sovereignty

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Nation-State and Sovereignty

In France, laws forbid use of foreign words such as le

weekend or le marketing in official documents. Forty

percent of songs played by popular radio stations must
be in French.

Example: Mexican government controlled more than

1,000 parastatals at one time. By the early 1990s, the

Mexican president had presided over the sale of full or
partial stakes in enterprises worth $23 billion, including
airlines, mines, and banks.
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Political Risk (1)

Risk of change in political

environment or
government policy that
would adversely affect a
companys ability to
operate effectively and
profitably.
A lower level of political risk
tends to attract higher
investments
When perceived political
risk is high, a country will
have a difficult time
attracting foreign direct
investment

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Political Risk (2) (International Examples)

Former Russian president Boris Yeltsins political
maneuverings created a high level of political risk. His

successor, Vladimir Putin, is enacting reforms and

strengthening intellectual and property law in an effort to
gain membership into the WTO and attract foreign
investment. Still, Russia is viewed as having high political
risk.
Companies can buy insurance to protect against political
risk. The U.S. government agency the Overseas Private
Investment Corp. (OPIC; http://www.opic.gov) offers
insurance to companies doing business abroad. Japan,
Germany, France, Canada, Britain offer similar protection.
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Political Risk (3)

Executives often fail to

understand political risk because

they have not studied political
science.
Businesspeople need to study the
political environment through
reading publications such as The
Economist or Financial Times or by
consulting web-based sources
like:
the Business Environment Risk

Intelligence (http://www.beri.com)
or
the PRS Group
(http://www.prs.com).

Some examples of political risk

include:

War
Social unrest
Politically motivated violence
Transparency
Social conditions (population
density and wealth
distribution)
Corruption, nepotism
Crime
Labor costs
Tax discrimination

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Taxes (1)
Governments rely on tax revenues to generate funds necessary 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.
In China, for example, even though import duties have dropped since it joined the
WTO, many imports are subject to double-digit duties plus a 17 % value-added tax.
As a result, significant quantities of oil, cigarettes, photographic film, personal
computers, and other products are smuggled into China. It is estimated that 90 %
of cigarettes are smuggled into China. Companies can still profit. For Philip Morris,
this means annual sales of $100 million to Hong Kong distributors! Cross-border
shopping can be spurred on by high excise and VAT taxes. It is estimated that
British citizens who travel to France by car return home with 80 bottles of wine.
Corporate taxation is another issue. The high level of political risk currently evident
in Russia can be attributed in part to excessively high taxes on business operations.
High taxes encourage many enterprises to engage in cash or barter transactions
that are off the books and sheltered from the eyes of tax authorities. This, in turn,
has created a liquidity squeeze that prevents companies from paying wages to
employees. Unpaid, disgruntled employees can contribute to political instability.
Putins government is pursuing a tough new tax policy in order to shrink Russias
deficit and qualify for IMF loans.
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Taxes (2)
Government taxation policies
High taxation can lead to black market growth and cross-border

shopping

Corporate taxation
Companies attempt to limit tax liability by shifting location of income

Many companies make efforts to minimise tax liability by

shifting locations of income

Example earnings stripping

Foreign company reduces earnings by making loans to U.S. affiliates rather

than using direct investment to finance U.S. activities

U.S. subsidiary deducts the interest paid on these loans, thereby reducing its
tax burden. It is estimated that tax minimization costs the U.S. government $3
billion a year.

A variety of international and bilateral treaties apply.

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Seizure of Assets (1)

Expropriation=governmental action to dispossess or control a foreign company or

investors ownership
Compensation should be provided in a prompt, effective, and adequate
manner
Confiscation = nationalisation without compensation
Creeping expropriation = severe limitations on economic activities.

May include
Limits on repatriation of profits, dividends, or royalties
Technical assistance fees
Increased local content laws
Quotas for hiring local nationals
Price controls
Discriminatory tariff and nontariff barriers
Discriminatory laws on patents and trademarks

Nationalization=host government takes control of some or all of the enterprises

in an entire industry
Acceptable according to international law if
Satisfies public purpose
Includes compensation
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Seizure of Assets (2)

(Int. Cases)

In the mid-1970s, Johnson & Johnson and other foreign investors in India

had to submit to a host of government regulations to retain majority equity

positions in companies already established. Many of these rules were
copied by Malaysia, Indonesia, the Philippines, Nigeria, and Brazil. By the
late 1980s, after a lost decade in Latin America characterized by debt
crises and low GNP growth, lawmakers reversed many of these restrictive
and discriminatory laws. The end of the Cold War contributed significantly
to these changes.

It is difficult to reclaim expropriated property. U.S. courts will not get

involved if foreign governments are involved. Companies can seek

recourse through the World Bank Investment Dispute Settlement Center.

