THE POLITICAL ENVIRONMENT
The political environment of international marketing includes any
national or international political factor that can affect its operations. A
factor is political when it derives from the government sector. The
political environment comprises three dimensions: the host-country
environment, the international environment, and the home-country
environment. Surveys have shown that dealing with problems in the
political arena is the number one challenge facing international
managers and occupies more of their time than any other management
function. (Terpestra & Sarathy,2000,p.120)
First-Ideological Forces:
Such names as communism, socialism, capitalism, liberal, conservative, left wing,
and right wing are used to describe governments, political parties, and people. These
names indicate ideological beliefs.
1-Communism:
It is communist doctrine that the government should own all the major factors of production. With exceptions, all production in these countries is done by state-owned factories and farms. Labor unions are government-controlled.
Expropriation and Confiscation:
The rules of traditional international law recognize a country's right to
expropriate the property of foreigners within its jurisdiction. But those rules
require the country to compensate the foreign owners, and in the absence of
compensation, expropriation becomes confiscation.
2-Capitalism:
The capitalist, free enterprise ideal is that all the factors of production should be
privately owned. Under ideal capitalism, government is restricted to those
functions that the private sector cannot perform: national defense; police,
fire, and other public services; and government-to-government international
relations. No such government exists.
Regulations and Red Tape:
All businesses are subject to countless government laws, regulations, and red
tape in their activities in the United States and all other capitalist countries.
Special government approval is required to practice such professions as law
and medicine. Tailored sets of laws and regulations govern banking, insurance,
transportation, and utilities. States and local governments require business
licenses and impose use restrictions on buildings and areas.
3-Socialism:
Socialism advocates government ownership or control of the basic means of
production, distribution, and exchange. Profit is not an aim.
In practice, so-called socialist governments have frequently performed in
ways not consistent with the doctrine. One of the most startling examples of this
is Singapore, which professes to be a socialist state but in reality is aggressively
capitalistic.
European Socialism:
In Europe, socialist parties have been in power in several countries,
including Great Britain, France, Spain, Greece, and Germany. In Britain, the
Labor party — as the socialists there call their political party — in the past
nationalized some basic industries, such as steel, shipbuilding, coal mining, and
the railroads, but did not go much further in that direction.
Socialism in Developing Countries:
The developing countries often profess and practice some degree of
socialism. The government typically owns and controls most of the factors of
production.
Unless the government of a developing country is communist, it will make
occasional exceptions and permit capital investment. This happens when the
developing country perceives advantages that would not be possible without
the private capital, such as more jobs for its people, new technology, skilled
managers or technicians, and export opportunities.
Conservative or Liberal:
Politically, in the United States, the word conservative connotes a person,
group, or party that wishes to minimize government activity and maximize the
activities of private businesses and individuals.
In the United States there is at least one exception to the generalization that
conservatives wish to minimize government activities: the antiabortion movement
calling for governmental control of abortion decisions. Although not all
antiabortionists are conservative, the media present their position as such.
Politically, in the United States in the 20th century, the word liberal came to
mean, and continues in the 21 century to mean, the opposite of what it meant in the
19th century. It now connotes a person, group, or party that urges greater
government participation in the economy and regulation or ownership of
business. Liberal and left wing are similar, but the latter generally indicates more
extreme positions closer to socialism or communism.
Importance to Business of Left versus Right:
Political advocacy organizations, both left and right, grow in size and
power every year. In the United States alone, they have total annual
revenues of some $5 billion, and they spend over $840 million a year on
lobbying in Washington, DC, and the state capitals. They are equally
influential and powerful in the corridors of power of the European Union
and other countries.
Less well known but just as important, these organizations litigate
precedent-setting lawsuits that affect judicial decisions for years to come.
These court decisions, as well as the laws that result from their lobbying,
powerfully affect business at every level.
One might reasonably assume that government ownership of the
factors of production is found only in communist or socialist
countries, but that assumption is not correct. Large segments of
business are owned by the governments of numerous countries that
do not consider themselves either communist or socialist. From
country to country, there are wide differences in the industries that
are government-owned and in the extent of government ownership.
Privatization:
Britain's former prime minister, Margaret Thatcher, was the
acknowledged leader of
the privatization movement. During her 11 years in office, Thatcher decreased
state-owned companies from 10 percent of Britain's GNP to 3.9 percent. She sold
over 30 companies, raising some $65 billion. Thatcher pioneered in what has
become a worldwide movement to privatize all sorts of government activities.
Nationalism:
Nationalism is an emotion that can cloud or even prevent rational dealings with
foreigners. For example, the chief of the joint staffs of the Peruvian military, when
taking charge in Peru, blamed the ills of its society on foreign companies.
