Political vulnerability in international marketing

Industry Readiness For Going Global

Assignment 1 Write a report on an industry’s potential for expanding internationally.

Select an industry and describe its products or services, and summarize industry data such as total size, number of companies, and recent growth.

Summarize global industry data, such as the size of the industry, number of companies, markets, and recent growth. You may present the data in tables or charts.

Identify and describe three major foreign competitors of the U.S. industry.

Compare the strengths and weaknesses of U.S. industry vis-à-vis foreign competitors.
Cite all the sources of information you use. Present your analysis as a 4-page report in a Word document formatted in APA style. All written assignments and responses should follow APA rules for attributing sources.

Assignment 2 Course Project Task 2

Your topic for the research paper is now finalized. You will do preliminary research this week. Use your textbook, Argosy University online library, and authoritative Web sources to research your topic. Keep in mind that your first objective is to identify sources of information. Later, you will select the information you want to use and work on it further.

Identify and briefly describe the qualitative and quantitative data you need for your paper.

Select 3–5 sources of such information and describe each.

Select five scholarly articles about your topic and write a brief summary of each. The summary must be original.

Comment on whether you found the information you needed or if there are gaps in your research that you need to fill.

Present all your work as a 4-page report in a Word document formatted in APA style. All written assignments and responses should follow APA rules for attributing sources.

The Political Environment: A CRITICAL CONCERN

CHAPTER OUTLINE

Global Perspective: World Trade Goes Bananas

The Sovereignty of Nations

Stability of Government Policies

Forms of Government

Political Parties

Nationalism

Targeted Fear and/or Animosity

Trade Disputes

Political Risks of Global Business

Confiscation, Expropriation, and Domestication

Economic Risks

Political Sanctions

Political and Social Activists and Nongovernmental Organizations

Violence, Terrorism, and War

Cyberterrorism and Cybercrime

Assessing Political Vulnerability

Politically Sensitive Products and Issues

Forecasting Political Risk

Lessening Political Vulnerability

Joint Ventures

Expanding the Investment Base

Licensing

Planned Domestication

Political Bargaining

Political Payoffs

Government Encouragement

CHAPTER LEARNING OBJECTIVES

What you should learn from Chapter 6:

• What the sovereignty of nations means and how it can affect the stability of government policies

• How different governmental types, political parties, nationalism, targeted fear/animosity, and trade disputes can affect the environment for marketing in foreign countries

• The political risks of global business and the factors that affect stability

• The importance of the political system to international marketing and its effect on foreign investments

• The impact of political and social activists, violence, and terrorism on international business

• How to assess and reduce the effect of political vulnerabililty

• How and why governments encourage foreign investment

Global Perspective: WORLD TRADE GOES BANANAS

Rather than bruising Chiquita Bananas, the wrath of politics instead has hammered Prosciutto di Parma ham from Italy, handbags from France, and bath oils and soaps from Germany. These and a host of other imported products from Europe were all slapped with a 100 percent import tariff as retaliation by the U.S. government against European Union banana-import rules that favor Caribbean bananas over Latin American bananas. Keep in mind that no bananas are exported from the United States, yet the United States has been engaged in a trade war over the past seven years that has cost numerous small businesses on both sides of the Atlantic millions of dollars. But how can this be, you ask? Politics, that’s how!

One small business, Reha Enterprises, for example, sells bath oil, soaps, and other supplies imported from Germany. The tariff on its most popular product, an herbal foam bath, was raised from 5 percent to 100 percent. The customs bill for six months spiraled to $37,783 from just $1,851—a 1,941 percent tax increase. For a small business whose gross sales are less than $1 million annually, it was crippling. When Reha heard of the impending “banana war,” he called everyone—his congressperson, his senator, the United States Trade Representative (USTR). When he described his plight to the USTR, an official there expressed amazement. “They were surprised I was still importing,” because they thought the tariff would cut off the industry entirely. That was their intention, which of course would have meant killing Reha Enterprises as well.

In effect, he was told it was his fault that he got caught up in the trade war. He should have attended the hearings in Washington, just like Gillette and Mattel, and maybe his products would have been dropped from the targeted list, just as theirs were. Scores of European products, from clothing to stoves to glass Christmas ornaments, dolls, and ballpoint pens, that were originally targeted for the retaliatory tariffs escaped the tariff. Aggressive lobbying by large corporations, trade groups, and members of Congress got most of the threatened imported products off the list. The USTR had published a list of the targeted imports in the Federal Register, inviting affected companies to testify. Unfortunately, the Federal Register was not on Reha’s reading list.

In that case, he was told, he should have hired a lobbyist in Washington to keep him briefed. Good advice—but it doesn’t make much sense to a company that grosses less than $1 million a year. Other advice received from an official of the USTR included the off-the-record suggestion that he might want to change the customs number on the invoice so it would appear that he was importing goods not subject to the tariff, a decision that could, if he were caught, result in a hefty fine or jail. Smaller businesses in Europe faced similar problems as their export business dried up because of the tariffs.

How did this banana war start? The European Union imposed a quota and tariffs that favored imports from former colonies in the Caribbean and Africa, distributed by European firms, over Latin American bananas distributed by U.S. firms. Chiquita Brands International and Dole Food Company, contending that the EU’s “illegal trade barriers” were costing $520 million annually in lost sales to Europe, asked the U.S. government for help. The government agreed that unfair trade barriers were damaging their business, and 100 percent tariffs on selected European imports were levied. Coincidentally, Chiquita Brands’ annual political campaign contributions increased from barely over $40,000 in 1991 to $1.3 million in 1998.

A settlement was finally reached that involved high tariffs on Latin America bananas and quotas (with no tariffs) on bananas from Europe’s former colonies. But the bruising over bananas continues. Most recently, the issue has shifted to banana bending. That is, bananas from Latin America tend to be long and straight, while those from the non-tariff countries are short and bent. Because the latter are not preferred by the shippers or retailers (the bendier ones don’t stack as neatly and economically), the bananas from the former colonies are still not preferred. And new regulations have been adopted by the European Commission that mandate that bananas must be free from “abnormal curvature of the fingers.” So the bendy banana producers are threatening to renege on the whole agreement. Everyone involved finds this prospect very unappealing.

Sources: “U.S. Sets Import Tariffs in Latest Salvo in Ongoing Battle over Banana Trade,” Minneapolis Star Tribune, March 4, 1999; Timothy Dove, “Hit by a $200,000 Bill from the Blue,” Time, February 7, 2000, p. 54; Sarah Ryle, “Banana War Leaves the Caribbean a Casualty,” The Observer, November 24, 2002; “EU Fights Back over Bendy Bananas Rule,” Irish Examiner, December 26, 2007; Jeremy Smith, “EU Heading for Trade Crunch over Bananas,” Reuters, November 14, 2007.

No company, domestic or international, large or small, can conduct business without considering the influence of the political environment within which it will operate. One of the most undeniable and crucial realities of international business is that both host and home governments are integral partners. A government reacts to its environment by initiating and pursuing policies deemed necessary to solve the problems created by its particular circumstances. Reflected in its policies and attitudes toward business are a government’s ideas of how best to promote the national interest, considering its own resources and political philosophy. A government controls and restricts a company’s activities by encouraging and offering support or by discouraging and banning or restricting its activities—depending on the pleasure of the government.

International law recognizes the sovereign right of a nation to grant or withhold permission to do business within its political boundaries and to control where its citizens conduct business. Thus the political environment of countries is a critical concern for the international marketer. This chapter examines some of the more salient political considerations in assessing global markets.

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 by a state in relation to other countries and the supreme powers exercised over its own members.1 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 beyond national borders. It is with the extension of national laws beyond a country’s borders that much of the conflict in international business arises. This reasoning is especially true when another country considers its own sovereignty to be compromised.