Fidel Castros Cuban government nationalized property of American sugar companies.

The government offered Cuban bonds for compensation, which was all that was
required under Cuban law.
South Korea recently nationalized Kia (number-three automaker) in the wake of the
Asian currency crisis.

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Dilution of Equity Controls

In lower-income countries there is often political

pressure for national control of foreign-owned

companies
Goal of national governance: protect the right of
national sovereignty
Political pressure often causes companies to take
local partners (strategic alliances, joint-ventures)

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

International Law

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

 International law = the rules and principles nation-states

consider binding upon themselves
Two categories
Public law, or Law of Nations
International Commercial Law

Two fundamentally different legal systems

Code law
Based on written norms (codices), supplemented by judicial decisions
E.g., trademarks must be registered

Case law
Rests on tradition and precedence stemming from past jurisdiction
E.g., trademarks are established by prior use

 Disputes between nations are issues of Public

International Law.
To reduce legal uncertainty, international organisations
attempt to provide guidelines
World Court or The United Nations International Court of

Justice (ICJ)
Judicial arm of the United Nations
If a nation refuses to accept a decision against it made by the
World Court, it can appeal to the Security Council of the
United Nations.
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

 Roots of international law can be traced to the 17th century

Peace of Westfalia. Early laws were concerned with war
and peace and political issues. As trade increased, issues of

commercial affairs grew in importance.

Code Napoleon of 1804 = prototype for the Code Law

System that predominates in Europe today.

The Napoleonic Code of 1804 drew on the Roman legal
system and is the basis for continental European law
today. Code law is also known as civil law.
The U.S. legal system is based on English Civil Law also
called English Common Law.
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Common Law versus Civil Law

Common law country
Disputes are decided by reliance

on the authority of past judicial

decisions
Companies are legally

incorporated by state authority

Code law is used in few areas; the

Civil law country

Legal system reflects the structural

concepts and principles of the Roman

Empire
Companies are formed by contract

between two or more parties who are

fully liable for the actions of the
company

U.S. Uniform Commercial Code

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Laws in Countries
Asian countries are split.
Common Law adapters: India, Pakistan, Malaysia, Singapore, and

Hong Kong.
Civil-Law Jurisdictions: Japan, Korea, Thailand, Indochina, Taiwan,
Indonesia, and China.
Scandinavian countries use parts of both systems. The majority of
countries today have civil-law systems.
In post-communist Eastern and Central Europe, consultants from both

civil and common law countries are trying to influence the process.
Central Europe relies on the German civil law system.
Russia looks to the U.S. system.
Germans think that U.S. law is too complicated.
The U.S. thinks the German system is outdated.

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Islamic Law
Legal system in many Middle Eastern countries
Shariaa comprehensive code governing
Muslim conduct in all areas of life, including
business
Koranholy book
Hadith
Based on life, sayings, and practices of Muhammad
(PBUH)
Identifies forbidden practices, haram

Any Westerner doing business in Malaysia and in

the Middle East should have, at minimum, a
rudimentary understanding of Islamic law and its
implications for commercial activities. Brewers,
for example, must refrain from advertising beer
on billboards or in local-language newspapers.
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Sidestepping Legal Issues

Get expert legal help

Prevent conflicts
Establish jurisdiction
Protect intellectual

property
Avoid bribery

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How to Avoid Legal Problems (1)

Scope of legal regulations
Know about treaties of friendship, commerce, and
navigation
Jurisdiction
Specify which nations laws apply, when a transaction
crosses boundaries
Intellectual Property
Ensure that patents and trademarks are registered in each
country business is conducted

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Jurisdiction
Refers to a courts authority to rule on particular types of issues

arising outside of a nations 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
Revlon sued a British company, UOL, for breach of contract in a

federal court in New York. UOL claimed the court lacked

jurisdiction. Revlon cited the presence of UOLs name on an
office building in the city in which the company had 50%
ownership. The judge ruled against the motion to dismiss.
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Antitrust
Laws are designed to combat restrictive business practices and to

encourage competition.
European Commission prohibits agreements and practices that
prevent, restrict, and distort competition
However, in many European countries, individual country laws
apply to specific marketing mix elements
Enforced by FTC in the United States, Fair Trade Commission in

Japan, European Commission in European Union

The Sherman Act of 1890 prohibits certain restrictive business
practices including fixing prices, limiting production, allocating
markets, or any other scheme designed to limit or avoid
competition. Law applies to U.S. companies outside U.S. borders
and to foreign companies operating in the United States.
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Intellectual Property

