Who is able to complete this discussion?

4 Social and Cultural Environments

Learning Objectives

4-1 Define culture and identify the ­various expressions and ­manifestations of culture that can impact global marketing strategies.

4-2 Compare and contrast the key aspects of high- and low-context cultures.

4-3 Identify and briefly explain the major dimensions of Hofstede’s social ­values typology.

4-4 Explain how the self-reference ­criterion can affect decision making at global companies, and provide a step-by-step example of a company adapting to conditions in a global market.

4-5 Analyze the components of diffusion theory and its applicability to global marketing.

4-6 Explain the marketing implications of different social and cultural environments around the globe.

Case 4-1 Strange Brew: Coffee Culture Around the World

Coffee beans are the second-most widely traded commodity in the world (Can you guess what is number 1?). According to legend, the bean’s stimulant properties were discovered hundreds of years ago by a goat herder in Kaffa, a highland region of Ethiopia. Beans and plants were eventually transported across the Red Sea to the Arabian Peninsula. By the end of the fifteenth century, coffee cultivation had taken root in Yemen, and a hot beverage brewed using roasted beans quickly became part of Islamic cultural life.

The growth and evolution of the global coffee trade from the early 1600s through today is documented in many sources, including John Keay’s history of the British East India Company. In the fertile valleys of Yemen, Captain John Jourdain found groves of plantings that he called “cohoo.” Jourdain wrote:

The seeds of this cohoo is a great marchandise [sic] for it is carried to Grand Cairo and all other places of Turkey and the Indias.1

As Keay notes, traders had indeed brought coffea Arabica from Africa to the Middle East for cultivation. “Kahwa” was the word used in the Arab world. The crop was cultivated only in this region, and, at the time, no market for coffee existed in Europe.

By the 1660s, coffee had become the staple export of the Red Sea ports. Gradually, coffee made its way to Europe. London’s first coffee house opened in 1652; diarist Samuel Pepys was a regular patron. Venetian traders imported coffee from Egypt and sold it to wealthy citizens of the Venetian Republic; Italy’s first coffee café was opened in the early 1680s.

Although the British East India Company dominated the export trade at the Yemeni port of Mocha, by the end of the seventeenth century the rival Dutch East India Company (Verenigde Oostindische Copagnie) had established coffee plantations in Indonesia on the island of Java. Other European nations followed suit, introducing the crop in their far-flung networks of colonies. Coffee had gone global!

Today, coffee culture continues to spread around the globe. The brew is even becoming popular in countries such as India and China, where tea has traditionally been the hot beverage of choice (see Exhibit 4-1). Meanwhile, in Ethiopia, where coffee was first discovered, conflict is brewing between government budget needs and consumer aspirations: The government wants to generate more revenues by boosting exports of premium coffee beans, while consumers want to drink more coffee made from those same beans.

Exhibit 4-1

The conflicting priorities of commerce and consumption in Ethiopia, the broader acceptance of coffee worldwide, and the rapid growth of coffee-centric brands such as Starbucks illustrate the ways that the social and cultural environments impact marketing opportunities and dynamics around the globe. This chapter focuses on the forces that shape and affect individual, group, and corporate behavior in the marketplace.

We start with a general discussion of the basic aspects of culture and society and the emergence of a twenty-first-century global consumer culture. Next, several useful conceptual frameworks for understanding culture are presented, including Hall’s concept of high- and low-context cultures, Maslow’s hierarchy of needs, Hofstede’s cultural typology, the self-reference criterion, and diffusion theory. The chapter also cites specific examples of the impact of culture and society on the marketing of both consumer and industrial products.

Clearly, coffee’s popularity is on the rise around the world. It remains to be seen, however, how rising levels of consumption can be balanced with increased production in Ethiopia and other emerging markets. You will have the opportunity to explore the issue in the continuation of this case at the end of the chapter. The discussion questions at the end of the case will give you a chance to reflect further on “lessons learned.”

4-1 Society, Culture, and Global Consumer Culture

4-1 Define culture and ­identify the various expressions and manifestations of culture that can impact global marketing strategies.

Both differences and similarities characterize the world’s cultures, meaning that the task of the global marketer is twofold. First, marketers must study and understand the cultures of the countries in which they will be doing business. Second, they must incorporate this understanding into the marketing planning process. In some instances, strategies and marketing programs will have to be adapted to the local culture; however, marketers should also take advantage of shared cultural characteristics and avoid unneeded and costly adaptations of the marketing mix.

Any systematic study of a new geographic market requires a combination of tough-mindedness and open-mindedness. While marketers should be secure in their own convictions and traditions, an open mind is required to appreciate the integrity and value of other ways of life and points of view. Put simply, people must overcome the prejudices that are a natural result of the human tendency toward ethnocentricity. Although “culture shock” is a normal human reaction to the new and unknown, successful global marketers strive to comprehend human experience from the local point of view. One reason cultural factors challenge global marketers is that many of these factors are hidden from view. Because culture is a learned behavior passed on from generation to generation, it can be difficult for outsiders to fathom. However, as they endeavor to understand cultural factors, outsiders gradually become insiders and develop cultural empathy. There are many different paths to the same goals in life: The global marketer understands this and revels in life’s rich diversity.

