CHAPTER 5THE POLITICAL, LEGAL, AND REGULATORY ENVIRONMENTS

OF GLOBAL MARKETING

SUMMARYThe 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 is comprised of the rules and principles that nation-states consider binding upon themselves. The countries of the world can be broadly categorized in terms of common-law legal systems or civil-law legal system. The United States and Canada and many former British colonies are common law countries; most other countries are civil-law. 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 Practice 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 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 non-governmental, 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 European Union makes laws governing member states. The World Trade Organization 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.

OVERVIEW

Each of the world’s national governments regulates trade and commerce with other countries and attempts to control the access of outside enterprises to national resources.

Every country has its own unique legal and regulatory system that affects the operations and activities of the global enterprise, including the global marketer’s ability to address market opportunities and threats.

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Laws and regulations constrain the cross-border movement of products, services, people, money, and know-how. The global marketer must attempt to comply with each set of national constraints. The fact that laws and regulations are frequently ambiguous and continually changing hamper these efforts.

In this chapter, we consider the basic elements of the political, legal, and regulatory environments of global marketing, including the most pressing current issues and some suggested approaches for dealing with those issues.

Some specific topics, such as rules for exporting and importing industrial and consumer products, standards for health and safety, and regulations regarding packaging, labeling, advertising, and promotion, are covered in later chapters devoted to individual marketing mix elements.ANNOTATED LECTURE/OUTLINE

THE POLITICAL ENVIRONMENT

Global marketing takes place within the political environment of governmental institutions, political parties, and organizations through which a country’s people and rulers exercise power.

What is the purpose of a ‘political culture’?

A political culture reflects the importance of the government and legal system.

It provides a context for understanding the relationship between individuals and corporations and the political system.

Any company doing business outside its home country should carefully study the political culture in the target country and analyze salient issues arising from the political environment. These include the governing party’s attitude toward sovereignty, political risk, taxes, the threat of equity dilution, and expropriation.

Nation-States and Sovereignty Sovereignty is defined as the supreme and independent political authority.

Government actions taken in the name of sovereignty occur in the context of two important criteria:

1. A country’s stage of development2. The political and economic system.

the economies of individual nations may be classified as industrialized, newly industrializing, or developing. Governments in developing countries control economic

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development by passing protectionist laws to encourage their nation’s economic development.

Nations with advanced stages of economic development declare that any practice that restrains free trade is illegal. Antitrust laws and regulations promote fair competition.

Most economies combine elements of market and non-market systems. Sovereign political power in a non-market economy reaches far into the economic life of a country. For example, a French law passed in 1996 requires that at least 40 percent of the songs played by popular radio stations must be French.

Most of the world’s economies combine elements of market and nonmarket systems. The sovereign political power of a government in a predominantly nonmarket economy reaches quite far into the economic life of a county. In a capitalist, market-oriented democracy, power is more constrained. Non-market and market structures currently have privatization, which reduces government involvement as a supplier of goods and services.

A current global phenomenon in both nonmarket and market structures is the trend toward privatization. Privatization moves a nation’s economy in the free-market direction (e.g., Mexico has partially privatized banks, airlines, etc.) Some believe that global market integration erodes economic sovereignty. Nations give up sovereignty in return for something of value (e.g., EU countries gave up their currencies in exchange for improved market access).

Political risk

Define ‘political risk.’

Political risk is the possibility of a change in political environment or government policy that would adversely affect a company’s ability to operate effectively and profitably.

Political risk can deter a company from investing abroad; to put it another way, when a country’s political environment is characterized by a high level of uncertainty, it may have difficulty in attracting foreign investment.

Managers often omit political risk assessment in global strategic planning because they think it is too expensive or too unreliable.

Political forces can drastically change the business environment with little advance notice.

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Commercial sources vary in the criteria that constitute political risk (e.g., BERI assesses societal and system attributes, whereas PRS assesses government actions and economic functions). For example, BERI is concerned with societal and system attributes, whereas PRS Group focuses more directly on government actions and economic functions (see Table 5-1).

Companies can purchase insurance to offset potential risks arising from the political environment.

Taxes

How do taxation policies frequently motivate companies and individuals to profit by not paying taxes?

Governments rely on tax revenues to generate funds for social services, the military and other expenditures. Unfortunately, government taxation policies on the sale of goods and services frequently motivate companies and individuals to profit by not paying taxes.