Nations can and do abridge specific aspects of their sovereign rights to coexist with other nations. The European Union, North American Free Trade Agreement (NAFTA), North Atlantic Treaty Organization (NATO), and World Trade Organization (WTO)2 represent examples of nations voluntarily agreeing to give up some of their sovereign rights to participate with member nations for a common, mutually beneficial goal. As indicated in Exhibit 1.4 (page 24), the United States’ involvement in international political affiliations is surprisingly low (i.e., it is largely sovereign). Indeed, when it comes to participation in international treaty regimes, the United States is ranked near the bottom of the 72 countries included in Foreign Policy magazine rankings, tied with Iran and Israel (at 68th) and ahead of only Hong Kong and Taiwan. Most notably, the Kyoto Protocol3 on global climate change and the International Criminal Court were rejected by the Bush administration, along with lesser known treaties such as the Basel Convention on the Control of Trans-boundary Movement of Hazardous Wastes.4 This apparent lack of international political engagement is particularly hard to understand given the wide acceptance that such agreements lead to peace and mutual understanding.5

Countries that agree to relinquish some of their sovereignty often are subject to a nagging fear that too much has been given away. For example, the WTO is considered by some as the biggest threat so far to national sovereignty. Adherence to the WTO inevitably means the loss of some degree of national sovereignty, because the member nations have pledged to abide by international covenants and arbitration procedures that can override national laws and have far-reaching ramifications for citizens. Sovereignty was one of the issues at the heart of the spat between the United States and the European Union over Europe’s refusal to lower tariffs and quotas on bananas (see the Global Perspective). And critics of the free trade agreements with both South Korea6 and Peru7 claim America’s sacrifice of sovereignty is too great.

Foreign investment can also be perceived as a threat to sovereignty and thus become a rallying cry by opposing factions. The Chinese national oil company’s proposed purchase of Unocal was opposed on such grounds. As American banks struggled to maintain liquidity during the 2008 home mortgage debacle, huge investments from overseas were solicited and received from one class of foreign investors that U.S. politicians particularly disfavored—the so-called “sovereign wealth funds” that entail vast pools of money controlled by foreign governments from China and the Middle East.8 At the same time, members of the U.S. Congress have demanded that China raise the value of its currency, but that would make it even easier for Chinese firms and their government to buy American assets.9 Of course, the Chinese resist the latter political pressure as a threat to their sovereignty. Ironically, Americans have criticized Mexico for hindering similar sorts of American investments. That is, Mexico badly needs privately financed electricity generating plants to meet electrical power demands and to upgrade the country’s overloaded transmission network. The Mexican government entered into an agreement with a Belgian company to build a power plant that would bypass the state electricity monopoly and sell electricity directly to large Mexican manufacturers. But the Mexican constitution limits private ownership of utilities, and any exception requires a two-thirds vote of the legislature. The Institutional Revolutionary Party saw the attempt to open Mexico’s protected energy industry as an assault on Mexican sovereignty and blocked the agreement. What all this conflict highlights is that national sovereignty is a critical issue in assessing the environment in which a firm operates.

Stability of Government Policies

The ideal political climate for a multinational firm is a stable, friendly government. Unfortunately, governments are not always stable and friendly, nor do stable, friendly governments remain so. Radical shifts in government philosophy when an opposing political party ascends to power,10 pressure from nationalist and self-interest groups, weakened economic conditions, bias against foreign investment, or conflicts among governments are all issues that can affect the stability of a government. Because foreign businesses are judged by standards as variable as there are nations, the stability and friendliness of the government in each country must be assessed as an ongoing business practice.

At the top of the list of political issues concerning foreign businesses is the stability or instability of prevailing government policies. Governments might change11 or new political parties might be elected, but the concern of the multinational corporation is the continuity of the set of rules12 or codes 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. In Italy, for example, more than 50 different governments have been formed since the end of World War II. While the political turmoil in Italy continues, business goes on as usual. In contrast, India has had as many different governments since 1945 as Italy, with several in the past few years favorable to foreign investment and open markets. However, much government policy remains hostile to foreign investment. Senior civil servants who are not directly accountable to the electorate but who remain in place despite the change of the elected government continue with former policies. Even after elections of parties favoring economic reform, the bureaucracy continues to be staffed by old-style central planners in India.

Conversely, radical changes in policies toward foreign business can occur in the most stable governments. The same political party, the Institutional Revolutionary Party (PRI), controlled Mexico from 1929 to 2000. During that period, the political risk for foreign investors ranged from expropriation of foreign investments to Mexico’s membership in NAFTA and an open door for foreign investment and trade. In recent years, the PRI created a stable political environment for foreign investment in contrast to earlier expropriations and harassment. Beginning with the elections in 2000, however, a new era in Mexican politics emerged as a result of profound changes within the PRI brought about by then-president Ernesto Zedillo. Since 1929, the Mexican president had selected his successor, who, without effective challenge, was always elected. President Zedillo changed the process by refusing to nominate a candidate; instead he let the nomination be decided by an open primary—the first in seven decades. From a field of four candidates, the PRI selected Labastida Ochoa, and the opposing party PAN13 selected Vicente Fox who, though considered a long shot, won the presidency. Although the PAN had gained strength for several years in the congress and among state governments, its presidential candidates never had a winning chance until the 2000 election.

Political disaster strikes Kenya. In the Nairobi slum of Kibera, supporters of opposition leader Raila Odinga tear up a key railway that ran from the coast to Uganda. They renamed the broken line “Odinga Highway.” As many as 12 people were killed in the associated clashes. Of course, this destruction will do great damage to commerce and progress to all the countries in Eastern Africa. Let’s hope the highway and international airport south of Nairobi stay intact, as they supply all of Europe with flowers from the burgeoning greenhouses in the area, and flower exports are a key source of revenue for the formerly thriving Kenyan economy. (© Carolyn Cole)

Some African countries are unstable, with seemingly unending civil wars, boundary disputes, and oppressive military regimes. Even relatively stable and prosperous Kenya fell victim to political violence in 2008 that greatly disrupted growth in commerce in the entire region.14 Sierra Leone has had three changes in government in five years; the most recent coup d’etat ended the country’s brief experiment with democracy. Shortly after the coup, a civil war erupted, and UN peacekeeping forces have had to maintain peace. Central Africa, where ethnic wars have embroiled seven nations, is one of the most politically unstable regions in the world. Africa is trapped in a vicious cycle. For its nations to prosper, they need foreign investment. But investment is leery of unstable nations, which is the status of most of Africa.15 A recent World Bank study showed that the 47 nations of sub-Saharan Africa were attracting less than $2 billion annually in direct foreign investment—about one-tenth of what a developing nation such as Mexico attracts.

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. PepsiCo, for example, operated profitably in the Soviet Union when it had one of the world’s most extreme political systems. Years before the disintegration of the USSR’s Communist Party, PepsiCo established a very profitable countertrade business with the USSR. The company exchanged Pepsi syrup for Russian vodka thus avoiding the legally complicated financial transactions of the time.16

Socioeconomic and political environments invariably change, as they have in the Soviet Union and Mexico. There are five main political causes of instability in international markets: (1) some forms of government seem to be inherently unstable, (2) changes in political parties during elections can have major effects on trade conditions, (3) nationalism, (4) animosity targeted toward specific countries, and (5) trade disputes themselves.

Forms of Government

Circa 500 bc, the ancient Greeks conceived of and criticized three fundamental forms of government: rule by one, rule by the few, and rule by the many. The common terms for these forms in use today are monarchy (or dictatorship), aristocracy (or oligarchy), and democracy. About the same time in history Cyrus the Great, monarch of Persia, declared that the purpose of government was to serve the people, not vice versa. Cyrus’s notion is embedded in the constitutions of most modern nations. Following the collapse of colonialism beginning with World War II and communism circa 1990, the world seemed to have agreed that free-enterprise democracy was the best solution to all the criticisms of government since the time of Aristotle, Cyrus, and the others.17

Thus of the more than 200 sovereign states on the planet, almost all have at least nominally representative governments with universal suffrage for those 18 years and over. In about 10 percent of the nations voting is required; in the rest it is voluntary. A few countries have some unusual rules for suffrage: In Bolivia, you can vote at 18 if you are married and at 21 if single; in Peru, police and military personnel cannot vote; in Croatia, you can vote at 16 if employed; in Lebanon, only women with at least an elementary education can vote (though all men can vote); and Saudi Arabia precludes women from voting. The last appears to be the only state still completely in the dark ages with regards to suffrage. Exhibit 6.1 lists a sampling of the countries that are currently taking a different approach to the conventional wisdom of representational democracy. More troubling though is the apparent backsliding of some countries toward autocracy and away from democracy, such as Nigeria, Kenya, Bangladesh, Venezuela, Georgia, and Kyrgyzstan.18 Meanwhile we can all witness perhaps the world’s greatest experiment in political and economic change: the race between Russian “big-bang” reform and Chinese gradualism as communism is left further behind in both countries.19

Exhibit 6.1: A Sampling of Government Types

The Central Intelligence Agency20 claims to have taken a look beyond the facade of constitutions in their descriptors. For example, Iran (modern Persia) is defined as a “theocratic republic,” recognizing that the constitution codifies Islamic principles of government as interpreted from the Koran. Although political parties are allowed to function, they hold little political power. Instead, the Supreme Leader controls all-important decisions of the government, including who is allowed to run for president in Iran.

