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Global Marketing

Tenth Edition

Chapter 5

The Political, Legal, and Regulatory Environments

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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

Political Environment

The Political Culture reflects the importance of the government and legal system and provides a context within which individuals and corporations understand their relationship to the political system.

Political Issues include sovereignty, political risk, tax policies, threat of equity dilution, risk of expropriation.

Sovereignty

Sovereignty: Supreme and independent political authority

“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.”

Richard Stanley

President, Stanley Foundation

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.”

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.

Sovereignty & Global Market Integration

Some believe that global market integration is eroding national economic sovereignty

In the E U, individual countries gave up their rights to a national currency, product standards in exchange for better market access

“The ultimate resource of a government is power, and we’ve seen repeatedly that the willpower of governments can be overcome by persistent attacks from the marketplace.”

~ Neal Soss, Economic Consultant

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.

Political Risk (1 of 3)

Risk of change in political environment or in government policy that would adversely affect a company’s ability to operate effectively and profitably.

When perceived political risk is high, a country will have a difficult time attracting foreign direct investment.

Managers need to track political trends such as the emergence of far-right parties in Germany, France, Austria, etc.

Some governments offer political risk insurance.

Executives often fail to understand political risk because they have not studied political science. Businesspeople need to study the political environment through reading publications like The Economist, Financial Times or consulting web-based sources like the Business Environment Risk Intelligence (www.beri.com) or the PRS Group (www.prs.com).

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 provides various types of political risk insurance to U.S. companies; in Canada, the Export Development Corporation performs a similar function.

Political Risk (2 of 3)

Some examples of political risk include:

War

Social unrest, fractionalized by language, ethnic and/or religious groups

Orderly political transfer

Politically motivated violence

International disputes

Change in government/pro-business orientation

Social conditions (population density and wealth distribution)

Corruption, nepotism

Companies can buy insurance to protect against political risk. The U.S. government agency, the Overseas Private Investment Corp. (OPIC; www.opic.gov), offers insurance to companies doing business abroad. Japan, Germany, France, Canada, and Britain offer similar protection.

The political maneuverings of the Russian government create a high level of political risk. During his first two terms as Russia’s president, Vladimir Putin implemented reforms in an effort to pave the way for Russia’s membership in the WTO and to attract foreign investment. In 2008, when Dmitry Medvedev was elected president, Putin became prime minister. It was generally perceived that Putin was the more powerful member of this “ruling tandem.” The Russian government has a number of bills pending that, if adopted, will strengthen intellectual property and contract law. Meanwhile, the level of political risk remains high; compounding matters is the fact that Russia’s economy has been severely impacted by the global economic crisis. As Paul Melling, a partner at the law firm of Baker & McKenzie, explains, “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.” 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.

Political Risk (3 of 3)

Crime

Labor costs

Tax discrimination

Exchange controls, tariff barriers

Dependence on and/or importance to a major hostile power

Repatriation restrictions

Taxes

Government taxation policies

High taxation can lead to black market growth and cross-border shopping

High import duties in China leads to smuggling of oil, cigarettes, P Cs, film

In Great Britain, cars returning from France bring in an average 80 bottles of wine

Companies like Amazon, Google, and Apple attempt to limit tax liability by shifting location of income

Governments rely on tax revenues to generate funds necessary for social services, the military, and other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate for companies and individuals to profit by not paying taxes. In China, for example, even though import duties have dropped since it joined the WTO, many imports are subject to double-digit duties plus a 17 percent value-added tax. As a result, significant quantities of oil, cigarettes, photographic film, personal computers, and other products are smuggled into China. It is estimated that 90% of cigarettes are smuggled into China. Companies can still profit. For Philip Morris, this means annual sales of $100 million to Hong Kong distributors! Cross-border shopping can be spurred on by high excise and VAT taxes. It is estimated that British citizens who travel to France by car return home 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 (1 of 3)

Expropriation-governmental action to dispossess a foreign company or investor

Compensation should be provided in a “prompt, effective, and adequate manner”

Confiscation occurs when no compensation is provided

In 1959 Castro’s Cuban government nationalized U.S. sugar companies’ properties and paid in Cuban government bonds. Viewed as inadequate by the U.S. State Dept.

More recently, 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.

