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The Political Environment
• In the US, buses have a sign saying ”Don’t speak
to driver.”
• In England: “You are graciously requested to
refrain from speaking to the driver.”
• In Germany: “It is strictly forbidden for passengers
to speak to the driver.”
• In Italy: “Don’t answer the driver.”
International Marketing AT BANZON
Salient Issues
• Nation-states and Sovereignty
• Political Risk
• Taxes
• Seizure of Assets
International Marketing AT BANZON
• Each nation has a political culture, which reflects
the relative importance of the government and
legal system and provides a context within which
individuals and corporations understand their
relationship to the political system.
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Salient Issues
• Nation-states and Sovereignty
• Sovereignty is supreme and independent political
authority.
• Government actions taken in the name of sovereignty
occur in the context of two important criteria: a
country’s stage of development and the political and
economic system in place in the country.
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Salient Issues Salient Issues

• Nation-states and Sovereignty
• A century ago, US Supreme Court Justice Fuller said:
• “Every sovereign state is bound to respect the independence
of every other sovereign state, and the courts in one country
will not sit in judgment on the acts of government of another
done within its territory.
• Nation-states and Sovereignty
• The economies of individual nations may be classified
as industrialized, newly industrializing, or developing.
• Many governments in developing countries exercise
control over their nations’ economic development by
passing protectionist laws and regulations.

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Salient Issues Salient Issues

• Nation-states and Sovereignty • Nation-states and Sovereignty
• When many nations reach advanced stages of economic • The sovereign political power of a government in a
development, their governments declare that any practice or predominantly nonmarket economy reaches quite far into
policy that restrains free trade is illegal. the economic life of a country.
• Advanced country laws often define and preserve a nation’s
social order; laws may extend to political, cultural and even
intellectual activities and social conduct.

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Salient Issues Salient Issues

• Nation-states and Sovereignty • Nation-states and Sovereignty
• In a capitalist, market-oriented democracy, power tends to • Privatization reduces direct governmental involvement as a
be more constrained. supplier of goods and services.
• A current global phenomenon in both nonmarket and • Privatization moves a nation’s economy further into the
market structures is the trend toward privatization. free-market direction.

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Salient Issues
• Nation-states and Sovereignty
• Some believe that global market integration is eroding
national economic sovereignty.
• In Europe, individual countries are giving up the right to
have their own currencies, ceding right to set their own
product standards in exchange for improved market access.
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Salient Issues
• Political risks
• When the perceived level of political risk is high, a country
will have greater difficulty attracting foreign investment.
• Political forces can drastically change the business
environment with too little advance notice.
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Salient Issues
• Causes of Political Risks
• The fundamental cause of political risk is tension between
the residents’ aspirations and goals and the real conditions
at a given time.
• The gap between aspirations and reality in high-income
countries is seldom great enough to generate a significant
level of political risk.
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Salient Issues
• Political risks
• Risk of a change in political environment or government
policy that would adversely affect a company’s ability to
operate effectively and profitably.
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Salient Issues
• Political risks
• Up-to-date political risk reports on individual country
markets are provided by periodicals like The Economist,
Financial Times, and groups like Economist Intelligence
Unit, the Geneva-based Business Environment Risk
Intelligence and the PRS Group.
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Salient Issues
• Causes of Political Risks
• When a political risk is present in a high-income country, it
can be traced to identifiable, long-standing issues in the
country, like the conflict between Protestants and Catholics
in Northern Ireland.
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Salient Issues Salient Issues

• Causes of Political Risks
• In lower- and lower-middle-income countries, an economic
crisis can trigger political risk.
• The incompetence of the government and private sector in
Indonesia provoked the expulsion of President Suharto.
• Causes of Political Risks
• The rupiah plunged from 2,300 to 18,000 to the US dollar,
then settled at the rate of 10,000 rupiah to a dollar.
• Hungary, Latvia and Albania represent 3 different levels of
risk.

