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Chapter 5
The Political
and Legal
Environment
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Home Country Political and Legal
Environment
2
• While deciding upon a firm’s international marketing
activities the manager needs to concentrate on three
areas:
– The political and legal circumstances of the home
country.
– The political and legal circumstances of the host
country.
– The bilateral and multilateral agreements, treaties, and
laws governing the relations between host and home
countries.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
3
• Firms are affected by government policies and the
legal system, and this has a major impact on a firm’s
opportunities abroad.
• Minimum wage legislation affects the international
competitiveness of a firm using production processes
that are highly labor intensive.
• The cost of domestic safety regulations may
significantly affect the pricing policies of firms in their
international marketing efforts; example being
Environmental Superfund.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
4
• Governments may attempt to aid and protect the
international marketing efforts of companies through
gray market activities.
• Gray market goods are products that enter markets in
ways not desired by their manufacturers.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
5
• Four main areas of governmental activities which are
of major concern to the international marketer are:
–
–
–
–
Embargoes and trade sanctions
Export controls
Import controls
Regulation of international business behavior
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
6
• Embargoes and sanctions - Government actions to
distort the free flow of trade in goods, services, or
ideas for adversarial and political purposes.
• Reasons for the impositions are varied, ranging from
human rights to nuclear nonproliferation to terrorism.
• Unilateral impositions result in shift in trade, and do
not produce the desired result.
• Sanctions must be imposed multilaterally.
• Governments often consider sanctions as being free
of cost.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
7
• Export control
– Designed to deny or delay the acquisition of
strategically important goods by the adversaries.
– The legal basis for export controls varies across
nations.
– Dual use items, which are goods useful for both
military and civilian purposes, are controlled by the
Joint List of the European Union.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
8
• Export control
– The U.S. export control system is based on the
• Export Administration Act (Department of Commerce)
• Arms Expert Control Act (Department of State)
– The exporter must obtain an export license, which
consists of written authorization to send a product
abroad.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 5.3 - The U.S. Export Control System
9
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Home Country Political and Legal
Environment
10
• Export control
– Restricts the flow of materials and helps avoid the
proliferation of weapons of mass destruction.
– Reduces flows of technological knowledge to control
the sophistication of armaments used by insurgent
groups.
– Imposes financial controls which inhibit funding for
terrorist training.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
11
• Import controls
– Either all imports or imports of particular products are
controlled through tariff and non tariff mechanisms.
– Tariffs - Taxes imposed on imports, which
subsequently increase the price of the imported
product in the domestic market.
– Voluntary restraint agreements - Nontariff trade
barriers in the form of self imposed restrictions and cut
backs aimed at avoiding punitive trade actions from the
host country.
– Quota systems - Reduce the volume of imports
accepted by a country.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
12
• Problems faced while administering import controls:
– They exact a huge price from domestic consumers.
– The social cost of these controls may be damaging to
the economy.
– They bring about downstream change in import
composition.
– They often do not to work.
– Supply may respond to artificial stimulation and grow
far beyond demand.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Home Country Political and Legal
Environment
13
• Regulation of international business behavior
– Boycotts - Firms refuse to do business with someone,
often for political reasons.
– Antitrust measures - Firms restrict competition.
– Bribery and corruption - Passing laws in the sphere of
ethics that affect U.S. firms operating overseas.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
14
• Political risk - The risk of loss when investing in a
given country caused by changes in a country’s
political structure or policies.
• Major types of political risk
– Ownership risk - Exposes property and life.
– Operating risk - Interference with the ongoing
operations of a firm.
– Transfer risk - Encountered while shifting funds
between countries.
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Exhibit 5.4: Exposure to Political Risk 15
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
16
• Government policies to combat political risks include
– Expropriation - Seizure of foreign assets by a
government with payment of compensation to the
owners.
– Confiscation - Transfer of ownership from a foreign
firm to the host country without compensation for the
firm.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
17
• Government policies to combat political risks include
– Domestication - Demanding partial transfer of
ownership and management, and imposing regulations
to ensure that a large share of the product is locally
produced and major profit is retained in the country.
– Effects of domestication include:
•
•
•
•
Poor cooperation and communication from managers.
Increased costs, inefficiency, and lower-quality products.
Disruption of international distribution plans.
Inefficiencies due to a lack of market discipline.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment 18
• Common risks faced by most businesses operating
abroad:
–
–
–
–
Shortage of foreign currency.
Difficulty dealing with exchange controls.