Some of the effects of nationalism on international companies are
(1) requirements for minimum local ownership or local product assembly or
manufacture,
(2) reservation of certain industries for local companies,
(3) preference of local suppliers for government contracts,
(4) limitations on the number and types of foreign employees,
(5) protectionism, using tariffs, quotas, or other devices,
(6) seeking a "French solution" instead of a foreign takeover of a local firm,
(7) in the most extreme cases, expropriation or confiscation.(Ball et al ,2002,348370)
These feelings of nationalism are manifested in a variety of ways including a call
to "buy pure country's products only" (e.g., "Buy American"), restrictions on imports,
restrictive tariffs, and other barriers to trade. They may also lead to control over
foreign investment, often regarded with suspicion, which then becomes the object of
intensive scrutiny and control.(Cateora & Graham,2005,pp.144-146)
Protection:
A historical function of government, whatever its ideology, has been the
protection of the economic activities — farming, mining, manufacturing, and so forth
— within its geographic area of control. These activities must be protected from
attacks and destruction or robbery by terrorists, bandits, revolutionaries, and
foreign invaders. A war was required to free Kuwait and its oil wealth from Iraq.
Stability and Instability: Examples and Results
Instability in Lebanon
Until 1974, Lebanon prospered as the trading, banking, international
company regional headquarters, business services (that is, accounting, legal,
and financial services), transportation, and tourist center of the Middle East. The
country achieved this prosperity with virtually no natural resources; its land is
mostly arid desert or mountains. Its prosperity was the work of an industrious
people given political stability.
Then civil war broke out in Lebanon. The results were catastrophic. Homes,
offices, banks, stores, transportation, communications, and hospitals were
destroyed. The people fled the country or fought and survived as best they
could. Almost all of the previous commercial activities ended. (Ball et al
,2002,pp.348-370)
Political Parties:
Particularly important to the marketer is knowledge of the philosophies of all
major political parties within a country, since any one of them might become
dominant alter prevailing attitudes. In Great Britain, for example, the Labor Party
traditionally has tended to be more restrictive on foreign trade than the Conservative
Party. The Labor Party, when in control, has limited imports, while the
Conservative has tended to liberalize foreign trade when it is in power.
Stability of Government Policies:
At the top of the list of political conditions that concern foreign businesses is the
stability or instability of prevailing government policies. Governments might change
one political parties might be elected, but the concern of the multinational
corporation is the continuity of the set of rules or code of behavior—regardless
of which government is in power. A change in government, whether by election
or coup, does not always mean a change in the level of political risk. In Italy, for
example, there have been more than 50 different governments formed since the
end of World War II. While the political turmoil in Italy continues, business goes
on as usual. In contrast, India has had 51 different governments since 1945 with
several in the past few years favorable to foreign investment and open markets;
however, much government policy remains hostile to foreign investment. (Cateora
& Graham,2005,pp.144-146)
Political Risks of Global Business
Confiscation, Expropriation, and Domestication:
The most severe political risk is confiscation, that is, “ the seizing of a
company's assets without payment ”. The two most notable recent confiscations of
United States property occurred when Fidel Castro became the leader in Cuba and
later when the Shah of Iran was overthrown.. Less drastic, but still severe, is
expropriation, which requires some reimbursement for the government-seized
investment. A third type of risk is domestication, which” occurs when host
countries take steps to transfer foreign investments to national control and
ownership through a series of government decrees.” (Cateora &
Graham,2005,p.148)
- Economic Risks:
Exchange Controls. Exchange controls stem from shortages of foreign exchange
held by a country. When a nation faces shortages of foreign exchange, controls may
be levied over all movements of capital or selectively against the most politically
vulnerable companies to conserve the supply of foreign exchange for the most
essential uses. A rat rent problem for the foreign investor is getting profits and
investments into the currency of the home country.
Exchange controls also are extended to products by applying a system of multiple
exchange rates to regulate trade in specific commodities classified as necessities or
luxuries.
Local-Content Laws. In addition to restricting imports of essential supplies to
force local purchase, countries often require a portion of any product sold
within the country to have local content, that is, to contain locally made parts.
Import Restrictions. Selective restrictions on the import of raw materials,
machines, and spare parts are fairly common strategies to force foreign
industry to purchase mere supplies within the host country and thereby create
markets for local industry.
Tax Controls. Taxes must be classified as a political risk when used as a
means of controlling foreign investments. In such cases, they are raised without
warning and in violation of formal agreements. A squeeze on profit results
from taxes being raised significantly as a business becomes established. In those
underdeveloped countries where the economy is constantly threatened with a
shortage of funds, unreasonable taxation of successful foreign investments
appeals to some governments as the handiest and quickest means of finding
operating funds.
Price Controls. Essential products that command considerable public interest,
such as pharmaceuticals, food, gasoline, and cars, are often subjected to price
controls.
-Labor Problems. In many countries, labor unions have strong government
support that they use effectively in obtaining special concessions from business.
Layoffs may be forbidden, profits may have to be shared, and an extraordinary
number of services may have to be provided. In fact, in many countries foreign
firms are considered fair game for the demands of the domestic labor supply. In
France, the belief in full employment is almost religious in fervor; layoffs of any
size, especially by foreign-owned companies, are regarded as national crises.
