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Global Marketing SEVENTH EDITION

Warren J. Keegan • Mark. C. Green

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Pearson Global Edition

G lo

bal M arketing

K eegan • G

reen SE

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GLOBAL EDITION

GLOBAL EDITION GLO

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This Global Edition has been edited to include enhancements making it more relevant to students outside the United States. The editorial team at Pearson has worked closely with educators around the globe to include:

• New! Discussions on social media are now included throughout the book.

• New! Marketing Metrics and Analytics Section. • New! Coverage on the importance of key emerging markets.

Global Marketing refl ects current marketing issues and events from around the world including the Gulf Cooperation Council in the Middle East, branding The Beatles in Europe and Tesco’s global strategy. Keegan and Green balances these examples with conceptual and analytical tools that will help students apply the 4Ps to global marketing.

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CHAPTER 5 • THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS 177

and exports, trade practices, labeling, food and drug regulations, employment conditions, collective bargaining, advertising content, and competitive practices. As noted in The Wall Street Journal:

Each nation’s regulations reflect and reinforce its brand of capitalism—predatory in the U.S., paternal in Germany, and protected in Japan—and its social values. It’s easier to open a business in the U.S. than in Germany because Germans value social consensus above risk- taking, but it’s harder to hire people because Americans worry more about discrimination lawsuits. It’s easier to import children’s clothes in the U.S. than Japan because Japanese bureaucrats defend a jumble of import restrictions, but it’s harder to open bank branches across the U.S. because Americans strongly defend state prerogatives.46

In most countries, the influence of regulatory agencies is pervasive, and an understanding of how they operate is essential to protect business interests and advance new programs. Executives at many global companies are realizing the need to hire lobbyists to represent their interests and to influence the direction of the regulatory process. For example, in the early 1990s McDonald’s, Nike, and Toyota didn’t have a single representative in Brussels. Today, each of the companies has several people representing its interests to the European Commission. U.S. law firms and consulting firms also have sharply increased their presence in Brussels; in an effort to gain insight into EU politics and access to its policymakers, some have hired EU officials. In all, there are currently approximately 15,000 lobbyists in Brussels representing about 1,400 companies and nonprofit organizations from around the world.47

Regional Economic Organizations: The EU Example The overall importance of regional organizations such as the WTO and the EU was discussed in Chapter 3. The legal dimensions are important, however, and will be briefly mentioned here. The Treaty of Rome established the European Community (EC), the precursor to the EU. The treaty created an institutional framework in which a council (the Council of Ministers) serves as the main decision-making body, with each country member having direct representation. The other three main institutions of the community are the European Commission, the EU’s executive arm; the European Parliament, the legislative body; and the European Court of Justice.

The 1987 Single European Act amended the Treaty of Rome and provided strong impetus for the creation of a single market beginning January 1, 1993. Although technically the target was not completely met, approximately 85 percent of the new recommendations were imple- mented into national law by most member states by the target date, resulting in substantial harmonization. A relatively new body known as the European Council (a distinct entity from the Council of Ministers) was formally incorporated into the EC institutional structure by Article 2 of the 1987 act. Composed of heads of member states plus the president of the commission, the European Council’s role is to define general political guidelines for the union and provide direction on integration-related issues such as monetary union.48 Governments in Central and Eastern European countries that hope to join are currently getting their laws in line with those of the EU.

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.49

Commission members represent the union rather than their respective nations.

46Bob Davis, “Red-Tape Traumas: To All U.S. Managers Upset by Regulations: Try Germany or Japan,” The Wall Street Journal (December 14, 1995), p. A1. 47Raphael Minder, “The Lobbyists Take Brussels by Storm,” Financial Times (January 26, 2006), p. 7. See also Brandon Mitchener, “Standard Bearers: Increasingly, Rules of Global Economy Are Set in Brussels,” The Wall Street Journal (April 23, 2002), p. A1. 48Klaus-Dieter Borchardt, European Integration: The Origins and Growth of the European Union (Luxembourg: Office for Official Publications of the European Communities, 1995), p. 30. 49Klaus-Dieter Borchardt, The ABC of Community Law (Luxembourg: Office for Official Publications of the European Communities, 1994), p. 25.

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178 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

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 have been working 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 provides improved protection against trademark counterfeiting.

With the rise of the single market, many industries are facing new regulatory environments. The European Court of Justice, based in Luxembourg, is the EU’s highest legal authority. It is responsible for ensuring that EU laws and treaties are upheld throughout the union. Based in Luxembourg, it consists of two separate tribunals. The senior body is known as the Court of Justice; a separate entity, the Court of First Instance, hears cases involving commerce and competition (see Table 5-5).

