Politics and Law
A frnal, major issue that is critical for intemational business managers is that of
general standards of behavior and ethics- Increasingly, public concems are raised
about such issues as environmental protecdon, global warming, pollution, and moral
behavior- However, these issues are not of the same importance in every country.
What may be frowned upon or even illegal in one nation may be customary or at
least acceptable in others. For example, the cutting down of the Brazilian rain forest
may be acceptable to the govemment of Brazil, but scientists and concemed consumers may object vehemently because of the effect on global warming and other climatic changes. The export of U.S. tobacco products may be legal but results in
accusations of exporting death to developing nations. China may use prison labor in
producing products for export, but U.S. law prohibits the importation of such products. Mexico may permit the use of low safety standards for workers, but the buyers of
Mexican products may obiect to the resulting dangers.
Intemational frrms must understand the conflicts in standards and should assert
leadership in implementing change. Not everything that is legally posible should be
exploited for pro6t. By acting on existing, leading-edge knowledge and standards,
firms will be able to benefrt in the long term through consumer goodwill and the
avoidance of later recriminations,
lnternational executives are "selling" the world on two key issues: one is the
benefit of market forces that results in the interplay of supply and demand. This
interplay in tum uses price signals instead of government fiat to adjust activities,
thrives on competition, and works within an environment of respect for profitability
and private property. The second key proposition is that intemational marketers will
do their best to identify market niches and bring their products and services to cus.
tomers around the globe. Since these activities take up substantial financial resources, they provide individuals with the opportunity to invest their funds in the
most productive and efficient manner.
Key underlying dimensions of both of these issues are managerial and corporate
virtue, vision, and veracity. Unless the world can believe in what executives say and
do, and trust their global activities, it will be hard, if not impossible, to forge a global
commitment between those doing the marketing and the ones being marketed to. It
is therefore of vital interest to executives to ensure that corruption, bribery, lack of
mansparency, and the misleading of consumen, investors, and employees are systematically relegated to the history books-where they belong. It will be the extent of
openness, resporuiveness, long-term thinking, and truthfulness that will determine
the degrees of freedom of international business.ls
Politics and laws of a host country affect intemational business operations in a variety of ways. The good manager will understand these dimensions of the countries in
which the firm operates so that he or she can work within existing parameters and
can anticipate and plan for changes that may occur.
POLITICAL ACTION AND RISK
Firms usually prefer to conduct business in a country with a stable and friendly govemment, but such govemments are not always easy to 6nd. Managers must therefore
continually monitor the govemmenr, its policies, and its stability to determine the
potential for political change that could adversely affect corporate operations.
To learn how
govemmenb allect
2,
business through
legislation and rcgulations
ENVIRONMENT
Loss May Be the Result of:
The actions of legitimale
governmenl authorities
Contingencies
May lnclude:
The involuntary loss of
conlrol over specific assets
without adequate
compensation
Events caused by factors outside
the conkol of government
. Total or partial expropriation
. Forced divestiture
. Revoluiion
. Confiscation
. Cancellation or unfair calling ol
. Strikes
. Extortion
performance bonds
A reduciion in the value
of a stream oi benefits
expected lrom the
f
oreign-controlled
afl
iliate
. Nonapplicability of "national
treatment"
. Restriction in access to financial,
labor, or material markets
. Controlon prices, outputs, or
activities
. Currency and remittance
reshictions
. Value-added and export
. Nationalistic buyers or
suppliers
. Threats and disruption to
operations by hostile groups
. Externally induced financial
constraints
. Externally imposed limits on
imports or exports
performance requirements
Sourcer Adapted from los6 de la Torre and David H. Neckar, "Forecasling Political Risks for lntemational Operalions," in H. Ve'non'Worirel and L. Worlzel, G/obal
Stntegic Manasenent: The Esserr;r/s, 2nd ed. (New York lohn Wiey and Sons, 1990), i95.
political risk The risk of
loss
by an inrernational
corporation of assets, earning
power, or managerial control
as a result of political actions
by the host counrry.
ownership risk The risk
inherent in maintaining
ownership of property
abroad. The exposure of
foreign owned assets to
govemmental iniervention.
operating risk The danger
of interference by governments or other groups in
one's corporate operating
abroad.
transfer risk The
danger
of
ha\,ing one's ability to transfer
prolits or products in and out of
a
country inhibited by
govemmental rules and
regularions.
terrorism lllegal and violent
acts toward property and
people.