How is it possible for global companies to profit from illegal smuggling practices?

Ironically, global companies can still profit from the smuggling practice; it has been estimated, for example, that 90 percent of the foreign cigarettes sold in China are smuggled in. For Philip Morris, this means annual sales of $100 million to distributors in Hong Kong, who then smuggle the smokes across the border.

High excise and VAT taxes encourage legal cross-border shopping as consumers go abroad in search of good values (e.g., Great Britain estimates that cars returning from France have an average 80 bottles of wine).

Political risk in Russia is high. Why?

Corporate taxation is another issue. High political risk in Russia is due to high taxes on business operations. High taxes encourage off-the-books cash and sheltered from the eyes of tax authorities.

This, in turn, creates a liquidity squeeze that prevents companies from paying employees, and unpaid, disgruntled workers contribute to political instability.

Diverse geographical activity requires special attention to tax laws. Companies minimize their tax liability by shifting the location of income (e.g., foreign companies in the U.S. cost the government $3 billion a year in lost revenue). For example: using the concept of “earnings stripping,” foreign companies reduce earnings by making loans to U.S. affiliates rather than using direct investment to finance U.S. activities. The U.S. subsidiary can deduct the interest it pays on such loans and thereby reduce its tax burden.

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Seizure of Assets

The ultimate threat of a government can pose is seizing assets.

What is ‘expropriation’?

Expropriation refers to governmental action to dispossess a foreign company or investor.

Compensation is generally provided, although not often in a “prompt, effective and adequate” manner.

How does ‘expropriation’ differ from ‘confiscation’?

If no compensation is provided, the action is referred to as confiscation. International law prohibits a government to take foreign property without compensation.

Nationalization is typically broader in scope than expropriation and occurs when the government takes control of some or all of the enterprises in a particular industry.

International law is generally interpreted as prohibiting any act by a government to take foreign owned property without compensation. Nationalization is generally broader in scope than expropriation; it occurs when the government takes control of some or all of the enterprises in a particular industry. International law recognizes nationalization as a legitimate exercise of government power, if it satisfies a “public purpose” and is accompanied by “adequate payment.”

In 1959, Castro nationalized the property of American sugar producers to retaliate for American import quotas, yet Cuban-owned production was not nationalized. Castro offered compensation in the form of Cuban government bonds, which was adequate under Cuban law, but the U.S. viewed this particular act of nationalization as discriminatory because of the low compensation.

South Korea nationalized Kia, the nation’s number three automaker, in the wake of the Asian currency crisis. Additionally, some industry observers believe that the needed reform of Japan’s banking system will require nationalization.

Short of outright expropriation or nationalization, the phrase creeping expropriation applies to limits on economic activities of foreign firms in particular countries. These have included limitations on repatriation of profits, dividends, royalties, and technical assistance fees from local investments or technology arrangements.

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Other issues include increased local content requirements, quotas for hiring local nationals, price controls, and other restrictions affecting return on investment.

Global companies suffer discriminatory tariffs and nontariff barriers that limit market entry, patents and trademarks, and intellectual property.

For example, intellectual property restrictions have had the practical effect of eliminating or drastically reducing protection of pharmaceutical products.

When governments expropriate foreign property, there are impediments to reclaiming that property (e.g., if a foreign state is involved, U.S. courts will not get involved).

Representatives of expropriated companies seek recourse at the World Bank Investment Dispute Settlement Center or buy expropriation insurance from a government agency such as OPIC.

International Law

International law may be defined as the rules and principles that nation-states consider binding upon themselves. International law pertains to property, trade, immigration, and other areas traditionally under the jurisdiction of individual nations.

International law applies only to the extent that countries are willing to assume all rights and obligations.

The law originally dealt only with nations as entities, but a growing body of law rejected the idea that only nations can be subject to international law.Paralleling the expanding body of international case law in the twentieth century, new international judiciary organizations have contributed to the creation of an established rule of international law. Disputes arising between nations are issues of public international law and may be taken before the World Court or the International Court of Justice.Other sources of modern international law include treaties, international custom, judicial case decisions in the courts of law of various nations, and scholarly writings. What happens if a nation has allowed a case against it to be brought before the International Court of Justice and then refuses to accept a judgment against it? The plaintiff nation can seek recourse through the United Nations Security Council.

Common Law versus Civil Law Private international law applies to disputes arising from transactions between companies of different nations.