- Political Sanctions:
In addition to economic risks, one or a group of nations may boycott another
nation thereby stopping all trade between the countries, or issue sanctions against
the trade of specific products. The United States has long-term boycotts of trade
with Cuba , Iran and Libya. Less severe and more often imposed are sanctions
against the trade in specific products. For example, the United States joined the
United Nations' sanction trade with Libya in hydrocarbon equipment.
- Politically Sensitive Products:
While there are no specific guidelines to determine a product's vulnerability
at any point, there are some generalizations that help to identify the tendency for
products to be politically sensitive. Products that have an effect upon or are
perceived to have an effect upon the environment, exchange rates, national and
economic security, and the welfare of people, and are publicly visible or subject
to public debate, are more apt to be politically sensitive.
Fast-food restaurants, obviously visible, have often been lightning
rods for groups opposed to foreign companies. For example, Kentucky
Fried Chicken (KFC) has faced continued problems since opening stores
in India. (Cateora & Graham,2005,pp.150-154)
Host-Country Political Environment:
By definition, the international firm is a guest, a foreigner in all of
its markets abroad. Therefore, international managers are especially
concerned with nationalism and dealings with governments in host
countries.
Host-Country National Interests:
One way to get a feeling for the situation in a foreign market is to see
how compatible the firm's activities are with the interests of the host
country. Although each country has its own set of national goals, most
countries also share many common objectives.
All countries wish to maintain and enhance their national
sovereignty. Foreign firms, individually or collectively, may be
perceived as a threat to that sovereignty. The larger and more numerous
the foreign firms, the more likely they are to be perceived as a threat.
Countries wish to protect their national security. Although the foreign
firm is not a military threat as such, it may be considered as potentially
prejudicial to national security. Governments generally prohibit foreign
firms from involvement in "sensitive" industries, such as defense,
communications, and perhaps energy and natural resources.
Countries are also concerned about their national prestige. They
establish national airlines and try to send winning teams to the Olympics as
ways of gaining international recognition. Economically, they may foster
certain industries for the same reason. Foreign firms may be prevented
from entering those industries or from acquiring a national firm in a
certain industry. Many countries seek "national solutions" to help troubled
companies to retain what are perceived to be national champions.
International firms need to be sensitive to these issues and to be careful not
to be too "foreign." This includes advertising and branding policies as well
as ownership and staffing. Establishing local R&D would be perceived
favorably in this context.
Host-Country Controls:
To try to ensure desirable behavior by foreign firms—and to prevent
undesirable behavior—governments use a variety of tools. We note some
of these controls here.
1.Entry restrictions. If allowed to enter the country, the firm may be
restricted as to the industries it may enter. It may be prohibited from
acquiring a national firm. It may not be allowed 100 percent ownership
but may be required to enter a joint venture with a national firm. It may
be restricted as to the products it sells.
2. Price controls. One of the most common is price controls, which in
inflationary economies can severely limit profitability. Gerber left
Venezuela because a decade of price controls prevented a profitable
operation. Other regulations may affect advertising or other marketing
practices of the firm.
3. Quotas and tariffs. The country's quotas and tariffs may limit the firm's
ability to import equipment, components, and products, forcing a higher
level of local procurement than it may want.
4. Exchange control. Many countries run chronic deficits in their balance
of payments and are short of foreign exchange. They ration its use
according to their priorities. Foreign firms may be low on that priority list
and have difficulty getting foreign exchange for needed imports or profit
repatriation.
5.Expropriation. Defined as official seizure of foreign property,
expropriation is the ultimate tool for controlling foreign firms. (Terpestra
& Sarathy,2000,pp.120-121)
POLITICAL-RISK ASSESSMENT:
Political risk can be a challenge not only to the firm, but also to its
employees.
Some firms provide evaluations as to the political risk of specific
countries. These services are moderate in cost—up to a few thousand
dollars a year, depending on coverage.
In its own study of the political environment, the firm can include a
preliminary analysis of its political vulnerability in a particular host
country. Elements in such an analysis include external and company
factors.
External Factors
1.The firm's home country. Other things being equal, a firm has a better
reception in a country that has good relations with its own.
2.Product or industry. Sensitivity of the industry is an important
consideration. Generally, raw materials, public utilities, communications,
pharmaceuticals, and defense-related products are most sensitive.
3. Size and location of operations. The larger the foreign firm, the more
threatening it is perceived to be. This is especially true if the firm has
large facilities and is located in a prominent urban area, such as the
capital. This serves as a constant reminder of the foreign presence.
4.Visibility of the firm. The greater the visibility of the foreign firm, the
greater its vulnerability. Visibility is a function of several things. Two are
the size and location of the firm's operations in the country. Another is
the nature of its products. Consumer goods are more visible than
industrial goods. Finished goods are more visible than components or
inputs that are hidden in the final product. Heavy advertisers are more
visible than nonadvertisers. International brands are more provocative
than localized brands.
5.Host-country political situation. The political situation can affect the
firm. The country's political risk should be evaluated.