Eyes on the polls. Portraits of Ayatollah Ali Khamenei (the Supreme Leader) and the late Ayatollah Ruhollah Khomeini loom over Iranian women lined up to vote at a mosque south of Tehran. As mandated by law, women and men waited in separate lines at polling places with more than one ballot box. The current government also specifies the public dress of the women pictured. (© Behrouz Mehri/AFP/Getty Images)

Political Parties

For most countries around the world, it is particularly important for the marketer to know the philosophies of all major political parties within a country, because any one of them might become dominant and alter prevailing attitudes and the overall business climate.21 In countries where two strong political parties typically succeed one another in control of the government, it is important to know the direction each party is likely to take.22 In Great Britain, for example, the Labour Party traditionally has been more restrictive regarding foreign trade than the Conservative Party. The Labour Party, when in control, has limited imports, whereas the Conservative Party has tended to liberalize foreign trade when it is in power. A foreign firm in Britain can expect to seesaw between the liberal trade policies of the Conservatives and the restrictive ones of Labour. Of course, in the United States in recent years, the Democratic Congress has been reluctant to ratify free trade pacts negotiated by the Republican administration in the White House.23

Even in Mexico, where a dominant party (PRI) maintained absolute control for seven decades, knowledge of the philosophies of all political parties is important. Over the years, the doctrines of opposing parties have had an influence on the direction of Mexican policy. With the election of the PAN party nominee for president, it was (and is) even more essential to know the philosophy and direction of both the PRI and PAN, the two major political parties in Mexico.

An astute international marketer must understand all aspects of the political landscape to be properly informed about the political environment. Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift. In short, a current assessment of political philosophy and attitudes within a country is important in gauging the stability and attractiveness of a government in terms of market potential.

Nationalism

Economic and cultural 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, where minor harassment and controls of foreign investment are supported, if not applauded. Economic nationalism has as one of its central aims the preservation of national 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 relations.

Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only” (e.g., “Buy American”),24 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 or the domestic economy declines, the more nationalistic it becomes in protecting itself against intrusions.

During the period after World War II, when many new countries were founded and many others were seeking economic independence, manifestations of militant nationalism were rampant. Expropriation of foreign companies, restrictive investment policies, and nationalization of industries were common practices in some parts of the world. During this period, India imposed such restrictive practices on foreign investments that companies such as Coca-Cola, IBM, and many others chose to leave rather than face the uncertainty of a hostile economic climate. In many Latin American countries, similar attitudes prevailed and led to expropriations and even confiscation of foreign investments.

CROSSING BORDERS 6.1: Coke’s Back, and It Still Ha s the Secret

For almost 100 years, the formula for making Coca-Cola has been a closely guarded secret. Then the government of India ordered Coca-Cola to disclose it or cease operations in that country. A secret ingredient called 7-X supposedly gives Coke its distinctive flavor. The government’s minister for industry told the Indian parliament that Coca-Cola’s Indian branch would have to transfer 60 percent of its equity shares to Indians and hand over its know-how by April 1978 or shut down.

Indian sales accounted for less than 1 percent of Coca-Cola’s worldwide sales, but the potential market in India, a country of 800 million, was tremendous. The government refused to let the branch import the necessary ingredients, and Coca-Cola—whose products were once as abundant as the bottled drinking water sold in almost every Indian town of more than 50,000—packed up its bags and left the country. The minister for industry said that Coca-Cola’s activities in India “furnish a classic example of how multinational corporations operating in a low-priority, high-profit area in a developing country attain run-away growth and . . . trifle with the weaker indigenous industry.”

Sixteen years later, India’s attitudes toward foreign investment changed, and Coca-Cola reentered the market without having to divulge its formula. During Coke’s 16-year exile, however, Pepsi Cola came to India and captured a 26 percent market share. Not to worry; there is plenty of growth potential for both, considering that India’s per capita consumption is just 3 eight-ounce bottles a year, versus about 12 for Pakistan and over 500 in Mexico. To forestall further political vulnerability, Coke sold 49 percent of its Indian bottler subsidiary to institutional investors and employees. The company hopes this move will put to rest an issue that concerned the Indian government, which wanted Indians to own part of Coke’s local operation—in other words, Coke took steps to domesticate its operations.

But India is still a tough market. Most recently, a water quality dispute, domestic price competition, a pesticide scare, and cool weather have hurt Coke’s sales in India, despite a general global rebound in revenues and profits.

Sources: “Indian Government Rejects Coke’s Bid to Sell Soft Drinks,” The Wall Street Journal, March 16, 1990, p. B5; “Coke Adds Fizz to India,” Fortune, January 10, 1994, pp. 14–15; Manjeet Kripalani, “Finally, Coke Gets It Right,” BusinessWeek, February 10, 2003, p. 47; Craig Simons, “India Coke Plant Still Closed as Water Woes Argued,” Atlanta Journal-Constitution, December 16, 2007, p. F1; “Coke India Chief Bullish on India Becoming Top 5 Global Market,” Asia Pulse, January 15, 2008.

By the late 1980s, militant nationalism had subsided; today, the foreign investor, once feared as a dominant tyrant that threatened economic development, is often sought as a source of needed capital investment.25 Nationalism comes and goes as conditions and attitudes change, and foreign companies welcomed today may be harassed tomorrow and vice versa.

Although militant economic nationalism has subsided, nationalistic feelings can be found even in the most economically prosperous countries. When U.S. negotiators pushed Japan to import more rice to help balance the trade deficit between the two countries, nationalistic feelings rose to a new high. Deeply rooted Japanese notions of self-sufficiency, self-respect, and concern for the welfare of Japanese farmers caused Japan to resist any change for several years. It was only after a shortfall in the Japanese rice harvests that restrictions on rice imports were temporarily eased. Even then, all imported foreign rice had to be mixed with Japanese rice before it could be sold.

Targeted Fear and/or Animosity

It is important for marketers not to confuse nationalism, whose animosity is directed generally toward all foreign countries, with a widespread fear or animosity directed at a particular country. This confusion was a mistake made by Toyota in the United States in the late 1980s and early 1990s. Sales of Japanese cars were declining in the States, and an advertising campaign was designed and delivered that assumed the problem was American nationalism. However, nationalism was clearly not the problem, because sales of German cars were not experiencing the same kinds of declines. The properly defined problem was “Americans’ fear of Japan.” Indeed, at the time, Americans considered the economic threat from Japan greater than the military threat from the Soviet Union. So when Toyota spent millions on an advertising campaign showing Toyotas being made by Americans in a plant in Kentucky, it may well have exacerbated the fear that the Japanese were “colonizing” the United States.

Historically unfriendly neighbors begin to make friends. Manmohan Singh, India’s Prime Minister, visits China and reviews the troops with Chinese Premier Wen Jiabao. Both countries have pledged to increase trade and military cooperation. (© Andrew Wong/Getty Images)

The World Is Not Merchandise, Who Is Killing France? The American Strategy, and No Thanks Uncle Sam have been best-selling titles in France that epitomize its animosity toward the United States. Although such attitudes may seem odd in a country that devours U.S. movies, eats U.S. fast foods, views U.S. soap operas, and shops at U.S. Wal-Mart stores, national animosity—whatever the cause—is a critical part of the political environment. The United States is not immune to the same kinds of directed negativism either. The rift between France and the United States over the Iraq–U.S. war led to hard feelings on both sides and an American backlash against French wine, French cheese, and even products Americans thought were French. French’s mustard felt compelled to issue a press release stating that it is an “American company founded by an American named ‘French.’”26 Thus, it is quite clear that no nation-state, however secure, will tolerate penetration by a foreign company into its market and economy if it perceives a social, cultural, economic, or political threat to its well-being.

