THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS
The legal/political aspect is very important in global marketing. "International law" can be defined as rules and principles that states and nations consider binding upon themselves. This raises two interesting characteristics of international law. The first is that "law" belongs to individual nations and international law only exists to the degree that individual nations are willing to relinquish their rights. The second is the lack of an adequate international judicial and administrative framework or a body of law which would form the basis of a truly comprehensive international legal system.
The international business is also subject to political decrees made by governments both in "home" and "host" countries. Home governments can apply pressure not to deal with disapproved parties. These measures may take the refusal to grant an export license, or withdrawal of export guarantee cover. The host government may take measures like taxation, ownership controls, operating restrictions or expropriation.
Factors affecting Political Environment:
1. The Sovereignty of Nations:
In the context of international law, a sovereign state is independent and free from all external control; enjoys full legal equality with other states; governs its own territory; selects its own political, economic, and social systems; and has the power to enter into agreements with other nations. Sovereignty refers to both the powers exercised over its own members. A state sets requirements for citizenship, defines geographical boundaries, and controls trade and the movement of people and goods across its borders. Additionally, a citizen is subject to the state’s laws even when eyond national borders. It is with the extension of national laws beyond a country’s borders that much of the conflict in international business arises.
The ideal political climate for a multinational firm is a stable, friendly government. Unfortunately, governments are not always stable and friendly. Sometimes, changes in attitudes and goals can cause a stable and friendly situation to become risky. Changes are brought about by any number of events. The stability and friendliness of the govt. in each country must be assessed as an ongoing business practice.
2. Stability of Government Policies:
Governments might change or new political parties might be elected, but the concern of the multinational corporation is the continuity of the set of rules or code of behavior and the continuation of the rule of law – regardless of which government is in power. A change in government, whether by election or coup, does not always mean a change in the level of political risk.
If there is potential for profit and if permitted to operate within a country, multinational companies can function under any type of government as long as there is some long-run predictability and stability.
3. Political Parties:
Particularly important to the marketer is knowledge of the philosophies of all major political parties within a country, since any one of them might become dominant and alter prevailing attitudes. In those countries where there are two strong political parties that typically succeed one another in control of the government. It is important to know the direction each party is likely to take.
Changes in direction that a country may take toward trade and related issues are caused not only by political parties with differing philosophies but also by politically strong interest groups and factions within different political parties that cooperate to affect trade policy. An astute marketer must understand all the aspects of the political landscape to be properly informed about the political environment.
4. Nationalism:
Economic Nationalism, which exists to some degree within all countries, is another factor important in assessing business climate. Nationalism can best be described as an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. This pride can take an anti-foreign business bias, and minor harassment and controls of foreign investment are supported, if not applauded. Economic nationalism has as one of its central aims the preservation of natural economic autonomy in that residents identify their interests with the preservation of the sovereignty of the state in which they reside. In other words, national interest and security are more important than international considerations.
Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only”, restrictions on imports, restrictive tariffs, and other barriers to trade. They may also lead to control over foreign investment, often regarded with suspicion, which then becomes the object of intensive scrutiny and control. Generally speaking, the more a country feels threatened by some outside force, the more nationalistic it becomes in protecting itself against the intrusion.
5. Political Sanctions:
One or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. The US has long-term boycotts of trade with Cuba, Iran, and Libya.
6. Political and Social Activists:
Although not usually officially sanctioned by the government, the impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to affect change. When well organized, the actions of PSAs can be effective.
7. Violence and Terrorism:
Although not usually government initiated, violence is another related risk for multinational companied to consider in assessing the political vulnerability of their activities. Terrorism has many different goals. Multinationals are targeted to embarrass a government and its relationship with firms, to generate funds by kidnapping executives to finance terrorist foals, and to use as pawns in political or social disputes not specifically directed at them.
Political Risks of Global Business:
Risks can range from confiscation, the harshest, to many lesser but still significant government rules and regulations such as exchange controls, import restrictions, and price controls that directly affect the performance of business activities. Although not always officially blessed initially, social or political activist groups can provoke governments into action that proves harmful to a business. Of all political risks, the most costly are those actions that result in a transfer of equity from the company to the government, with or without adequate compensation.
The most severe political risk is confiscation, that is, the seizing of a company’s assets without payment. The two most notable recent confiscations of US property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was overthrown.
Less drastic, but still severe, is expropriation, which requires some reimbursement for the government-seized investment. A third type of risk is domestication, which occurs when host countries take steps to transfer foreign investments to national control and ownership through a series of government decrees. Government seeks to domesticate foreign held assets by mandating:
· A transfer of ownership in part or totally to nationals
· The promotion of a large number of nationals to higher levels of management
· Greater decision-making powers resting with nationals
· A greater number of component products locally produced
· Specific export regulations designed to dictate participation in world markets.
The ultimate goal of domestication is to force foreign investors to share more of the ownership and management with nationals than was the case before domestication.
A change in government attitudes, policies, economic plans, or philosophy concerning the role of foreign investment in national economic and social goals is behind the decision to confiscate, expropriate, or domesticate existing foreign assets.