Prolonged negotiations with government officials.
Increase in tax rates or stricter applications of the host
country’s tax codes.
– Government control on the prices of imported products
or services.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
19
• Countries differ in their laws as well as in their
implementation of these laws.
• Two major legal systems popular worldwide are:
– Common law - Based on tradition and depends less on
written statutes and codes than on precedent and
custom.
– Code law - Based on a comprehensive set of written
statutes that spell out legal rules explicitly; based on
Roman law.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
20
• Antidumping laws – Prohibit below-cost sales of
products.
• Laws may be designed to protect domestic industries
and reduce imports.
• The enforcement of laws may have a different effect
on national and foreign marketers.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Host Country Political and Legal
Environment
21
• Dealing with the intricacies of national politics:
– Ignore prevailing rules and expect to get away with it.
– Provide input to trade negotiators and expect problems
to be resolved through multilateral negotiations.
– Develop coalitions or constituencies to motivate
legislators and politicians to consider and implement
change through:
• Recasting or redefining issues.
• Highlighting direct linkages and their benefits to
legislators.
• Lobbying.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
22
• International politics
– Political relations and conflicts between countries can
have a profound impact on firms trying to do
business internationally.
– If bilateral political relations between countries
improve, business can benefit.
– Apart from being aware of political currents worldwide,
an international marketer must anticipate changes and
plan strategies in accordance.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
23
• International law
– No enforceable body of international law exists;
– Treaties and agreements respected by a number of
countries influence international business operations.
– Firms are restricted by both home and host country
laws.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
24
• International law
– In case of a conflict in deciding which country’s law to
follow, firms can choose either arbitration or litigation.
• Litigation often involves extensive delays and is very
costly.
• Arbitration procedures are often included in the original
contract.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
25
• International terrorism and marketing
– Terrorism is the systematic use (or threat) of violence
aimed at attaining a political goal and conveying a
political message.
– Terrorists direct their strikes at business more than any
other target.
– Terrorism creates new opportunities for firms in a few
industries like construction, security, and information
technology.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
• International terrorism and marketing
– Direct effect of terrorism on business activities are the
immediate cost levied on individual firms.
– Indirect effect of terrorism on business activities are in
the form of real or perceived decline in per capita
income, purchasing power, and stock market values.
– Chill effect - A phenomenon where uncertainty about
the state of a nation’s economy leads to a sharp
reduction in demand for both consumer and industrial
goods.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The International Environment
• International terrorism and marketing
– Physical damage inflicted by terrorism disrupts power
supply, communication, transport and other forms of
infrastructure, thereby disturbing the supply of inputs,
resources and services.
– Terrorism deteriorates transnational relationships.
– Regulations imposed by the government to reduce a
country’s vulnerability to terrorism may delay the
supply of inputs, increase administrative burden and
require firms to invest in new procedures.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 5.6 - A Model of Corporate
Preparedness for Terrorism
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Ethical Issues
• The ethical obligations faced by multinational
enterprises include:
– Corporate governance and responsibility
– Intellectual property rights
– Bribery and corruption
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ethical Issues
• Corporate governance and responsibility
– Corporate governance - Relationships among stake
holders that determine and control the strategic
direction and performance of an organization.
– Its key elements include:
• Transparency of a firm’s operation.
• Financial results.
• Principles by which it measures sales, expenses, assets,
and liabilities.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Exhibit 5.7 - Comparative Corporate
Governance Regimes
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ethical Issues
• Intellectual property - Legal entitlement of exclusive
rights to use an idea, piece of knowledge, or
invention.
• Bribery and corruption
– The Foreign Corrupt Practices Act (FCPA) was passed
in 1977 to disallow U.S. firms to bribe foreign officials
for business purposes.
– Functional lubrication - The “express fee” charged in
many countries, which has several characteristics: the
amount is small, it is standardized, and is passed on to
others involved in the processing of the documents.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ethical Issues
• Bribery and corruption
– In the process driven by “individual greed,” the amount
depends on the individual official and is for the official’s
own personal use.
– In 1995, the Organization of American States (OAS)
officially condemned bribery.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ethical Issues
• Bribery and corruption
– The Organization for Economic Cooperation and
Development (OECD) in 1999 agreed to change the
bribery regulations among its member countries to
prohibit the tax deductibility of improper payments.
– The Sarbanes-Oxley Act of 2002 was intended to
protect investors by improving the accuracy and
reliability of corporate disclosures.
© 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.