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Law in the Western world can be traced to two sources: Rome, from which the continental European civil law tradition originated, and English common law, from which the U.S. legal system originated.

What are the primary differences between ‘civil law’ and ‘common law’?

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

In common-law countries, many disputes are decided by reliance on the authority of past judicial decisions(cases)A common-law legal system is based on the concept of precedent, sometimes called stare decisis. Precedent is the notion that past judicial decisions on a particular issue are binding on a court when that same issue is presented later. Precedent and stare decisis represent the fundamental principle of common law decision making. In American and English law, the law inferred from past judicial decisions equals the law set down in codes.

The Uniform Commercial Code (UCC), fully adopted by 49 U.S. states, codifies a body of specifically designed rules covering commercial conduct. In common-law countries, companies are legally incorporated by state authority. In civil-law countries, a contract between two or more parties, who are fully liable for the actions of the company, forms a company. The host country’s legal system directly affects the form a legal business entity will take.

Former British colonies founded their systems on common law. Roman law influenced Continental Europe. Asian countries use both. Scandinavian legal systems are mixed.

Most countries have legal systems based on civil-law traditions.

In Eastern and Central Europe in the post-Communist era, consultants representing both common- and civil- law countries try to influence the process.

In much of Central Europe, including Poland, Hungary, and the Czech Republic, the German civil-law tradition prevails.

In Eastern Europe (particularly Russia), the U.S. has greater influence, and Germany accuses the U.S. of promoting a system so complex that it requires lawyers. The U.S. says that the German system is outdated.

Islamic law

The legal system in many Middle Eastern countries, is identified with the laws of Islam, which are associated with “the one and only one God, the Almighty.” In Islamic law, the sharia is a comprehensive code governing Muslim conduct in all areas of life, including business.

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The code is derived from two sources:

1. The Koran, the Holy Book written in Arabic that is a record of the revelations made to the Prophet Mohammed by Allah.

2. The Hadith, which is based on the life, sayings and practices of Muhammad.

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 in the Middle East should have, at minimum, a rudimentary understanding of Islamic law and its implications for commercial activities.

Sidestepping Legal Problems: Important Business Issues

How can the astute, proactive marketer help prevent conflicts?

Clearly, the global legal environment is very dynamic and complex. Therefore, the best course to follow is to get expert legal help. This helps prevent conflicts concerning establishment, jurisdiction, patents and trademarks, antitrust, licensing and trade secrets, bribery, and advertising and promotion.

Jurisdiction

Company personnel working abroad should understand the extent to which they are subject to the jurisdiction of host-country courts. Jurisdiction pertains to global marketing insofar as it concerns 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 working in the United States must understand that courts have jurisdiction to the extent that the company can be demonstrated to be doing business in the state in which the court sits.

Jurisdiction was an issue in a trade dispute that pitted Revlon and United Overseas Limited (UOL) in U.S. District Court for the Southern District of New York, charging the British company with breach of contract. UOL asked the court to dismiss the complaint; Revlon cited the presence of a UOL sign about the entrance to its New York offices. The court rejected UOL’s motion to dismiss.

Intellectual Property: Patents, Trademarks, and Copyrights

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Patents and trademarks that are protected in one country are not necessarily protected in another, so global marketers must ensure that patents and trademarks 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.

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. (Exhibit 5 – 7 and 5 – 8).

A copyright establishes ownership of a written, recorded, performed, or filmed creative work.

Counterfeiting is the unauthorized copying and production of a product.

An associative counterfeit, or imitation, uses a product name that differs slightly from a well-known brand but is close enough that consumers will associate it with the genuine product. (Exhibit 5-9).

What is ‘piracy’?

Piracy is the 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.

In the United States, patents, trademarks, and copyrights are registered with the Federal Patent Office, the patent holder retains all rights for the life of the paten even if the product is not produced or sold.

Patent and trademark protection in the United States is very good.

to register a patent in Europe, a company has the option of filing on a country-by country basis or applying to the European Patent Office in Munich for patent registration in a specific number of countries. A third option will soon be available: The Community Patent Convention will make it possible for an inventor to file a patent that is effective in the 27 signatory nations.

Currently, patent procedures in Europe are quite expensive, in part because of the cost of translating technical documents into all the languages of the EU countries.

