Week 4_3XPP

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MKTG7506: International Marketing

Management (S1-2010)

22 March 20

Week 4: Political and legal environment

Political & Legal EnvironmentC & G Chapter 6

Dr Ravi Pappu

Office: Room 416 Colin Clark Building

Phone: 3346 8089

Email: [email protected]

Consultation: Monday 3-4 PM; Room 416 Colin Clark

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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.

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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 inmost countries.

Government participation in commercial activities,

infrastructure, and public welfare.

Control over marketing of exports e.g. Australian

Wheat Board.

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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.

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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 control s 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 steelindustries.

Liberalization of the economy.

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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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Economic Nationalism

Feeling of national pride and unity Buy one countries

product only campaigns.

Foreign firms tend to be regarded with suspicion andtheir 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 theydo 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 ensureprice 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 partiesconcerned.

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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(iii) Litigation

Should be used only as a last resort

Disadvantages of l itigation 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.

Week 4_3XPP

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