There is political risk in every nation, but the range of risks varies widely from
country to country. In general, political risk is lowest in countries that have a history
of srabiliry and consistency. Political risk tends to be highesr in nations thar do nor
have this sort of history. ln a number of countdes, however, consistency and stability
that were apparent on the surface have been quickly swept away by major popular
movements that drew on the bottled-up frustrations of the population. Three major
types of political risk can be encountered: ownership risk, which exposes properry
and Life; operating risk, whlch refers to interference with the ongoing operations of
a lirm; and transfer risk, which is mainly encountered when attempts are made to
shift funds between countries. Firms can be exposed to political risk due to government actions or even actions outside the control of governments. The type of actions
and their effects are classified in Figure 6.2.
A major risk in many countries is that of conflict and violent change. A manager
will want to think twice before conducting business in a country in which rhe likeli.
hood of such change is high. To begin with, if conflict breaks out, violence directed
toward the lirm's property and employees is a srong possibility. Guerrilla warfare,
civil disturbances, and terrorism often take an anti-industry bent, making compa.
nies and their employees potential targets. International corpomtions are often subject to rnajor threats, even in countries that boast great political stability. There are a
number ofrecent incidences where international businesses have been threatened. ln
July 2009, bombings killed and wounded innocent business travelers ar the J.\X/.
Marriott and Ritz Carlton hotels, both managed by Marriott, in Jakarta, lndonesia.
Hundreds were killed or wounded in September 2008, when a massive explosion
destroyed the Maniott in lslamabad, Pakistan. ln November 2008, more than a
hundred people were killed in terrorists attacks on the Taj Mahal and Oberoi, both
luxury hotels favored by international managers.
Intemational terrorists frequently target U.S. facilities, operations, and personnel abroad. Since the September 11 attacks on the World Trade Center and the
Politics and Law
Pentagon, we know that such attacks can also take
place within the United States. U.S. lirms, by their narure, cannot have the elaborate security and restricted
access of U.S. diplomatic offices and military bases. As
a result, United States businesses are the primary target
of terrorists worldwide, and remain the most vulnerable
targets
in the future.l9 Ironically enough, in
many
instances, the businesses attacked or burned are the
franchisees of U.S. business concepts. Therefore, the
ones suffering most from such attacks are the local owners and local employees.
The methods used by terrorists against business facilities include bombing, arson, hljacking, and sabotage. To
obtain funds, the terrorists resort to kidnapping execurives, armed robbery, and .*t,rnion.2o To reduce intemaTenorist aftacks often focus on internalional
tional terrorism, recent experience has demonstrated that
intemational collaboration is imperative to identi$' and
track terrorist groups and to systematically reduce their safe havens and financial support. ln spite of such efforts, terrodsm is likely to continue. As former U.S. senators
Han and Rudman have written: "prudence requires we assume . . . advenaries . . . have
Ieamed fiom the attacks how vulnerable the U.S. and other countries are. They will also
have observed that relatively low-cost tenorist operations . . . can inflict exteruive damage and profound disruption . . . As long as catastrophic attacks are likely to yield tangible results in undermining our economy and way of life, undertaking these attacks wiLl
be attractive to those who regard the U.S. and its allies as their enemy."2r
As a consequence, governments are likely to continue imposing new regulations
and restrictions intended to avert terr)rist acts. For example, increasingly complex
customs clearance and intemational logistical requirements, or specifrc requirements
imposed to enhance security systems, all combine to increase the cost of doing business internationally. Moreover, these security measures will also tend to lessen the
:
n
=
businesses.
efficiency with which intemational business channels can f.,nction.22
ln many countries, particularly in the developing world, coups d'6tat can result
in drastic changes in government. The new government often will attack foreign
iirms as remnants of a Western-dominated colonial past, as has happened in
Cuba, Nicaragua, and Iran. Even if such changes do not represent an immediate
physical threat, they can lead to policy changes that rray have drastic effects. The
Fast decades have seen coups in Ghana, Ethiopia, Pakistan, and Ivory Coast, for
example, that have seriously impeded the conduct of international business.
Less drastic, but still worrisome, are changes in govemment policies that are not
caused by changes in the government itsell These occur when, for one reason or
another, a government feels pressured to change its policies toward frtreign businesses. The pressure may be the result of nationalist or religious factkrns or wide-
coups d'6tat A forccd
change in a country's
gnvernment, often resuhing
in attacks of foreign lirrns
and policy changes by rhe
new governlnent.
spread anti-Western feeling.
A broad range of policy changes is possible as a result of political unrest. All of the
changes can affect the company's intemational operations, but not all of them are equal
in weight. Except for extreme
cases, companies do
not usually have to fear violence
against their employees, although violence agairut company property is qutte common.
