© 2005 prentice hall5-1 chapter 5 the political, legal, and regulatory environments of global...
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© 2005 Prentice Hall 5-1
Chapter 5The Political, Legal, and Regulatory Environments
of Global Marketing
© 2005 Prentice Hall 5-2
The Political Environment
Political cultures provide context– Governing party’s attitude toward
• Sovereignty• Political risk• Taxes• Threat of equity dilution• Expropriation
© 2005 Prentice Hall 5-3
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 Hall 5-4
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 Hall 5-5
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 Hall 5-6
Categories of Political RiskEIU
Economic Intelligence Unit
BERIBusiness Environment
Risk Intelligence
PRS Group World Political Risk Forecasts
WarFractionalization of
the political spectrumpolitical turmoil
probability
Social unrest
Fractionalization by language, ethnic, and/or religious
groupsEquity
restrictions
Orderly political transfer
Restrictive/coercive measures required to
retain powerlocal operations
restrictions
Politically motivated violence
Mentality (xenophobia, nationalism,
corruption, nepotism)Taxation
discrimination
© 2005 Prentice Hall 5-7
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 Hall 5-8
Expressions and Symptoms of Political Risk
The less developed a country the greater the riskIncreased economic uncertainty increases riskPolitical risk insurance
© 2005 Prentice Hall 5-9
Expressions and Symptoms of Political Risk
Low
High
HighRisk
Inco
me Triad
CountriesRussia,
Indonesia, China
© 2005 Prentice Hall 5-10
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 Hall 5-11
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 Hall 5-12
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 Hall 5-13
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 Hall 5-14
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 Hall 5-15
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 Hall 5-16
Sidestepping Legal Issues
Get expert legal help
Preventing conflicts– Establish jurisdiction
– Protecting intellectual property
– Avoid bribery
© 2005 Prentice Hall 5-17
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 courtsCourts have jurisdiction if it can be demonstrated that the company is doing business in the state the court sits
© 2005 Prentice Hall 5-18
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 Hall 5-19
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 Hall 5-20
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 Hall 5-21
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 Hall 5-22
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 Hall 5-23
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 5-24
2005 Corruption Perceptions Index
7 ‘cleanest’ countries
1. Iceland 9.7
2. Finland 9.6
3. New Zealand 9.6
4. Denmark 9.5
5. Singapore 9.4
6. Sweden 9.2
7. Switzerland 9.1
7 most corrupt countries
1. Bangladesh 1.7
2. Chad 1.7
3. Turkmenistan 1.8
4. Myanmar 1.8
5. Haiti 1.8
6. Nigeria 1.9
7. Equatorial Guinea 1.9
© 2005 Prentice Hall 5-25
2005 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 Hall 5-26
Conflict Resolution
Country Lawyers per 100,000 people
USA 290
Australia 242
United Kingdom 141
France 80
Germany 79
Hungary 79
Japan 11
Korea 3