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Chapter # 5

The Political and Legal


Environment

International Political Issues.

Nationalism
Sovereignty
Imperialism/domination
Power
Ideologies
National interests
Political risk

A Snapshot of Chapter
The political and legal environment in the home
country, the environment in the host country, and
the laws and agreements governing relationships
among nations are all important to the
international marketer.
Compliance with them is mandatory in order to do
business abroad successfully.
Such laws can control exports and imports both
directly and indirectly and can also regulate the
international business behavior of firms,
particularly in the areas of boycotts, antitrust,
corruption, and ethics.

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To avoid the problems that can result from changes in the
political and legal environment, the international marketer
must anticipate changes and develop strategies for coping
with them.
Whenever possible, the manager must avoid being taken by
surprise and thus not let events control business decisions.
On occasion, the international marketer may be caught
between clashing home and host country laws. In such
instances, the firm needs to conduct a dialogue with the
governments in order to seek a compromise solution.
Alternatively, managers can encourage their government to
engage in government-to-government negotiations to settle
the dispute.

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Governmental disputes can result lost of business volume and


employment and the firm can seek redress in court.
In the final analysis, a firm conducting business internationally is
subject to the notions/ideas of political and legal changes and may lose
business as a result.
The best the manager can do is to be aware of political influences and
laws and strive to adopt them as far as possible.

Political/Legal Concerns of International


Marketers
Home country political and legal circumstances
Host country political and legal circumstances host country.
Bilateral and multilateral agreements, treaties, and laws
governing the relations between host and home countries.

Home country government policies and the legal systems have a major
impact on a firms opportunities abroad. Examples:
Minimum wage legislation affects the international competitiveness of a
firm using highly labor intensive production processes.
The cost of domestic environment safety regulations may also
significantly affect the pricing policies of firms in their international
marketing efforts

Restricting International Marketing


Often, however, governments also have specific rules
and regulations restricting international marketing. Such
regulations are frequently political in nature and are
based on the fact that governments believe commerce to
be only one objective among others, such as foreign
policy and national security. Four main areas of
governmental activities are of major concern to the
international marketer here:
1. Embargoes or trade sanctions,
2. Export controls,
3. Import controls, and
4. The regulation of international business behavior.

1- Embargoes and Sanctions


The terms trade sanctions and embargoes as used here
refer to governmental actions that distort the free flow of
trade in goods, services, or ideas for decidedly adversarial
and political, rather than strictly economic, purposes.
One key concern with sanctions is the fact that
governments often consider them as being free of cost.
However, even though they may not affect the budget of
governments, sanctions imposed by governments can
mean significant loss of business to firms.
One estimate claims that the economic sanctions held in
place by the United States annually costs the country
some $20 billion in lost exports and that the success rate
of all U.S. sanctions where the United States was part of a
sanction coalition remained in the 25 percent range.

2- Export Controls
Export controls
Designed to deny or delay the acquisition of strategically
important goods by the adversaries/rivals.
The legal basis for export controls varies across nations.
Dual use items (goods useful for both military and civilian
purposes) are controlled by the Joint List of the European Union.
Restricts the flow of materials and helps avoid the
proliferation/sudden increase of weapons of mass destruction.
Reduces flows of technological knowledge to control the
sophistication of armaments/weapons used by insurgent/dissatisfied
groups.
Imposes financial controls which inhibit funding for terrorist training.

3- Import Controls
In these countries, either all imports or the imports of
particular products are controlled through tariff and
nontariff mechanisms.
Tariffs place a tax on imports and raise prices.
Nontariff barriers like voluntary restraint agreements
are self-imposed restrictions and cutbacks aimed at
avoiding punitive/punishing trade actions from the host.
Quota systems reduce the volume of imports accepted
by a country.
The final effect of all these actions is a quantitative
reduction of imports

3- Import Controls
For the international marketer, such restrictions may
mean that the most efficient sources of supply are not
available because government regulations restrict
importation from those sources.
The result is either second-best products or higher costs
for restricted supplies. This in turn means that the
customer receives inferior service and often has to pay
significantly higher prices, and that the firm is less
competitive when trying to market its products
internationally.
Policymakers are faced with several problems when
trying to administer import controls.
First, most of the time such controls exact a huge price
from domestic consumers.

3- Import Controls

A second major problem resulting from import controls is the downstream


change in import composition that results from these controls.
For example, if the import of copper ore/mineral is restricted, either through
voluntary restraints or through quotas, firms in copper-producing countries
may decide to shift their production systems and produce copper wire
instead, which they then export.
As a result, initially narrowly defined protectionist measures may have to
increase in order to protect one downstream industry after another.
A final major problem that confronts the policymaker is that of efficiency.
Import controls that are frequently designed to provide breathing room to a
domestic industry either to grow or to recapture its competitive position often
turn out not to work.
Rather than improve the productivity of an industry, such controls provide it
with a level of safety and a cushion of increased income yet let the drive for
technological advancement fall behind.
Alternatively, supply may respond to artificial stimulation and grow far
beyond demand.

4- The regulation of international


business behavior
Home countries may implement special laws
and regulations to ensure that the international
business behavior of their firms is conducted
within the legal, moral, and ethical boundaries
considered appropriate.
The definition of appropriateness may vary from
country to country and from government to
government. Therefore, such regulations, their
enforcement, and their impact on firms can differ
substantially among nations.