.{.lso common are changes in policy that result from a new govemment or a strong new
srance thar is nationalist and opposed to foreign investment. The most drastic public
sreps resulting from such policy changes are usually expropriation and confiscation.
Expropriation is the transfer of ownership by the host govemment to a domestic
entity with payment of compensation. Expropriation was an appealing action to many
countries because it demonstrated their nationalism and mansferred a certain amount
expropriation The
government takeovcr of a
company with compens:rti()n,
fretluently at a level lower
than the invesnnenr value of
the company's asscts,
o
o
RISK MAP
2O1O
SECURITY RISK FOBECAST
I
lnsignilicant
I-_-.l
lo"
ll] t',t"oim
ffi
Hisn
!
extre."
Kl
ei,.u"y
f
Politics and Law
Pirates: Not Just in the
Caribbean
ships. ln 1661, a Chinese pirate named Koxinga led 100,000
men and seized Taiwan from the Dutch. A few decades later, a
Lately, there have been threats to international business emanating from ungovemed
the South China Sea.
spaces. For example, government snipers had to intervene to
rescue the captain of a hijacked U.S. cargo vessel. Off the
coast of East Africa, piracy groMh is explosive. ln 2OO?,41
ships were attacked; in 2008 it was 122; by mid-May 2009,
102 ships had been attacked. Often, the cargo and the crew
were held hostage until a ransom payment was made. With
estimated payments of more than $100 million, piracy has
emerged as a very lucrative industry.
Even though it often appears as il today's governments
are taken by surprise when such piracy happens, the phenomenon itself has been around lor a long time and has had a
major impact on international business.
During the times of Julius Caesar, Rome's carriers of
wheat were so often under attack by pirates that Pompeius
was issued with special powers and a fleet to end this abuse,
which he accomplished successfult. ln the early sixteenth
century, the North African pirate Barbarossa conquered
Algiers and Tunis and used them as bases to attack ocean
confederation of 40,000 pirates based in Canton dominated
Ship owners typically try to avoid arming their ships or
providing a proper defense. Rather than taking cuts in their
profits, they expect their home navy and government to come
to their aid. Governments, in turn, often pay large tributes in
order to ensure safe passage for their ships, But even with
such payments, piracy continues as a threat.
Research evidence appears to indicate that the key approach to reducing piracy is to constantly challenge the pi
rates. Whether a country or company sends ships of war lor
protection, hires private pirate hunters, offers pardons to
former pirates, or chases pirates at sea and on land, it is crucial to track and inlervene in piracy. The cost lor the pirates
must go up and their rewards must go down if a reduction of
the problem is to occur.
Sources. [4a( Bool, "Pirates, Then and Nowr How PiEcy Wa€ Defeated in lhe
Past and Can Be Again," turcign Afhits, JulylAugust 200S, 94-107; ICC Commercial Crime Services, /MB Pincy Map,wwvr.icc-ccs.org, accessed October
28, 2009.
of wealth and resources from foreign companies to the host country immediately. lt
did have costs to the host country, however, to the extent that it made other frrms
more hesitant to invest there. Expropriation does not relieve the host govemment of
providing compensadon to the former owners, However, these compensation negoriations are often protracted and frequently result in settlements that are unsatisfactory
to the owners. For example, govemments may offer compensation in the form of local, nontransferable cunency or may base compensation on the book value of the
lirrn. Even though firms that are expropriated may deplore the lorv levels of payment
obtained, they frequently accept them in the absence of better altemarives.
In the mid-1970s, when more than 83 expropriatioru took place in a single year,
expropriation was a serious policy tool by some govemments. By 2000, the annual
average had declined to fewer than th,ree. More recently, expropriation has resurfaced,
particularly among the Bolivarian socialist regimes of South America. Venezuelan
President Hugo Chavez nationalized four oil projects in the Orinoco River basin in
1007, causing Exxon and ConocoPhillips to leave Venezuela. The Chavez govemment
has also nationalized the country's largest telecommunications company, buying out
\/erizon's stake. In 2008, the Venezuelan govemment took control of the cement inJustry, buying out Switzerland's Holcim and reducing the stake of France's Lafarge and
\lexico's Cemex. The food industry has also been targeted, with Venezuela expropriating a local unit of U.S. food giant Cargill ln 2009.23
Confiscation is similar to expropriation in that it results in a transfer of owne$hip
rrom the firm to the host country. lt differs in that it does not involve compensation for
the firm. Some industries are more vulnerable than others to confscation and expropriation because of their importance to the host country's economy and their lack of abil.
iw to shift operations. For this reason, such sectors as mining, energy, public utilities,
:nd banking have liequently been targets of such govemment actions.