Although the European Court of Justice plays a role similar to that of the U.S. Supreme Court, there are important differences. The European court cannot decide which cases it will hear, and it does not issue dissenting opinions. The court exercises jurisdiction over a range of civil matters involving trade, individual rights, and environmental law. For example, the court can assess damages against countries that fail to introduce directives by the date set. The court also hears disputes that arise among the 27 EU member nations on trade issues such as mergers, monopolies, trade barriers and regulations, and exports. The court is also empowered to resolve conflicts between national law and EU law. In most cases, the latter supersedes national laws of individual European countries.

Marketers must be aware, however, that national laws should always be consulted. National laws may be stricter than community law, especially in such areas as competition and antitrust. To the extent possible, community law is intended to harmonize national laws to promote the purposes defined in Articles 30 through 36. The goal is to bring the lax laws of some member states up to desig- nated minimum standards. However, more restrictive positions may still exist in some national laws.

For example, Italy recently introduced the Reguzzoni-Versace Law. It is intended to regulate trade in textiles, leather, and footwear; it states that if at least two stages of production—there are four stages altogether—occur in Italy, a garment can be labeled “Made in Italy.” In addition, the country or countries in which the remaining production stages took place must be identified. Reguzzoni-Versace was supposed to enter into force October 1, 2010. However, Brussels objected on grounds that the law conflicts with Article 34 which prohibits national measures providing restrictions to trade in the European Union. EU regulators view Reguzzoni-Versace as “protectionist” and more stringent than EU law which only requires that one main production stage take place in Europe.50

TABLE 5-5 Recent Cases Before the European Court of Justice/Court of First Instance

Country/Plaintiffs Involved Issue

Chocoladefabriken Lindt & Sprüngli AG (Switzerland)/Franz Bauswirth GmbH (Austria)

Lindt markets gold-foil wrapped chocolate Easter bunnies (Goldhase), for which it owns a trademark. Lindt sued Hauswirth for trademark infringement after the Austrian company began marketing its own foil-wrapped bunny. The Austrian Supreme Court asked the ECJ to rule on “bad faith” in trademark matters.51

L’Oréal (France)/Bellure (France) Perfume marketer L’Oréal sued rival Bellure for marketing “knockoff” perfume that mimicked the bottles, packaging, and fragrances of L’Oréal’s brands. The ECJ ruled in favor of L’Oréal on the grounds that the similarity of Bellure’s products to L’Oréal’s constituted an unfair advantage. The Court of Appeal later upheld the ECJ’s decision.52

Italy/Monsanto, Syngenta, Pioneer Hi-Bred International

In 2000, fearing risk to human health, Italy banned foods containing four strains of genetically modified corn. The Italian court hearing the plaintiffs’ appeal asked for ECJ intervention; in 2003, the ECJ ruled that the ban was not justified. The case was returned to Italy for a final ruling; the Italian court ruled that the government was not entitled to impose the ban.

50David Segal, “Is Italy Too Italian?” The New York Times (July 31, 2010), p. B1. 51Charles Forelle, “Europe’s High Court Tries on a Bunny Suit Made of Chocolate,” The Wall Street Journal (June 11, 2009), p. A1. 52Michael Peel, “L’Oréal in Legal Victory over Rival,” Financial Times (June 18, 2009).

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CHAPTER 5 • THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS 179

Summary The political environment of global marketing is the set of governmental institutions, political parties, and organizations that are the expression of the people in the nations of the world. In particular, anyone engaged in global marketing should have an overall understanding of the importance of sovereignty to national governments. The political environment varies from country to country, and political risk assessment is crucial. It is also important to understand a particular government’s actions with respect to taxes and seizure of assets. Historically, the latter have taken the form of expropriation, confiscation, and nationalization.

The legal environment consists of laws, courts, attorneys, legal customs, and practices. International law comprises the rules and principles that nation-states consider binding upon themselves. The countries of the world can be broadly categorized as having either common-law legal systems or civil-law legal systems. The United States and Canada and many former British colonies are common-law countries; most other countries are civil-law countries. A third system, Islamic law, predominates in the Middle East. Some of the most important legal issues pertain to jurisdiction, antitrust, and licensing. In addition, bribery is pervasive in many parts of the world; the Foreign Corrupt Practices Act (FCPA) applies to American companies operating abroad. Intellectual property protection is another critical issue. Counterfeiting is a major problem in global marketing; it often involves infringement of a company’s copyright, patent, or trademark ownership. When legal conflicts arise, companies can pursue the matter in court or use arbitration.