Company Factors
1.Company behavior. Each firm develops some record of corporate
citizenship based on its practices. Some firms are more sensitive and
responsive to the situation in the host country than others. Goodwill in this
area is a valuable asset.
2.Contributions of the firm to the host country. Many of these are quite
objective and quantifiable. How much employment has been generated?
How much tax has been paid? How many exports has the firm generated?
What new resources or skills has the firm brought in?
3. Localization of operations. Generally, the more localized the firm's
operations, the more acceptable it is to the host country. There are several
dimensions to localization, including having local equity, hiring local
managers and technical staff, using local content in the products,
including local suppliers of goods and services, and developing local
products and local brand names.
4. Subsidiary dependence. This factor is somewhat in contradiction to the
preceding point. The more the firm's local operation depends on the
parent company, the less vulnerable it is. If it cannot function as a
separate, self-contained unit but is dependent on the parent for critical
resources and/or for markets, it will be seen as a less rewarding takeover
target.
International Political Environment:
The international political environment involves political relations
between two or more countries.
One aspect of a country's international relations is its relationship
with the firm's home country. U.S. firms abroad are affected by the host
nation's attitude toward the United States. When the host nation dislikes
any aspect of U.S. policy, it may be the U.S. firm that is bombed or
boycotted along with the U.S. Information Service office. English or
French firms operating in the former colonies of those countries are
affected by that relationship, favorably or otherwise.
A second critical element affecting the political environment is the hostcountry's relations with other nations. If a country is a member of a
regional group, such as the EU or ASEAN, that fact influences the firm's
evaluation of the country. If a nation has particular friends or enemies
among other nations, the firm must modify its international logistics to
comply with how that market is supplied and to whom it can sell. For
example, the United States limits trade with various countries. Arab nations
have boycotted companies dealing with Israel.
Another clue to a nation's behavior is its membership in international
organizations. Members of NATO, for example, accept a military
agreement that could restrict their military or political action.
Membership in WTO reduces the likelihood that a country will
impose new trade barriers. As a rule, the more international
organizations a country belongs to, the more regulations it accepts, and
the more dependable is its behavior. (Terpestra & Sarathy,2000,p.120)
Overall Country Risk Rating
This rating assesses the overall risk of investment in the country.
Political risk—measuring political stability and the effectiveness of the political system.
Economic policy risk—measuring the quality and consistency of economic policy
management and performance.
Economic structure risk—measuring economic variables central to solvency.
Liquidity risk—measuring the stability of the country's funding base and the risk of
imbalances between its resources and obligations. The subcategory scores are also used
to compile three separate ratings that measure the risk of specific investments.
Currency risk rating—assessing the risk of a devaluation against the U.S. dollar of 20
percent or more.
Sovereign debt risk rating—assessing the risk of a build-up in arrears of sovereign debt.
Banking risk rating—assessing the risk of a build-up in arrears on foreign currency debt
by
the
country's
private
banking
institutions.
Home-Country Political Environment:
The firm's home-country political environment can constrain its
international operations as well as its domestic operations. It can limit the
countries that the international firm may enter. The United States, for example,
prohibits U.S. firms from dealing with Cambodia, Cuba, Libya, and North
Korea. It has special restrictions on trade with Iran and Iraq.
The United States also can limit the products its firms can sell abroad under
its strategic technology controls. That power is even occasionally exercised
against foreign firms, such as Toshiba, which was penalized for selling to the
Russians technology that allowed their submarines to move more quietly.
One challenge facing multinationals is that they truly have a triple-threat
political environment. Even if the home country and the host country give them
no problems, they can face threats in third markets.
6. Firms that do not have problems with their home government or the host
government, for example, can be bothered or boycotted in third countries.
Nestlé’s problems with its infant formula controversy were most serious, for
example, not at home, in Switzerland, or in African host countries, but in a third
market—the United States. (Terpestra & Sarathy,2000,pp.122-126)
Strategies to Lessen Political Risk:
- Joint Ventures. Typically less susceptible to political harassment, joint ventures',
can be with either locals or other third-country multinational companies; in both
castes a company's financial exposure is limited. A joint venture with locals
helps minimize anti-MNC feelings, and a joint venture with another MNC adds the
additional bargaining power of a third country.
- Expanding the Investment Base. Including several investors and banks in
financing an investment in the host country is another strategy.
- Marketing and Distribution. Controlling distribution in markets outside the
country can be used effectively if an investment should be expropriated; the
expropriating country would lose access to world markets. This has proved
especially useful for MNC’s in the extractive industries where world markets for
iron ore, copper, and so forth,, crucial to the success of the investment.
- Licensing. A strategy some firms find that eliminates almost all risks is to
license technology for a fee. Licensing can be effective in situations where the
technology is unique and the risk is high. Of course, there is some risk assumed
because the licensee can refuse to pay the required fees while continuing to use the
technology.