Confiscation and expropriation constirure major political risk for foreign invesrors. Other government actions, however, are equally detrimental to foreign firms.
confiscation The forceful
govemment seizure of a
company without compensation for the
assets seized.
ENVIRONMENT
domestication Govemment
demand for partial transfer of
ownership and management
responsibilily fiom a foreign
company to local entities, with
or without compensation.
local content Regulations to
gain control over foreign
investment by ensuing that
a large share of the product
is locally produced or a larget
share of the profit is retained
in the country.
Many countries are tuming from confiscation and expropriation to more subtle forms
of control, such as domestication. The goal of domestication is the same-that is, to
gain control over foreign investment but the method is different. Through domestication, the govemment demands transfer of ownership and management responsibility, It can impose local content regulations to ensure that a large share of the
product is locally produced or demand that a larger share of the profit is retained in
the country. Changes in labor laws, patent protection, and tax regulations are also
used for purposes of domestication.
Changes in labor laws, patent protection, and tax regulations are also used for
purposes of domestication. In 2006, then newly elected President Evo Morales nationalized the oil and natural gas industry in Bolivia, taking over control from companies like the Spanish/Argentine venture RepsolYPF and Brazil's PetroleoBrasiliero.
"Rather than expropriation, the nationalization consisted of higher taxes on petroleum companies and renegotiated contracts. As such, the private companies chose to
stay in the country and continue operations. As a result of the new policy and high
gas prices, the Bolivian govemment's income ftom the country's oil and gas industry
has increased dramatically, nine fold in fact between 2002 ar.d2007."za
Domestication can have profound effects on an international business operation
for a number of reasons. If a frrm is forced to hire nationals as managers, poor cooperation and communication can result. If domestication is imposed within a very short
time span, corporate operations overseas may have to be headed by poorly trained
and inexperienced local managers. Domestic content requirements may force a firm
to purchase its supplies and parts locally. This can result in increased costs, less ef6ciency, and lower-quality products. Export requirements imposed on companies may
create havoc for their international distribution plans and force them to change or
even shut down operations in third countdes.
Finally, domestication usually will shield an industry within one country from
foreign competition. As a result, ineffrciencies will be allowed to thrive due to a lack
of market discipline. This will affect the long'tun intemational competitiveness ofan
operation abroad and may rn into a major problem when, years later, domestication is discontinued by the government,
lf govemment action consists of weakening or not enforcing intellectual property right (lPR) protection, companies run the risk of losing their core competitive
edge. Such steps may temporarily permit domestic frrms to become quick irnitators.
Yet, in the longer term, they will not only discourage the ongoing transfer of technology and knowledge by multinational firms, but also reduce the incentive for local
6rms to invest in innovation and progress.
Poor IPR legislation and enforcement in the otherwise lucrative markets of Asia
illustrate a clash between intemational business interests and developing nations' political and legal environrnents. Businesses attempting to enter the markets of China,
lndonesia, Malaysia, Singapore, Taiwan, Thailand, and the Philippines face corsiderable risk in these countries, which have the world's worst records for copynight piracy
and intellectual property infiingements. But these newly industrialized counffies argue
that IPR laws discriminate against them because they impede the diffusion of technology and artificially inflate prices. They also point to the fact that industrialized natiors
such as the United States and Japan violated IPR laws during earlier stages of development. ln fact, the United States became a signatory to the Berne Convention on
copyrighs only in 1989-around one hundred years after its introduction-and Japan
disregarded IPR laws in adapting \Testem technologies during the 1950s. Furthermore,
although newly industrialized nations are becoming increasingly aware that snong IPR
protection will encourage technology transfer and foreign investment, the weak nature
of these countries' court structures and the slow pace of legislation often fail to keep
pace with the needs of their rapidly transforming economies.Z5
Politics and Law
Due to successful international negotiations in the Uruguay Round, the World
Trade Organization now has agreement on signifcant dimensions of the traderelated aspects of intellectual property rights (TRIPS) (http://www.wto.org). This
agreement sets minimum standards of protection to be provided by each member
country for copyrights, trademarks, geographical indications, industrial designs, patents, layout designs of integrated circuits, and undisclosed information such as trade
secrets and test data.26 While not all-encompassing, these standards provide substantial assurances of protection, which, after an implementation delay for the poorest
countries, will apply to virtually all parts of the world.