Seizure of Assets (2 of 3)

Nationalization-a government takes control of some or all of the enterprises in an entire industry

Acceptable according to international law if:

satisfies public purpose

includes “adequate payment”

Castro’s Cuban government nationalized property of American sugar companies. The government offered Cuban bonds for compensation, which was all that was required under Cuban law. Viewed as inadequate by the U.S. State Department

Hugo Chavez of Venezuela seized the public electric company and paid AES Corp. $739.3 million; Verizon got $572 for its stake in CANTV.

Seizure of Assets (3 of 3)

Creeping expropriation-limits economic activities of foreign firms

May include:

Limits on repatriation of profits, dividends, or royalties

Technical assistance fees

Increased local content laws

Quotas for hiring local nationals

Price controls

Discriminatory tariff and nontariff barriers

Discriminatory laws on patents and trademarks

In the mid-1970s, Johnson & Johnson and other foreign investors in India had to submit to a host of government regulations to retain majority equity positions in companies already established. Many of these rules were copied 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 GNP growth, lawmakers reversed many of these restrictive and discriminatory laws. The end of the Cold War contributed significantly to these changes.

It is difficult to reclaim expropriated property. U.S. courts will not get involved if foreign governments are involved. Companies can seek recourse through the World Bank Investment Dispute Settlement Center. It is possible to purchase expropriation insurance from private companies or a government agency such as OPIC.

International Law

The rules and principles that nation-states consider binding among themselves

Pertains to property, trade, immigration, and other areas

Disputes between nations are issues of public international law

World Court or International Court of Justice (I C J);

Judicial arm of the United Nations

Roots of international law can be traced to the 17th century Peace of Westfalia. Early laws were concerned with war and peace and political issues. As trade increased, issues of commercial affairs grew in importance.

If a nation refuses to accept a decision against it made by the World Court, it can appeal to the Security Council of the U.N.

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

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

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

c. the general principles of law recognized by civilized nations;

d. 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

International Court of Justice

Judicial arm of the United Nations founded in 1947

Settles disputes between nations

Offers advice on legal issues submitted by various international agencies

Common Law versus Civil Law (1 of 2)

The Napoleonic Code of 1804 drew on the Roman legal system and is the basis for continental European law today. Code law is also known as civil law.

U.S. law is rooted in English common law.

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. Harry Jones, “Our Uncommon Common Law,” Tennessee Law Review 30 (1975), p. 447.

Common Law versus Civil Law (2 of 2)

Common Law

Disputes are decided by reliance on the authority of past judicial decisions

Companies are legally incorporated by state authority

Code law is used in only a few areas; the U.S. Uniform Commercial Code fully adopted by 49 states, Louisiana still influenced by French civil law

Civil Law

Legal system reflects the structural concepts and principles of the Roman Empire

Companies are formed by contract between two or more parties who are fully liable for the actions of the company

Asian countries are split. India, Pakistan, Malaysia, Singapore, and Hong Kong are common-law countries. Japan, Korea, Thailand, Indochina, Taiwan, Indonesia, and China are civil-law jurisdictions. Scandinavian countries use parts of both systems. The majority of countries today have civil-law systems.

As various countries in Eastern and Central Europe have wrestled with establishing legal systems in the post-Communist era, a struggle of sorts has broken out, with consultants representing both common-law and civil-law countries trying to influence the process. In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German civil-law tradition prevails. As a result, banks not only take deposits and make loans, but also engage in the buying and selling of securities.

In contrast, in Eastern Europe, and particularly in Russia, the U.S. system has had greater influence. Germany has accused the United States of promoting a system so complex that it requires legions of lawyers to interpret it. The U.S. response: The German system is outdated.

In any event, the constant stream of laws and decrees issued by the Russian government creates an unpredictable, evolving legal environment. Specialized publications such as Anatoly Zhuplev’s Doing Business in Russia: A Concise Guide are important resources for anyone doing business in Russia or in the 11 other nations that comprise the Commonwealth of Independent States.

Islamic Law

Legal system in many Middle Eastern countries

Sharia-a comprehensive code governing Muslim conduct in all areas of life, including business

Koran-Holy Book; like code law

Hadith-like common law

Based on life, sayings, and practices of Muhammad

Identifies forbidden practices “haram”

In Islamic law, the sharia is a comprehensive code governing Muslim conduct in all areas of life, including business. The code is derived from two sources. First is the Koran, the Holy Book written in Arabic that is a record of the revelations made to the Prophet Mohammed by Allah. The second source is the Hadith, which is based on the life, sayings, and practices of Muhammad. In particular, the Hadith spells out the products and practices that are haram (forbidden). The orders and instructions found in the Koran are analogous to code laws; the guidelines of the Hadith correspond to common law. Any Westerner doing business in Malaysia or the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities. Brewers, for example, must refrain from advertising beer on billboards or in local-language newspapers.