Trade Disputes

Finally, narrow trade disputes themselves can roil broader international markets. At the beginning of the chapter we discussed our favorite example—bananas. Among several hot issues circa 2008 were undervalued Chinese currency,27 the ban on beef imports into Japan,28 Chinese subsidies in apparent violation of WTO rules,29 farm subsidies in developed countries, and the long-simmering AIRBUS–Boeing battle over subsidies. Any of these disputes might boil over and affect other aspects of international trade, but at least at this writing, cooler heads seem to be prevailing—along with the WTO dispute resolution processes.

Political Risks of Global Business

Issues of sovereignty, differing political philosophies, and nationalism are manifest in a host of governmental actions that enhance the 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 actions that prove harmful to business. Of all the 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.

Confiscation, Expropriation, and Domestication

The most severe political risk is confiscation , that is, the seizing of a company’s assets without payment. Two notable confiscations of U.S. property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was overthrown. Confiscation was most prevalent in the 1950s and 1960s when many underdeveloped countries saw confiscation, albeit ineffective, as a means of economic growth.

Less drastic, but still severe, is expropriation , where the government seizes an investment but makes some reimbursement for the assets. Often the expropriated investment is nationalized; that is, it becomes a government-run entity. A third type of risk is domestication , which occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees that mandate local ownership and greater national involvement in a company’s management. The ultimate goal of domestication is to force foreign investors to share more of the ownership, management, and profits with nationals than was the case before domestication.

Rather than a quick answer to economic development, expropriation and nationalization have often led to nationalized businesses that were inefficient, technologically weak, and noncompetitive in world markets. Risks of confiscation and expropriation appear to have lessened over the last two decades (with exceptions in Latin America, particularly Venezuela),30 because experience has shown that few of the desired benefits materialize after government takeover.31 Today, countries often require prospective investors to agree to share ownership, use local content, enter into labor and management agreements, and share participation in export sales as a condition of entry; in effect, the company has to become domesticated as a condition for investment.

Countries now view foreign investment as a means of economic growth. As the world has become more economically interdependent, it has become obvious that much of the economic success of countries such as South Korea, Singapore, and Taiwan is tied to foreign investments. Nations throughout the world that only a few years ago restricted or forbade foreign investments are now courting foreign investors as a much needed source of capital and technology. Additionally, they have begun to privatize telecommunications, broadcasting, airlines, banks, railroads, and other nationally owned companies as a means of enhancing competition and attracting foreign capital.

The benefits of privatizing are many. In Mexico, for example, privatization of the national telephone company resulted in almost immediate benefits when the government received hundreds of millions of dollars of much needed capital from the sale and immediate investment in new telecommunications systems. A similar scenario has played out in Brazil, Argentina, India, and many eastern European countries. Ironically, many of the businesses that were expropriated and nationalized in earlier periods are now being privatized.

Economic Risks

Even though expropriation and confiscation are waning as risks of doing business abroad, international companies are still confronted with a variety of economic risks that can occur with little warning. Restraints on business activity may be imposed under the banner of national security to protect an infant industry, to conserve scarce foreign exchange, to raise revenue, or to retaliate against unfair trade practices, among a score of other real or imagined reasons. These economic risks are an important and recurring part of the political environment that few international companies can avoid.

Exchange Controls.

Exchange controls stem from shortages of foreign exchange held by a country. When a nation faces shortages of foreign exchange and/or a substantial amount of capital is leaving the country, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange for the most essential uses. A recurrent problem for the foreign investor is getting profits in and out of the host country without loss of value, which can occur when a currency is devalued. Exhibit 6.2 illustrates how exchange controls can affect an international company’s profits. Many countries maintain regulations for control of currency, and should an economy suffer a setback or foreign exchange reserves decline severely, the controls on convertibility are imposed quickly.

Exhibit 6.2: How Complicated Things Can Get!

Sources: “Myanmar’s Crumbling Kit,” Asiaweek, March 2, 2001, p. 8; Michael Vatikiotis, “Neighbors Lean on Myanmar,” International Herald Tribune, February 2, 2005, p. 7; “Myanmar Military Confirms No Change in Fuel Rations,” Dow Jones International, December 31, 2007.

Local-Content Laws.

In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts. Thailand, for example, requires that all milk products contain at least 50 percent milk from local dairy farmers. Contrary to popular belief, local-content requirements are not restricted to Third World countries. The European Union has had a local-content requirement as high as 45 percent for “screwdriver operations,” a name often given to foreign-owned assemblers, and NAFTA requires 62 percent local content for all cars coming from member countries.

Import Restrictions.

Selective restrictions on the import of raw materials, machines, and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry. Although this restriction is done in an attempt to support the development of domestic industry, the result is often to hamstring and sometimes interrupt the operations of established industries. The problem then becomes critical when there are no adequately developed sources of supply within the country.

Tax Controls.

Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements. India, for example, taxes PepsiCo and the Coca-Cola Company 40 percent on all soda bottled in India. And, using a different angle of attack, India is attempting to collect $40 million in taxes on travel tickets sold online from Sabre’s (an airlines reservations service) data center in Tulsa, Oklahoma. The Indian government contends that Sabre has a permanent establishment in India in the form of data flows between Sabre’s Tulsa processing center and the desktop computers of travel agents in India. To underdeveloped countries with economies constantly threatened with a shortage of funds, unreasonable taxation of successful foreign investments appeals to some government officials as the handiest and quickest means of finding operating funds. As the Internet grows in importance, countries will surely seize on Internet transactions as a lucrative source of revenue.

Price Controls.

Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests. A side effect on the local economy can be to slow or even stop capital investment.

Labor Problems.

In many countries, labor unions have strong government support that they use effectively in obtaining special concessions from business. Layoffs may be forbidden, profits may have to be shared, and an extraordinary number of services may have to be provided. In fact, in many countries, foreign firms are considered fair game for the demands of the domestic labor supply. In France, the belief in full employment is almost religious in fervor; layoffs of any size, especially by foreign-owned companies, are regarded as national crises. We should also note that some multinational companies are more powerful than local labor unions. Wal-Mart closed a store in Quebec rather than let it be unionized.32

Political Sanctions

In addition to economic risks, 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 United States has long-term boycotts of trade with Cuba and Iran. The United States has come under some criticism for its demand for continued sanctions against Cuba and its threats of future sanctions against countries that violate human rights issues.

History indicates that sanctions are almost always unsuccessful in reaching desired goals, particularly when other major nations’ traders ignore them. This lack of success is the case with Cuba, North Korea, and Iran, where the undesirable behavior that the sanctions were imposed to change continues, and the only ones who seem to be hurt are the people and companies that get caught in the middle. Moreover, the Chinese recently signed an agreement with Iran that will bring $70 billion of natural gas to China.33 Please see Crossing Borders 6.2 for more on this issue.

Political and Social Activists and Nongovernmental Organizations

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 effect change. When well organized, the actions of PSAs can succeed.

One of the most effective and best-known PSA actions was against Nestlé due to the sale of baby formula in Third World markets. The worldwide boycott of Nestlé products resulted in substantial changes in the company’s marketing. More recently, activists of the Free Burma Campaign (FBC) have applied enough pressure to cause several U.S. garment companies to stop importing textiles from Myanmar. Furthermore, activists on several U.S. college campuses boycotted Pepsi Cola drinks and PepsiCo.-owned Pizza Hut and Taco Bell stores, saying that the company’s commercial activities contributed to the abysmal human rights in Myanmar. The results of the boycott were serious enough that PepsiCo. sold its stake in its joint venture in Myanmar and withdrew from that market. The concern was that potential losses in the United States out-weighed potential profits in Myanmar. Holland’s Heineken and Denmark’s Carlsberg beer companies withdrew from Myanmar for similar reasons.

