Assignment 1
Sabrinzy
Week2LectureNotesI2.pptxTopic 2 Avoiding the pitfalls of the international political and legal environment
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2017-06-15 15:57:42
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The political and legal risks faced in foreign markets are considerable. These risks are a major factor in deciding whether or not to enter a market and, if the decision is taken to enter, what form the entry should take. Although the exporter may be plagued by government ‘red tape’, the investor is faced with a host of government laws and regulations which all increase the risk of doing business in the international market. In addition to the politics and laws of both the home and host countries, the international marketer must consider the global political and legal environment. Political issues usually lead to laws and regulations, and consequently political and legal issues in the international marketplace are often intertwined.
Learning Objectives
After completing this Topic you should be able to:
identify those aspects of the local political-legal environment that affect a firm’s international marketing
assess the way legal systems differ and the effect of these differences
identify the ways in which the impact of national laws might be minimised.
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There are a number of learning objectives for this topic:
Introduction
Political and legal risks are a major factor in deciding whether to enter an international market
Political and legal issues in the international environment are often intertwined
Government influence includes local, regional and state government bodies as well as the national government
The national political environment is shaped by variables such as ideology, the economic system and the strength of nationalism
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The national political environment is affected by a number of variables that form the context of all political activity. These include ideology, the economic system and the strength of nationalism. It is in the interests of international firms to monitor continually their activities in a market in relation to these variables because they contain the underlying forces that influence the degree of political risk. The major actor in the political arena in most countries is the national government. However, there are also state and regional governments. Often foreign firms make the mistake of courting the national government only in order to win the project or gain investment approval. In the process they ignore local government bodies in whose area the project will be undertaken or new plant located. To secure effective implementation as well as approval it is necessary to court all levels of government. This is illustrated by the case of Myanmar (Burma) where on the one hand there is a central government controlled by the military and on the other a dozen resistance armies formed among ethnic minorities such as the Shan, the Karen, the Karenni and the Kachin. It is in areas controlled by these groups that many resources for the future development of the nation, such as natural gas, lie. As such development cannot take place without foreign investment, potential investors face the prospect of dealing with two different regimes.
Be aware of the importance of political and legal risks on firms’ assessment of whether to enter foreign markets.
Different types of national governments
Parliamentary governments
Citizens interact via voting
Industrialised nations - parliamentary democracies
Absolutist governments
Dictate government policy without considering citizens opinions
Other governments
Most governments fall between the two extremes
Some monarchies and dictatorships have parliamentary elections
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There are two ends to the continuum on which most governments can be classified. These are parliamentary types and absolutist types. Parliamentary governments
A system where the government consults with its people at periodic intervals on matters related to national policy.
Absolutist governments
Dictatorship governments which don’t consider its citizens’ opinions, often with a strong military involvement. Refer to International Highlight 4.2 Rising dragon still sees red p.114. North Korea falls into this category, as did the former Soviet Union.
Other governments
Governments that fall between the two extremes of parliamentary and absolutist governments. These types of government may include monarchies. Australia and most other nations are mixed types, with elements of both, but tending toward one end of the spectrum or the other.
Reasons for government intervention
Reasons for:
Infant industries protection and national security
Safeguarding employment
Protection of citizens from imported human, animal and plant health risks and to ensure food self-sufficiency
Where the playing field in the international marketplace is not level, government must act to redress the balance
Official investment and export promotion are needed to compete with countries that do the same
Political approaches in international marketing
Marketing functions are influenced by their ideological environment
Nationalism is a factor in all countries to a greater or lesser degree and can build up if countries believe a foreign government is interfering in the affairs of the country
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The marketing concept evolved in the US and countries close to their ideology tend to copy the approach. One approach that can significantly impact on international marketers is that of nationalism, a force that exists in all countries to a greater or lesser degree. For example, Thai Airways are the first choice for Thai nationals. Nationalistic campaigns such as Buy Australian can distort the value of a product and affect international business.
Political stability and risk
Political stability refers to gradual and non violent change
Indicators of political instability:
Degree of social unrest
Frequency of changes in the regime
Extent to which the country is divided culturally
Religious division
Linguistic diversity
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Political risk assessment of an overseas market prior to conducting any international marketing activity is crucial. There are a number of things to look for in the foreign country: degree of social unrest – events in Egypt, Greece and Spain have seriously impeded business
frequency of changes in the national government – this may lead to substantial policy and regulation changes, but mostly to uncertainty which is detrimental to business extent of cultural divisions in that country – these may form the basis of social unrest or restrictive regulation
the extent of religious divisions in that country – this is important where action is taken based on religious principles such as persecution of minorities, or terrorism the extent of linguistic diversity in that country – may indicate cultural divisions, and also makes miscommunication likely, causing unrest.