- Planned Domestication. The strategies just discussed can be effective in
forestalling or minimizing the effect of a total takeover. However, in those cases
where an investment is being domesticated by the host country, the most effective
long-range solution is planned phasing out, that is, planned domestication. This is
not the preferred business practice, but the alternative of government-initiated
domestication can be as disastrous as confiscation. As a reasonable response to the
potential of domestication, planned domestication can be profitable and
operationally expedient for the foreign investor. Planned domestication is, in
essence, a gradual process of participating with nationals in all phases of company
operations. (Cateora & Graham,2005,pp.158)
THE LEGAL ENVIRONMENT
In addition to the political environment in a nation, the legal
environment—that is, the nation's laws and regulations pertaining to
business—also influences the operations of a foreign firm. A firm must
know the legal environment in each market because these laws constitute
the "rules of the game." At the same time, the firm must know the
political environment because it determines how the laws are enforced
and indicates the direction of new legislation. The legal environment of
international marketing is complicated, having three dimensions. For a
U.S. firm, these are (1) U.S. laws, (2) international law, and (3) domestic
laws in each of the firm's foreign markets.
Export Controls
Like other countries, the United States has a variety of controls on
export trade, but it has more than most countries. Since these are
continually evolving with the political climate. One kind of control
pertains to country destinations. There are absolute prohibitions or severe
restrictions on exports to several countries, such as Cuba, Iraq, Libya,
North Korea, and the Sudan. The ban also prohibits the sale of
components that go into a foreign firm's products that are destined for
one of the prohibited markets.
These controls are imposed to protect U.S. security and foreign policy
interests. Violation can bring severe punishment. In 1995, two technology
company CEOs we're convicted of illegally exporting equipment for making
missiles. Penalties were: fines of $250,000 each; up to five years in prison; a
$1 million fine for each company. These controls can be a serious constraint
on both product line and market selection for some international marketers.
The long arm of U.S. law reaches even to operations and firms outside the
United States, as the following examples show.
Another restriction on the freedom to export is in pricing. Although
the marketer would like to base export prices on supply and demand and
company considerations, the Internal Revenue Service (IRS) can also
influence the price. For example, the IRS has a say in transfer prices on
exports to foreign affiliates of U.S. companies. On such exports, the exporter
might wish a low transfer price as a way of aiding the subsidiary, of gaining
income in a lower tax jurisdiction. However, the IRS does not allow unduly
low transfer prices because they lower the firm's U.S. profits and therefore
lower the firm's U.S. income taxes.
Antitrust Controls:
It might seem strange that U.S. antitrust laws would affect the foreign
business activities of U.S. companies. The opinion of the U.S. Justice
Department is that even if an act is committed abroad, it falls within the jurisdiction of U.S. courts if the act produces consequences within the United States.
Many activities of U.S. business abroad have some repercussions on the U.S.
domestic market.
When a U.S. firm expands abroad by acquiring a foreign company, the
Justice Department is concerned about the possible impact on competition in
the United States. Action is more probable if the acquired firm were in the
same product line as the U.S. company.
Joint venturing with foreign firms either in the United States or
abroad can lead to government intervention similar to that in the
preceding example. General Electric and Hitachi sought to form a joint
venture in the United States to produce televisions. GE wanted to bolster
its relatively weak position and Hitachi wanted to increase its small 2
percent market share. The Justice Department challenged the venture,
stating, "Our investigation has led us to conclude that this venture
would eliminate potential competition between GE and Hitachi in the
manufacture and sale of television sets. It would create the third or
fourth largest producer in an already concentrated industry. We are not
persuaded that the venture is needed to maintain the viability of either
party." (Terpestra & Sarathy,2000,pp.126-128)
Organization and Ownership Arrangements:
The organization of a firm can be influenced by specific laws that are
designed to promote foreign trade. The general, more restrictive laws
may, indeed, allow certain exceptions to firms meeting specified
conditions.
Other Controls
Examples of other controls include the U.S. laws against bribery by U.S.
firms and against support of Arab boycotts.
Foreign Corrupt Practices Act. In the 1970s the practice by U.S. firms to
bribe foreign officials received much publicity.The U.S. government
passed the Foreign Corrupt Practices Act to prohibit U.S. firms from
engaging in these types of practices abroad.
Elimination of such payoffs is certainly desirable. The problem for
U.S. firms was that their competitors from Japan and Western Europe
were not forbidden to use bribes. U.S. firms complained that the act put
them at a serious competitive disadvantage because bribery has often
been the most effective form of persuasion in business and government
markets abroad. Fortunately, in 1997, the 29 OECD member
countries—and five others—signed a Convention of Bribery of Foreign
Public Officials. The parties are obligated to criminalize such bribery.
Time will tell how this works out.
Anti-Arab Boycott Rules. The conflict between Israel and the Arab states
has influenced U.S. control over the international marketing of U.S.
firms. The oil wealth of the Arab states has given them power that they
use in several ways. One way is to try to force companies that sell to their
now-rich markets not to have any dealings with Israel. Because the Arab
markets are collectively much larger than the Israeli market, many firms
are tempted to drop the Israeli market and sell to the Arabs. This is
counter to U.S. foreign policy, however, so the government has
legislation to prevent U.S. firms from cooperating with the Arab boycott.