They were “pirates” to some, “hostages” to others. But two anti-whaling activists (an Australian and a Briton from the Sea Shepherd Conservation Society) who drew global attention by forcibly boarding a Japanese harpoon ship in Antarctic waters have demonstrated how the emotional clash over Japan’s annual whale hunt can disrupt even the best international friendships. (Courtesy of Sea Shepherd Conservation Society)

PSA groups such as Greenpeace and Consumers International have been successful in raising doubts about the safety of genetically modified (GM) food. Europeans’ fears about “Frankenfood,” as it is sometimes called, have spread throughout much of the world and persuaded some famine-ridden countries in Africa to reject GM grains. In some areas in Uganda, an airborne fungus is decimating 80 percent of the banana plants. Bananas are a food staple there. Ugandans eat banana pancakes, banana mash, and banana bread. They season their beans with banana salt, and they guzzle banana beer and sip banana gin.34 Although a genetically modified plant has been developed that is immune to the leaf fungus, because of the fear of GM food, Uganda’s legislature has not enacted laws that will permit bioengineered banana plants into the country.

The rather broad issue of globalization is the also the focus of many PSA groups. The demonstrations in Seattle during a 1999 WTO meeting and in Washington, DC, against the World Bank and the International Monetary Fund (IMF), along with similar demonstrations in other countries, reflect a growing concern about a global economy. Whether misguided, uninformed, or just “wackos,” as they have been described, PSAs can be a potent force in rallying public opinion and are an important political force that should not be dismissed, as companies such as Nike, McDonald’s, and Nestlé know.

CROSSING BORDERS 6.2: Trade Does Not Work as a Stick, Only as a Carrot

It was 1807 when Thomas Jefferson proposed trade sanctions as an innovation in diplomacy. The donkeys he endeavored to persuade were quite big and quite stubborn—England and France. The goal was to get these warring nations to leave American ships alone on the high seas. Lacking a competitive navy, our third president dreamed up the trade embargo; rather than using trade as a carrot, he planned to withhold trade and use it as a stick. However, instead of changing French or English policies and behaviors, Jefferson’s policy actually endangered New England traders. They complained:

Our ships all in motion, once whiten’d the ocean;

They sail’d and return’d with a Cargo;

Now doom’d to decay, they are fallen a prey,

To Jefferson, worms, and EMBARGO.

Jefferson’s embargo fell apart in just 15 months. Only the War of 1812 settled the problems with English aggression at sea.

Consider the track record of trade sanctions in the last century. In 1940 the United States told the Japanese to get out of China, and the ensuing embargo of gasoline and scrap metal led directly to the Pearl Harbor attack. Since 1948 Arab countries have boycotted Israel. Given that countries trade most with their close neighbors, you have to wonder how much this lack of trade has promoted the continuing conflicts in the area. Israel is still there. In 1959 Fidel Castro took over Cuba, and for the next 49 years, the United States has boycotted sugar and cigars, but Castro remained in charge for almost 50 years. OPEC’s 1973 oil flow slowdown was intended to get America to stop supporting Israel. However, the dollars still flow fast to Israel and now Egypt as well.

In 1979 the United States told the Soviets to get out of Afghanistan. They refused. America boycotted the Moscow Olympics and stopped selling the Soviets grain and technology. The Soviet response: They continued to kill Afghans (and, by the way, Soviet soldiers) for another 10 years. Moreover, in 1984 they and their allies’ athletes stayed away from the Olympics in Los Angeles. And the high-tech embargo didn’t work anyway. A San Diego division of Caterpillar lost millions of dollars in service contracts for Soviet natural gas pipelines in the mid-1970s. These revenues were lost permanently, because the Soviets taught themselves how to do the maintenance and overhauls. In 1989 a Moscow weapons research facility had every brand of computer then available in the West: IBMs, Apples, and the best from Taiwan and Japan as well.

Perhaps the 1980s’ multilateral trade sanctions imposed on South Africa hastened apartheid’s demise. But look how well the world’s 10-year embargo of Iraq changed policy there. Using trade as a weapon killed kids while Saddam Hussein celebrated at $12 million birthday parties. Indeed, the best prescription for Middle East peace (and American taxpayers’ wallets, by the way) is all sides dropping all embargoes.

The end of the last century witnessed great strides in the elimination of ill-conceived trade sanctions. Perhaps most important was the U.S. Senate’s and President’s approvals of permanently normalized trade relations (PNTR) with China. However, other important steps were the relaxation of some of the trade restrictions on Vietnam, North Korea, Iran, and Cuba. Indeed, as a result of President Clinton’s diplomacy, North and South Koreans marched together at the Sydney Olympics; Americans can now buy pistachio nuts and carpets from Tehran, and U.S. firms can sell medical supplies and services in Havana. Remarkable!

These same kinds of carrots need to be thrown in the direction of the other countries on America’s blacklist—Myanmar, Angola, Libya, Sudan, and Syria. Be certain that the chorus of criticism regarding human rights, freedom of the press, and democracy should continue, loud and clear. But instead of dropping bombs (or threatening to), we should be selling them computers and Internet connections. The cost of a cruise missile is about the same as 2,000 Apple computers! And at the most fundamental level, coercion does not work. Exchange does.

Source: John L. Graham, “Trade Brings Peace,” in Joseph Runzo and Nancy M. Martin (eds.), War and Reconciliation (Cambridge, MA: Cambridge University Press, 2008).

The Internet has become an effective tool of PSAs to spread the word about whatever cause they sponsor. During protest rallies against the U.S.–Iraq war, organizers were able to coordinate protest demonstrations in 600 cities worldwide and to disseminate information easily. A Google search for “peace protest” during that time (2003) resulted in 788,000 entries (about 660,000 in 2008), including news briefs, Web sites for peace organizations, online petitions for peace, where to show up with your placard, where to send your dollars, and how to write your member of Congress.35

Often associated with political activism, nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments.36 Many are involved in peaceful protests, lobbying, and even collaborations with governmental organizations. Many also are involved in mitigating much of the human misery plaguing parts of the planet. Some NGOs have received global recognition—the Red Cross and Red Crescent, Amnesty International, Oxfam, UNICEF, Care, and Habitat for Humanity are examples—for their good works, political influence, and even their brand power.37

Violence, Terrorism, and War

Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities. The State Department reported 3,200 terrorist incidents worldwide in 2004, up dramatically from previous years, given a new approach to counting.38 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 goals, to use as pawns in political or social disputes not specifically directed at them, and to inflict terror within a country, as did September 11.

September 11 has raised the cost of doing business domestically and internationally. The dominance of the United States in world affairs exposes U.S. businesses to a multitude of uncertainties, from the growing danger of political violence to investment risks in emerging markets. In the past 30 years, 80 percent of terrorist attacks against the United States have been aimed at American businesses. Since September 11, McDonald’s, KFC, and Pizza Hut combined have been bombed in more than 10 countries, including Turkey, Saudi Arabia, Russia, Lebanon, and China; most attacks have been linked with militant Islamic groups. There are reasons to expect that businesses will become increasingly attractive to terrorists, both because they are less well defended than government targets and because of what they symbolize. Based on the threats of terrorism and other violence, the U.S. State Department posts travel warnings on its Web site (see Exhibit 6.3 for a recent listing). However, many international travelers appear to regularly ignore those warnings.39

Exhibit 6.3: U.S. State Department Travel Warnings (in order of date of posting, most recent first)

Finally, we note strong reasons to believe that international warfare is fast becoming obsolete. The number of wars has declined steadily since the end of the Cold War. Even though politicians in almost all countries use xenophobia to consolidate their own political power, the threat of one country attacking another is declining fast. Some predict a coming war in space, with satellites used as weapons, but the multinational collaboration on the International Space Station makes such a possibility seem remote.40 In 1996, political scientist Samuel Huntington41 notoriously predicted a clash of civilizations. In his vision, the world was already divided up into nine civilizations (or cultural groupings): Western, Latin America, African, Islamic, Sinic, Hindu, Orthodox, Buddhist, and Japanese. This prediction reminds us of several others in the early 1990s who suggested the world would soon devolve into three spheres of influence based on trade, dominated by Japan, the European Union, and the United States. There may be some sense to the latter classification; time zones exercise an important influence on trade patterns that favor north–south exchanges. However, both theories oversimplify power and trade relations as they are unfolding. Both theories also ignore the successes of the World Trade Organization and the fast multiplying bilateral trade agreements, such as that between the United States and South Korea. And certainly the facts included in Exhibit 6.4 suggest that these warnings about a new clash of civilizations are off the mark. Although two of the five wars ongoing in 2006 were international ones (in Afghanistan and Iraq), the other three are better examples of civil wars (in Sri Lanka, Chad, and Sudan). Rather than state-to-state or civilization-to-civilization military action, the greater threats to peace and commerce for the 21st century remain civil strife and terrorism.