The regulatory environment consists of agencies, both governmental and nongovernmental, that enforce laws or set guidelines for conducting business. Global marketing activities can be affected by a number of international or regional economic organizations; in Europe, for example, the EU makes laws governing member states. The WTO will have a broad impact on global marketing activities in the years to come. Although all three environments are complex, astute marketers plan ahead to avoid situations that might result in conflict, misunderstanding, or outright violation of national laws.

Discussion Questions 1. What is sovereignty? Why is it an important consideration in the political environment

of global marketing? 2. Describe some of the sources of political risk. Specifically, what forms can political risk

take? 3. Briefly describe some of the differences between the legal environment of a country that

embraces common law and one that observes civil law. 4. Global marketers can avoid legal conflicts by understanding the reasons conflicts arise

in the first place. Identify and describe several legal issues that relate to global commerce.

5. You are an American traveling on business in the Middle East. As you are leaving country X, the passport control officer at the airport tells you there will be a passport “processing” delay of 12 hours. You explain that your plane leaves in 30 minutes, and the official suggests that a contribution of $50 would probably speed things up. If you comply with the suggestion, have you violated U.S. law? Explain.

6. “See you in court” is one way to respond when legal issues arise. Why can that approach backfire when the issue concerns global marketing?

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180 PART 2 • THE GLOBAL MARKETING ENVIRONMENT

CASE 5-1 CONTINUED (REFER TO PAGE 150)

America’s Cuban Conundrum: The Assignment

Cuba is a communist outpost in the Caribbean where “socialism ordeath” is the national motto. After Fidel Castro came to power in 1959, his government took control of most private companies without providing compensation to the owners. American assets owned by both individuals and companies worth approximately $1.8 billion were among those expropriated; today, those assets are worth about $6 billion (see Table 1). President Kennedy responded by imposing a trade embargo on the island nation. Five decades later, when Fidel Castro finally stepped down, no significant changes in policy were made.

In 1990, Castro opened his nation’s economy to foreign investment; by the mid-1990s, foreign commitments to invest in Cuba totaled more than half a billion dollars. In 1993, Castro decreed that the U.S. dollar was legal tender although the peso would still be Cuba’s official currency. As a result, hundreds of millions of dollars were injected into Cuba’s economy; Cuban exiles living in the United States were the source of much of the money. Cubans were able to spend the dollars in special stores that stocked imported foods and other hard-to-find products. In a country where doctors are among the highest paid workers with salaries equal to about $20 per month, the cash infusions significantly improved a family’s standard of living. In 1994, mercados agropecuarios (“farmers markets”) were created as a mechanism to enable farmers to earn more money.

Cuba desperately needed investment and U.S. dollars, in part to com- pensate for the end of subsidies following the demise of the Soviet Union. Oil companies from Europe and Canada were among the first to seek po- tential opportunities in Cuba. Many American executives were concerned that lucrative opportunities would be lost as Spain, Mexico, Italy, Canada, and other countries moved aggressively into Cuba. Anticipating a softening in the U.S. government’s stance, representatives from scores of U.S. compa- nies visited Cuba regularly to meet with officials from state enterprises.

Throughout the 1990s, Cuba remained officially off-limits to all but a handful of U.S. companies. Some telecommunications and financial services were allowed; AT&T, Sprint, and other companies have offered direct-dial service between the United States and Cuba since 1994. Also, a limited number of charter flights were available each day between Miami and Havana. Sale of medicines was also permitted under the em- bargo. At a State Department briefing for business executives, Assistant Secretary of State for Inter-American Affairs Alexander Watson told his audience, “The Europeans and the Asians are knocking on the door in Latin America. The game is on and we can compete effectively, but it will be a big mistake if we leave the game to others.” Secretary Watson was asked whether his comments on free trade applied to Cuba. “No, no. That simply can’t be, not for now,” Watson replied. “Cuba is a special case. This administration will maintain the embargo until major demo- cratic changes take place in Cuba.”

Within the United States, the government’s stance toward Cuba had both supporters and opponents. Senator Jesse Helms pushed for a tougher embargo and sponsored a bill in Congress that would penalize foreign countries and companies for doing business with Cuba. The Cuban-American National Foundation actively engaged in anti-Cuba and anti-Castro lobbying. Companies that openly spoken out against the embargo included Carlson Companies, owner of the Radisson Hotel chain; grain-processing giant Archer Daniels Midland (ADM); and the Otis Elevator division of United Technologies. A spokesperson for Carlson noted, “We see Cuba as an exciting new opportunity—the forbidden fruit of the Caribbean.” A number of executives, including Ron Perelman, whose corporate holdings include Revlon and Consolidated Cigar Corporation, were optimistic that the embargo would be lifted within a few years.