Anthropologists and sociologists have offered scores of different definitions of culture. As a starting point, culture can be understood as “ways of living, built up by a group of human beings, that are transmitted from one generation to another.” A culture acts out its ways of living in the context of social institutions, including family, educational, religious, governmental, and business institutions. Those institutions, in turn, function to reinforce cultural norms. Culture also includes both conscious and unconscious values, ideas, attitudes, and symbols that shape human behavior and that are transmitted from one generation to the next. Organizational anthropologist Geert Hofstede defines culture as “the collective programming of the mind that distinguishes the members of one category of people from those of another.”2 A particular “category of people” may constitute a nation, an ethnic group, a gender group, an organization, a family, or some other unit.

Some anthropologists and sociologists divide cultural elements into two broad categories: material culture and nonmaterial culture. The former is sometimes referred to as the physical component or physical culture; it includes physical objects and artifacts created by humans such as clothing and tools. Nonmaterial culture (also known as subjective or abstract culture) includes intangibles such as religion, perceptions, attitudes, beliefs, and values. It is generally agreed that the material and nonmaterial elements of culture are interrelated and interactive. Cultural anthropologist George P. Murdock studied material and nonmaterial culture and identified dozens of “cultural universals,” including athletic sports, body adornment, cooking, courtship, dancing, decorative art, education, ethics, etiquette, family feasting, food taboos, language, marriage, mealtime, medicine, mourning, music, property rights, religious rituals, residence rules, status differentiation, and trade.3

It is against this background of traditional definitions that global marketers should understand a key worldwide sociocultural phenomenon of the early twenty-first century:4 Consumption has become the hallmark of postmodern society. As cultural information and imagery flow freely across borders via satellite TV, the Internet, and other communication channels, new global consumer cultures are emerging. Persons who identify with these cultures share meaningful sets of consumption-related symbols. Some of these cultures are associated with specific product categories; marketers speak of “coffee culture,” “credit-card culture,” “fast-food culture,” “pub culture,” “soccer/football culture,” and so on. This cosmopolitan culture, which is composed of various segments, owes its existence in large part to a wired world in which there is increasing interconnectedness of various local cultures. It can be exploited by global consumer culture positioning (GCCP), a marketing tool that will be explained in more detail in Chapter 7. In particular, marketers can use advertising to communicate the notion that people everywhere consume a particular brand or to appeal to human universals.

Attitudes, Beliefs, and Values

If we accept Hofstede’s notion of culture as “the collective programming of the mind,” then it makes sense to learn about culture by studying the attitudes, beliefs, and values shared by a specific group of people. An attitude is a learned tendency to respond in a consistent way to a given object or entity. Attitudes are clusters of interrelated beliefs. A belief is an organized pattern of knowledge that an individual holds to be true about the world. Attitudes and beliefs, in turn, are closely related to values. A value can be defined as an enduring belief or feeling that a specific mode of conduct is personally or socially preferable to another mode of conduct.5 In the view of Hofstede and others, values represent the deepest level of a culture and are present in the majority of the members of that particular culture.

Some specific examples will allow us to illustrate these definitions by comparing and contrasting attitudes, beliefs, and values. The Japanese, for example, strive to achieve cooperation, consensus, self-denial, and harmony. Because these all represent feelings about modes of conduct, they are values. Japan’s monocultural society reflects the belief among the Japanese that they are unique in the world. Many Japanese, especially young people, also believe that the West is the source of important fashion trends. As a result, many Japanese share a favorable attitude toward American brands. Within any large, dominant cultural group, there are likely to be subcultures—that is, smaller groups of people with their own shared subset of attitudes, beliefs, and values. Values, attitudes, and beliefs can also be surveyed at the level of any “category of people” that is embedded within a broad culture. For example, if you are a vegetarian, then eating meat represents a mode of conduct that you and others who share your views avoid. Subcultures often represent attractive niche marketing opportunities.

Religion

Religion is an important source of a society’s beliefs, attitudes, and values. The world’s major religions include Buddhism, Hinduism, Islam, Judaism, and Christianity; the last includes Roman Catholicism and numerous Protestant denominations. Examples abound of religious tenets, practices, holidays, and histories directly impacting the way people of different faiths react to global marketing activities. For example, Hindus do not eat beef, which means that McDonald’s does not serve hamburgers in India (see Case 1-2). In Muslim countries, Yum! Brands successfully promotes KFC in conjunction with religious observances. In the Islamic world, Ramadan is a time of fasting that begins in the ninth month of the Islamic calendar. In Indonesia, home to the world’s largest Muslim population, KFC uses Ramadan-themed outdoor advertising to encourage Indonesians to come to the restaurants at buka puasa, the end of each day’s fast. Business at KFC Indonesia’s 500 units increases as much as 20 percent during Ramadan.

