CHAPTER 4 – The Political, Legal, and Regulatory ...

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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

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

• 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?

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

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 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 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 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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