Meanwhile, opinion was divided on the question of whether the embargo was costing U.S. companies once-in-a-lifetime opportunities. Some observers argued that many European and Latin American investments in Cuba were short-term, high-risk propositions that would not create barriers to U.S. companies. The opponents of the embargo, how- ever, pointed to evidence that some investments were substantial. Three thousand new hotel rooms were added by Spain’s Grupo Sol Melia and Germany’s LTI International Hotels. Both companies were taking advantage of the Cuban government’s goal to increase tourism. Moreover, Italian and Mexican companies were snapping up contracts to overhaul the country’s telecommunications infrastructure. Wayne Andreas, chairman of ADM, summed up the views of many American executives when he said, “Our embargo has been a total failure for 30 years. We ought to have all the Americans in Cuba doing all the business they can. It’s time for a change.”

The Helms-Burton Era The Helms-Burton Act brought change, but not the type advocated by ADM’s Andreas. The toughened U.S. stance signaled by Helms-Burton greatly concerned key trading partners, even though Washington insisted that the act was consistent with international law. In particular, supporters noted that the “effects doctrine” of international law permits a nation to take “reasonable” measures to protect its interests when an act outside its boundaries produces a direct effect inside its boundaries. Unmoved by such rationalizations, the European Commission responded in mid-1996 by proposing legislation barring European companies from complying with Helms-Burton. Although such a “blocking statute” was permitted under Article 235 of the EU treaty, Denmark threatened to veto the action on the grounds that doing so exceeded the European Commission’s authority; its concerns were accommodated, and the leg- islation was adopted. Similarly, the Canadian government enacted legis-

TABLE 1 American Companies Seeking Restitution from Cuba

Company Amount of Claim (millions)

American Brands $10.6

Coca-Cola $27.5

General Dynamics $10.4

ITT $47.6

Lone Star Cement $24.9

Standard Oil $71.6

Texaco $50.1

Source: U.S. Justice Department.

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CHAPTER 5 • THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS 181

lation that would allow Canadian companies to retaliate against U.S. court orders regarding sanctions. Also, Canadian companies that com- plied with the U.S. sanctions could be fined $1 million for doing so.

In the fall of 1996, the WTO agreed to a request by the EU to convene a three-person trade panel that would determine whether Helms-Burton violated international trade rules. The official U.S. position was that Helms-Burton was a foreign policy measure designed to pro- mote the transition to democracy in Cuba. The United States also hinted that, if necessary, it could legitimize Helms-Burton by invoking the WTO’s national security exemption. That exemption, in turn, hinged on whether the United States faced “an emergency in international relations.”

Meanwhile, efforts were underway to resolve the issue on a diplo- matic basis. Sir Leon Brittan, trade commissioner for the EU, visited the United States in early November with an invitation for the United States and EU to put aside misunderstandings and join forces in promoting democracy and human rights in Cuba. He noted:

By opposing Helms-Burton, Europe is challenging one country’s presumed right to impose its foreign policy on others by using the threat of trade sanctions. This has nothing whatever to do with human rights. We are merely attacking a precedent which the U.S. would oppose in many other circumstances, with the full support of the EU.

In January 1997, President Clinton extended the moratorium on lawsuits against foreign investors in Cuba. In the months following the Helms-Burton Act, a dozen companies ceased operating on confiscated U.S. property in Cuba. Stet, the Italian telecommunications company, agreed to pay ITT for confiscated assets, thereby exempting itself from possible sanctions. However, in some parts of the world, reaction to the president’s action was lukewarm. The EU issued a statement noting that the action “falls short of the European Commission’s hopes for a more comprehensive resolution of this difficult issue in trans-Atlantic relations.” The EU also reiterated its intention of pursuing the case at the WTO. Art Eggleton, Canada’s international trade minister responded with a less guarded tone: “It continues to be unacceptable behavior by the United States in foisting its foreign policy onto Canada, and other countries, and threatening Canadian business and anybody who wants to do business legally with Cuba.”

In February, the WTO appointed the panel that would consider the dispute. However, Washington declared that it would boycott the panel proceedings on the grounds that the panel’s members weren’t competent to review U.S. foreign policy interests. Stuart Eizenstat, undersecretary for international trade at the U.S. Commerce Department, said, “The WTO was not created to decide foreign-policy and national- security issues.” One expert on international trade law cautioned that the United States was jeopardizing the future of the WTO. Professor John Jackson of the University of Michigan School of Law said, “If the U.S. takes these kinds of unilateral stonewalling tactics, then it may find itself against other countries doing the same thing in the future.”