Political sovereignty: government seeks to exert influence over foreign operations often through increases in taxes
Political conflict: categorised as:
Turmoil – generally an unanticipated upheaval on a major scale e.g. military coup
Conspiracy – an instant planned act of aggression against those in power e.g. assassination
Internal war – is organised violence on a large scale against a government
Political change does not always lead to a less favourable business climate.
Sources of political instability
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Political sovereignty The desire to exert control over foreign-owned enterprises operating within a country. Often practised in extreme cases in less-developed nations or nations with absolutist government regimes. This includes special laws that only regulate foreign-owned organisations.
Political conflict
Categorised as internal war, conspiracy and turmoil within a country. Often happens during times of national elections but may be an occurrence that has had a long history in that country.
Impact of technology on sovereignty and political instability includes:
Enables global communication that crosses borders
National governments no longer have control over messages disseminated across their borders
New information infrastructure diminishes government control
Sources of political instability (cont.)
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Note the increasing role of social network media . Good examples include the use of this media during the Arab uprisings.
Nature of political risk (cont.)
Types of political risk and government intervention include:
Confiscation, nationalisation or expropriation of assets
Making the currency inconvertible
Inciting violence such as riots, civil wars and insurrection
Cancelling export/import licences
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The risk from political factors can result in any of these forms of intervention by a host nation government:
Confiscation, nationalisation or expropriation – these are different forms of the process by which a host government takes over a firm’s assets without their consent, and sometimes without any form of compensation. This sort of action has long term consequences for the country of discouraging any further foreign investment. Inconvertible currency – severely restricts the ability of investors to transfer funds out of the country. For example, early investors in China were forced to buy US dollars on the black market, and physically carry them out of the country in order to repatriate their profits.
Governments may officially or unofficially incite violence in the country in order to force foreign investors to flee, leaving their assets behind. Cancelling licences – prevents the firm from exporting its output or importing essential inputs for its business.
Risk assessment factors overview
General political environment
Product related factors External factors Company factors
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As well as the political risk assessment factors indicated above, a firm’s appraisal of the exposure to political risk overseas should include: general political environment factors – the general nature of the environment in the overseas country (see Fisher et al. 2006, p.129) product-related factors – whether the product(s) being marketed are a likely topic of political debate
external factors – e.g. relations between the domestic country and the international destination company factors – the general reputation of the firm in an international context.
Is the country a democracy or dictatorship?
Does the government rely on the free market or on itself to allocate resources?
Are the customers for the products or services to be offered in the public or the private sector and, if the latter, is there a policy of preferment for local firms?
When changing policies, does the government rely on the rule of law or act arbitrarily?
How stable is the existing government and does political change result in major changes to economic policies?
Risk and the political environment
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Some of the questions that should be investigated regarding the general political environment of a country are shown here.
Risk and product related factors
What is the effect of adequate supply on the country’s security or welfare?
Is the product a critical input for other industries?
Is the product socially or politically sensitive, as with food and drugs?
Does the product have national defence significance, as with uranium?
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Risk involving the product we wish to manufacture and/or market can be based on the elements shown here.
Risk and external factors
The state of relations between the government of the home country and the government of the other country
The size of the international firm, because the larger it is, the more threatening it may appear to be
The extent to which the firm has visibility as a foreign business – the larger its visibility, the greater its vulnerability
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Relations between a firm’s home country government and the host country government can affect the ability to do business. Malaysia and Australia have had a rocky diplomatic history which has, at times, severely affected Australian firms working in Malaysia.
Risk and company factors
The general reputation of the firm internationally as a good corporate citizen
The extent of past contributions by the firm to the welfare and development of the host country
The extent to which operations in the country have been localised
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Has your firm built up goodwill in the host nation? Or is it seen as a foreign exploiter?
The trade-off
There is often a trade off between perceived opportunities and potential risks
Companies need to understand and control as many risks as possible before committing to an international marketing venture
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There is often a trade-off between the perceived political instability on the one hand and growth prospects on the other. This is particularly apparent in the Middle East where despite changes in social cultural and political conditions the area is still seen as problematic.