4-29

Intellectual Property
Intellectual Property (cont.)
Beware of counterfeiting: the unauthorized copying and
production of a product
Beware of piracy: the unauthorized publication or
reproduction of copyrighted work
Know about international treaties, e.g.
World Intellectual Property Organization
The Patent Cooperation Treaty
European Patent Convention

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Intellectual Property
Intellectual property must be registered in each country
where business is conducted.
It is essential to know about international treaties, e.g.
World Intellectual Property Organization
The Patent Cooperation Treaty
European Patent Convention

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Intellectual Property Rights

Registered

Non-Registered

Patents

Trademarks

Trademarks /

Copyright

Design Rights

Database Rights

Domain Rights
Plant Breeder Rights

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Infringement of Intellectual Property

Patentgives an inventor exclusive right to make, use,
and sell an invention for a specified period of time
Trademarkdistinctive mark, motto, device, or emblem
used to distinguish it from competing products
Copyrightestablishes ownership of a written, recorded,
performed, or filmed creative work
Counterfeitingunauthorized copying and production of a
product
Associative counterfeit/imitationproduct name differs

slightly from a well-known brand

Piracyunauthorized publication or reproduction of
copyrighted work
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Protecting Intellectual Property

In the United States, registration is with the Federal

Patent Office
In Europe, applicants use the European Patent Office
or register country by country. European patents are
expensive because of the need to translate technical
documents into all of the languages of the European
Union.
Soon the Community Patent Convention will cover 25
countries

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Protecting Intellectual Property

World Intellectual Property Organization
Governed by the Madrid Agreement and the Madrid Protocol

Allows trademark owners to seek protection in as many as 74

countries with a single application and fee

4-35

Protecting Intellectual Property

International Convention for the Protection of Industrial
Property
Paris Convention
Honored by 100 countries
Facilitates multi-country patent registration, ensures that once a

company files, it has a right of priority in other countries for 1

year from that date

Patent Cooperation Treaty

European Patent Convention

4-36

U.S. Companies Receiving the Most Patents,

2005
Company
1.
IBM
2.
Hitachi
3.
Canon Kabushiki Kaisha
4.
Matsushita Electric Industrial
5.
Hewlett-Packard
6.
Samsung Electronics
7.
Micron Technology
8.
Intel
9.
Siemems
10. Toshiba

# of Patents
2,941
1,918
1,875
1,813
1,808
1,641
1,561
1,549
1,345
1,338

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Licensing and Trade Secrets

Licensing is a contractual agreement 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

4-38

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
The Uniform Trade Secrets Act has been adopted by
most U.S. states
TRIPS, Trade-Related Aspects of Intellectual Property
Rights signed by members of GATT

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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 U.S. 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

Omnibus Trade and Competitiveness Act

Allows for grease payments to cut red tape, such as

getting shipments trough customs, getting permits

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Conflict Resolution, Dispute

Settlement and Litigation
International lawsuits can be very complex, time-

and cost-consuming
Extrajudicial, alternative approaches often provide
faster, easier, and less expensive ways to resolve
commercial disputes
Institutions such as the International Chamber of
Commerce have established Courts of Arbitration
that can be employed by global companies
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

Conflict Resolution

Country
Lawyers per
_________100,000 People
United States

290

Australia

242

United Kingdom

141

France

80

Germany

79

Hungary

79

Japan

11

Korea

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Conflict Resolution
Litigation
Formal arbitration
Settles disputes outside of court
Groups agree to abide by panels decision

1958 United Nations Convention on the Recognition and

Enforcement of Foreign Arbitral Awards (New York

Convention)
Most important treaty regarding international arbitration signed

by 107 countries

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The Regulatory Environment

Agencies, both governmental and non-governmental,

that enforce laws or set guidelines for conducting

business
Marketing activities affected by international and
regional economic organizations
EU
WTO

4-44

International Institutions and

their Political Role

Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University

European Unions Role

Articles and directives constitute community law
European Court of Justice
Hears disputes among the member nations on trade issues (e.g., mergers,
monopolies, trade barriers)
Resolves conflicts between national law and EU law

National Laws in Europe should always be consulted (may

be more strict than community law)
World Trade Organisations (WTO) Role
Precursor GATT, established in 1948, was based on three principles
Non-discrimination
Open markets
Fair trade

Establishment of WTO in 1995 as a permanent institution

with more decision making power

Summary
Political environment is influenced by

governmental institutions, political parties, and

organisations. Risk assessment is crucial.
Legal environment consists of laws, courts,
attorneys, and legal customs and practices.
Countries follow either common-law system or
code-law system.
Regulators environment consists of agencies,
governmental and non-governmental, that
enforce laws or set guidelines for conducting
businesses.
Ms. Adiba Anis, Lecturer, School of Business, Bangladesh Open University