In July 1997, in response to complaints, the European Patent Office instituted a 19 percent reduction in the average cost of an eight-country patent registration. The United States recently joined the World Intellectual Property Organization (WIPO). The system

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allows trademark owners to seek protection in as many as 74 countries with a single application and fee.

Two important agreements govern intellectual property issues:

The International Convention for the Protection of Industrial Property.

Also known as the Paris Union or Paris Convention. This treaty is now honored by nearly 100 countries. A U.S. company wishing to obtain foreign patent rights must apply to the Paris Union within 1 year of filing in the United States or risk a permanent loss of patent rights abroad.

The International Union for the Protection of Literary and Artistic Property.

Also known as the Berne Convention, this was a landmark agreement on copyright protection.

Two other treaties of importance are:

The Patent Cooperation Treaty (PCT).

This treaty has more than 100 members, including Australia, France, Germany, Japan, North Korea, South Korea, the Russian Federation, 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 Convention

The European Patent Office administers applications for the Convention, which is effective in the EU and Switzerland.

In recent years, the U.S. has devoted considerable diplomatic effort to improving the worldwide environment for intellectual property protection.

Effective June 7, 1995, in accordance with GATT, new U.S. patents are granted for a period of 20 years from the filing date. Now, U.S. patent laws harmonize with those in the EU as well as Japan.

However, patents in Japan are narrower than those in the United States. As a result, companies such as Caterpillar have been unable to protect critical innovations in Japan because products very similar to those made by U.S. companies can be patented without fear of infringement.

Another key issue is global patent protection for software. Although copyright laws protect the computer code, it does not apply to the idea embodied in the software.

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Beginning in 1981, the U.S. Patent and Trademark Office extended patent protection to software.

Table 5-2 represents the companies receiving the most U.S. Patents, 2005.

Antitrust

What is the purpose of antitrust laws?

Antitrust laws in the United States and other countries are designed to combat restrictive business practices and to encourage competition.

The laws are enforced by agencies such as the U.S. Federal Trade Commission, Japan’s Fair Trade Commission, and the European Commission.

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

The law applies to foreign companies conducting business in the U.S. (e.g., Nippon Paper Industries was found guilty in a federal appeals court of conspiring with other Japanese companies to raise U.S. fax paper prices). For the past four decades, the competition authority of the European Commission has had the power to prohibit agreements that prevent, restrict, and distort competition. Beginning in the mid-1990’s the commission has taken an increasingly activist approach.

There have been calls for the EU to revamp its approach to antitrust issues, but proposed changes pit modernists against traditionalists.

The interstate trade clause of the Treaty of Rome applies to trade with third countries, so that a company must be aware of the conduct of its affiliates.

Individual country laws in Europe can apply to specific marketing mix elements (e.g., some countries permit selective distribution). However, EC law takes precedence.

In some instances, companies or entire industries have been able to secure exemption from antitrust rules (e.g., KLM and Northwestern airlines were exempted by the U.S. and share computer codes and set prices jointly).

The European Commission permitted United International Pictures (UIP), a joint venture between Paramount, Universal, and MGM/UA, to cut costs by collaborating on motion picture distribution in Europe. But, in 1998, the commission reversed itself and notified the three studios that they must distribute their films independently in Europe.

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In the U.S., most cartels are illegal although major shipping lines enjoy exemption from anti-trust laws.

Licensing and trade agreements

Licensing is a contractual agreement for the use patents, trademarks, trade secrets, technology, or intangible assets in return for royalty payments or other compensation.

U.S. laws do not regulate this process as do technology transfer laws in the European Union, Australia, Japan, and many developing countries.

To prevent the licensee from using the licensed technology to compete directly with the licensor, the latter may try to limit the licensee to selling only in its home country.

Licensing agreements can come under antitrust scrutiny (e.g., the Justice Department said that Bayer/Johnson arrangement was unacceptable in a highly concentrated market).

The duration of the agreement and royalties are commercial negotiations between licensor and licensee without government restrictions on remittances of royalties abroad.

Important considerations include: what assets a firm may offer for license, how to price the assets, and rights to “make” or “use” the product, and to “sell” the product.

The right to sublicense is another important issue; decisions must be made regarding exclusive or nonexclusive arrangements and the size of the licensee’s territory.

Licensing is potentially dangerous because it may create a competitor.

What happens if a licensee learns trade secrets?

Trade secrets are confidential information with commercial value and for which steps have been taken to keep it secret; including manufacturing processes, designs, and customer lists.