When followers of a particular religion believe they have been offended, the response can sometimes be tragic (see Exhibit 4-2). In the aftermath of the September 2001 terrorist attacks in New York and Washington, D.C., and the subsequent U.S. military actions in the Middle East and Afghanistan, some Muslims have tapped into anti-American sentiment by urging a boycott of American brands. One entrepreneur, Tunisian-born Tawfik Mathlouthi, launched a soft drink brand, Mecca-Cola, as an alternative to Coca-Cola for Muslims living in the United Kingdom and France. The brand’s name is both an intentional reference to the holy city of Islam and an ironic swipe at Coca-Cola, which Mathlouthi calls “the Mecca of capitalism.” London’s Sunday Times called Mecca-Cola “the drink now seen as politically preferable to Pepsi or Coke.”6 In 2003, Qibla Cola (the name comes from an Arabic word for “direction”) was launched in the United Kingdom. Founder Zahida Parveen hoped to reach a broader market than Mecca-Cola by positioning the brand “for any consumer with a conscience, irrespective of ethnicity or religion.”7

Aesthetics

Within every culture, there is an overall sense of what is beautiful and what is not beautiful, what represents good taste as opposed to tastelessness or even obscenity, and so on. Such considerations are matters of aesthetics. Global marketers must understand the importance of visual aesthetics embodied in the color or shape of a product, label, or package. Likewise, different parts of the world perceive aesthetic styles—various degrees of complexity, for example—differently. Aesthetic elements that are attractive, appealing, and in good taste in one country may be perceived in an entirely different way in another country.

In some cases, a standardized color can be used in all countries; examples include Caterpillar Yellow, the trademark of the earthmoving equipment company and its licensed outdoor gear. Likewise, Cadbury has trademarked the color purple for its chocolate confectionary packaging. In surveys about color preferences, 50 percent of respondents indicate blue is their favorite—and it is favored by a wide margin over the next-preferred color. The use of blue dates back millennia; artisans in ancient Egypt, China, and Mayan civilizations all worked with the color after the advent of mining led to the extraction of minerals containing blue pigment. Because it was rare and expensive, blue came to be associated with royalty and divinity.8 Today, Tiffany Blue is a trademarked color that the luxury goods marketer uses on its gift bags and boxes. When Prince William and his family visit other European royalty, blue is a frequent wardrobe choice (see Exhibit 4-3).

Exhibit 4-3

Members of the British royal family make diplomatic tours during which their wardrobe choices often reflect cultural awareness. When the Duke and Duchess of Cambridge arrived in Germany in 2017, the duchess wore Prussian blue; Prince William wore a matching tie.

Because color perceptions can vary among cultures, adaptation to local preferences may be required. Such perceptions should be taken into account when making decisions about product packaging and other brand-related communications. In highly competitive markets, inappropriate or unattractive product packaging may put a company or brand at a distinct disadvantage. New color schemes may also be needed because of a changing competitive environment.

There is nothing inherently “good” or “bad” about any color of the spectrum; all associations and perceptions regarding color arise from culture. Red is a popular color in most parts of the world: Besides being the color of blood, in many countries red is tied to centuries-old traditions of viticulture and winemaking. One eight-country study of color perceptions found that red is associated with perceptions such as “active,” “hot,” and “vibrant”; in most countries studied, it also conveys meanings such as “emotional” and “sharp.”9 As such, red has positive connotations in many societies. In contrast, in Korea, it is taboo to write a person's name in red ink. Why? Because traditionally, red was used to record the names of the deceased. Blue, because of its associations with sky and water, has an elemental connotation with undertones of dependability, constancy, and eternity. White connotes purity and cleanliness in the West, but is often associated with death, mourning, and funerals in China and other parts of Asia. Attitudes are changing quickly among the younger generation, however; today, many Chinese women rent white wedding gowns and pose for photos with their friends to commemorate graduating from university!10

Another research team concluded that gray connotes inexpensive in China and Japan, whereas it is associated with high quality and high cost in the United States. The researchers also found that the Chinese associate brown with soft drink labels and perceive the color as connoting a beverage that tastes good; in contrast, South Korean and Japanese consumers associate yellow with soft drinks that “taste good.” For Americans, the color red has those associations.11

Music is an aesthetic component of all cultures and is accepted as a form of artistic expression and a source of entertainment. In one sense, music represents a “transculture” that is not identified with any particular nation. For example, rhythm, or movement through time, is a universal aspect of music. But music is also characterized by considerable stylistic variation with regional or country-specific associations. For example, bossa nova rhythms are associated with Argentina; samba with Brazil; salsa with Cuba; reggae with Jamaica; merengue with the Dominican Republic; and blues, driving rock rhythms, hip-hop, and rap with the United States. Sociologists have noted that national identity derives in part from a country’s indigenous or popular music; a unique music style can “represent the uniqueness of the cultural entity and of the community.”12