Exhibit 6.4: Armed Conflicts Around the World

Source: The International Peace Research Institute, Oslo, http://www.prio.no/cwp/ArmedConflict.

Cyberterrorism and Cybercrime

Always on the horizon is the growing potential for cyberterrorism and cybercrime.42 Although still in its infancy, the Internet provides a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. One problem in tracing cyberterrorists and criminals is that it is hard to determine if a cyberattack has been launched by a rogue state, a terrorist, or a hacker as a prank. The “I Love You” worm, which caused an estimated $25 billion in damage, was probably just an out-of-control prank. However, the Melissa virus and the denial of service (DoS) attacks that overloaded the Web sites of CNN, ZDNet, Yahoo!, and Amazon.com with a flood of electronic messages, crippling them for hours, were considered purposeful attacks on specific targets.

Each wave of viruses gets more damaging and spreads so rapidly that considerable harm is done before it can be stopped. The “Slammer,” for example, brought Internet service to a crawl. It doubled its numbers every 8.5 seconds during the first minute of its attack and infected more than 75,000 hosts within 10 minutes.43 After infecting hundreds of thousands of computers in Europe and North America, the “Goner worm” traveled to Australia overnight and brought down government agencies, financial and manufacturing sites, and at least 25 MNCs. Whether perpetrated by pranksters or hackers out to do harm, these incidents show that tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a country’s infrastructure.

Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of 844 conference convened to discuss cybercrime, expressing the urgent need for cooperation among governments, industry, and users to combat the growing menace of cybercrime. As the Internet grows, “it’s only a matter of time before every terrorist, anarchist, thief, and prankster with a PC and a phone line will be waging a virtual war and inflicting real harm.”

Assessing Political Vulnerability

There are at least as many reasons for a company’s political vulnerability as there are political philosophies, economic variations, and cultural differences. Some companies appear to be more politically vulnerable than others, in that they receive special government attention. Depending on the desirability of a company, this special attention may result in positive actions toward the company or in negative attention.

Unfortunately, a marketer has no absolute guidelines to follow to determine whether a company and its products will be subject to political attention. Countries seeking investments in high-priority industries may well excuse companies from taxes, customs duties, quotas, exchange controls, and other impediments to investment. In a bid to attract foreign investment and increase exports, India announced a new trade policy that eases restraints and offers tax breaks for companies developing and maintaining infrastructure. Conversely, firms either marketing products not considered high priority or that fall from favor for some other reason often face unpredictable government restrictions.

As a case in point, Continental Can Company’s joint venture to manufacture cans for the Chinese market faced a barrage of restrictions when the Chinese economy weakened. China decreed that canned beverages were wasteful and must be banned from all state functions and banquets. Tariffs on aluminum and other materials imported for producing cans were doubled, and a new tax was imposed on canned-drink consumption. For Continental Can, an investment that had the potential for profit after a few years was rendered profitless by a change in the attitude of the Chinese government.

Politically Sensitive Products and Issues

Although there are no specific guidelines to determine a product’s vulnerability at any point, there are some generalizations that help identify the tendency for products to be politically sensitive. Products that have or are perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people (and particularly children—recall the story of Barbie in Saudi Arabia from the previous chapter) or that are publicly visible, subject to public debate, or that are associated with their country of origin are more likely to be politically sensitive.

Activists of the Bharatiya Janata Party wearing “evil” masks shout antigovernment slogans near the Union Carbide plant in the central Indian city of Bhopal on the eve of World Environment Day. The activists protested to draw the attention of the government to chemical waste and demanded the cleanup of hazardous waste in the area. The leak from the Union Carbide pesticide plant in 1984 was one of the world’s worst industrial accidents, killing 3,000 people and leaving thousands of others with lifetime illnesses. (© Reuters/Corbis)

Fast-food restaurants, which are intended to be visible, have often been lightning rods for groups opposed to foreign companies. Authorities closed a KFC restaurant for health reasons (two flies were seen in the kitchen) after months of protesters arguing that foreign investment should be limited to high technology. “India does not need foreign investment in junk-food,” said the leader of a protesting farmers’ group. The store was later reopened by court order.

Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern. The European Union has banned hormone-treated beef for more than a decade. There is a question about whether the ban is a valid health issue or just protection for the European beef industry. The World Trade Organization concluded in 1989 that the ban had no scientific basis; nevertheless, Europe has yet to lift the ban. Reluctance to respond to the WTO directive may be the result of the recent outcry against genetically modified (GM) foods that has, for all practical purposes, caused GM foods to be banned in Europe. Public opinion against Frankenfood has been so strong that Unilever announced that it would stop using GM ingredients in all its products in Britain. Additionally, 11 leading restaurant chains, including McDonald’s, Pizza Hut, Wimpy, and Burger King, have gone GM-free. The issue in the United States has not risen to the same level of concern as in Europe; to forestall such adverse public opinion, many U.S. companies are slowing the introduction of GM foods. Fearing a strong public reaction as in Europe, McDonald’s has decided to stop using genetically modified potatoes for its french fries in its U.S. stores.

Forecasting Political Risk

In addition to qualitative measures of political vulnerability, a number of firms are employing systematic methods of measuring political risk.45 Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions. Perhaps the greatest risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets. Foreign Policy magazine uses 12 criteria to rank countries on its “Failed States Index.”46 The list of criteria includes demographic pressures, human flight, uneven development, and the like. (See Exhibit 6.5.)

Exhibit 6.5: Top 20 States in Danger of Failing (ranked in order of closest to failure)

Risk assessment is used to estimate the level of risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept. In the former Soviet Union and in China, the risk may be too high for some companies, but stronger and better financed companies can make long-term investments in those countries that will be profitable in the future. Additionally, one study found that compared with American and Japanese managers, French managers’ market entry decisions appear to be more influenced by concerns about political risk in foreign markets.47 Early risk is accepted in exchange for being in the country when the economy begins to grow and risk subsides.

CROSSING BORDERS 6.3: When States Fail: Dodging the Bullet in Former Yugoslavia

One pundit suggested that nations with McDonald’s don’t attack one another. Perhaps Yugoslavia was the exception that proves the rule?

During most of the 78-day air war against Yugoslavia in 1999, McDonald’s kept the burgers flipping while NATO kept the bombs dropping. After only one night of air strikes, mobs of youths, whipped to patriotic fervor by the state-controlled media’s attacks on the “NATO criminals and aggressors,” targeted six McDonald’s stores, smashing windows and scribbling insults on doors and walls. McDonald’s Corporation was forced to temporarily close its 15 restaurants in Yugoslavia. Weeks later, when local managers flung the doors open again, they accomplished an extraordinary comeback using an unusual marketing strategy: They put McDonald’s U.S. citizenship on the back burner.

Within a week after the attacks, they had launched a campaign to identify the plight of ordinary Serbs with the Mac. “McDonald’s is sharing the destiny of all people here,” read a sign at one branch. A key aspect of the campaign was to present McDonald’s as a Yugoslav company. Restaurants promoted the McCountry, a domestic pork burger with paprika garnish, and lowered its price. Pork is considered the most Serbian of meats.

In a national flourish to evoke Serbian identity and pride, McDonald’s produced posters and lapel buttons showing the golden arches topped with a traditional Serbian cap called the sajkaca (pronounced shy-KACH-a). The managing director said McDonald’s needed to get Serbs to view the company as their own. He masterminded the campaign to “Serbify” McDonald’s. It was in this vein that he and his team decided to redesign the logo with the Serbian cap cocked at a haughty angle over one arch. Traditional national emblems, like the sajkaca, a strong, unique Serbian symbol, had undergone a revival in recent years with the rise of Serbian nationalism. “By adding this symbol of our cultural heritage, we hoped to denote our pride in being a local company.”

Additionally, more than 3,000 free burgers were delivered to the participants of the Belgrade marathon, which was dominated by an anti-NATO theme. At the same time, the company announced that for every burger sold, it would donate one dinar (about a nickel) to the Yugoslav Red Cross to help victims of NATO’s air strikes. It also handed out free cheeseburgers at anti-NATO rallies.