The licensing of unpatented trade secrets should be linked to confidentiality contracts.

The 1990s have seen improvements in laws pertaining to trade secrets (e.g., NAFTA marked the first international trade agreement with provisions for protecting trade secrets).

Despite formal legal developments, 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.

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Bribery and Corruption: Legal and Ethical Issues

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

Western companies have opportunities in Eastern Europe, in the Middle East and other parts of the world, where bribery is a way of life and corruption is widespread.

Transparency International ranks countries in the Corruption Perceptions Index. The “cleanest” score is 10. Table 5-4 shows the 2008 top 10 and bottom ten countries.

In the United States, the Foreign Corrupt Practices Act (FCPA) made it a crime for U.S. corporations to bribe an official of a foreign government or political party to obtain or retain business.

Payments to third parties are also prohibited when the company has reason to believe that part or all of the money would be channeled to foreign officials. Subsequent FCPA changes exclude “grease” payments to low-level officials to cut red tape in clearing shipments through customs, securing permits, or getting clearance to leave a country.

FCPA enforcement has generally been lax.

Critics call the FCPA moral imperialism, imposing U.S. laws, standards, values, and mores on American companies and citizens worldwide.

U.S. companies face difficulty vis-à-vis competitors such as Japan and Europe (e.g., 1994, bribes offered by non-U.S. companies factored into 100 business deals valued at $45 billion).

Bribery in world markets will not change because the U.S. Congress condemns it.

Bribery is a deductible business expense in many European countries.

The OECD is working to create so-called islands of integrity with players pledging not to bribe. Despite progress, industry observers express concerns. Companies operating abroad face a continuum of ethical choices. They can maintain home-country ethics worldwide or abandon company ethics and adapt to local circumstances. If competitors offer bribes, U.S. companies can ignore the bribery or evaluate its effect on the purchase decision as another element of the marketing mix. The overall value of a company’s offer must equal or exceed the competitor’s offering, bribe included.

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A lower price, a better product, better distribution, or better advertising may offset the value added by the bribe.

The best line of defense is to have a product that is clearly superior to that of the competition. In such a case, a bribe should not sway the purchase decision.

Alternatively, clear superiority in service and in local representation may tip the scales.

Conflict Resolution, Dispute Settlement, and Litigation

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 U.S. 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.

Conflicts inevitably arise in business anywhere, especially when different cultures come together to buy, sell, establish joint ventures, compete, and cooperate in global markets.

For American companies, litigation in foreign courts becomes vastly complex, partly because of differences in language, legal systems, currencies, and traditional business customs and patterns.

In addition, problems arise from differences in procedures relating to discovery. Discovery is the process of obtaining evidence to prove claims and determining which evidence may be admissible in which countries under which conditions. A further complication is the fact that judgments handed down in courts in another country may not be enforceable in the home country. For all of these reasons, many companies prefer to pursue arbitration before proceeding to litigate.

Alternatives to Litigation for Dispute Settlement

Define ‘arbitration.’

Formal arbitration is one means of settling international business disputes outside the courtroom. Arbitration is a negotiation process that the two parties have, by prior agreement, committed themselves to using.

The most important treaty regarding international arbitration is the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention.

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The framework created by the New York Convention is important for several reasons:1. When parties enter into agreements that provide for international arbitration, the

signatory countries can hold the parties to their pledge. 2. After arbitration has taken place and the arbitrators have made an award, the

signatories recognize and can enforce the judgment. 3. The signatories agree that there are limited grounds for challenging arbitration

decisions. By law, U.S. courts must accept an arbitrator’s decision in patent disputes; in other countries, however, there is no general rule of acceptance.

Business arbitration is promoted through the International Court of Arbitration at the Paris-based International Chamber of Commerce (ICC; www.iccwbo.org).

Overall, the ICC has gained a reputation for being slower, more expensive, and more cumbersome than alternatives.

The American Arbitration Association (AAA) has also become recognized as an effective institution within which to resolve disputes. In 1992, the AAA signed a cooperation agreement with China’s Beijing Conciliation Center.

The AAA has entered into cooperation agreements with the ICC and other global organizations to promote the use of alternative dispute resolution methods. In one recent case, Toys “R” Us was the losing party in a dispute brought to the AAA. The AAA ruled that Toys “R” Us was to pay a $55 million arbitration award.The Swedish Arbitration Institute is another agency for settling disputes. This agency frequently administered disputes between Western and Eastern European countries. An International Council for Commercial Arbitration (ICCA) was established to coordinate the far-flung activities of arbitration organizations. The United Nations Conference on International Trade Law (UNCITRAL; www.un.or.at/uncitral) is another significant force.