4- The regulation of international business behavior

Several major areas in which nations attempt to govern the international marketing activities
of its firms are boycotts, whereby firms refuse to do business with someone, often for
political reasons; antitrust measures, wherein firms are seen as restricting competition; and
corruption, which occurs when firms obtain contracts with bribes rather than through
performance
Arab nations, for example, have developed a blacklist of companies that deal with Israel.
Even though enforcement of the blacklisting has decreased, some Arab customers still
demand from their suppliers assurances that the source of the products purchased is not
Israel and that the company does not do any business with Israel.
Boycott measures put firms in a difficult position. Caught in a web of governmental activity,
they may be forced to either lose business or pay fines. This is particularly the case if a firms
products are competitive yet not unique, so that the supplier can opt to purchase them
elsewhere. Heightening of such conflict can sometimes force companies to withdraw
operations entirely from a country

4- The regulation of international


business behavior

The second area of regulatory activity affecting


international marketing efforts of firms is antitrust laws.
These can apply to the international operations of firms
as well as to domestic business.
In the European Union, for example, the commission
watches closely when any firm buys an overseas
company, engages in a joint venture with a foreign firm,
or makes an agreement with a competing firm.
The commission evaluates the effect these activities will
have on competition and has the right to disapprove such
transactions.
A third area in which some governments regulate
international marketing actions concerns bribery and
corruption.
The United States has taken a lead on this issue by
passing laws in the sphere of ethics that affect U.S. firms
operating overseas.

Host Country Political and Legal


Environment
Political Actions and Risk
Firms usually prefer to conduct business in a country with a stable and friendly
government, but such governments are not always easy to find.
Managers must therefore continually monitor the government, its policies, and its
stability to determine the potential for political change that could adversely affect
corporate operations.
There is political risk in every nation, but the range of risks varies widely from
country to country.
Political risk is defined as the risk of loss when investing in a given country caused
by changes in a countrys political structure or policies, such as tax laws, tariffs,
expropriation of assets (taking companies into govt. control), or restriction in
repatriation of profits.
For example, a company may suffer from such loss in the case of expropriation or
tightened foreign exchange repatriation rules, or from increased credit risk if the
government changes policies to make it difficult for the company to pay creditors.
In general, political risk is lowest in countries that have a history of stability and
consistency.

Host Country Political and Legal


Environment
Legal Differences and Restraints
Home country laws
Host country laws
International law
Two major legal systems popular worldwide are:
Common law - Based on tradition and depends less on
written orders and codes than on precedent/example and
custom.
Code law - Based on a comprehensive set of written
orders that spell out legal rules explicitly; based on
Roman law

International Law
No enforceable body of international law exists;
Treaties and agreements respected by a number of
countries influence international business operations.
Firms are restricted by both home and host country laws.
In case of a conflict in deciding which countrys law to follow,
firms can choose either arbitration or litigation.
Litigation/trial often involves extensive delays and is
very costly.
Arbitration procedures should always be included in
the original contract.

International Terrorism
Terrorism is the systematic use (or threat) of
violence aimed at attaining a political goal and
conveying a political message.
Terrorists direct their strikes at business more
than any other target.
Terrorism creates new opportunities for firms
in a few industries like construction, security,
and information technology.

International Terrorism
Direct effect of terrorism: the immediate cost
imposed on individual firms.
Indirect effect on business activities: the real
or perceived decline in per capita income,
purchasing power, and stock market values.
Chill effect - Uncertainty about the state of a
nations economy leads to a sharp reduction
in demand for both consumer and industrial
goods.

International Terrorism
Physical damage disrupts power supply,
communication, transport and other forms of
infrastructure, thereby disturbing the supply of
inputs, resources and services.
Terrorism deteriorates transnational
relationships.
Regulations imposed by the government to
reduce a countrys vulnerability/weakness to
terrorism may delay the supply of inputs,
increase administrative burden and require
firms to invest in new procedures.

Ethical Issues
The ethical obligations faced by
multinational enterprises include:
Corporate governance and responsibility
Intellectual property rights
Bribery and corruption

Corporate governance and


responsibility
Corporate governance - Relationships among
stakeholders that determine and control the
strategic direction and performance of an
organization.
Its key elements include:
Transparency of a firms operation.
Financial results.
Principles by which it measures sales, expenses,
assets, and liabilities.

Bribery and corruption


The Foreign Corrupt Practices Act (FCPA):
passed in 1977 to prohibit U.S. firms to bribe
foreign officials for business purposes.
Functional lubrication/Enabling payments: the
amount is small, it is standardized, and is passed on
to others involved in the processing of the
documents.
Bribery: the process driven by individual greed,
the amount depends on the individual official and is
for the officials own personal use.

Bribery and corruption


In 1995, the Organization of American States (OAS)
officially condemned bribery.
The Organization for Economic Cooperation and
Development (OECD) in 1999 agreed to change the
bribery regulations among its member countries to
prohibit the tax deductibility of improper payments.
The Sarbanes-Oxley Act of 2002 was intended to protect
investors by improving the accuracy and reliability of
corporate disclosures.

Class Discussion
Topic
The impact of terrorism in
France and other countries of
Europe on the international
trade with Asian countries
especially with Muslim
countries.
The consequences of
terrorism should be discussed
both in short run and long run
on the international business
as well.

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