Managing the foreign political environment
Company behaviour
Assume neutrality
Combine investment with civic projects and community activities
Home government actions towards overseas countries such as foreign aid and criticisms
Contribute to the host country industry by being a good corporate citizen and buying local products forming alliances and training local employees
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There are a number of ways that an organisation can manage its exposure to political risk. Company Behaviour
Being politically neutral.
Combining investment projects with civic projects. Wholly or partially disengaging from the market. Lobbying by the firm to influence political decisions. Home government actions
The provision of aid, financial rescue or diplomatic recognition to the government of the international market. Criticism of the foreign government(s) by the domestic government.
Criticism of foreign governments by the domestic media. Contribution to the host country
Behave like a good corporate citizen.
Link the firm’s investments to the nation’s economic interests and planned activity: buy local raw materials wherever possible
form alliances of joint ventures with local firms establish training programs for local employees demonstrably upgrade technology levels.
Generate exports from the foreign country to another overseas country. Recruit locals for senior management positions.
Convert the firm from a private company to a public company.
Managing the foreign political environment (cont.)
Localisation of operations: the greater the local ownership of an operation the less likely it is to be subjected to political risk
When a foreign country demands that a firm reduce their ownership Encarnation and Vachani (1985) suggest:
Leave the country altogether
Totally indigenise the company
Negotiate an arrangement under the new laws
Take pre-emptive action
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As the firm’s operations grow in one foreign country, a method of avoiding political intervention is to gradually localise the firm’s operations by progressively transferring ownership of the firm to local entities. This could be achieved privately or by public share listing.
If the foreign government demands that the firm surrenders equity to local interests, the firm has four alternative courses of action (Encarnation and Vachani 1985): leave the country altogether – cutting their losses, but may mean they are not welcome to come back later
totally indigenise the operations – hire all local employees and managers, buy all inputs locally. Means a loss of control for the organisation. negotiate an arrangement under the new law – may be difficult, particularly for SMEs who have little power.
take pre-emptive action in advance of announced changes – this option means being proactive about undertaking one of the other 3 choices.
Managing the foreign political environment (cont.)
Marketing implications - political
Carefully examine the political climate
Study the history of the government’s intervention in foreign business activities
Analyse the foreign government for its:
Stability
Competence in economic management
Frequency in changes in policy toward foreign investment
Nature of the relationship between the government and the people
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International marketers should conduct a thorough political risk analysis of every foreign country that they plan to enter as a matter of business diligence.
The legal environment
International trade usually involves two or more legal systems
Hence the legal complexities are greater for international trade than they are with domestic trade
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An international marketing activity involves two or more firms conducting business in two or more nations that may have two or more legal systems that govern them. Hence, the legal systems and they way they are administered internationally are considerably more complex than in the domestic market. The international marketer needs to be sensitive to the broad principles of law as it applies to doing business abroad.
International law
International law grows out of the agreement of two or more nations and implies a desire to lessen differences in the way countries treat legal problems
Generally, international law minimises the range of differences between national laws particularly in connection with political and military issues
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There is a small but growing body of international law, which is agreed on by most nations in the world. It includes the operations of the International Criminal Court which prosecutes the most serious crimes of concern to the international community, such as genocide and war crimes. International law grows out of an agreement between two or more nations.
It acts to minimise the range of differences between national laws.
International organisations and agencies are now covered by international law –not just nations. Regional economic groupings (e.g. ASEAN) have led to the creation of laws applied on a regional basis.
International law (cont.)
In recent years coverage has become much broader and encompasses:
international trade
investments
taxation
labour relations
intellectual property
the environment
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These laws are designed to manage issues that have cross-border significance.
International law and multilateral bodies
World Trade Organization (WTO)
United Nations Commission on International Trade Law (UNICITRAL)
Arbitration rules (1976)
Convention on the Carriage of Goods by Sea (1987) Conventions on Contracts for the International Sales of Goods (1980)
Model Law on International Commercial Arbitration (1985)
Multilateral and regional agreements
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International Laws or regulations that have specific emphasis for international marketing have been developed by multilateral bodies such as the WTO and UNICITRAL. There are also regional agreements such as within ASEAN that are binding on their members.
International bodies are now playing an increasing role in governance of international trade.
Legal jurisdiction
A common problem in international business is determining which country’s law applies
Jurisdiction can become the subject of dispute where:
Practice of international law conflicts with national law
A nation tries to impose its laws on another
Business people operating internationally are required to conform to the laws of their home country
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A common issue in international business is to determine which country’s law applies in the event of a dispute. The answer depends on: which country is nominated in the jurisdictional clause in the contract
where the contract was entered into
where the provisions of the contract are to be carried out.
