Chapter 5

The Political, Legal, and

Regulatory Environments
of Global Marketing

© 2005 Prentice Hall 5-1

 The Political Environment
Political cultures provide context
– Governing party’s attitude toward
• Sovereignty
• Political risk
• Taxes
• Threat of equity dilution
• Expropriation

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 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 5-3

 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 5-4

 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 5-5

 Categories of Political Risk
EIU BERI PRS Group
Economic Intelligence Business Environment World Political
Unit Risk Intelligence Risk Forecasts
Fractionalization of political turmoil
War the political spectrum probability
Fractionalization by
language, ethnic,
and/or religious Equity
Social unrest groups restrictions
Restrictive/coercive
measures required to local operations
Orderly political transfer retain power restrictions
Mentality (xenophobia,
Politically motivated nationalism, Taxation
violence corruption, nepotism) discrimination

© 2005 Prentice Hall 5-6

 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

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 Expressions and Symptoms of
Political Risk
The less developed
a country the
greater the risk
Increased economic
uncertainty
increases risk
Political risk
insurance

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 Expressions and Symptoms of
Political Risk
High

Triad
Income

Countries
Russia,
Indonesia,
China

Low
Risk High

© 2005 Prentice Hall 5-9

 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 5-10

 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 5-11

 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 5-12

 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 5-13

 Common Law vs. Civil Law
Common Law country Civil Law country
– Disputes are decided by – Legal system reflects the
reliance on the authority of structural concepts and
past judicial decisions principles of the Roman
– Companies are legally Empire
incorporated by state – Companies are formed by
authority contract between two ore
– USA, GB, India, Malaysia, more parties who are fully
Canada liable for the actions of the
company
– Continental Europe, Japan,
Korea, Thailand, China, etc.

© 2005 Prentice Hall 5-14

 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 5-15

 Sidestepping Legal Issues
Get expert legal help
Preventing conflicts
– Establish jurisdiction
– Protecting intellectual
property
– Avoid bribery

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 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 courts
Courts have jurisdiction if it can be demonstrated
that the company is doing business in the state the
court sits

© 2005 Prentice Hall 5-17

 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.

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 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 5-19

 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

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 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 5-21

 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

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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 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 5-23

 2005 Corruption Perceptions Index
7 ‘cleanest’ countries 7 most corrupt countries
1. Iceland 9.7 1. Bangladesh 1.7
2. Finland 9.6 2. Chad 1.7
3. New Zealand 9.6 3. Turkmenistan 1.8
4. Denmark 9.5 4. Myanmar 1.8
5. Singapore 9.4 5. Haiti 1.8
6. Sweden 9.2 6. Nigeria 1.9
7. Switzerland 9.1 7. Equatorial Guinea 1.9

© 2005 Prentice Hall 5-24

 2005 Bribe Payers Index
Countries with lowest Countries with highest
propensity to bribe propensity to bribe
– Australia 8.5 – Russia 3.2
– Sweden 8.4 – China 3.5
– Switzerland 8.4 – Taiwan 3.8
– Austria 8.2 – South Korea 3.9
– Canada 8.1 – Italy 4.1
– Netherlands 7.8 – Hong Kong 4.3
– Belgium 7.8 – Malaysia 4.3

© 2005 Prentice Hall 5-25

 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
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