Assessing political vulnerability
Political vulnerability should be assessed by using a systematic checklist. Such a checklist should include the following:
The firm's own country's relations with other countries
Sensitivity of the product or industry
Size and location of operation - the bigger the more vulnerable
Visibility of firm - is it high profile say via advertising?
Host country's political situation
Company behavior - is it a good corporate citizen?
Contribution to host country, for example, employment
Localisation of operations
Subsidiary dependence.
The legal environment
As indicated in the introduction to this section, the international legal framework is somewhat confused. Most controls or regulations revolve around export and import controls, transfer pricing, taxes, regulation of corrupt practices, embargoed nations, antitrust, expropriation and distribution of equity, patents and trademarks. The following touches on a number of these issues and in particular the import/export regulations (terms of access).
Bases for Legal Systems:
Three heritages form the bases for the majority if the legal systems of the world: (1) Common Law, derived from English law and found in England, the United States, Canada, and other countries once under English influence; (2) Civil or Code law, derive from Roman law and found in Germany, Japan, France and in non-Islamic and non-Marxist countries; and (3) Islamic law, derived from the interpretation of the Koran and found in Iran, Saudi Arabia, Pakistan and other Islamic states. A fourth heritage for a commercial legal system is the Marxist-Socialist economies of Russia and the republics of the former Soviet Union, Eastern Europe, China, and other Marxist-socialist states whose legal system centered on the economic, political, and social policies of the state. As such country moves toward its own version of a free market system and enters the global market; a commercial legal system is also evolving from those Marxist-socialist tenets.
The differences among these four systems are of more than theoretical importance, because due process of law may vary considerably among and within these legal systems. Even though a country’s laws may be based on the doctrine of one of the four legal systems, its individual interpretation may vary significantly- from a fundamentalist interpretation of Islamic law as found in Pakistan to a combination of several legal systems found in the United States, where both common and code law are reflected in the laws.
The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings. Common law seeks “interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts”. Code law, on the other hand, is based on all-inclusive system of written rules of law. Under code law, the legal system is generally divided into three separate codes: commercial, civil, and criminal.
Common law is recognized as not being all-inclusive, whereas code law is considered complete as a result of catchall provisions found in most code law systems.
The implications of international law on marketing operations are legion. The principle ones are as follows:
Product decisions - physical, chemical, safety, performance, packaging, labelling, warranty
Pricing decisions - price controls, resale price maintenance, price freezes, value added systems and taxation
Distribution - contracts for agents and distribution, physical distribution, insurance
Promotion - advertising codes of practice, product restriction, sales promotion and,
Market research - collection, storage and transmission of data.
Other areas affected are obviously in currency and payments but these will be dealt with in later sections.
The international business is also subject to political decrees made by governments both in "home" and "host" countries. Home governments can apply pressure not to deal with disapproved parties. These measures may take the refusal to grant an export license, or withdrawal of export guarantee cover. The host government may take measures like taxation, ownership controls, operating restrictions or expropriation.
Factors affecting Political Environment:
1. The Sovereignty of Nations:
In the context of international law, a sovereign state is independent and free from all external control; enjoys full legal equality with other states; governs its own territory; selects its own political, economic, and social systems; and has the power to enter into agreements with other nations. Sovereignty refers to both the powers exercised over its own members. A state sets requirements for citizenship, defines geographical boundaries, and controls trade and the movement of people and goods across its borders. Additionally, a citizen is subject to the state’s laws even when eyond national borders. It is with the extension of national laws beyond a country’s borders that much of the conflict in international business arises.
The ideal political climate for a multinational firm is a stable, friendly government. Unfortunately, governments are not always stable and friendly. Sometimes, changes in attitudes and goals can cause a stable and friendly situation to become risky. Changes are brought about by any number of events. The stability and friendliness of the govt. in each country must be assessed as an ongoing business practice.
2. Stability of Government Policies:
Governments might change or new political parties might be elected, but the concern of the multinational corporation is the continuity of the set of rules or code of behavior and the continuation of the rule of law – regardless of which government is in power. A change in government, whether by election or coup, does not always mean a change in the level of political risk.
If there is potential for profit and if permitted to operate within a country, multinational companies can function under any type of government as long as there is some long-run predictability and stability.
3. Political Parties:
Particularly important to the marketer is knowledge of the philosophies of all major political parties within a country, since any one of them might become dominant and alter prevailing attitudes. In those countries where there are two strong political parties that typically succeed one another in control of the government. It is important to know the direction each party is likely to take.
Changes in direction that a country may take toward trade and related issues are caused not only by political parties with differing philosophies but also by politically strong interest groups and factions within different political parties that cooperate to affect trade policy. An astute marketer must understand all the aspects of the political landscape to be properly informed about the political environment.
4. Nationalism:
Economic Nationalism, which exists to some degree within all countries, is another factor important in assessing business climate. Nationalism can best be described as an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. This pride can take an anti-foreign business bias, and minor harassment and controls of foreign investment are supported, if not applauded. Economic nationalism has as one of its central aims the preservation of natural economic autonomy in that residents identify their interests with the preservation of the sovereignty of the state in which they reside. In other words, national interest and security are more important than international considerations.
Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only”, restrictions on imports, restrictive tariffs, and other barriers to trade. They may also lead to control over foreign investment, often regarded with suspicion, which then becomes the object of intensive scrutiny and control. Generally speaking, the more a country feels threatened by some outside force, the more nationalistic it becomes in protecting itself against the intrusion.
5. Political Sanctions:
One or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products. The US has long-term boycotts of trade with Cuba, Iran, and Libya.
6. Political and Social Activists:
Although not usually officially sanctioned by the government, the impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to affect change. When well organized, the actions of PSAs can be effective.
7. Violence and Terrorism:
Although not usually government initiated, violence is another related risk for multinational companied to consider in assessing the political vulnerability of their activities. Terrorism has many different goals. Multinationals are targeted to embarrass a government and its relationship with firms, to generate funds by kidnapping executives to finance terrorist foals, and to use as pawns in political or social disputes not specifically directed at them.
Political Risks of Global Business:
Risks can range from confiscation, the harshest, to many lesser but still significant government rules and regulations such as exchange controls, import restrictions, and price controls that directly affect the performance of business activities. Although not always officially blessed initially, social or political activist groups can provoke governments into action that proves harmful to a business. Of all political risks, the most costly are those actions that result in a transfer of equity from the company to the government, with or without adequate compensation.
The most severe political risk is confiscation, that is, the seizing of a company’s assets without payment. The two most notable recent confiscations of US property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was overthrown.
Less drastic, but still severe, is expropriation, which requires some reimbursement for the government-seized investment. A third type of risk is domestication, which occurs when host countries take steps to transfer foreign investments to national control and ownership through a series of government decrees. Government seeks to domesticate foreign held assets by mandating:
· A transfer of ownership in part or totally to nationals
· The promotion of a large number of nationals to higher levels of management
· Greater decision-making powers resting with nationals
· A greater number of component products locally produced
· Specific export regulations designed to dictate participation in world markets.
The ultimate goal of domestication is to force foreign investors to share more of the ownership and management with nationals than was the case before domestication.
A change in government attitudes, policies, economic plans, or philosophy concerning the role of foreign investment in national economic and social goals is behind the decision to confiscate, expropriate, or domesticate existing foreign assets.
Assessing political vulnerability
Political vulnerability should be assessed by using a systematic checklist. Such a checklist should include the following:
The firm's own country's relations with other countries
Sensitivity of the product or industry
Size and location of operation - the bigger the more vulnerable
Visibility of firm - is it high profile say via advertising?
Host country's political situation
Company behavior - is it a good corporate citizen?
Contribution to host country, for example, employment
Localisation of operations
Subsidiary dependence.
The legal environment
As indicated in the introduction to this section, the international legal framework is somewhat confused. Most controls or regulations revolve around export and import controls, transfer pricing, taxes, regulation of corrupt practices, embargoed nations, antitrust, expropriation and distribution of equity, patents and trademarks. The following touches on a number of these issues and in particular the import/export regulations (terms of access).
Bases for Legal Systems:
Three heritages form the bases for the majority if the legal systems of the world: (1) Common Law, derived from English law and found in England, the United States, Canada, and other countries once under English influence; (2) Civil or Code law, derive from Roman law and found in Germany, Japan, France and in non-Islamic and non-Marxist countries; and (3) Islamic law, derived from the interpretation of the Koran and found in Iran, Saudi Arabia, Pakistan and other Islamic states. A fourth heritage for a commercial legal system is the Marxist-Socialist economies of Russia and the republics of the former Soviet Union, Eastern Europe, China, and other Marxist-socialist states whose legal system centered on the economic, political, and social policies of the state. As such country moves toward its own version of a free market system and enters the global market; a commercial legal system is also evolving from those Marxist-socialist tenets.
The differences among these four systems are of more than theoretical importance, because due process of law may vary considerably among and within these legal systems. Even though a country’s laws may be based on the doctrine of one of the four legal systems, its individual interpretation may vary significantly- from a fundamentalist interpretation of Islamic law as found in Pakistan to a combination of several legal systems found in the United States, where both common and code law are reflected in the laws.
The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings. Common law seeks “interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts”. Code law, on the other hand, is based on all-inclusive system of written rules of law. Under code law, the legal system is generally divided into three separate codes: commercial, civil, and criminal.
Common law is recognized as not being all-inclusive, whereas code law is considered complete as a result of catchall provisions found in most code law systems.
The implications of international law on marketing operations are legion. The principle ones are as follows:
Product decisions - physical, chemical, safety, performance, packaging, labelling, warranty
Pricing decisions - price controls, resale price maintenance, price freezes, value added systems and taxation
Distribution - contracts for agents and distribution, physical distribution, insurance
Promotion - advertising codes of practice, product restriction, sales promotion and,
Market research - collection, storage and transmission of data.
Other areas affected are obviously in currency and payments but these will be dealt with in later sections.
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