Music provides an interesting example of the “think globally, act locally” theme of this book. Musicians in different countries draw from, absorb, adapt, and synthesize transcultural music influences, as well as country-specific ones, as they create hybrid styles such as Polish reggae or Italian hip-hop. Motti Regev describes this paradox as follows:

Producers of and listeners to these types of music feel, at one and the same time, participants in a specific contemporary, global-universal form of expression and innovators of local, national, ethnic, and other identities. A cultural form associated with American culture and with the powerful commercial interests of the international music industry is being used in order to construct a sense of local difference and authenticity.13

Because music plays an important role in advertising, marketers must understand which style is appropriate to use in their campaigns in a given national market. Although background music can be used effectively in broadcast commercials, the type of music appropriate for a commercial in one part of the world may not be acceptable or effective in another part. Government restrictions must also be taken into account. In China, authorities have the power to dictate which songs can be marketed and performed, as the Rolling Stones can attest.

Dietary Preferences

Cultural influences are also quite apparent in food preparation and consumption patterns and habits. Need proof? Consider the following examples:

Domino’s Pizza, the world’s largest pizza-delivery company, pulled out of Italy because Italians perceived its product to be “too American.” In particular, the tomato sauce was too bold and the toppings were too heavy. Domino’s had better luck in India, where it ­localized its recipes with offerings that include pizza keema do pyaaza, peppy paneer, and five ­peppers.14 Today, Domino’s is the largest foreign fast-food chain in India, with more than 700 stores.

When Dunkin’ Donuts opened its first Indian outlets in 2012, morning business was slow because most Indians eat breakfast at home. Success finally came after the company introduced a new menu item: Original Tough Guy Chicken Burgers.15

These examples underscore the fact that a solid understanding of food-related cultural preferences is important for any company that seeks to market food or beverage products globally. Titoo Ahluwalia, chairman of a market research firm in Mumbai, has pointed out that local companies can also leverage superior cultural understanding to compete effectively with large foreign firms: “Indian companies have an advantage when they are drawing from tradition. When it comes to food, drink, and medicine, you have to be culturally sensitive.”16 Companies that lack such sensitivity are bound to make marketing mistakes. To avoid this kind of problem, when Subway expanded into India, the company chose two U.S.-educated Indian brothers to help open stores and supervise operations.

Although some food preferences remain deeply embedded in culture, plenty of evidence suggests that global dietary preferences are converging. Over the past half century, the fast-food culture has gained increased acceptance around the world. Heads of families in many countries are pressed for time and are disinclined to prepare home-cooked meals. Millennials, who are open to different cultures and lifestyles, are experimenting with different foods. In addition, the global tourism boom has exposed travelers to pizza, pasta, and other ethnic foods. Shorter lunch hours and tighter budgets are forcing workers to find a place to grab a quick, cheap bite before returning to work. As food-related cultural differences become less relevant, such convenience products are likely to be purchased wherever consumers’ disposable incomes are high enough to afford them (see Exhibit 4-5).

Exhibit 4-5

SPAM, the iconic brand of canned ham, is a reliable, if unglamorous, pantry staple in American households. SPAM is so deeply embedded in American food culture that there is even a SPAM Museum in Austin, Minnesota, home to parent company Hormel Foods Corporation.

In South Korea, SPAM is regarded as a delicacy, often packaged in gift sets for holiday giving. It turns out that SPAM is a favorite of Chloe Kim, the American gold medalist in snowboarding at the 2018 Winter Olympics in PyeongChang, South Korea.

Source: Jodi Cobb/National Geographic Image Collection/Alamy.

Chapt. 5

5 The Political, Legal, and Regulatory Environments

Learning Objectives

5-1 Understand the elements of a country’s political environment that can impact global marketing activities.

5-2 Define international law and describe the main types of legal systems found in different parts of the world.

5-3 Understand the most important business issues that can lead to legal problems for global marketers.

5-4 Describe the available alternatives for conflict resolution and dispute settlement when doing business outside the home country.

5-5 In general terms, outline the regulatory environment in the European Union.

Case 5-1 Travis Kalanick and Uber

Travis Kalanick is an entrepreneur who has achieved a level of success and notoriety rarely matched in the modern era. Kalanick is cofounder of Uber Technologies, the parent company of the wildly popular Uber ride-sharing service.

Kalanick, along with friend and cofounder Garrett Camp, launched the Uber service in San Francisco in 2010. By now, most people are familiar with the way Uber works: Customers download the Uber app to a smartphone and set up an account that includes mobile payment information. Then, when the customer needs a ride, he or she opens the app and types in a destination. The app’s GPS identifies the customer’s current location and calculates an estimated fare, distance, and trip time to the destination. If the fare is acceptable, the customer then requests a car and driver.

