MKTG7506: International Marketing Management (S1-2010)

22 March 2010

Political & Legal Environment

C & G Chapter 6

Dr Ravi Pappu Office: Room 416 Colin Clark Building Phone: 3346 8089 Email: r.pappu@business.uq.edu.au Consultation: Monday 3-4 PM; Room 416 Colin Clark

Learning Objectives
Identify frameworks and tools to analyse political and legal environments in global markets. Recognise those aspects of the political-legal environment, both in home and host countries, impacting on a firms international operations. Analyse the impact of political and legal factors on international marketing decisions. Determine ways of minimising the political and legal risk in host countries.

Political Environment - Governments

Government affects almost every aspect of business life which industries will receive protection in the country, which will face competition. Determines labour regulations and property laws. Trade agreements political and legal implications. A firm has to face both home country and host country government regulations and laws. Three roles: participator, facilitator and regulator

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Government Role
(i) Participator Government procurement Buy domestic policy in the US bidding disadvantage against local suppliers in most countries. Government participation in commercial activities, infrastructure, and public welfare. Control over marketing of exports e.g. Australian Wheat Board.

Government Role
(ii) Facilitator Incentives and government programs loans, subsidies or training programs to support export activities. Policy planning focused on exporters. Systematic export promotion activities - Government investment missions abroad. Government subsidies Direct government subsidies e.g. Airbus and SEMATECH.

Government Role
(iii) Regulator (in the Home Country) Regulations in the home country e.g. Minimum wage regulations affects international competitiveness - sweat shops and laws on bribery. Embargoes and Sanctions resulting in export import curtailment, elimination of credit, freezing assets, prohibition of financial transactions. Export controls (a) export control systems military and dual-purpose items export licensing. Boycotts refusing do business with another country.
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Government Role
Regulator (in the Host Country) Economic risks arising from host country regulations Exchange controls due to shortage of exchange. Ownership controls National ownership e.g. Kuwait USA. Local content regulations a portion to be sold within the country or local raw material content. Tax controls Raising taxes without warning. Price controls For essential products.
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Host Country - Structure of Government

Political ideology Communism government owns and manages all businesses - no private ownership allowed. Capitalism free-market mechanism will determine the resources allocation. Political parties Single, dual and multi-party systems. e.g. Consistency in party policies: Britain, USA and Russias determination for economic reforms.
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Host Country - Macroeconomic Policies

Exchange rate manipulation fixed and floating currencies. Fiscal policies types of taxes e.g. lowering long term capital gains tax to encourage investment e.g. depreciation policies in Japans ship building and steel industries. Liberalization of the economy.

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MKTG7506: International Marketing Management (S1-2010)

22 March 2010

Political Risk

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Political Risk
Political risk is the risk of change in political environment or government policy that would adversely affect a companys ability to operate effectively and profitably. Agencies that assess political risk The Economist Intelligence Unit (www.eiu.com) Business Environment Risk Intelligence (www.beri.com) PRS Group (www.prsgroup.com)

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Political Stability and Risk

Stability continuity of set of rules regardless of which government is in power. Change is a normal feature instability involves radical and violent. Indications of political instability (a) higher social unrest, (b) frequent change of governments, (c) religious and ethnic division (d) linguistic diversity. These indicators enables to assess political instability.

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22 March 2010

Economic Nationalism
Feeling of national pride and unity Buy one countries product only campaigns. Foreign firms tend to be regarded with suspicion and their products discriminated against restrictive practices against multinationals Coca-Cola in India. Subsiding militant nationalism in developing countries emerging nationalistic feelings developed countries.

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Political Risks of Global Business

Confiscation: seizing a companys assets e.g. Cuba and Iran. Expropriation: Less drastic, but still severe paying compensation for government seized investment. Domestication: domesticate foreign-held assets.