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Salient Issues Salient Issues

• Causes of Political Risks
• Hungary has already achieved upper-middle-income status.
• Latvia, a lower-middle-income country, is projected to grow
slowly.
• Albania does not even have economic data available.
• Expressions and Symptoms of Political Risk
• The level of political risk is inversely related to a country’s
stage of economic development:
• All others things being equal, the less developed a country, the
greater the political risk.

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Income versus Political Risk Salient Issues

• Currency depreciation is frequently accompanied by
High Triad economic decline which in turn churns up the political
Countries waters.
• The threat of a civil disorder or ethnic conflict is also a
INCOME

symptom of political risk.

Russia,
Indonesia,
China

Low

Low RISK High

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Salient Issues Salient Issues

• As the political risk cannot be accurately predicted,
the corporate culture must be considered when
making a decision.
• For an aggressive, entrepreneurial company wishing
to make a minimum investment, a country with some
political risk may have great market potential.
• For a conservative company or one considering a
multi-million-dollar investment, the same country
may have potential for a great market loss.
• Companies can purchase insurance to offset potential
risks arising from the political environment.

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Salient Issues Salient Issues

• Taxes • Taxes
• Governments rely on tax revenues to generate funds for its • High import tariffs lead to smuggling, falsification of
expenditures. documents, cross-border shopping.
• Unfortunately, government taxation policies on the sale of
goods and services frequently motivate companies to profit
by not paying taxes.

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Salient Issues
Salient Issues
Seizure of assets
• Seizure of assets
government action to dispossess a • Nationalization is recognized by international law as a
foreign company or investor ; legitimate exercise of government power, as long as the act
Expropriation compensation provided but not in a satisfies a “public purpose” and is accompanied by
prompt and adequate manner “adequate payment” (fair market value).

Confiscation no compensation

government takes control of some or

Nationalization all of the enterprises in a particular
industry

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Salient Issues
• Seizure of assets
• South Korea nationalized Kia (number 3 car maker) in the
wake of the Asian crisis.
• The Castro government nationalized property belonging to
American sugar producers in retaliation for new American
import quotas on sugar.
International Marketing AT BANZON
Salient Issues
• Seizure of assets
• Other issues are increased local content requirements,
quotas for hiring local nationals, price controls and other
restrictions affecting ROI.
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International Law
• Early international law was concerned with waging
war, establishing peace and other political issues such
as diplomatic recognition of new national entities and
governments.
• Elaborate international rules emerged covering the
status of neutral nations.
International Marketing AT BANZON
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Salient Issues
• Seizure of assets
• Creeping expropriation applies to limitations on
repatriation of profits, dividends, royalties and technical
assistance fees from local investments or technology
arrangements.
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International Law
• Defined as the rules and principles that nation-states
consider binding upon themselves.
• It pertains to property , trade, immigration and other
areas that have traditionally been under the
jurisdiction of individual nations.
33 International Marketing AT BANZON 34
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 God, the Almighty.”
• The sharia is a comprehensive code governing Muslim
conduct in all areas of life, including business.
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Islamic Law Important Business Issues

• The code is derived from 2 sources:
• Koran, the Holy Book – record of the revelations made to the • Jurisdiction
Prophet Mohammed by Allah • Company personnel working abroad should understand the
• Hadith – based on the life, sayings and practices of Muhammad. It extent to which they are subject to the jurisdiction of host-
spells out the products and practices that are haram (forbidden). country courts.
• No beer advertisement on billboards or in local language newspapers

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Important Business Issues Important Business Issues

• Jurisdiction
• Employees of foreign companies working in the US 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.
• Intellectual Property: Patents, Trademarks and
Copyrights
• Patents and trademarks that are protected in one country
are not necessarily protected in another.
• Global marketers should ensure that patents and
trademarks are registered in each country where business
is conducted.

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Important Business Issues Important Business Issues

• Intellectual Property: Patents, Trademarks and
Copyrights
• In France, YSL was barred from marketing a new luxury
perfume called Champagne because French laws allow the
name to be applied only to sparkling wines produced in the
Champagne Region.
• Intellectual Property: Patents, Trademarks and
Copyrights
• So YSL launched it in the US, Great Britain, Germany and
Belgium.
• It was sold in France without a name.