By the end of 2014, Uber had raised venture capital that valued the company at nearly $40 billion! The service was available in more than 250 cities worldwide, and some industry observers hailed the company as a prime example of digital technology disrupting an established industry. Uber’s rapid growth was another example that the “sharing economy,” also known as “collaborative consumption,” was gaining traction, as evidenced by the success of Lyft (an Uber competitor), room rental service Airbnb, and others.

However, Uber has encountered resistance as its popularity has grown. In London and other major cities, drivers have staged demonstrations and mass protests against what they claim is unfair competition from unregulated drivers. Several cities, including Brussels, Miami, and Las Vegas, have banned Uber. In Brussels, a court fines drivers who use the service. Uber has been paying the fines and providing legal support. Regulators in Germany succeeded in obtaining a temporary injunction banning the service; after a series of appeals and counter-appeals, the injunction was lifted.

The European Commission, the executive arm of the EU, conducted an inquiry to determine whether Uber was an “information-society service company,” as Uber maintained, or the equivalent of a taxi service, as the French government alleged (see Exhibit 5-1).

Exhibit 5-1

Protests against Uber have been staged in Spain, France, the United Kingdom, and other countries.

Kalanick’s company provides a case study of the impact that the political, legal, and regulatory environments can have on international trade and global marketing activities. Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access outside enterprises have to their country’s national resources. Every country has its own unique legal and regulatory system that affects the operations and activities of the global enterprise, including the global marketer’s ability to address market opportunities and threats. Laws and regulations constrain the cross-border movement of products, services, people, money, and know-how. The global marketer must attempt to comply with each set of national—and, in some instances, regional—constraints. The fact that laws and regulations are frequently ambiguous and continually changing hampers these efforts. And, in the case of Uber, new technologies are evolving at a faster pace than laws and regulations can follow.

In this chapter, we consider the basic elements of the political, legal, and regulatory environments of global marketing, including the most pressing current issues, and offer some suggestions for dealing with those issues. Some specific topics—such as rules for exporting and importing industrial and consumer products; standards for health and safety; and regulations regarding packaging, labeling, advertising, and promotion—are examined in later chapters devoted to individual marketing mix elements.

5-1 The Political Environment

5-1 Understand the elements of a country’s political environment that can impact global marketing activities.

Global marketing activities take place within the political environment of governmental institutions, political parties, and organizations through which a country’s people and rulers exercise power. As we saw in Chapter 4, each nation has a unique culture that reflects its society. Each nation also has a political culture that reflects the relative importance of the government and legal system and provides a context within which individuals and corporations understand their relationship to the political system. Any company doing business outside its home country should carefully study the political culture in the target country and analyze salient issues arising from the political environment. These issues include the governing party’s attitude toward sovereignty, present and future levels of political risk, tax policies, the threat of equity dilution, and the risk of expropriation.

Nation-States and Sovereignty

Sovereignty can be defined as supreme and independent political authority. A century ago, U.S. Supreme Court Chief Justice Melville Fuller said, “Every sovereign state is bound to respect the independence of every other sovereign state, and the courts in one country will not sit in judgment on the acts of government of another done within its territory.” The late Richard Stanley, founder and former president of the Stanley Foundation, offered the following concise description:

A sovereign state was considered free and independent. It regulated trade, managed the flow of people into and out of its boundaries, and exercised undivided jurisdiction over all persons and property within its territory. It had the right, authority, and ability to conduct its domestic affairs without outside interference and to use its international power and influence with full discretion.1

Government actions taken in the name of sovereignty occur in the context of two important criteria: a country’s stage of development, and the political and economic systems in place in the country.

As outlined in Chapter 2, the economies of individual nations may be classified as industrialized, newly industrializing, or developing. Many governments in developing countries exercise control over their nations’ economic development by passing protectionist laws and regulations. Their primary objective is to encourage economic development by protecting emerging or strategic industries in the home country, but government leaders can also engage in cronyism and provide favors for family members or “good friends.”

Conversely, when many nations reach advanced stages of economic development, their governments declare that (in theory, at least) any practice or policy that restrains free trade is illegal. Antitrust laws and regulations are established to promote fair competition. Advanced-country laws often define and preserve a nation’s social order; these laws may extend to political, cultural, and even intellectual activities and social conduct.

In France, for example, laws forbid the use of foreign words such as le weekend or le marketing in official documents. Also, a French law that went into effect in 1994 required that at least 40 percent of the songs played by popular radio stations be in the French language. The rationale? To protect against an “Anglo-Saxon cultural invasion.” In 2016, the quota was reduced to 35 percent, as Daft Punk and other French recording artists released music with English-language lyrics to appeal to a global audience. Companies that may be affected positively or negatively by legislative acts sometimes use advertising as a vehicle for expressing their positions on issues (see Exhibit 5-2).

Exhibit 5-2

Many global companies use corporate advertising to advocate their official position on trade-related issues. In the mid-1990s, Mobil mounted an advocacy campaign that addressed a number of topics of public interest, including trade issues, clean air, alternative fuels, and health care reform. This op-ed urged the U.S. ­Congress to approve GATT.