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Mandatory Domestication
A transfer of ownership in part or totally to nationals. The promotion of a large number of nationals to higher management levels. Greater decision-taking power with nationals. A greater component of products are locally produced Specific export regulations dictating the participation in world markets. Current situation competing for foreign investment, selling off government enterprises.
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Need for Political Risk Assessment

Decide if risk insurance is necessary. Devise an intelligence network and an early warning system. Develop contingency plans for unfavourable political events. Build a database of past political events to predict future political events. Interpret the data gathered by a companys intelligence network in order to advise and forewarn corporate decision makers about political situations.
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Risk Assessment Criteria

Stability of the political system. Degree of control of economic system. Effectiveness of public administration. Labour regulations and social peace.

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Strategies to Reduce Political Risk

Company behaviour adopt open political neutrality contribution to civic projects. Home government actions Use of international relations and foreign aid to influence overseas government decisions. Joint ventures helps minimize anti-MNC feelings Licensing

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Strategies to Reduce Political Risk

Contribution to the host country good corporate citizen buying local raw materials, generate employment. Localisation of operations accommodate local in management positions - forming alliances or joint ventures with local firms. Political risk insurance - Premiums for political risk will vary according to the country concerned.

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Legal Environment

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Legal Environment
Need to understand the existence of two legal environments The more general international environment. The legal environment in each country in which they do business.

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(a) International Law

Body of rules that is binding on states and other international persons in their mutual relations. International customs. Treaties. International court decisions (International court of justice for arbitration among parties in dispute court rulings do not establish precedent, but rather apply only to the case in hand.

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(b) Local Legal Systems

Common law - based on tradition, past practices, legal precedent, and interpretation via court decision. Code law - based on an all-inclusive system of written rules of law (a) Civil (b) Criminal. Islamic law - based on the Koran, and applied by Islamic countries. Other legal codes - include tribal (or indigenous) law, and socialist laws.

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Law and the International Marketing Mix

Product Standards specified by law. e.g. product standards, quarantine regulations, safety standards, packaging and labelling regulations. Price Price controls regulations to ensure price competition, laws anti-dumping laws and transfer pricing.

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Law and the International Marketing Mix

Distribution Laws regulating trade. e.g. the use of Australian registered vessels in the Australian coastal trade. Laws specifying agents nationality. e.g. Indonesia - regulations governing the termination of agency agreements. Promotion: highly regulated element in the marketing mix prohibition of advertising of tobacco products local industry codes of conduct.

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Intellectual Property
Inadequate protection of IP- Has attracted attention because of computer software piracy. In order to justify protection unique properties must be revealed. Registration in one country often does not give protection in another. Uruguay Round of GATT. World Trade Organization.

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International Dispute Resolution

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International Dispute Resolution

When things go wrong in a commercial transaction three processes available. Conciliation Arbitration Litigation

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(i) Conciliation
The best approach if at all possible Least likely to close the door on future business Sometimes necessary to seek the intervention of a third party. The Shuttle conciliation approach saves face for both parties in a dispute.

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(ii) Arbitration
Advantages of arbitration (Coddington, 1994): Increases the ability of parties to enforce judgments. Sensitive matters remain confidential to the parties concerned. Likely to be quicker than litigation. Judges may be chosen by both parties. An arbitration judgement is unlikely to be appealed and more likely to be treated as final.
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MKTG7506: International Marketing Management (S1-2010)

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(iii) Litigation
Should be used only as a last resort Disadvantages of litigation are: Usually closes the door on future business Can create a poor image and damage public relations. There is the risk of unfair treatment at the hands of a foreign court. There may be difficulty in collecting the judgment. There is considerable opportunity cost.
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Marketing Implications - Legal

Awareness of areas, where international law might impinge on international marketing activities, is required. Sensitivity is required of the the legal differences between domestic and foreign markets. Some of the most important legal issues pertain to jurisdiction, intellectual property protection and bribery. When legal conflicts arise companies can pursue the matter in court or use arbitration.
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