The growing influence of the ICCA and UNCITRAL rules, coupled with the proliferation of regional arbitration centers, have contributed to changing attitudes in developing countries and resulted in the increased use of arbitration around the world.

THE REGULATORY ENVIRONMENT

The regulatory environment consists of a variety of governmental and nongovernmental agencies that enforce laws or set guidelines for conducting business.

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.

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U.S. law firms and consulting firms also have increased their presence in Brussels to gain insight into EU politics and access to its policy makers; some have hired EU officials.

Regional Economic Organizations: The European Union Example

The Treaty of Rome established the European Community (EC), the precursor to the European Union.

The Treaty created an institutional framework in which a council (the Council of Ministers) serves as the main decision-making body.

The European Council (a distinct entity from the Council of Ministers) defines general political guidelines and provides direction on integration-related issues.The 20-member EU Commission, the administrative arm, proposes laws and policies, monitors 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. Laws, regulations, directives, and policies are submitted to the parliament and then to the council for a final decision.

Regulations automatically become law throughout the union; directives include a time frame for implementation by legislation in each member state.

The Single Market era is one in which many industries face new regulatory environments.

The European Court of Justice, based in Luxembourg, ensures that EU laws and treaties are upheld throughout the EU. The Court is empowered to resolve conflicts between national law and EU law.

National laws should always be consulted. National laws may be stricter than community law, especially in such areas as competition and antitrust.

Conversely, national laws may be less restrictive than community law. For example, Germany had traditionally placed few restrictions on banana imports. When a German court decreed that German companies could import bananas without complying with the EU’s 1993 banana regime regulations, the Court of Justice ruled that national courts could not grant interim judicial relief.

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DISCUSSION QUESTIONS

1. What is sovereignty? Why is it an important consideration in the political environment of global marketing?

The term “sovereignty” is defined as “supreme and independent political authority.” Sovereignty is a central consideration in several global business issues today. For example, Europe views the U.S. Helms-Burton legislation against Cuba to be an unacceptable extension of sovereignty outside the U.S. “Extraterritorial sovereignty” is invoked by those who object to the constraints that the Foreign Corrupt Practices Act places on U.S. businesses.

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

Political risk increases when a country experiences a currency crisis, when there is civil disorder, or ethnic unrest. Political risk manifests itself in the form of various restrictions on organizational activities – the most extreme of which is seizure of assets.

3. Briefly describe some of the differences between the legal environment of a country that embraces common law and one that observes civil law.

Common-law countries follow the Anglo-Saxon tradition of relying on precedent established by past judicial decisions. Civil-law countries look to code as the source of authority.

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.

The chapter discusses five potential sources of conflict.

1. Jurisdiction concerns the right of a court to hear and decide a case brought before it.

2. Patent and trademark protection is a particularly vexing issue in many markets.

3. Companies must also understand and comply with antitrust laws in different countries. For example, the European Commission can decide whether to permit a proposed merger (such as the one between Ciba-Geigy and Sandoz) to go through.

4. Licensing and trade agreements are another area where intellectual property laws apply.

5. Finally, businesspersons should understand that bribery and corruption are widespread in the world today. However, businesspersons are advised to comply with both home-country and host-country bribery laws.

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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.

The scenario described in the question is not illegal. Rather, it constitutes a “grease payment” for cutting red tape.

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?

Arbitration can be faster, easier, and less expensive than litigation. Also, with arbitration, you have the likelihood of a “level playing field,” since you agree BEFOREHAND on how the arbitration will be handled.

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CASES

Case 5-1: America’s Cuban Conundrum: The Assignment

Overview: Cuba and United States have a tense relationship over years beginning with the Fidel Castro’s coming to power in 1959. The expropriation of American property by Cuban government resulted in American embargo toward the island nation. Helms-Burton Act was signed by President Clinton in 1996 and led to many disputes in the world political and business arena.

1. What was the key issue that prompted the EU to take the Helms-Burton dispute to the WTO?

The Helms-Burton act was considered as a violation to the rules of international trade. EU didn’t want to comply with the Helms-Burton act and requested WTO to create a three person trade panel that would decide the case of the act.