Once the war was over, the company basked in its success. Cash registers were ringing at prewar levels. McDonald’s restaurants around the country were thronged with Serbs hungry for Big Macs and fries. And why not, asks 16-year-old Jovan Stojanovic, munching on a burger. “I don’t associate McDonald’s with America,” he says. “Mac is ours.” This claim is music to McDonald’s ears. “We managed to save our brand.”

Sources: Robert Block, “How Big Mac Kept from Becoming a Serb Archenemy,” The Wall Street Journal, September 3, 1999; John Kozak, “McDonald’s Can’t Serve Up World Peace,” The Guardian, April 26, 2005, p. 27.

During the chaos that arose after the political and economic changes in the Soviet Union, the newly formed republics were eager to make deals with foreign investors, yet the problems and uncertainty made many investors take a wait-and-see attitude. However, as one executive commented, “If U.S. companies wait until all the problems are solved, somebody else will get the business.” Certainly the many companies that are investing in the former Soviet Union or China do not expect big returns immediately; they are betting on the future. For a marketer doing business in a foreign country, a necessary part of any market analysis is an assessment of the probable political consequences of a marketing plan, since some marketing activities are more susceptible to political considerations than others.

Lessening Political Vulnerability

Although a company cannot directly control or alter the political environment of the country within which it operates, a specific business venture can take measures to lessen its degree of susceptibility to politically induced risks.

Foreign investors frequently are accused of exploiting a country’s wealth at the expense of the national population and for the sole benefit of the foreign investor. This attitude is best summed up in a statement made by a recent president of Peru: “We have had massive foreign investment for decades but Peru has not achieved development. Foreign capital will now have to meet government and social goals.” Such charges are not wholly unsupported by past experiences.

As long as these impressions persist, the political climate for foreign investors will continue to be hostile. Companies must manage external affairs in foreign markets to ensure that the host government and the public are aware of their contributions to the economic, social, and human development of the country. Relations between governments and MNCs are generally positive if the investment (1) improves the balance of payments by increasing exports or reducing imports through import substitution; (2) uses locally produced resources; (3) transfers capital, technology, and/or skills; (4) creates jobs; and/or (5) makes tax contributions.

In addition to the economic contributions a company makes, corporate philanthropy also helps create positive images among the general population. Many MNCs strive to benefit countries through their social programs, which polish their image as well. For example, Microsoft, recognizing that developing countries need sophisticated technical assistance, pledged more than $100 million in technology and training as part of a deal to put government services online in Mexico. Cisco Systems, the leading maker of Internet hardware, relies on nonprofit organizations to run its 10,000 networking academies, which train college and high school students to create computer networks in 150 countries. In China, Procter & Gamble is helping local schools and universities train and educate leaders. And in Malaysia, Motorola and Intel have instituted training programs to enhance the skills of local workers.

Merck, the pharmaceutical company, has developed a pill to fight river blindness in Africa and Latin America. River blindness is a parasitic disease transmitted to humans through the bite of the black fly commonly found along the riverbanks in some African countries. The parasite infiltrates, multiplies, and spreads throughout the body for as long as 15 years, causing acute skin rashes, terrible itching, and sometimes disfigurement or blindness. The pill is taken just once a year and has been proven to prevent the disease. Merck contributed millions of doses to fight the disease in developing countries.48

Although companies strive to become good corporate citizens in their host countries, political parties seeking publicity or scapegoats for their failures often serve their own interests by focusing public opinion on the negative aspects of MNCs, whether true or false. Companies that establish deep local roots and show by example, rather than meaningless talk, that their strategies are aligned with the long-term goals of the host country stand the best chance of overcoming a less than positive image. “In times like these,” says one executive, “global citizenship is perhaps more important than ever.”49 An effective defense for the multinational company is to actively participate in improving the lives of local citizens.

In addition to corporate activities focused on the social and economic goals of the host country and good corporate citizenship, MNCs can use other strategies to minimize political vulnerability and risk.

Joint Ventures

Typically less susceptible to political harassment, joint ventures can be with locals or other third-country multinational companies; in both cases, a company’s financial exposure is limited. A joint venture with locals helps minimize anti-MNC feelings, and a joint venture with another MNC adds the additional bargaining power of a third country.

The most entertaining protest technique was pioneered by French farmers. Perhaps they were inspired by that American export, Animal House. In any case, French farmers like to throw their food. Here they tossed tomatoes and such at McDonald’s; they’ve also lobbed lamb chops at their own trade ministers. Apparently they pay attention in Taiwan. Most recently, fishermen pitched perch in Taipei to protest the Japanese fishing fleet’s presence in their waters. (left: AP Photo/Claude Paris; right: AP Photo)

Expanding the Investment Base

Including several investors and banks in financing an investment in the host country is another strategy. This approach has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened. This strategy becomes especially powerful if the banks have made loans to the host country; if the government threatens expropriation or other types of takeover, the financing bank has substantial power with the government.

Licensing

A strategy that some firms find eliminates almost all risks is to license technology for a fee. Licensing can be effective in situations in which the technology is unique and the risk is high. Of course, there is some risk assumed, because the licensee can refuse to pay the required fees while continuing to use the technology.

Planned Domestication

In those cases in which a host country is demanding local participation, the most effective long-range solution is planned phasing out, that is, planned domestication. This method is not the preferred business practice, but the alternative of government-initiated domestication can be as disastrous as confiscation. As a reasonable response to the potential of domestication, planned domestication can be profitable and operationally expedient for the foreign investor. Planned domestication is, in essence, a gradual process of participating with nationals in all phases of company operations.

Political Bargaining

Multinational companies clearly engage in lobbying and other sorts of political bargaining to avoid potential political risks.50 Mattel issued an extraordinary apology to China over the recall of Chinese-made toys, saying the items were defective because of Mattel’s design flaws rather than faulty manufacturing.51 In doing so, Mattel was (1) protecting the huge and all-important head of its value chain; (2) recognizing that it would be easier to fix its design and inspection routines than quickly affect manufacturing practices in China; and (3) uniquely for an American firm, publicly admitting its own very real culpability. On the other side of the Pacific, Toyota has considered raising prices of its cars in the American market to “help” its ailing American competitors.52 The Japanese government has set quotas on auto exports in the past as American car companies have struggled. And in the face of growing American and European criticism, China has agreed to put quotas on its exports of textiles53 and to float its currency.54 Finally, a cynical way to look at the motivation behind corporate social responsibility in general is its use as a bargaining chip with foreign publics and governments.55

Political and economic aid in action, where everybody wins. The Japanese government has paid for the construction of a new highway that connects key safari tourism areas in Tanzania. Foreign tourism becomes more efficient, comfortable, and profitable for the Tanzanian company (and others) pictured—Kibo is one of the best in the country. The Japanese designers, consultants, and contractors involved make money on the work. And the road ultimately pays for itself in the form of lower warranty expenses on the armada of Toyota Land Cruisers that regularly ply the path between the Makuyuni and Ngorongoro animal preserves.

Political Payoffs

One approach to dealing with political vulnerability is the political payoff—an attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company. This choice is not an approach we recommend in any way. However, your competitors may use such a tactic, so beware. Political payoffs, or bribery, have been used to lessen the negative effects of a variety of problems. Paying heads of state to avoid confisca-tory taxes or expulsion, paying fees to agents to ensure the acceptance of sales contracts, and providing monetary encouragement to an assortment of people whose actions can affect the effectiveness of a company’s programs are decisions that frequently confront multinational managers and raise ethical questions.

Bribery poses problems for the marketer at home and abroad, because it is illegal for U.S. citizens to pay a bribe even if it is a common practice in the host country. Political payoffs may offer short-term benefits, but in the long run, the risks are high, and bribery is an untenable option. This issue is discussed in more detail in Chapter 7.

Government Encouragement

Governments, both foreign and U.S., encourage foreign investment as well as discourage it. In fact, within the same country, some foreign businesses may fall prey to politically induced harassment, while others may be placed under a government umbrella of protection and preferential treatment. The difference lies in the evaluation of a company’s contribution to the nation’s interest.