World Trade Organization rules do allow countries to get around intellectual
property rights in the case of medical emergency, which has serious implications for
pharmaceutical companies. In 2007, Thailand and Brazil issued compulsory licenses
for certain anti-retroviml drugs used in treating HIV/AIDS, bypassing patents held
by companies including Abbott Laboratories and Merck. This allowed the countries,
both afflicted by AIDS epidemics, to purchase the drugs at cheaper prices for free
distribution to their citizens.2? This certainly seems like a humane and moral action
on the part of these govemmenb. From the companies' point of view, however, this
affects their ability to realize the profits that allow further research and development
for advancement in the 6ght against AIDS.
One might ask why companies would choose to do business in risky markets.
However, as with anything international (or any business for that matter), the issue
is not whether there is any risk, but rather the degree of risk that exists. Key links to
risk are the dimension of reward. With appropriate rewards, many risks become rnore
tolerable. For brave businessfolk, there may be rich returns in unexpected places.28
ECONOMIC RISK
Most businesses operating abroad face a number ofother risks that are less dangerous,
but probably more common, than the drastic ones already described. A host govemment's political situation or desires may lead it to impose economic regulations or
Iaws to restrict or control the international activities of firms.
Nations that face a shortage of foreign currency will sometimes impose controls on
rhe movement of capital into and out of the country. Such controls may make it difficult for a firm to remove its profits or investments from the host country. Sometimes
exchange controls are also levied selectively against certain products or companies in
an effort to reduce the importation of goods that are considered to be luxuries or to be
suffciently available through domestic production. Such regulations often affect the
importation of pans, components, or supplies that are vital to production operations in
rhe country. They may force a 6rm either to alter its production program or, wo$e yet,
ro shut down its entire plant. Prolonged negotiations with govemment officials may be
necessary to reach a compromise on what constitutes a "valid" expenditure of foreign
currency resources. Because the goals of govemment officials and corporate managers
are often quite different, such compromises, even when they can be reached, may result
in substantial damage to the intemational operations of the firm.
Countries may also use tax policy toward foreign investors in an effort to control
multinational corporations and their capital. Tax increases may raise much-needed
revenue for the host country, but they can severely damage the operations of foreign
investors. This damage, in tum, will frequently result in decreased income for the
host country in the long run. The raising of tax rates needs to be carefully differentiated from increased tax scrutiny of foreign investo$. Many govemments believe that
multinational firms may be tempted to shift tax burdens to lower-tax countries by
using artificial pricing schemes between subsidiaries. ln such instances, govemments
are likely to take measures to obtain their fair contribution from multinational
exchange controls Controls
on the movement of capital
in and out of a country,
sometimes imposed when the
country faces a shortage of
foreign currency.
tax policy A means by
which countries may control
foreign investors.
Itw
ENVIRONMENT
ln the United States, for example, increased focus on the taxation of
multinational frrms has resulted in various back-tax payments by foreign firms and
the development of new corporate pricing policies developed in collaboration with
operations.
price controls Regulation of
the prices of goods and
services,
the Internal Revenue Service.29
The intemational executive also has to worry about price controls, ln many
countdes, domestic political pressures can force govemments to control the prices of
imported products or services, particularly in sectors coruidered highly sensitive liom a
political perspective, such as food or health care. A foreign frrm involved in these
areas is vulnerable to price controls because the govemment can play on citizens'
nationalistic tendencies to enforce the controls. Particularly in countries that suffer
from high inflation, frequent devaluations, or sharply rising costs, the intemational
executive may be forced to choose between shutting down the operation or continuing production at a loss in the hope of recouping profrts when the govemment loosens
or removes its price restrictions. Price controls can also be adrninistered to prevent
prices ftom being too low. Because govemmen$ have enacted antidumping laws,
which prevent foreign competitors from pricing their imports unfaifi low in order to
drive domestic competito$ out of the market. Since dumping charges depend heavily
on the definition of "fair" price, a firm can sometimes become the target of such accusations quite unexpectedly. Proving that no dumping took place can become quite
onerous in terms of time, money, and information disclosure.
MANAGING THE RISK
Managers face the risk of confrscation, expropriation, domestication, or other government interference whenevet they conduct business overseas, but ways exist to
lessen the risk. Obviously, if a new govemment comes into power and is dedicated to
the removal of all foreign influences, there is little a firm can do. ln less extreme
cases, however, managers can take actions that will reduce the risk, provided they
understand the root causes of the host country's policies.
Adverse governmental actions are usually the result of nationalism, the deterioration of political relations between home and host country, the desire for independence, or opposition to colonial remnants. If a host country's citizens feel exploited
by foreign investors, government officials are more likely to take antiforeign action.