Sidestepping Legal Issues

Get expert legal help

Prevent conflicts

Establish jurisdiction

Protect intellectual property

Protect licenses and trade secrets

Avoid bribery

Advertising & promotion

Jurisdiction

Refers to a court’s authority to rule on particular types of issues arising outside of a nation’s borders or to exercise power over individuals or entities from different countries.

Employees of foreign companies should understand the extent to which they are subject to the jurisdiction of host-country courts.

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

Revlon sued a British company, UOL, for breach of contract in a federal court in New York. UOL claimed the court lacked jurisdiction. Revlon cited the presence of UOL’s name on an office building in the city in which the company had 50% ownership. The judge ruled against the motion to dismiss.

Intellectual Property (1 of 2)

Intellectual property must be registered in each country where business is conducted.

Patent-gives an inventor exclusive right to make, use, and sell an invention for a specified period of time

Trademark-distinctive mark, motto, device, or emblem used to distinguish it from competing products

Patents and trademarks that are protected in one country are not necessarily protected in another, so global marketers must ensure that all forms of intellectual property are registered in each country where business is conducted. A patent is a formal legal document that gives an inventor the exclusive right to make, use, and sell an invention for a specified period of time. Typically, the invention represents an “inventive leap” that is “novel” or “nonobvious.” A trademark is defined as a distinctive mark, motto, device, or emblem that a manufacturer affixes to a particular product or package to distinguish it from goods produced by other manufacturers (see Exhibit 5-6 and Exhibit 5-7). A copyright establishes ownership of a written, recorded, performed, or filmed creative work.

Infringement of Intellectual Property

Counterfeiting-unauthorized copying and production of a product

Associative Counterfeit/Imitation-product name differs slightly from a well-known brand

Piracy-unauthorized publication or reproduction of copyrighted work

Counterfeiting and piracy are particularly important in industries such as motion pictures, recorded music, computer software, and textbook publishing. Companies in these industries produce products that can be easily duplicated and distributed on a mass basis. The United States in particular has a vested interest in intellectual property protection around the globe because it is home to many companies in the industries just mentioned. However, the United States faces significant challenges in countries such as China. As one expert has noted: Current attempts to establish intellectual property law, particularly on the Chinese mainland, have been deeply flawed in their failure to address the difficulties of reconciling legal values, institutions, and forms generated in the West with the legacy of China’s past and the constraints imposed by its present circumstances.

Intellectual Property (2 of 2)

“You may not realize it, but by using the name Kleenex® as a generic term for tissue, you risk erasing our coveted brand name that we’ve worked so hard for all these years. Kleenex® is a registered trademark and should always be followed by the ® and the words ‘Brand Tissue.’ Just Pretend it’s in permanent marker.”

Kimberly-Clark Corporation markets Kleenex® brand tissues and is the registered trademark owner. Trademarks and other forms of intellectual property are valuable assets; this ad, which appeared in Advertising Age magazine, serves notice that Kimberly-Clark is protecting its investment in the Kleenex® brand name. Companies take this type of action to prevent brand names from becoming generic terms.

The Champagne region in France is world famous for producing sparkling wines. However, the word “Champagne” sometimes appears on labels of sparkling wines from the United States and other countries. The EU recently asked the WTO for permission to restrict the use of “Champagne” and certain other words associated with traditional European products. Such “geographic indicators” would assure consumers about the origin and authenticity of the products they buy; in other words, a wine labelled “Champagne” would be from Champagne, France. In 2005, representatives from several wine regions in the United States and the EU signed a Joint Declaration to Protect Wine Place & Origin. In addition, a Wine Accord signed by the United States and EU bans the misuse of 16 place names by marketers of wine products that do not originate in those places.

Protecting Intellectual Property (1 of 3)

In the U.S., registration is with the Federal Patent and Trademark Office

In Europe, applicants use the European Patent Office or register country-by-country

Soon the Community Patent Convention will cover 27 countries

Madrid Protocol trademark owners are protected in 74 countries with 1 application

European patents are expensive because of the need to translate technical documents into all of the languages of the EU.