Jurisdiction can be further complicated when the practice of international law: conflicts with a nation’s law
when one nation endeavours to impose its laws on another
businesspeople operating in another country are required to conform to the laws of their country.
Legal jurisdiction
Extraterritorial application of law
Occurs when one country endeavours to apply its national law outside its boundaries
Potentially perceived as a violation of host country’s sovereignty
Example: home government imposes its anti-corruption regulations on subsidiaries operating in host country
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An example here is the US The Foreign Corrupt Practices Act of 1977. The US government asserts that any US organisation that becomes involved in corrupt practices such as bribery can be prosecuted under US jurisdiction, regardless of where this occurred, even if it is accepted practice in the foreign nation.
Law and the marketing mix
Laws governing each element of the marketing mix may vary between countries
Product related laws apply to:
The physical and chemical aspects of product
Packaging and labelling requirements
Price
Many countries do not operate a free-market system which impacts on price due to government price control, anti-dumping laws and laws related to transfer pricing
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Law as it applies to commercial activities such as application of the marketing mix varies between countries even when the countries operate under the same legal system Product
Laws exist related to the physical and chemical aspects of a product and are aimed at protecting consumers. National laws are related to the minimum product standards. The requirements under the law may result in the customisation of the product for overseas marketing. Specific laws related to packaging and labelling cannot be ignored either. E.g. any product sold in Canada must include labelling in both French and English.
Price
Government-initiated price controls are aimed at protecting consumers’ interests. Another reason for this may be to ensure price competition in the market. For example: retail price maintenance
discrimination against competitors
limitations of licensing and franchising agreements
collusive action in setting prices. In Australia, the fuel suppliers are often investigated on this basis, as it seems unlikely that each would independently set exactly the same prices on the same day.
Law and the marketing mix (cont.)
Distribution is affected by regulations covering physical distribution of goods/carriers, the nature of channels and intermediaries/resellers
Promotion is highly regulated in may countries and can include:
Trade descriptions
Prohibitions on advertising certain products
Prohibitions on using certain words and expression
Limitations on extent of promotional expenditure
Content and style of advertising
Other promotional elements
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Distribution
International marketers need to be aware of the laws which cover physical distribution of goods. For example:
shipping arrangements
distribution channel activities practiced in one country may be prohibited in another (e.g. door-to-door selling is illegal in France) exclusive distribution agreements may also be illegal in overseas markets
laws governing the registration of shipping vessels and airlines affect movement of product to a foreign nation and within the foreign nation.
This is a highly regulated element of the marketing mix in which most nations attempt to regulate against deceptive, misleading and fraudulent marketing communication activities.
Promotion
These laws differ on a country-by-country basis. Some of the more frequent areas of regulation are: trade descriptions
prohibitions on advertising certain products prohibitions on using certain words and expressions limitation on extent of promotional expenditure content and style of advertisement
other promotional elements (e.g. use of premiums, vending machines and catalogue sales).
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Are vending machines for pharmaceutical products legal where you live? This is a photo I took in Shanghai.
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Is such an ad legal or socially acceptable in a nation?
Law and the marketing mix overseas (cont.)
People
Human resources practices can be strongly regulated, visa rules
Process
E-government, payment systems, personal interaction requirements
Physical cues
Accessibility, web presence, uniforms
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The extra 3 Ps of the services (or intangibles) marketing mix are also affected by laws in different nations. These are a few examples
Impact of law on international operations: Overview
Additional areas in which the firm faces problems due to the application of different laws:
Environmental law
Human resources
Intellectual property
Anti trust
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Note the impact of application of different laws between countries on these three issues, over and above its impact on the marketing mix.
Impact of law on international operations: Environment
Increasing move towards global environmental standards Environmental laws relate to:
Packaging including material used
Recycling
Pollution
Energy consumption
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Environmental laws overseas influence:
how a product is manufactured or produced (e.g. problems with greenhouse gas emissions or farmers’ burn-offs) how a product is packaged (including material used, recycling and waste of resources)
the constitution of a product (e.g. the amount of wattage for electrical products).
As with other legal issues, there may be a difference between the strength of the law, and the consistency of application.