International Law and International Marketing:
No international lawmaking body corresponds to the legislatures of
sovereign nations. What then is international law? For our present
discussion, we ” define it as the collection of treaties, conventions, and
agreements between nations that have, more or less, the force of law “.
International law in this sense is quite different from national laws that
have international implications, such as the U.S. antitrust laws.
(Terpestra & Sarathy,2000,pp.128-130)
The legal implications of regional groupings:
FCN and Tax Treaties
The United States has signed treaties of friendship, commerce, and
navigation
(FCN) with many countries. FCN treaties cover commercial relations
between two nations. They commonly identify the nature of the rights of
U.S. companies to do business in those nations with which the United
States has such a treaty, and vice versa. FCN treaties usually guarantee
"national treatment" to the foreign subsidiary; that is, it will not be
discriminated against by the nation's laws or judiciary.
Of a similar type are the tax treaties that the United States has signed
with a number of nations. The purpose of such treaties is to avoid double
taxation; that is, if a company has paid income tax on its operations in a
treaty nation, the United States will tax the firm's income only to the
extent that the foreign tax rate is less than the U.S. rate.
IMF and WTO:
The both agreements are part of the limited body of effective
international law. Both agreements identify acceptable and nonacceptable
behavior for member nations. Their effectiveness lies in their power to
apply sanctions. The IMF can withhold its services from members who act
"illegally," that is, contrary to the agreement. WTO allows injured nations
to retaliate against members who have broken its rules.
International marketers are interested in both IMF and WTO because of
a shared concern in the maintenance of a stable environment conducive
to international trade. These firms are concerned about the IMF's ability to
reduce restrictions on international finance, and they support WTO's
efforts to free the international movement of goods.
UNCITRAL: A Step Ahead:
The United Nations established a Commission on International
Trade Law (UNCITRAL) with a goal to promote a uniform commercial
code for the whole world. Its purpose is to bridge the communications
gap between countries having different legal systems as well as minimize
contract disputes and facilitate the task of selling goods between countries.
In the 1990s, UNCITRAL is working on a Model Law on Procurement,
International Commercial Arbitration, and Electronic Commerce.
ISO:
The International Standards Organization (ISO). Industry groups in
most of the major industrial countries participate in the work of ISO.
Differing national standards are a major hindrance to international
trade. To overcome such obstacles, ISO has been working, through its
technical committees, to develop uniform international standards.
Patent Protection Systems:
Many firms have patented products to sell. When selling outside their
home market, they want to protect their patent right. Generally, patents
must be registered separately in each country where the firm wants
protection. This can be a time-consuming and expensive process.
The purpose of patent protection is to prevent others from selling the
patented product wherever the patent is registered. This element of
monopoly protection allows
Trademark Conventions:
Trademarks are another form of intellectual property. Like patents,
trademarks or brands must go through a national registration process to
be protected; registration is less time-consuming and costly, though.
There are two major international trademark conventions. One
is the Paris Union, which also covers patents. The Paris Union allows a
six-month protection period in the case of trademarks, as contrasted with
a one-year period for patents. That is, registration of a trademark in one
member country gives the firm six months in which to register in any
other member countries before it loses its protection in those countries.
The second major convention is the Madrid Arrangement for
International Registration of Trademarks, The advantage of the
Madrid Arrangement is that it permits a registration in just one member
country to qualify as registration in all other member countries, with
appropriate payments.
A third convention, and a major one, is the new EU Community
Trademark— a significant advance in Europe. It allows for one
registration and payment instead of 15—true one-stop shopping.
Regional Groupings and International Law:
Many nations have felt the need for larger market groupings to
accelerate their economic growth. Such regional groupings have de-
veloped on all continents. What each grouping has found, however, is
that economic integration alone is not sufficient without some
international legal agreement. Initially, this takes the form of the treaty
that establishes the regional grouping. Inevitably, however, as
integration proceeds, further legal agreements are necessary. In this way,
the body of international (regional) law grows. Because these groupings
are primarily economic alliances, the international law that develops
relates primarily to economic and business questions. Therefore,
regional groupings provide a development of international law of
interest to multinational companies.
The World of International Law:
The body of international law is small compared to domestic law.
Furthermore, international law, whether regional or global, is the
growth area in the legal environment of international marketing.
International law generally facilitates international trade. If a change in
law is unfavorable, however, firms will want to be informed about the
change in order to optimize performance within the new constraints.
Two other areas of international law need scrutiny by international
marketers. One is the codes of conduct developed by international
groups such as UNCTAD and the OECD. Although these codes for
multinational firms are not true international law, in a practical sense
they become the norms by which nations, labor unions, and other
critics judge the multinational. As an illustration, the World Health
Organization (WHO) passed a code of conduct for the marketing of
infant formula that for all intents and purposes serves as international law
on the subject.