To reduce the risk of government intervention, the intemational frrm needs to demonstrate that it is concerned with the host country's society and that it considers
itself an integral part of the host country, rather than simply an exploitative foreign
corporation. Ways of doing this include intensive local hiring and training practices,
better pay, contributions to charity, and societally useful investments. ln addition,
the company can form joint ventures with local partners to demonstrate that it is
willing to share its gains with nationals. Although such actions will not guarantee
freedom from political risk, they will certainly lessen the exposure.
Another action that can be taken by corporations to protect against political risk
is the close monitoring of political developments. Increasingly, private sector firms
offer such monitoring assistance, permitting the overseas corporation to discover potential trouble spots as early as possible and to react quickly to prevent major losses.
Firms can also take out insurance to cover losses due to political and economic
risk. Most industrialized countries offer insurance programs for their firms doing business abroad. In Germany, for example, Hermes Kreditanstalt (http://www.hennes.de)
provides exporters with iruurance. ln the United States, the Ovemeas Pdvate lnvestment Corporation (OPIC) (hnp:i/www.opic.gov) can cover three types of risk insurance: curency inconvertibility insurance, which covers the inability to convert prolits,
debt service, and other remittances ftom local currency into U.S. dollars; expropriation
insurance, which covers the loss of an investment due to expropriation, nationalization,
Politics and Law
or conliscation by a foreign govemment; and political violence iruurance, which covers the loss of assets or income
due to war, revolution, insurrection, or politically motivated civil strife, terrorism, and sabotage. The cost of cov-
erage varies by country and type
of activity, but for
manufacturers it averages $0.35 for $100 of coverage per
year to protect against inconvertibility, $0.68 to protect
against expropriation, and $0.50 to compensate for damage to business income and assets from political vio-
lence.lo Usually the policies do not cover commercial
risks and, in the event of a claim, cover only the actual
loss-not lost profits. In the event of a major political upheaval, however, risk insurance can be critical to a firm's
survival,
9
E
@
Brussels is the center of government for the European lJnion.
The discussion to this point has focused primarily on
the political environment. Laws have been mentioned only
as they appear to be the
direct result of political change. However, the laws of host countries need to be considered on their own to some extent, for the basic system oflaw is important to the conduct
of intemational business.
LEGAL DIFFERENCES AND RESTRAINTS
Countries differ in their laws as well as in their use of the law. For example, over the
past decade, the United States has become an increasingly litigious society in which
institutions and individuals are quick to initiate lawsuits. Court battLes are often protracted and costly, and even the threat of a court case can reduce business opportunities. ln contrast, Japan's tradition tends to minimize the role of the law and of lawyers.
On a per capita basis, Japan has only about 4 percent of the number of lawyem that the
United States h^.ll V/h.th.. the number of lawyers is cause or effect, the Japanese
tend not to litigate. Litigation in Japan means that the parties have failed to compromise, which is contrary to Japanese tradition and results in loss of face. A cultural predisposition therefore exists to settle conflicts outside the court system.
Over the millennia of civilization, many different laws and legal systems have
emerged. King Hammurabi of Babylon codifled a series of decisions by judges into a
body of laws. Legal issues in many African tribes were settled through the verdicts of
clansmen. A key legal perspective that survives today is that of theocracy. Examples
are Hebrew law and Islamic law (the Sharia) which are the result of the dictates of
God, scripture, prophetic uttemnces and practices, and scholarly interpretations.3z
These legal systems have faith and belief as their key focus and are a mix of societal,
legal, and spiritual guidelines.
'l(/hile
legal systems are impoftant to society, from an international business perspective, the two major legal systems worldwide can be categorized into common law
and code law. Common law is based on tradition and depends less on written stat.
utes and codes than on precedent and custom. Common law originated in England
and is the system of law in the United States. Code law on the other hand, is based
on a comprehensive set of written statutes. Countries with code law try to spell out
all possible legal rules explicitly. Code law is based on Roman law and is found in the
majority of the nations of the world.
ln general, countries with the code law system have much more rigid laws than
those with the common law system. In the latter, courts adopt precedents and customs to frt cases, allowing a better idea of basic judgment likely to be rendered in
new situations. The differences between code law and common law and their impact
on international business, while wide in theory, are not as broad in practice. One
theocracy A legal
perspective based on religious
practices and interpretations.
common law Law based on
tradition and depending less
on written statutes and codes
than on precedent and
used in the United
custom
States.
code law Law based on a
cornprehensive set of written
statutes.
ENVIRONMENT
reason is that many common-law countries, including the United States, have
adopted commercial codes to govern the conduct of business.