Companies sometimes find ways to exploit loopholes or other unique opportunities offered by patent and trademark laws in individual nations. Sometimes, individuals register trademarks in local country markets before the actual corporate entity files for trademark protection. For example, Starbucks filed for trademark protection in 1997 in Russia but did not open any cafés there. Sergei Zuykov, an attorney in Moscow, filed a petition in court in 2002 to cancel Starbucks’ claim to the brand name because it had not been used in commerce. Technically, Zuykov was merely taking advantage of provisions in Russia’s civil code; even though he has been denounced as a “trademark squatter,” he was not violating the law. Zuykov then offered to sell Seattle-based Starbucks its name back for $600,000.

Protecting Intellectual Property (2 of 3)

World Intellectual Property Organization

Governed by the Madrid Agreement and the Madrid Protocol, allows trademark owners to seek protection in 74 countries with one application and fee.

Firms exploit loopholes in patent laws by filing for patent protection before entering the market.

claim to the brand name because it had not been used in commerce. Technically, Zuykov was merely taking advantage of provisions in Russia’s civil code; even though he has been denounced as a “trademark squatter,” he was not violating the law. Zuykov then offered to sell Seattle-based Starbucks its name back for $600,000!

Protecting Intellectual Property (3 of 3)

International Convention for the Protection of Industrial Property

Also known as the Paris Convention

Honored by almost 100 countries

Facilitates multi-country patent registration, ensures that once a company files, it has a “right of priority” in other countries for one year from that date

Patent Cooperation Treaty

Over 100 countries cooperate with patent applications

European Patent Convention

the E U and Switzerland

International concern about intellectual property issues in the 19th Century resulted in two important agreements. The first is the International Convention for the Protection of Industrial Property. Also known as the Paris Union or Paris Convention, the convention dates to 1883 and is now honored by nearly 100 countries. This treaty facilitates multi-country patent registrations by ensuring that, once a company files in a signatory country, it will be afforded a “right of priority” in other countries for one year from the date of the original filing. A U.S. company wishing to obtain foreign patent rights must apply to the Paris Union within one year of filing in the United States or risk a permanent loss of patent rights abroad.

The Patent Cooperation Treaty (PCT) has more than 100 contracting states, including Australia, Brazil, France, Germany, Japan, North Korea, South Korea, the Netherlands, Switzerland, Russia and other former Soviet states, and the United States. The members constitute a union that provides certain technical services and cooperates in the filing, searching, and examination of patent applications in all member countries. The European Patent Office administers applications for the European Patent Convention, which is effective in the EU and Switzerland. An applicant can file a single patent application covering all of the convention states; the advantage is that the application will be subject to only one procedure of grant. Although national patent laws remain effective under this system, approved patents are effective in all member countries for a period of 20 years from the filing date.

In 1886, the International Union for the Protection of Literary and Artistic Property was formed. Also known as the Berne Convention, this was a landmark agreement on copyright protection. References to the convention pop up in some unexpected places. For example, sharp-eyed fans of The Ellen DeGeneres Show on the CBS television network will see the following message appear as the final credits roll:

Country of publication United States of America. WAD Productions, Inc. is the author of this film/motion picture for purposes of Article 15 (2) of the Berne Convention and all national laws giving in effect thereto.

Companies Receiving the Most International Patents, 2015

Table 5 - 2 Companies Filing the Most International Patent Applications under P C T, 2015

Company	Country	Number of Patent Applications Filed
Huawei Technologies	China	3,898
Qualcomm	United States	2,442
Z T E	China	2,155
Samsung Electronics	South Korea	1,683
Mitsubishi Electric	Japan	1,593
Telefonaktiebolaget L M Ericsson	Sweden	1,481
L G Electronics	South Korea	1,457
Sony	Japan	1,381
Koninklijke Philips	Netherlands	1,378
Hewlett-Packard Development	United States	1,310

Other Patent Issues

U.S. patents are issued for 20 years in accordance with G A T T

U.S. laws are harmonized with those in the E U and Japan

Patents in Japan are narrower than the U.S. so companies like Caterpillar cannot protect critical innovations

Global software protection

U.S. copyright law protects computer code

U.S. Patent and Trademark Office protects software (1981)

E U covered software in 1997

American Innovation Act (2011) protects companies against trolls who file multiple patents to get large tech companies to pay

Patent Trial and Appeal Board resolves patent infringement

American Innovation Act. This act addressed the problem of so-called patent trolls who file multiple patent applications with the intent of getting large tech companies such as Facebook, Apple, and Google to pay large sums to settle patent claims. A new entity, the Patent Trial and Appeal Board, was created to expedite the process of resolving patent infringement cases. Some observers have noted that the push-back on patent protection has led to a decline of U.S. investment in life sciences and software.

