Politics

CHAPTER 4

The Political, Legal, and Regulatory Environment of Global Business

What makes global marketing so different from domestic marketing?

While marketers use essentially the same strategic elements (the 4 p’s) to market their

products the environment (PELFREC, plus geography) of different markets (countries) affect

how these elements can be used. This chapter focuses on the political and legal aspects of the

global environment.

POLITICAL ENVIRONMENT

Politics has to do with the way power is gained and used and it is closely related to the

legal system since governments, and the courts they appoint, determine the laws and the eventual

application of those laws and regulations.

Permission needed to do business in foreign countries, hence the need to assess both

domestic and foreign political climate. A firm is a guest in the foreign market and therefore

assumes high risk. This makes political risk assessment very important. National environments

differ because of geography, resources, economics, labor skills and supply, politics, culture.

Governments react to political pressures and the local political reality gets tied into the view of

global business operations. Since government determines how people express their will,

government plays a vital role in global trade. Form of government includes:

(a) Parliamentary Government (use of political parties to crystallize public

opinion). This type of government can be classified as Republic (two or multi

party system) or as Monarchies (constitutional election headed by a

representative of the Queen/King).

(b) Absolutist - absolute monarchies and dictatorships

Global Marketing Spring 2001

Political parties influence government attitude towards business as well as determines the

role of global businesses in the economy. Party philosophy affect government policy hence

stability/instability of policies important to business. Radical changes (in government or policy)

create uncertainty and hence risk. Governments may use foreign businesses as a scapegoat

9target for social discontent and frustration) by stating that they are exploiters. Firms must

therefore assess the political climate and political vulnerability in the foreign market by viewing:

Form of government

Stability of the government

Stability of government policy

Investment climate

Nationalism

One corner stone of political is the notion of sovereignty or the right to self-determination

among nation states. Sovereignty suggests “freedom or independence” in that that each “state”

or political entity respects the rights of other states to decide things as they wish. This freedom

to make decisions within ones borders brings with it a certain degree of political risk.

For the firm, political risk results for the potential adverse effects that a change in

government, or a change in government policy may have on the business operations of the firm.

Which political risk can present business opportunities, firms generally want political risk to be

relatively low, an indication that the country is political stable and that policies do not change

radically from one government to another or from one period to another.

Among some of the policy changes that can adversely affect business operations are:

Taxes

Ownership and/or control of assets in foreign countries

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Confiscation (ownership taken away without compensation), expropriation

(ownership taken away but with some, though often not full compensation) of

assets, nationalization (government takeover or orders sale of assets to citizens).

Political Vulnerability

Some products are more vulnerable than others in that the product receives more political

attention and therefore create more risk for the firm. For example, in times of rising prices oil

becomes a politically sensitive product. This can lead to social and labor agitation, import

quotas, expropriation, nationalization and so on. Indeed, the attitudes to political vulnerable and

sensitive products are subject to change at very short notice.

Since political risk increases if the product is politically sensitive marketers must find out

or detect the degree of vulnerability by addressing the following:

Is the product critical to the economic debate in the foreign market?

Is the product critical to the political debate in the foreign market?

Is the product in an industry that employs most of the people in the country?

Do other local industries depend on your output?

Is your product essential to national security?

Are you competing with local/domestic industry in the foreign market?

Is your product a danger to health or the environment?

Does your product drain resources?

Does your product or firm drain foreign exchange?


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Forecasting Political Risk

Firms can use quantitative or qualitative methods to assess political risk. Political risk

assessment helps in deciding about risk insurance, data gathering and intelligence networking,

development of contingency planning, establishment of early warning system.

Types of Political Risk

Confiscation (take-over without reimbursement)

Restriction

Price Controls

Labor Policy

Expropriation (takeover/unwilling sale with full or partial payment)

Domestication (local ownership, management, material inputs)

Nationalization (government ownership of industry)

Economic Risk

In the political setting, economic risk comes under the banner of:

National security

Protection of infant industry

Protection of foreign exchange (exchange Controls)

Tax/Revenue controls

Price controls

Import/Export (Trade) restrictions

Political sanctions

Violence and Labor problems

Political Reprisals


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Avoiding Political Risk

1) Refrain from political activity

2) Maintain a low profile in the foreign market

3) Integrate the firm into the economy/society

4) View net contribution to the host country

5) Use joint ventures

6) Expand investment base (use several investors including locals)