Host countries may adopt a number of laws that affect the 6rm's ability to do
business. Tariffs and quotas, for example, can affect the entry of goods. Special licenses for foreign goods may be required.
Other laws may restrict entrepreneurial activities. ln Europe for example, 11 EU
member states restrict nonpharmacists from holding a majority stake in pharmacies.
Spanish laws restrict pharmacy ownership to pharmacists with a limit of one location, while German laws allow a licensed pharmacist to own up to four stores. ln
2009, the European Court ofJustice (ECJ) upheld pharmacy ownership requirements
on the grounds that its member-states should be abLe to take protective measures to
minimize risks to human health.ll
Speci6c legislation may also exist regulating what does and does not constitute
deceptive advertising. Many countries prohibit specilic claims that compare products
to the competition, or they restrict the use of promotional devices. Even when no
Laws exist, regulations may hamper business operations. For example, in some countries, lirms are required to join the Local chamber of commerce or become a member of
the national trade association. These institutions in turn may have internal sets of
rules that specify standards for the conduct of business that may be quite confining.
Seemingly innocuous local regulatioru that rnay easily be overlooked can have a
major impact on the intemational firm's success. For example, Japan had an intricate
process regulating the building of new department stores or supermarkets. The govemment's desire to protect smaller merchants brought the opening of new, large stores to a
virtuaL standstill. Because department stores and supermarkets serve as the major conduit for the sale of imported consumer products, the lack of new stores severely affected
opportunities for market penetration of imported merchandise.l4 Only after intense
pressure from the outside did the Japanese govemment decide to reconsider the regulations. Another example concems the growing global controversy that surrounds the use
of genetic technology. Govemments increasingly devise new rules that affect trade in
genetically modilied products. Australia introduced a mandatory standard for foods produced using biotechnology that prohibits the sale of such prc ucts unless the food has
been assessed by the Australia New Zealand Food Authority.
Other laws may be designed to protect domestic industries and reduce imports.
For example, Russia assesses high excise taxes on goods such as cigarettes, autorno.
biles, and alcoholic beverages, and provides a burdensome import licensing regime
for alcohol to depress Russian demand for imports.r5
Finally, the interpretation and enforcement of Laws and regulations may have a
major effect on intemational business activities. For example, in deciding what product
can be called a "Swiss" Army knife or "French" wine, the interpretation given by
courts to the meaning of a name can affect consumer perceptions and sales of products.
THE INFLUENCING OF POTITICS AND LAWS
To succeed in a market, the international manager needs much more than business
know-how. He or she must also deal with the intricacies of national politics and laws.
Although to fully understand another country's legal political system will rarely be
possible, the good manager will be aware of its importance and will work with people
who do understand how to operate within the system. To do so is particularly impor.
tant for mukinational corporations. These firms work in many countries and must
manage relationships with a large number of governments. Often, these governments
have a variety of ideologies that may require different corpomte responses. To be
strategically successful, the lirm must therefore be able to formulate and implement
political activities on a global s.ale.36
Politics and Law
Many areas of politics and law are not immutable. Viewpoints can be modified or
even reversed, and new laws can supersede old ones. Therefore, existing political and
legal restraints do not always need to be accepted. To achieve change, however,
some impetus for it-such as the clamors of a constituency-must occur. Otherwise,
systemic inertia is likely to allow the status quo to prevail.
The intemational manager has various options. One is to simply ignore prevailing
rules and expect to get away wirh it. Pursuing this oprion is a high-risk strategy because the possibility of objection and even prosecution exists. A second, traditional
option is to provide input to trade negotiators and expect any problem areas to be
resolved in multilateral negotiations. The drawbacks to this option are, of course, the
quite time-consuming process involved and the lack of control by the 6rm.
A third option involves the development of coalitions and constituencies that
can motivate legislators and politicians to consider and ultimately implement
change, This option can be pursued in various ways. One direction can be the recasting or redefinition of issues. Often, specilic terminology leads to conditioned, though
inappropriate, responses. For example, before China's accession to the \World Trade
Organization in 2001, the country's trade status with the United States was highly
controversial for many years. The U.S. Congress had to decide annually whether or
not to grant "most-favored nation" (MFN) status to China. The debate on this decision was always very contentious and acerbic, and often framed around the question
as to why China deserved to be treated the "most favored way." Lost in the debate
was often the fact
that the term "most favored" was simply taken from WTO termi-
nology, and only indicated that trade with China would be treated like that with any
other country. Only in late 1999 was the terminology changed from MFN to NTR, or
"normal trade relations." Even though there was still considerable debate regarding
China, at least the controversy about special treatment had been eliminated.l?