Antitrust

Laws are designed to combat restrictive business practices and to encourage competition

Enforced by F T C in the U.S., Fair Trade Commission in Japan, European Commission in the E U

The Sherman Act of 1890 prohibits certain restrictive business practices including fixing prices, limiting production, allocating markets, or any other scheme designed to limit or avoid competition.

Applies to U.S. companies outside U.S. borders and to foreign companies operating in the U.S.

Although antitrust laws are on the books in many countries, they are often weak or loosely enforced.

A recent rash of antitrust actions brought in the United States against foreign companies has raised concerns that the United States is violating international law as well as the sovereignty of other nations. The U.S. antitrust laws are a legacy of the nineteenth-century trust-busting era and are intended to maintain free competition by limiting the concentration of economic power.

For the past four decades, the competition authority of the European Commission has had the power to prohibit agreements and practices that prevent, restrict, and distort competition. The commission has jurisdiction over European-based companies as well as non-European-based ones that generate significant revenues in Europe. The commission can block a proposed merger or joint venture, approve it with only minor modifications, or demand substantial concessions before granting approval.

Licensing and Trade Secrets (1 of 2)

Licensing is a contractual agreement in which a licensor allows a licensee to use patents, trademarks, trade secrets, technology, and other intangible assets in return for royalty payments or other forms of compensation

Important considerations

What assets may be licensed

How to price assets

The rights granted

The duration of the licensing agreement and the amount of royalties a company can receive are considered a matter of commercial negotiation between licensor and licensee, and there are no government restrictions on remittances of royalties abroad. Important considerations in licensing include what assets a firm may offer for license, how to price the assets, and whether to grant only the right to “make” the product or the rights to “use” and to “sell” the product as well. The right to sublicense is another important issue. As with distribution agreements, decisions must also be made regarding exclusive or nonexclusive arrangements and the size of the licensee’s territory.

The licensor may limit the licensee to sell only in its home country in order to avoid direct competition. The licensee may also be required to stop using the technology after the license has expired.

The U.S. courts ruled that S.C. Johnson and Co. could not license an insecticide from the German company, Bayer AG. To do so would have allowed Johnson to monopolize the $450 million home market.

Licensing and Trade Secrets (2 of 2)

Trade secrets are confidential information or knowledge that has commercial value and is not in the public domain and for which steps have been taken to keep it secret

To prevent disclosure, use confidentiality contracts

The Uniform Trade Secrets Act has been adopted by most U.S. states

N A F T A was first international agreement protecting trade secrets

T R I Ps, Trade-Related Aspects of Intellectual Property Rights signed by members of G A T T

Trade secrets include manufacturing processes, formulas, designs, and customer lists.

In the U.S. states have jurisdiction over trade secrets. Several countries adopted trade secret law for the first time during the 1990s. Mexico (1991), China (1993).

The TRIPs agreement requires signatory countries to protect against acquisition, disclosure, or use of trade secrets “in a manner contrary to honest commercial practices.” Despite these formal legal developments, in practice, enforcement is the key issue. Companies transferring trade secrets across borders should apprise themselves not only of the existence of legal protection but also of the risks associated with lax enforcement.

Bribery and Corruption

Foreign Corrupt Practices Act

Requires publicly held companies to institute internal accounting controls that would record all transactions

Makes it a crime for a U.S. corporation to bribe an official of a foreign government or political party to obtain or retain business

Prohibits payments to third parties when there is reason to believe it may be channeled to foreign officials

Omnibus Trade and Competitiveness Act

Allows for “grease” payments to cut red tape; e.g., getting shipments through customs, getting permits

Bribery is the corrupt business practice of demanding or offering some type of consideration—typically a cash payment—when negotiating a cross-border deal.

History does not record a burst of international outrage when Charles M. Schwab, head of Bethlehem Steel at the beginning of the 20th century, presented a $200,000 diamond and pearl necklace to the mistress of Czar Alexander III’s nephew. In return for that consideration, Bethlehem Steel won the contract to supply the rails for the Trans-Siberian railroad. Things have changed. However, companies doing business in Central and Eastern Europe, the Middle East, and other parts of the world find that corruption and bribery are widespread.