Impact of law on international operations: Human resources
Need to conform to local labour laws including:
Local laws regarding employment of expatriate staff
Employment of unskilled guest workers
Hours of work
Minimum legal age
Discrimination
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Human resources laws overseas influence:
the adherence to labour laws of the foreign country
the acceptance of local employment conditions – e.g. need to allow for prayer times in Muslim nations the number of expatriate executives, their conditions of employment and time in the foreign country
the employment of unskilled labour, often ‘guest workers’, who are usually third country nationals (TCNs) What forms of discrimination are allowed, encouraged or forbidden?
Impact of law on international operations: Intellectual property
Differs between countries depending on legal systems e.g. common law and code law
Protection of intellectual property can be through:
Patents – provide a legal monopoly for a specific extended period
Copyright – protect original literary, musical, artistic, dramatic and other intellectual work
Trademarks – distinguish one product or service from another and are used to prevent others using the product/service with a similar mark
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Intellectual property protection refers to the protection of knowledge assets such as patents, copyright (e.g. brand names), design (e.g. unique product designs), trade secrets and plant varieties in overseas markets. Main devices to protect IP are: patents
copyrights trademarks.
Impact of law on international operations: Intellectual property
is common in IP
Piracy refers to the unauthorised copying or use of someone else’s intellectual property
Brand piracy can involve taking a global brand or logo and applying it to a product with which it has no connection or by modifying existing global brand names
The degree to which this is considered an important issue varies between countries
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Brand piracy is increasing with an emphasis on global brands and occurs:
when the global brand or logo is applied to a product with which it has no connections (e.g. Lacoste crocodile)
by modifying the brand name or logo but the consumer is still mislead into believing it is the same (e.g. ‘Starsbuck’).
Impact of law on international operations: Anti trust
Firms moving to foreign markets need to be aware of anti trust legislation
Laws with regard to anti-trust have been in existence in the US for over a century
Laws are now emerging elsewhere e.g. Japan and the European Union
The European Court of Justice has imposed penalties for activities such as:
Price discrimination
Withholding supply
Other anti-competitive practices
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The US has had anti-trust legislation for over a hundred years. It is only recently the laws have emerged in places such as Japan and countries of the EU. They cover issues including: price discrimination
monopoly creation withholding supply
other anti-competitive practices.
This is essentially about ensuring that monopolies or near-monopolies do not hold too much power in a market.
E.g. Microsoft has been taken to court a number of times under this legislation, notably because by bundling Internet Explorer into their software package, they unfairly influence the use of other browsers.
Transfer pricing
Firm sets the prices at which they transfer products, technologies or services to their affiliates in other countries
Often used to arrange affairs so that countries which offer most benefits are targeted
International countertrade
Linking of an import and an export transaction in a conditional way
Dumping
Selling products into an overseas market below cost or below domestic prices
Prohibited by the WTO
Reducing the impact of foreign laws on international activities
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Some techniques exist which assist an organisation in managing the impact of foreign laws. There is, however, a need for ethical application of strategies that reduce the impact of legal forces on international activities Transfer pricing
Transfer pricing refers to the pricing of goods, technologies or services among units or affiliates within a company. The purpose of transfer pricing is to accrue most tax-payable income in the countries with the lowest tax rate, and thus reduce the level of taxation paid on profits and/or to maximise profits from international operations. International countertrade
International countertrade involves trading in goods and services across international borders in exchange for other goods and services, hence the absence of cash in the transaction. The undervaluing of goods and services can influence the profit attributable (and therefore tax payable) on a transaction. Dumping
Dumping is defined as selling goods and services in international markets at below cost or below domestic prices and is coming under the close scrutiny of the World Trade Organization (WTO). It is often used domestically to increase market share and may be backed by government incentives that are factored into prices charged overseas, enabling products to be priced below current domestic market value.
Marketing Implications - Legal
Be aware of those areas where international law might impinge on international marketing activities
Be aware of differences in legal practices between the home market and the market in which business is proposed
In many countries there is a difference between what the law says and what people actually do.
Interpretation of laws also differs between countries following the same legal system
International marketers need to be sensitive to the legal differences between the home country and foreign markets
Summary
International marketing activities can be affected by international law as well as differing laws in the host country
Different legal systems and approaches can lead to different interpretations of the law
Before engaging in international activities, marketers need an awareness and appreciation of both the political environment and the legal system as part of their risk assessment
Summary
International marketing activities can be affected by international law as well as differing laws in the host country
Different legal systems and approaches can lead to different interpretations of the law
Before engaging in international activities marketers need an awareness and appreciation of both the political environment and the legal system as part of their risk assessment