2. Who benefits the most from an embargo of this type? Who suffers?

Cuba definitely suffers from this embargo. The country’s economy requires international investments, which are restricted by the Helms-Burton act. Without the act, Cuba is still in pretty decent shape since a lot of European countries have trade relationships with the country. But America is the closest neighbor and the lack of trade relationship is still reflected on the island.

Both Cuba and the United States and our allies suffer with this embargo.

3. In light of the overtures U.S. President Barack Obama has made to Raul Castro, is the likelihood that the United States and Cuba will resume diplomatic and trade relations during the Obama administration?

Student answers will vary depending upon their political affiliation. Political strategists mostly likely predict that in President Obama’s second term in office will come some embargo and sanction lifting. Perhaps sooner than later if Fidel Castro and when passes.

Case 5-2: Gambling Goes Global on the Internet

Overview: Gambling is an old habit of the mankind that started thousands years ago. Nowadays gambling is global. American government tries to raise an issue about the internet offshore gaming companies and prosecute those who are involved in this business. European countries are voting against the American policy. WTO rules that the United States are unfairly discriminating against offshore gaming companies by its Unlawful Internet Gaming Enforcement Act.

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1. Do you think that the Unlawful Internet Gaming Enforcement Act unfairly discriminates against offshore gaming companies?

I think that the Unlawful Internet Gaming Enforcement Act unfairly discriminates against offshore gaming companies. I agree with WTO ruling that the U.S. discriminates against online gambling in an unfair way. The United States does not have a right to control the business of other countries. U.S. rules against gaming can only be applied in the U.S. and not in Europe or anywhere else in the world.

2. How likely is it that legislative efforts to prevent people who want to gamble from gambling will be successful?

The legislative efforts might reduce the number of people who gamble online – but only possibly and then only slightly. The U.S. has tried many times over the years to control or limit various forms of gaming – typically with only limited results. For an example, just take a look at the number of legal gaming venues in the U.S. today. The number greatly exceeds what was available just a decade ago.

3. At a time when the U.S. government is desperate to generate revenues, would I make sense for policymakers to license, regulate, and tax Internet gambling? Do the results of the 2008 election and the current economic crisis create the conditions for tapping this new revenue source? Or, should concerns about the erosion of social values dominate the discussion of Internet gambling?

The United States needs to use government resources on more important cases than offshore Internet gambling – possibly education and healthcare would be two good places to start. Offshore gambling is a case that is out of the jurisdiction of the American government, but it seems the United States never considers this issue to be a problem.

TEACHING TOOLS AND EXERCISES

Activity: Students should be preparing or presenting their Cultural-Economic Analysis and Marketing Plan for their country and product as outlined in Chapter 1.

Out-Of-Class Reading: George S. Yip; Audrey J.M. Bink. “Managing Global Accounts” HBR Article R0709G.

Carbone, June, and Margaret McClean. “Genetically Modified Foods: The Creation of Trust and Access to Global Markets.” Business & Professional Ethics Journal 20, no. 3/4 (Fall/Winter 2001) pp. 79-104.

Internet Exercise: Have students log on to the United Nations International Law website (www.un.org/law/). Just have them peruse the wealth of data and information concerning recent legal decisions to give them an idea of the complexity of international law.

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Risk Analysis Exercise: There is commentary on China in all media, and students should be encouraged to look at specific risk profile reports, such as those published by The Economist and Euromoney. Both publications have websites, and both are in hard copy in the library. The point of the exercise is to get students to focus on one country and debate or question a real example of risk analysis.

The value of the assignment lies in the class discussions, as students are likely to disagree with the ratings. These differences may reflect individual risk preferences or biases, but they still should be able to argue economic and political points such as the instability of a “rule by man” nation, the inability of China to enforce intellectual property rights, home-host country relations, and currency issues. Students may be able to provide comparative analysis with data or statistical reports.

Debate: FCPA. Divide the class into two teams: Team A presents the case that the U.S. Foreign Corrupt Practices Act (FCPA) represents an ethical way to do business worldwide. Team B argues that the FCPA prevents the U.S. from being competitive globally. Each team has 15 minutes to prepare; the teams debate for 10-15 minutes.

SUGGESTED READINGS

BooksAlford, William P. To Steal a Book is an Elegant Offense: Intellectual Property Law in Chinese Civilization. Stanford, CA: Stanford University Press, 1995.