Beyond terminology, firms can also highlight rhe direct links and their costs and
benelits to legislators and politicians. For example, a manager can explain the
employment and economic effects of certain laws and regulations and demonstrate
the benefits of change. The picture can be enlarged by including indirect links. For
example, suppliers, customers, and distributors can be asked to help explain to decision makers the benefit of change. In addition, the public at large can be involved
through public statements or advertisements.
Developing such coalitions is not an easy task. Companies often seek assistance
in effectively influencing the government decision-making process. Typical categories of firm-level political behavior are lobbying, public/govemment relations, industry alliances and associations, and political incentives.38 Lobbying usually works best
rvhen narrow economic objectives or single-issue campaigns are involved. Typically,
lobbyists provide this assistance. Usually, there are well-connected individuals and
firms that can provide access to policymakers and legislators in order to communicate
new and pertinent information.
Many U.S. firms have representatives in Washington, DC, as well as in state capitals and are quite successfirl at influencing domestic policies. Often, however, they are
less adept at ensuring proper representation abroad even though, for example, the European Commission in Brussels wields far-reaching economic power, A survey of U.S,
international rnarketing executives found that knowledge and information about foreign trade and govemment officials was ranked lowest among critical international
business information needs. This low ranking appears to reflect the fact that many
U.S. firms are far less successful in their interactions with govemments abroad and far
less intensive in their lobbying efforts than arc foreign enrities in the United States.lg
Many countries and companies have been effective in their lobbying in the
United States. As an example, in 2005, the presidents of Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua, and the Dominican Republic visited 11 U.S. cities
lobbyist Typically, a wellconnected person or 6rm
that is hired by a business to
influence the decision
making of policymakers and
legislators.
ENVIRONMENT
and then came to Washington to meet with President Bush and members of Congress
to push for passage of the U.S.-Central American Free Trade Agreement (CAFTA)
The countries of the region retained Washington public relations and lobbying firms
in the fight for CAFTA, and many Central American business leaders had also vis.
ited Capitol Hill to advocate for the free trade agreemenr, which was approved by
Congress in July 2005. Colombia has pursued the passage of the U.S.-Colombia Free
Trade Agreement very aggressively, hosting more than 50 U.S. members of Congress
to demonstrate progress in social justice in Colombia. As of 2008, Colombia had paid
more than $1 million to Washington lobbying firms for work to pass the agreement.
Yet, by 2010 the agreement was still pending U.S. congressional approval.40
Political influence can be useful when it comes to general issues applicable to a
wide variety offirms or industries, or when long-term policy directions are at stake. In
such instances, the collaboration and power of many market actors can help sway the
direction of policy.
Although representation of the flrm's interests to govemment decision makers and
legislators is entirely appropriate, the intemational manager must also consider any potential side effects. Major questions can be raised if such rcpresentation becomes very
overt. Short-term gains may be far outweighed by long-term negative rcpercussions if
the intemational firm is perceived as exerting too much political influence.
3.
To see
how the political
actions of counties expose
fims to international risks
In addition to unde$tanding the politics and laws of both home and host countries,
the intemational manager must also consider the overall international political and
legal environment. This is important because policies and events occufiing among
countries can have a profound impact on firms trying to do business intemationally,
I
NTERNATIONAL POIITICS
The effect of politics on international business is determined by both the bilateral
political relations between home and host countries and by multilateral agreements
governing the relations among groups of countries.
The govemment-to-govemment relationship can have a profound influence in a
number of ways, particularly if it becomes hostile. President Bush's characterization
in February 2002 of Iran, lraq, and North Korea as an "axis of evil" aggnvated already unstable political relationships and threatened to set back negotiations by U.S.
companies to secure lucrative oil deals.4l In another example, although the intemal
political changes in the aftermath of the lranian Revolution certainly would have
affected any foreign ftrm doing business in lran, the deterioration in U.S.-lranian
political relations that resulted had a significant additionaL impacr on U.S. frrms,
which were injured not only by the physical damage caused by the violence, but also
by the anti-American feelings of the lranian people and their govemment. The resulting clashes between the two governments subsequently destroyed business relationships, regardless ofcorporate feelings or agreements on either side.
International political relations do not always have harmful effects. lf bilateral
political relations between countries improve, business can benefit. One example is
the improvement in Westem relations with central Europe following the official end
of the Cold War. The political warming opened the potentially lucrative former Eastem bloc markets to Westem firms.
The overall international political environment has effects, whether good or bad,
on intemational business. For this reason, the manager must strive to remain aware of