The second development affecting the internationalization of law is
the increasing cooperation between countries in legal matters. As one
example, Britain and the United States have a treaty spelling out
situations in which judgments of the courts of one country will be
enforced in those of the other. Most commercial disputes will be
covered. Broader than that treaty is the informal cooperation between
regulators in different countries. Regulators visit various countries and
exchange information in formulating new regulations concerning
business. In the antitrust area, there have been exchanges of personnel
between the United States and the EU.
Foreign Laws and International Marketing:
The laws of other nations play a similar role regarding the activities of
business within their boundaries. The importance of foreign laws to the
marketer lies primarily in domestic marketing in each foreign market.
Problems arise from the fact that the laws in each market tend to be
somewhat different from those in every other market.
Differing Legal Systems:
Most countries derive their legal system from either the common law
or the civil or code law traditions. Common law is English in origin and
is found in the United States and other countries (about 26) that have had
a strong English influence, usually a previous colonial tie. Common law
is tradition oriented; that is, the interpretation of what the law means on a
given subject is heavily influenced by previous court decisions as well as by
usage and custom. If there is no specific legal precedent or statute,
common law requires a court decision. To understand the law in a
common law country, one must study the previous court decisions in
matters of similar circumstance, as well as the statutes.
Civil or code law is based on an extensive and, presumably,
comprehensive set of laws organized by subject matter into a code. The
intention in civil law countries is to spell out the law on all possible legal
questions rather than to rely on precedent or court interpretation. The
"letter of the law" is very important in code law countries. Because code
law countries do not rely on previous court decisions, various applications
of the same law may yield different interpretations. This can lead to some
uncertainty for the marketer.
Islamic law represents the third major legal system. About 27
countries follow Islamic law in varying degrees, usually mixed with
civil, common, and/or indigenous law. The Islamic resurgence in recent
years has led many countries to give Islamic law, Shari'a, a more
prominent role. Shari'a governs all aspects of life in areas where it is
the dominant legal system, as in Saudi Arabia.
The differences among legal systems are important to the
international marketer. Because the legal systems of no two countries are
exactly the same, each market must be studied individually and
appropriate local legal advice sought when necessary. The following
merely alerts the marketer to some of the variations in legal systems
abroad. (Terpestra & Sarathy,2000,pp.130-136)
Foreign Laws and the Marketing Mix:
Product:
The international marketer will find many regulations affecting the
product. The physical and chemical aspects of the product are affected
by laws designed to protect national consumers with respect to its purity,
safety, or performance. As the Thalidomide tragedy showed, nations
differ as to the strictness of their controls.
In a similar vein, European manufacturers were disturbed by U.S.
safety requirements for automobiles, which had to be modified to meet
the needs of one market. Because the U.S. market is large, the adaptation
was not so serious as meeting the peculiar requirements of a small market.
This highlights what frequently appears to be the protectionist use of
these laws. Although consumers should be protected, different safety
requirements are not necessary for the consumers of every country.
Labeling is subject to more legal requirements than the package.
Labeling items covered include (1) the name of the product, (2) the
name of the producer or distributor, (3) a description of the ingredients
or use of the product, (4) the weight, either net or gross, and (5) the
country of origin. As to warranty, the marketer has relative freedom to
formulate a warranty in all countries.
Brand names and trademarks also face different national
requirements. Most of the larger nations are members of the Paris
Union or some other trademark convention.
Pricing. Price controls are pervasive in the world economy. Resale-price
maintenance (RPM) is a common law relating to pricing. Many nations
have some legal provisions for RPM, but with numerous variations.
Another variable is the fact that some countries allow price agreements
among competitors.
Some form of government price control is another law in a majority of
nations. The price controls may be economywide or limited to certain
sectors. For example, France has had a number of economywide price
freezes. At the other extreme, Japan controls the price on only one
commodity—rice. Generally, price controls are limited to "essential"
goods, such as foodstuffs. The pharmaceutical industry is one of the
most frequently controlled. Control here sometimes takes the form of
controlling profit margins.
Distribution. Distribution is an area with relatively few constraints on the
international marketer. The firm has a high degree of freedom in
choosing distribution channels from among those available in the
market. Of course, one cannot choose channels that are not available.
For example, France had a specific prohibition against door-to-door
selling, but the Singer Company received a special exemption from this
law. One major question is the legality of exclusive distribution. Fortunately, this option is allowed in most markets. In fact, the strongest legal
constraint does not apply to firms managing their own distribution in
foreign markets but rather to exporters who are selling through
distributors or agents.
Promotion. Advertising is one of the more controversial elements of
marketing and is subject to more control than some of the others. Most
nations have some law regulating advertising, and advertising groups in
many nations have self-regulatory codes. (New Zealand has no fewer than
33 laws relating to advertising.) Advertising regulation takes several
forms. One pertains to the message and its truthfulness. In Germany, for
example, it is difficult to use comparative advertising and the words
better or best. In Argentina, advertising for pharmaceuticals must have the
prior approval of the Ministry of Public Health. Even China brought
foreign firms to court over their advertising claims under its new law.