Political Risk

Political risk is the possibility of a change in a country’s political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably. As Ethan Kapstein, a professor at INSEAD, has noted:

Perhaps the greatest threats to the operations of global corporations, and those that are most difficult to manage, arise out of the political environment in which they conduct their business. One day, a foreign company is a welcome member of the local community; the next day, opportunistic politicians vilify it.5

Political risk can deter a company from investing abroad. Put another way, when a high level of uncertainty characterizes a country’s political environment, the country may have difficulty attracting foreign investment.

As Professor Kapstein has pointed out, executives often fail to conceptualize political risk because they have not studied political science—which means they have not been exposed to the issues that students of politics ask about the activities of global companies. (A strong argument for a liberal arts education!) The modern corporation is coming under increasing scrutiny from business and government leaders as well as the general public; the same is true of free-market capitalism in general. This trend can be viewed as contributing to political risk.

Without a doubt, current events must be part of the corporate information agenda; for example, business managers need to stay apprised of the formation and evolution of political parties as well as the public’s perception of political institutions. The emergence of far-right parties such as the Alternative for Germany (AfD), whose success in the 2017 national elections has been described as a “political earthquake,” is a case in point.6 Other potential disruptors of continental Europe’s established political order include Austria’s Freedom Party, France’s National Front, and the Party for Freedom in the Netherlands.

“If you want to be in growing markets you have to assume and expect some volatility. You can’t be in growth markets without presuming there will be risks.”7

Jørgen Buhl Rasmussen, CEO, Carlsberg

Valuable sources of current-events information include the Financial Times, The Economist, and other daily and weekly business periodicals. The Economist Intelligence Unit (EIU; www.eiu.com), the Geneva-based Business Environment Risk Intelligence (BERI; www.beri.com), and the PRS Group (www.prsgroup.com) publish up-to-date political risk reports on individual country markets. Note that these commercial sources vary somewhat in the criteria they consider to constitute political risk. For example, BERI focuses on societal and system attributes, whereas the PRS Group focuses more directly on government actions and economic functions (see Table 5-1).

Table 5-1 Categories of Political Risk

Source: Adapted from Llewellyn D. Howell, The Handbook of Country and Political Risk Analysis, 2nd ed. (East Syracuse, NY: The PRS Group, 1998). Reprinted by permission.

As noted in Case 5-2, the political maneuverings of the Russian government create a high level of political risk for companies that seek to do business in that country. During his first two terms as Russia’s president (2000–2008), Vladimir Putin implemented reforms in an effort to pave the way for Russia’s membership in the World Trade Organization (WTO) and to attract foreign investment. He also created an environment of uncertainty for foreign companies. In 2010, Paul Melling, a partner at the law firm of Baker & McKenzie, explained, “Many multinationals are thinking long and hard about how big their company in Russia ought to be—the bigger the company, the bigger the risk.”8 In 2018, Putin was elected to a fourth term as president, and the level of political risk remains elevated owing to tense relations between the White House and the Kremlin.

Meanwhile, the current political climate in the rest of Central and Eastern Europe is still characterized by varying degrees of uncertainty. In the Economic Intelligence Unit’s Political Instability Index rankings, Hungary, Albania, and Latvia are identified as having moderate levels of risk. Hungary and Latvia have already achieved upper-middle-income status. Now that Latvia has joined the euro zone, it is expected that lower interest rates will promote further economic growth. Moreover, political winds continue to shift in in the region: Poland and Hungary are two examples of countries that have recently elected populist governments. Common themes include opposition to adopting the euro, concern about welcoming migrants, and resistance to deeper integration with the EU.

Albania’s progress in transitioning to a market economy has attracted investment from abroad. Moreover, products that are labeled “Made in Albania” are finding acceptance in global markets. The evidence can be seen in the success of DoniAnna, a shoe manufacturer that was founded by Albanian entrepreneur Donika Mici.9 Diligent attention to risk assessment throughout the region should be ongoing to determine when the risk has decreased to levels acceptable to management.

Companies can purchase insurance to offset potential risks arising from the political environment. In Japan, Germany, France, Britain, the United States, and other industrialized nations, various agencies offer investment insurance to corporations doing business abroad. The Overseas Private Investment Corporation (OPIC; www.opic.gov) provides various types of political risk insurance to U.S. companies; in Canada, the Export Development Corporation performs a similar function.

Taxes

Governments rely on tax revenues to fund social services, to support their military forces, and to cover other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes. For example, in China, import duties have dropped since the country joined the WTO. Even so, many goods are still subject to double-digit duties plus a 17 percent value-added tax (VAT). As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. In some instances, customs documents are falsified to undercount goods in a shipment; the Chinese military has allegedly escorted goods into the country as well.