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Important Business Issues Important Business Issues

• Antitrust
• Designed to combat restrictive business practices and to
encourage competition.
• These came about because some experts believe that the
pressures of global competition have resulted in an
increased incidence of price-fixing and collusion among
firms.
• Antitrust
• Nippon Paper Industries was found guilty in a US court of
conspiring with other Japanese firms to raise fax paper
prices in the US.
• The Japanese government denounced this citing Japan’s
sovereignty.

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Important Business Issues Important Business Issues

• Antitrust
• Though meetings which discussed the pricing strategies
took place outside the US but the judge said:
• “We live in an age of international commerce, where decisions
reached in one corner of the world can reverberate around the
world”.
• Licensing and Trade Secrets
• Licensing is a contractual agreement in which a licensor
allows a licensee to use patents, trademarks, trade secrets,
technology or other intangible assets in return for royalty
payments or other forms of compensation.

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Important Business Issues Important Business Issues

• Licensing and Trade Secrets
• Licensing is a potentially dangerous action: it may be
instrumental in creating a competitor.
• Licensors should be careful to ensure that their own
competitive position remains advantageous.
• This requires constant innovation.
• Licensing and Trade Secrets
• The licensor may limit the licensee to selling only in its
home country.
• The licensor may also seek to contractually bind the
licensee to discontinue use of the technology after the
contract has expired.

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Important Business Issues Important Business Issues

• Licensing and Trade Secrets
• Trade secrets are confidential information or knowledge
that has commercial value and is not in the public domain,
and for which steps have been taken to keep it secret.
• Licensing and Trade Secrets
• To prevent disclosure, the licensing of unpatented trade
secrets should be linked to confidentiality contracts with
each employee who has access to the protected
information.

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Important Business Issues Important Business Issues

• Licensing and Trade Secrets
• To prevent disclosure, the licensing of unpatented trade
secrets should be linked to confidentiality contracts with
each employee who has access to the protected
information.
• Bribery and Corruption
• Charles M. Schwab, head of Bethlehem Steel at the
beginning of the 20th century, presented a $200,000
diamond and pearl necklace to the mistress of Czar
Alexander III’s nephew.

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Important Business Issues Important Business Issues

• Bribery and Corruption
• In return for this, Bethlehem Steel won the contract to
supply the rails for the Trans-Siberian railroad.
• Bribery is a way of life and corruption is widespread.
• Bribery and Corruption
• Bribery payments are considered a deductible business
expense in many European countries.
• It is estimated that the annual price tag for illegal payments
by German firms alone cost more than $5 billion.

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Most Corrupt Countries 2017

Corruption The Regulatory Environment
Rank Country Perception Index
(CPI) • Consists of a variety of governmental and
1 Somalia 10
nongovernmental agencies that enforce laws or set
2 South Sudan 11
guidelines for conducting business.
3 North Korea 12
4 Syria 13 • They address a wide range of marketing issues like
5 Yemen 14 price control, valuation of imports and exports, trade
Sudan 14 practices, labeling food and drug regulations,
Libya 14 employment conditions, collective bargaining,
6 Afghanistan 15 advertising content and competitive practices.
7 Guinea-Bissau 16

8 Venezuela 17
Iraq 17
9 Eritrea 18
Angola 18 55 International Marketing AT BANZON 56

Important Business Issues

Important Business Issues
• The influence of regulatory agencies is pervasive and
an understanding of how they operate is essential to
protect business interests and advance new
programs.
• Firms may need the assistance of home-country
diplomatic staff to obtain a favorable ruling.
• McDonald’s, Nike and Toyota have several people
representing their interests in the European Commission.
• US law firms and consulting firms have sharply increased
their presence in Brussels.
• To gain insight into EU politics and access to its policy
makers, they have hired EU officials.
• There are 15,000 lobbyists in Brussels representing 1,400
companies and nonprofit organizations from around the
world.

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