Another form of restriction relates to control over the advertising of
certain products. For example, Britain allows no cigarette or liquor
advertising on television. Another restriction is through the taxation of
advertising. For example, Peru once implemented an 8 percent tax on
outdoor advertising; Spain taxed cinema advertising.
Sales promotion techniques encounter greater restriction in some
markets than in the United States. There is often no constraint on
contests, deals, premiums, and other sales promotion gimmicks in the
United States. The situation is quite different in other countries. As a
general rule, participation in contests must not be predicated on
purchase of the product. Premiums may be restricted as to size, value,
and nature. A premium may be limited to a certain fraction of the value of
the purchase and might be required to relate to the product it promotes;
that is, steak knives could not be used as a premium with soap, or a
towel with a food product. Free introductory samples may be restricted
to one-time use of the product rather than a week's supply. In the infant
formula controversy, sampling was completely forbidden. Variations are
great, but in most cases the U.S. marketer is more limited in host
countries than at home.
Enforcement of the Laws
The firm needs to know how foreign laws will affect its operations in a
market. For this it is not sufficient to know only the laws; one must also
know how the laws are enforced. Most nations have laws that have been
forgotten and are not enforced. Others may be enforced haphazardly, and
still others may be strictly enforced.
An important aspect of enforcement is the degree of impartiality of justice.
Does a foreign subsidiary have as good a standing before the law as a strictly
national company? Courts have been known to favor national firms over
foreign subsidiaries. In such cases, biased enforcement makes it one law for
the foreigner and another for the national. Knowledge of such
discrimination is helpful in evaluating the legal climate.
The Firm in the International Legal Environment
Whose Law? Whose Courts?
Domestic laws govern marketing within a country. Questions of the
appropriate law and the appropriate courts may arise, however, in cases
involving international marketing. As noted, few international laws
apply to international marketing disputes. Nor is there an international
court in which to try them, except for the European Court of Justice for
the EU.
When commercial disputes arise between principals of two different
nations, each would probably prefer to have the matter judged in its own
national courts under its own laws. By the time the dispute has arisen,
however, the question of jurisdiction has usually already been settled by
one means or another. One way to decide the issue beforehand is by
inserting a jurisdictional clause into the contract. Then when the
contract is signed, each party agrees that the laws of a particular nation,
or state in the case of the United States, governs.
If the parties do not have prior agreement as to jurisdiction, the courts
in which the appeal is made decide the issue. One alternative is to apply
the laws of the nation in which the contract was signed. Another is to use
the laws of the country where contract performance occurs. In one of
these ways, then, the issue of which nation's laws shall govern is already
out of the company's hands when a dispute arises. Most companies
prefer to make that decision themselves and therefore insert a
jurisdictional clause into the contract, choosing the more favorable
jurisdiction. Of course, the choice of jurisdiction must be acceptable to
both parties.
The decision as to which nation's courts will try the case depends on
who is suing whom. The issue of which courts have jurisdiction is
separate from the issue of which nation's laws are applied. Suits are
brought in the courts of the country of the person being sued. For
example, a U.S. company might sue a French firm in France. This kind
of event leads not infrequently to the situation in which a court in one
country may try a case according to the laws of another country; that is,
a French court may apply the laws of New York State. This could happen
if the parties had included a jurisdictional clause stating that the laws of
New York State would govern; it could also happen if the French court
decided that the laws of New York State were applicable for one of the
other reasons mentioned.
Arbitration & Litigation:
The international marketer must be knowledgeable about laws and
contracts. Contracts identify two things: (1) the responsibilities of each
party, and (2) the legal recourse to obtain satisfaction. Actually, however,
international marketers consider litigation a last resort and prefer to settle
disputes in some other way. For several reasons, litigation is considered
a poor way of settling disputes with foreign parties. Litigation usually
involves long delays, during which inventories may be tied up and trade
halted. Further, it is costly, not only in money but also in customer
goodwill and public relations. Firms also frequently fear discrimination
in a foreign court. Litigation is thus seen as an unattractive alternative, to
be used only if all else fails.
More peaceful ways to settle international commercial disputes are
offered by conciliation, mediation, and arbitration. Conciliation and
mediation are informal attempts to bring the parties to an agreement.
They are attractive, voluntary approaches to the settlement of disputes. If
they fail, however, stronger measures such as arbitration or litigation are
needed. Because of the drawbacks of litigation, arbitration is used
extensively
in
international
commerce.
(Terpestra
&
Sarathy,2000,pp.137-142)
References:
Ball, D. A. , McCulloch, W. H. Jr. , Frantz, P. L. , Geringer, J. M. , & Minor, M. S. (2002)
International Business : The Challenge of Global Completion . 8th Edition ,
McGraw-Hill .
Cateora , P. R. & Graham , J. L. (2005) International Marketing . McGraw-Hill
Terpstra, V. & Sarathy, R. (2000) International Marketing. 8th Edition ,Orlando : The
Dryden Press.