Ironically, global companies can still profit from the practice; it has been estimated, for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip Morris, this means annual sales of $100 million to distributors in Hong Kong, which then smuggle the smokes across the border.10 High excise and VAT taxes can also encourage legal cross-border shopping as consumers go abroad in search of good values. In Great Britain, for example, the Wine and Spirit Association estimates that, on average, cars returning from France are loaded with 80 bottles of wine.

The diverse geographical activity of the global corporation also requires that special attention be given to tax laws. The issue is especially acute in the tech sector; many companies make efforts to minimize their tax liability by shifting the location in which they declare income. Facebook, Amazon, Google, and Apple are some of the companies that have shifted profits earned from intellectual property to low-tax jurisdictions such as Ireland and Luxembourg. In addition, tax minimization by foreign companies doing business in the United States costs the U.S. government billions of dollars each year in lost revenue. After the 2016 U.S. presidential election, companies looked to the Trump administration for broad-based tax reform. They were rewarded with a major tax cut that was passed in December 2017.

Seizure of Assets

The ultimate threat that a government can impose on a company is seizing its assets. ­Expropriation refers to governmental action to dispossess a foreign company or investor. Compensation is generally provided, albeit often not in the “prompt, effective, and adequate” manner provided for by international standards. If no compensation is provided, the action is referred to as ­confiscation.11 International law is generally interpreted as prohibiting any act by a government to take foreign property without compensation. Nationalization is generally broader in scope than expropriation; it occurs when the government takes control of some or all of the enterprises in a particular industry. International law recognizes nationalization as a legitimate exercise of government power, as long as the act satisfies a “public purpose” and is accompanied by “adequate payment” (i.e., payment that reflects fair market value of the property).

In 1959, for example, the newly empowered Castro government nationalized property belonging to American sugar producers in retaliation for new American import quotas on sugar. Castro offered compensation in the form of Cuban government bonds, which was adequate under Cuban law. Because Cuban-owned sugar producers were not nationalized, the U.S. State Department viewed this particular act as discriminatory and the compensation offered as inadequate.12 More recently, the late Venezuelan President Hugo Chávez nationalized Electricidad de Caracas, a utility company, and CANTV, a telecommunications provider. The Venezuelan government paid AES Corporation $739.3 million for Electricidad de Caracas; Verizon Communications received $572 million for its stake in CANTV.13

Short of outright expropriation or nationalization, the phrase creeping expropriation has been applied to limitations on economic activities of foreign firms in particular countries. These limitations have involved repatriation of profits, dividends, royalties, and technical assistance fees from local investments or technology arrangements. Other issues include increased local content requirements, quotas for hiring local nationals, price controls, and other restrictions affecting return on investment. Global companies have also suffered discriminatory tariffs and nontariff barriers that limit market entry of certain industrial and consumer goods, as well as discriminatory laws on patents and trademarks. Intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products.

In the mid-1970s, Johnson & Johnson (J&J) and other foreign investors in India had to submit to a host of government regulations to retain majority equity positions in companies they had already established. Many of these rules were later copied in whole or in part by Malaysia, Indonesia, the Philippines, Nigeria, and Brazil. By the late 1980s, after a “lost decade” in Latin America characterized by debt crises and low gross national product (GNP) growth, lawmakers reversed many of these restrictive and discriminatory laws. The goal was to again attract foreign direct investment and badly needed Western technology. The end of the Cold War and the restructuring of political allegiances contributed significantly to these changes.

When governments expropriate foreign property, a number of impediments can limit actions to reclaim that property. For example, according to the U.S. Act of State Doctrine, if the government of a foreign state is involved in a specific act, the U.S. courts will not get involved. Instead, representatives of expropriated companies may seek recourse through arbitration at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). It is also possible to buy expropriation insurance from either a private company or a government agency such as OPIC.

The expropriation of copper companies operating in Chile in the early 1970s shows the effect that companies can have on their own fate. Companies that strenuously resisted government efforts to introduce home-country nationals into the company management were expropriated outright; those companies that made genuine efforts to follow Chilean guidelines were allowed to remain under joint Chilean–U.S. management.

5-2 International Law

5-2 Define international law and describe the main types of legal systems found in different parts of the world.

International law may be defined as the rules and principles that nation-states consider binding upon themselves. International law pertains to property, trade, immigration, and other areas that have traditionally been under the jurisdiction of individual nations. International law applies only to the extent that countries are willing to assume all rights and obligations in these areas. The roots of modern international law can be traced back to the seventeenth-century Peace of Westphalia. Early international law was concerned with waging war, establishing peace, and handling other political issues such as diplomatic recognition of new national entities and governments.

Although elaborate international rules gradually emerged—covering, for example, the status of neutral nations—the creation of laws governing commerce proceeded on a state-by-state basis in the nineteenth century. International law still has the function of upholding order, although in a broader sense than laws dealing with problems arising from war. At first, international law was essentially an amalgam of treaties, covenants, codes, and agreements. As trade grew among nations, order in commercial affairs assumed increasing importance. The law had originally dealt only with nations as entities, but a growing body of law rejected the idea that only nations could be subject to international law.