Askari, Hossein, John Forret, Hildy Teegan, and Jiawen Yang. Ecnomic Sanctions: Examining Their Philosophy and Efficacy. Westport, CT: Praeger Publishers, 2004.

Borchardt, Klaus-Dieter. The ABC of Community Law. Luxembourg: Office for Official Publications of the European Communities, 1994.

Chukwumerige, Okezie. Choice of Law in International Commercial Arbitration. Westport, CT: Quorum Books, 1994.

Fishbein, Bette K. Germany, Garbage, and the Green Dot: Challenging the Throwaway Society. New York: Inform, 1994.

Hirschhorn, Eric. The Export Control Embargo Handbook, 2nd ed. New York: Oceana, 2005.

Jacoby, Neil H., Peter Nehmenkis, and Richard Eells. Bribery and Extortion in World Business. New York: McMillan, 1977.

Kelso, R. Randall, and Charles D. Kelso. Studying Law: An Introduction. St. Paul, Minn.: West Publishing, 1984.

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Ohmae, Kenichi. The Borderless World. New York: Harper Perennial, 1991.

Samuels, Barbara C. Managing Risk in Developing Countries: National Demands and Multinational Response. New Jersey: Princeton University Press, 1990.

Slomanson, William R. Fundamental Perspectives on International Law. St. Paul: West Publishing, 1990.

Sohn, Louis B. ed. Basic Documents of the United Nations. Brooklyn: The Foundations Press, Inc., 1968.

ArticlesAlbright, Katherine, and Grace Won. “Foreign Corrupt Practices Act.” American Criminal Law Review (Spring 1993), pp. 787.

Bagley, Jennifer M., Stephanie S. Glickman, and Elizabeth B. Wyatt. “Intellectual Property.” American Criminal Law Review, 32, no. 2 (Winter 1995), pp. 457-479.

Bradley, David G. “Managing Against Expropriation.” Harvard Business Review (July/August 1977).

Cleveland, Harlon. “Rethinking International Governance.” The Futurist (May 1991).

Carbone, June and Margaret McClean. “Genetically Modified Foods: The Creation of Trust and Access to Global Markets.” Business & Professional Ethics Journal 20, no. 3/4 (Fall/Winter 2001) pp. 79-104.

Czinkota, Michael R. and Erwin Dichtl. “Export Controls and Global Changes.” Der Markt 37, no. 5 (1996), pp. 148-155.

Gillespie, Kate. “Middle East Response to the U.S. Foreign Corrupt Practices Act.” California Management Review 29 (1987).

Graham, John L. “The Foreign Corrupt Practice Act: A New Perspective.” Journal of International Business Studies (Winter 1984), pp. 107-121.

Hawkins, Robert B., Norman Mintz, and Michael Provissoiero. “Government Takeovers of U.S. Foreign Affiliates.” Journal of International Business Studies (Spring 1976).

Khrushchev, Segei, Tony L. Henthorne, and Michael S. LaTour. “Cuba at the Crossroads: The Role of the U.S. Hospitality Industry in Cuban Tourism Initiatives.” Cornell Hotel and Restaurant Administration Quarterly 48, no. 4 (November 2007), pp. 402-415.

Jain, Subhash C. “Problems in International Protection of Intellectual Property Rights.” Journal of International Marketing 4, no. 1 (1996), pp. 9-32.

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Maruyama, Magoroh. “Bribing in Historical Context: The Case of Japan.” Human Systems Management 15 (1996), pp. 138-142.

Nash, Marian Leich. “Contemporary Practice of the United States Relating to International Law.” American Journal of International Law, 88, no. 4 (October 1994), pp. 719-765.

Ortego, Joseph, and Josh Kardisch. “Foreign Companies Can Limit the Risk of Being Subject to U.S. Courts.” National Law Journal 17, no. 3 (September 19, 1994), pp. C2-C3+.

Spero, Donald M. “Patent Protection or Piracy: A CEO Views Japan,” Harvard Business Review (September/October 1990), pp. 58-62.

Vernon, Raymond. “The World Trade Organization: A New Stage in International Trade and Development.” Harvard International Law Journal 36, no. 2 (Spring 1995), pp. 329-340.

Vogel, David. “The Globalization of Business Ethics: Why America Remains Distinctive.” California Management Review 35, no. 1 (Fall 1992), pp. 30-49.

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