7) Licensing

8) Control of global marketing & distribution

9) Planned domestication

10) Development of local suppliers

11) Adopt a low-key reactive style rather than an aggressive management style in

the foreign market

12) Develop and maintain a global image

13) Resist pressure to pay bribes and or take sides in political contests

14) Keep an eye on the local environment

Legal Issues

The legal system varies from nation to nation - - no uniform system of laws exists. The

notion that there is “International Law” is a myth. While there are some legal principles that

countries consider binding, there is no legal mechanism that can enforce these principles in much

the same way that they are enforced inside a given country. Therefore, it is impossible for a

citizen of one nation to bring a case against a citizen of another country in an International Court

of law. Generally, the International Court is used to help address issues between nation states


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with full recognition that either party may decide not to abide by the judicial decision.

International law is based upon treaties between or among nation states covering such issues as

trade, and war. In this respect, the decision of the court is used to help create international and/or

political pressure in the United Nations or similar bodies.

Issues

Jurisdiction: In the case of a trade disagreement, which set of laws should the disputing

parties use to settle the dispute? This is not an automatic decision. The parties to the agreement

should therefore stipulate conditions and applicable laws for settling disputes. In attempting to

decide on jurisdiction pay attention to rules of competition. For example a firm from country “A”

signs an agreement with a firm from country “B” but the agreement was signed in country “C”

and the laws across all three countries differ. Which set of laws should be used to settle disputes,

is it A’s or B’s or is it C’s laws? It is impossible to answer this question unless the parties to the

agreement so specify in the agreement. It is important that the parties to the agreement include a

jurisdiction (settlement of dispute) clause in their contract/agreement.

Intellectual Property: Patents and trademarks do not receive universal protection simply

because they are registered in one country (note that to some extent this is changing as the WTO

seeks to expand global trade. However, enforcement continues to be problematic). The

worldwide demand for some goods have given rise to counterfeiting or unauthorized production

and sale of products to include use of restricted technology, patents, and brand name.

Bribery and Corruption

Bribery is often used to buy influence and lessen political and other kinds of risk.

However, in the long run, bribery may result to negative exposure in the home and foreign

market and can affect the firms programs and standing and result in high fines and or criminal


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penalty. Under the Foreign Corrupt Practices Act (FCPA, 1977) it is illegal for American

companies to pay bribes to foreign officials or political parties to retain or gain business. While

many other countries have similar rules enforcement is often a major problem. Criticism of the

law includes claims of moral imperialism (the US telling others what is good and right for them)

and claims that the law puts American companies at a disadvantage since firms from other

countries often pay bribes to foreign officials. For example, it is illegal for German firms to pay

a bribe inside Germany but it is perfectly legal for them to do so in a foreign country and claim it

as an international business expense. Corporate codes of conduct and ethical/moral sensitivity

and training can be used to help employees recognize and avoid ethical dilemmas such as those

brought about by requests for bribes.

Conflict Resolution Options

Conflicts between trading partners does not always have to end up in court. The

parties to an agreement can stipulate how and where conflicts will be handled. Given the

relatively high cost of litigation and the negative publicity that goes with it, many firms

are opting for arbitration and other forms of non-court based solutions to disputes. With

arbitration the parties agree to have a third party hear and decide the case with the

decision being “binding” (the parties agree before hand to legally accept the decision). If

one party refused to accept the decision, the other party can go to court to enforce the

decision that was reached. Thus, while the courts can still be used, its purpose is to

enforce the decision not to decide on the merits/demerits of the dispute.

Regulating Global Trade

Much of the world’s trade is regulated by regional and or international

organizations. Much of the world is divided into huge trading blocks (Europe, Central


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Europe, the Americas, Asian pacific Rim, Africa, Middle East) with subdivisions within

these major blocks. Chief among the trade blocks or organizations are:

ASEAN (Association of Southeast Asian Nations)

EU (European Union)

CAEU (Council of Arab Economic Unity)

CARICOM (Caribbean Economic Community)

CEFTA (Central Europe Free Trade Area)

ECCAS (Economic Council of Central African States)

IMF (International Monetary Fund)

LAFTA (Latin American Free Trade Association)

NAFTA (North American Free Trade Association)

WTO (World Trade Organization – successor to GATT – General Agreement of

Tariffs and Trade)


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Documents

Politics