Paralleling the expanding body of international case law in the twentieth and twenty-first centuries, new international judiciary organizations have contributed to the creation of an established rule of international law: the Permanent Court of International Justice (1920–1945); the International Court of Justice (ICJ; www.icj-cij.org), which is the judicial arm of the United Nations and was founded in 1946; and the International Law Commission, established by the United States in 1947 (see Exhibit 5-4). Disputes arising between nations are issues of public international law, and they may be taken before the ICJ (also known as the World Court), located in The Hague. As described in the supplemental documents to the United Nations Charter, Article 38 of the ICJ Statute concerns international law:

he Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply:

international conventions, whether general or particular, establishing rules expressly recognized by the contesting states;

international custom, as evidence of a general practice accepted as law;

the general principles of law recognized by civilized nations;

subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

Other sources of modern international law include treaties, international customs, judicial case decisions in the courts of law of various nations, and scholarly writings. What happens if a nation allows a case against it to be brought before the ICJ and then refuses to accept a judgment against it? The plaintiff nation can seek recourse through the United Nations Security Council, which can use its full range of powers to enforce the judgment.

Common Law versus Civil Law

Private international law is the body of law that applies to disputes arising from commercial transactions between companies based in different nations. As noted, the laws governing commerce emerged gradually, leading to a major split in legal systems among various countries.14 The story of law in the Western world can be traced to two sources: Rome, from which the continental European civil-law tradition originated, and English common law, from which the U.S. legal system originated.

A civil-law country is one in which the legal system reflects the structural concepts and principles of the Roman Empire in the sixth century.

For complex historical reasons, Roman law was received differently and at vastly different times in various regions of Europe, and in the nineteenth century each European country made a new start and adopted its own set of national private-law codes, for which the Code Napoleon of 1804 was the prototype. But the new national codes drew largely on Roman law in conceptual structure and substantive content. In civil-law countries, the codes in which private law is cast are formulated in broad general terms and are thought of as completely comprehensive, that is, as the all-inclusive source of authority by reference to which every disputed case must be referred for decision.15

“To understand stare decisis, you have to understand English common law. To understand English common law, you have to understand where England came from—the Norman Conquest, the Vikings, the Romans … “16

U.S. Supreme Court Justice Clarence Thomas

In a common-law country, many disputes are decided by reliance on the authority of past judicial decisions (cases). A common-law legal system is based on the concept of precedent, sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular issue are binding on a court when that same issue is presented later. This description is somewhat cryptic, because it is easier to observe the operation of precedent than to define it. Nevertheless, precedent and stare decisis represent the fundamental principles of common-law decision making.

In its origins, the legal system of the United States was substantially influenced by English law. The English and American systems are common law in nature; that is, the law is pronounced by courts when there are no statutes to follow. Common-law systems are distinguishable from the civil-law systems found in much of Europe. Although much of contemporary American and English law is legislative in origin, the law inferred from past judicial decisions is equal in importance to the law set down in codes. Common-law countries often rely on codification in certain areas—the U.S. Uniform Commercial Code (UCC) is one example—but these codes are not the all-inclusive, systematic statements found in civil-law countries.

The UCC, which has been fully adopted by 49 U.S. states, codifies a body of specifically designed rules covering commercial conduct. (Louisiana has adopted parts of the UCC, but its laws are still heavily influenced by the French civil code.) The host country’s legal system—that is, common or civil law—directly affects the form a legal business entity will take. In common-law countries, companies are legally incorporated by state authority. In civil-law countries, a contract between two or more parties who are fully liable for the actions of the company forms a company.

The United States, 9 of Canada’s 10 provinces, and other former colonies with an Anglo-Saxon history founded their systems on common law. Historically, much of continental Europe was influenced by Roman law and, later, the Napoleonic Code (see Exhibit 5-5). Asian countries are split on this issue: India, Pakistan, Malaysia, Singapore, and Hong Kong are common-law jurisdictions, whereas Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China are civil-law jurisdictions. The legal systems in Scandinavia are mixed, displaying some civil-law attributes and some common-law attributes. Today, the majority of countries have legal systems based on civil-law traditions.

Exhibit 5-5

Civil-law systems rely more heavily on statutes and codes, such as the Napoleonic Code of 1804, in deciding cases. From these code provisions, abstract principles are recognized and then applied in specific cases. By contrast, common-law courts find abstract principles in particular cases and then generalize what the law is from those principles.

Chapter 6

Global marketers utilize analytical techniques to solve specific issues. The primary analytical techniques are the Pareto principle, SWOT analysis, and gap analysis (Kadlecova, 2012). The Pareto principle simplifies management and decision-making that relies on twenty percent of causes generating eighty percent. At the same time, SWOT analysis is an analytical technique that evaluates internal and external factors that affect organizational success. Gap analysis is a methodology that helps in decision-making and problem-solving in situations that have experienced a change in strategies.