The Foreign Corrupt Practices Act (FCPA) is a legacy of the Watergate scandal during Richard Nixon’s presidency. In the course of his investigation, the Watergate special prosecutor discovered that more than 300 American companies had made undisclosed payments to foreign officials totaling hundreds of millions of dollars. The act was unanimously passed by Congress and signed into law by President Jimmy Carter on December 17, 1977.

After U.S. companies complained that their activities abroad were severely curtailed, President Reagan signed the OTCA in 1988.

Penalties for violating the law: 1-5 years in jail and fines in excess of $1 million. Critics say that the law puts American companies at a disadvantage. In 1994, bribes offered by non-U.S. companies were a factor in 100 business deals valued at $45 million of which 80% were awarded to non-U.S. firms. Bribery is legal and tax-deductible in some European countries.

Conflict Resolution

Litigation

Arbitration

Settles disputes outside of court

Groups agree in advance to abide by a three-member panel’s decision

1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)

Most important treaty regarding international arbitration signed by 157 countries

The degree of legal cooperation and harmony in the EU is unique and stems, in part, from the existence of code law as a common bond. Other regional organizations have made far less progress toward harmonization. The United States has more lawyers than any other country in the world and is arguably the most litigious nation on earth. In part, this is a reflection of the low-context nature of American culture and the spirit of confrontational competitiveness. Other factors can contribute to differing attitudes toward litigation. For example, in many European nations, class action lawsuits are not allowed. Also, European lawyers cannot undertake cases on a contingency fee basis. However, change is in the air, as Europe experiences a broad political shift away from the welfare state.

Arbitration is a negotiation process that the two parties have, by prior agreement, committed themselves to using. It is a fair process in the sense that the parties using it have created it themselves. Generally, arbitration involves a hearing of the parties before a three-member panel; each party selects one panel member, and those two panel members in turn select the third member. The panel renders a judgment that the parties agree in advance to abide by.

The N.Y. Convention is important because:

Signatory countries can require companies to use arbitration if those companies have a contract that provides for international arbitration

Signatories can enforce the award

The signatories agree that there are limited grounds for challenging arbitration decisions. The grounds that are recognized are different from the typical appeals that are permitted in a court of law.

Arbitration organizations:

International Chamber of Commerce (oldest and in Paris)

American Arbitration Association

Swedish Arbitration Institute of the Stockholm Chamber of Commerce

The U.N. Conference on International Trade Law

The Regulatory Environment

Agencies, both governmental and non-governmental, enforce laws or set guidelines for conducting business

E U has 15,000 lobbyists representing 1,400 companies and nonprofits globally

These regulatory agencies address a wide range of marketing issues, including price control, valuation of imports and exports, trade practices, labelling, food and drug regulations, employment conditions, collective bargaining, advertising content, and competitive practices.

Global companies are realizing they need to hire lobbyists to represent their interests and influence the direction of the regulatory process. In the early 1990s, McDonald’s, Nike, and Toyota did not have a single representative in Brussels, home of the European Commission. Today they have several. Overall, there are about 15,000 lobbyists representing 1,400 companies and nonprofits from around the world there.

Regional Economic Organizations: The European Union

The Treaty of Rome established the European Community which became the E U

It created the Council of Ministers which is the main decision-making body along with the European Commission, the European Parliament, and the European Court of Justice

The European Council guides integration-related issues, e.g., monetary union

The Treaty of Rome contains hundreds of articles, several of which are directly applicable to global companies and global marketers. Articles 30 through 36 establish the general policy referred to as “Free Flow of Goods, People, Capital and Technology” among the member states. Articles 85 through 86 contain competition rules, as amended by various directives of the 20-member EU Commission. The commission is the administrative arm of the EU; from its base in Brussels, the commission proposes laws and policies, monitors the observance of EU laws, administers and implements EU legislation, and represents the EU to international organizations. Commission members represent the union rather than their respective nations.

The laws, regulations, directives, and policies that originate in the commission must be submitted to the parliament for an opinion and then passed along to the council for a final decision. Once the council approves a prospective law, it becomes union law, which is somewhat analogous to U.S. federal law. Regulations automatically become law throughout the union; directives include a time frame for implementation by legislation in each member state. For example, in 1994 the commission issued a directive regarding use of trademarks in comparative advertising. Individual member nations of the EU worked to implement the directive; in the United Kingdom, the 1994 Trade Marks Act gave companies the right to apply for trademark protection of smells, sounds, and images and also provided improved protection against trademark counterfeiting.

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