The parties averted a confrontation at the WTO when the EU suspended its complaint in April, following President Clinton’s pledge to seek congressional amendments to Helms-Burton. In particular, the presi- dent agreed to seek a waiver of the provision denying U.S. visas to employees of companies using expropriated property. A few days later, the EU and the United States announced plans to develop an agreement on property claims in Cuba with “common disciplines” designed to deter and inhibit investment in confiscated property.

The U.S. stance was seen in a new perspective following Pope John Paul II’s visit to Cuba in January 1998. Many observers were heartened by Cuban authorities’ decision to release nearly 300 political prisoners in February. In the fall of 2000, President Clinton signed a law that permits Cuba to buy unlimited amounts of food and medicine from the United

States. The slight liberalization of trade represented a victory for the U.S. farm lobby, although all purchases must be made in cash.

In 2002, several pieces of legislation were introduced in the U.S. Congress that would effectively undercut the embargo. One bill prohibited funding that would be used to enforce sanctions on private sales of medicine and agricultural products. Another proposal would have the effect of withholding budget money earmarked for enforcing both the ban on U.S. travel to Cuba and limits on monthly dollar remit- tances. Also in 2002, Castro began to clamp down on the growing democracy movement; about 70 writers and activists were jailed.

President George W. Bush responded by phasing out cultural travel exchanges between the United States and Cuba. In 2004, President Bush imposed new restrictions on Cuban Americans. Visits to immediate family members still living in Cuba were limited to only one every 3 years. In addition, Cuban Americans wishing to send money to relatives were limited to $1,200 per year.

The early months of Barack Obama’s administration saw a rollback of various restrictions. In April 2009, for example, the president lifted restrictions on family travel and money transfers. Although reactions to the announcement were mixed, a significant increase in travel on commercial airlines will not be possible until a bilateral aviation agree- ment is negotiated between the two nations.

At a Summit of the Americas meeting in Trinidad, President Obama declared, “The United States seeks a new beginning with Cuba. I know there is a longer journey that must be traveled in over- coming decades of mistrust, but there are critical steps we can take.” Many observers were surprised by the conciliatory tone of Raul Castro’s response to the U.S. president’s overtures. Castro indicated a willingness to engage in dialog about such seemingly intractable issues as human rights, political prisoners, and freedom of the press. “We could be wrong, we admit it. We’re human beings. We’re willing to sit down to talk, as it should be done,” Castro said.

Raul’s initial response to Obama’s overture was indeed conciliatory, and in August 2009 the United States and Cuba held extended talks for the first time in at least 10 years. These talks included meetings between U.S. and Cuban governmental official and between U.S. officials and Cuban opposition figures. But the official position of the Cuban government, announced in September by Cuban foreign minister Bruno Rodriguez, was that the U.S. trade embargo should be lifted unilaterally without preconditions. Meanwhile, Obama, despite his overtures, appears to be linking any lifting of the embargo to Cuba’s making progress on human rights.

Discussion Questions 1. What was the key issue that prompted the EU to take the Helms-

Burton dispute to the WTO? 2. Who benefits the most from an embargo of this type? Who suffers? 3. In light of the overtures U.S. President Barack Obama has made

to Raul Castro, what is the likelihood that the United States and Cuba will resume diplomatic and trade relations during the Obama administration?

Sources: The authors are indebted to Hunter R. Clark, Professor of Law, Drake University Law School, for his contributions to this case. Additional sources: Laura Meckler, “Leaders’ Comments Auger Warmer U.S.-Cuba Ties,” The Wall Street Journal (April 18, 2009), p. A3; Alan Gomez, “Obama Could Change Relations with Cuba,” USA Today (December 8, 2008), p. 4A; Jerry Perkins, “Making American Dollar Legal Tenderizes Tough Cuban Economy,” The Des Moines Register (April 6, 2003), pp. 1D, 5D; Mary Anastasia O’Grady, “Threshing Out a Deal Between the Farmers and Fidel,” The Wall Street Journal (September 20, 2002), p. A11; Pascal Fletcher, “Cuba Sees Itself as Shining Example Amid Global Troubles,” Financial Times (September 19–20, 1998), p. 3; Carl Gershman, “Thanks to the Pope, Civil Society Stirs in Cuba,” The Wall Street Journal (September 18, 1998), p. A11; Stuart E. Eizenstat, “A Multilateral Approach to Property Rights,” The Wall Street Journal (April 11, 1997), p. A18; Therese Raphael, “U.S. and Europe Clash over Cuba,” The Wall Street Journal (March 31, 1997), p. A14.

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