The most important reason to encourage foreign investment is to accelerate the development of an economy. An increasing number of countries are encouraging foreign investment with specific guidelines aimed toward economic goals. Multinational corporations may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of local industry, conserve foreign exchange, or meet a combination of these expectations as a requirement for market concessions. Recent investments in China, India, and the former republics of the Soviet Union include provisions stipulating specific contributions to economic goals of the country that must be made by foreign investors.

The U.S. government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries worldwide, including those that are politically risky. It seeks to create a favorable climate for overseas business by providing the assistance that helps minimize some of the more troublesome politically motivated financial risks of doing business abroad. The Department of Commerce (DOC) at www.doc.gov is the principal agency that supports U.S. business abroad. The International Trade Administration (ITA) at www.ita.gov, a bureau of the DOC, is dedicated to helping U.S. business compete in the global marketplace. Other agencies that provide assistance to U.S. companies include:

• Export-Import Bank (Ex-Im Bank) underwrites trade and investments for U.S. firms. www.exim.gov

• Foreign Credit Insurance Association (FCIA), an agency of the Ex-Im Bank, provides credit insurance that minimizes nonpayment risk caused by financial, economic, or political uncertainties. It includes insurance against confiscation, civil disturbances, and the cancellation or restriction of export or import licenses. www.fcia.com

• The Agency for International Development (AID) provides aid to underdeveloped countries and has limited protection in support of “essential” projects in approved countries and for approved products. www.usaid.gov

• The Overseas Private Investment Corporation (OPIC) provides risk insurance for companies investing in less-developed countries. www.opic.gov

Summary

Vital to every marketer’s assessment of a foreign market is an appreciation for the political environment of the country within which he or she plans to operate. Government involvement in business activities abroad, especially foreign-controlled business, is generally much greater than business is accustomed to in the United States. The foreign firm must strive to make its activities politically acceptable, or it may be subjected to a variety of politically condoned harassment. In addition to the harassment that can be imposed by a government, the foreign marketer frequently faces the problem of uncertainty of continuity in government policy. As governments change political philosophies, a marketing firm accepted under one administration might find its activities undesirable under another. An unfamiliar or hostile political environment does not necessarily preclude success for a foreign marketer if the company becomes a local economic asset and responds creatively to the issues raised by political and social activists. The U.S. government may aid an American business in its foreign operations, and if a company is considered vital to achieving national economic goals, the host country often provides an umbrella of protection not extended to others.

Questions

1. Define the following terms:

sovereignty

confiscation

nationalism

domestication

expropriation

PSAs

NGOs

2. Why would a country rather domesticate than expropriate?

3. “A crucial fact when doing business in a foreign country is that permission to conduct business is controlled by the government of the host country.” Comment.

4. What are the main factors to consider in assessing the dominant political climate within a country?

5. Why is a working knowledge of political party philosophy so important in a political assessment of a market? Discuss.

6. How can a change in the political party in power affect an investor? Discuss and give examples.

7. What are the most common causes of instability in governments? Discuss.

8. Discuss how governmental instability can affect marketing.

9. What are the most frequently encountered political risks in foreign business? Discuss.

10. Expropriation is considered a major risk of foreign business. Discuss ways in which this particular type of risk can be minimized somewhat as a result of company activities. Explain how these risks have been minimized by the activities of the U.S. government.

11. How do exchange controls impede foreign business? Discuss.

12. How do foreign governments encourage foreign investment? Discuss.

13. How does the U.S. government encourage foreign investment?

14. What are the motives behind U.S. government encouragement for foreign investment? Explain.

15. Discuss measures a company might take to lessen its political vulnerability.

16. Select a country and analyze it politically from a marketing viewpoint.

17. The text suggests that violence is a politically motivated risk of international business. Comment.

18. There is evidence that expropriation and confiscation are less frequently encountered today than just a few years ago. Why?

What other types of political risks have replaced expropriation and confiscation in importance?

19. You are an executive in a large domestic company with only minor interests in international markets; however, corporate plans call for major global expansion. Visit the home page of Control Risks Group (CRG) at www.crg.com. After thoroughly familiarizing yourself with the services offered by CRG, write a brief report to management describing how its services could possibly help with your global expansion.

20. Visit the Web site www.politicalresources.net/and select the Political Site of the Week. Write a brief political analysis highlighting potential problem areas for a company interested in investing in that country.

21. Search the Web for information about the activities of PSAs outside the United States and write a briefing paper for international management on potential problems.

22. Discuss ways the companies discussed in the Global Perspective could have minimized their losses in the banana wars.

23. Discuss any ethical and socially responsible issues that may be implied in the Global Perspective. Political disaster strikes Kenya. In the Nairobi slum of Kibera, supporters of opposition leader Raila Odinga tear up a key railway that ran from the coast to Uganda. They renamed the broken line “Odinga Highway.”

1For those interested in learning more about the concept of sovereignty, see Stephen D. Krasner (ed.), Problematic Sovereignty (New York: Columbia University Press, 2001).

2“Global Trade Talks Founder on Farm-Subsidy Issues,” The Wall Street Journal Online, June 21, 2007.

3“More Than Hot Air,” The Economist, July 16, 2005, p. 77.

4“Measuring Globalization,” Foreign Policy, November/December 2007, pp. 68–77.

5John L. Graham, “The Big Secret of World Peace,” Journal of Commerce, February 13, 1995, OPED page; John L. Graham, “Trade Brings Peace,” in J. Runzo and N. Martin (eds.), War and Reconciliation (Cambridge: Cambridge University Press, 2008); Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus, and Giroux, 2005).

6Choe Sang-Hun, “U.S. and South Korea Agree to Sweeping Trade Deal,” The New York Times, April 3, 2007, pp. C1, C8.

7Richard Simon, “Senate OKs Peru Free-Trade Pact,” Los Angeles Times, December 5, 2007, p. C3.

8Peter S. Goodman and Louise Story, “Overseas Investors Buying U.S. Holdings at Record Pace,” The New York Times, January 20, 2008, pp. 1, 14.

9“Lost in Translations,” The Economist, January 19, 2008, pp. 73–75.

10Sabrina Tavernise, “Debate Intensifies in Turkey over Head Scarf Ban,” The New York Times, January 19, 2008, p. A5.

11Sebastian Moffett, “Japanese Prime Minister Steps Down after Less than One Year in Office,” The Wall Street Journal Online, September 12, 2007.

12“If You’ve Got It, Don’t Flaunt It: The Sale of Luxury Goods in China Runs into Political Trouble,” The Economist, June 2, 2007, p. 72.

13PAN stands for Partido Accion National. PAN and PRI are the largest of eight political parties in Mexico.

14Michela Wrong, “Kenya’s Turmoil Cuts off Its Neighbors,” Los Angeles Times, January 14, 2008, p. C4.

15Visit http://www.eiu.com for abstracts of the Economist Intelligence Unit’s country reports of current political and economic data. Some information on this site is available for a fee only, but other sources are free.

16Visit the Pepsi Web site in Russia for a history of Pepsi in Russia, Pepsi advertising in Russia, and other information: http://www.pepsi.ru.

17Francis Fukuyama, The End of History and the Last Man (New York: The Free Press, 1992).

18“Freedom Marches Backwards,” The Economist, January 19, 2008, pp. 63–64.

19Brian Bremmer, “The Dragon’s Way or the Tiger’s?” BusinessWeek, November 20, 2006, pp. 55–62; N. Mark Lam and John L. Graham, Doing Business in China Now, The World’s Most Dynamic Market (New York: McGraw-Hill, 2007).

20http://www.cia.gov/cia/publications/factbook/, 2005.

21Paul M. Vaaler, Burkhard N. Schrage, and Steven A. Block, “Counting the Investor Vote: Political Business Cycle Effects on Sovereign Bond Spreads in Developing Countries,” Journal of International Business Studies 36, no. 1 (2005), pp. 62–88.

22Joy C. Shaw, “Taiwan’s KMT Wins Big in Legislative Elections,” The Wall Street Journal Online, January 12, 2008.

23Steven R. Weisman, “Bush in Accord with Democrats on Trade Pacts,” The New York Times, May 11, 2007, pp. 1, C7.

24Kent L. Granzin and John J. Painter, “Motivational Influences on ‘Buy Domestic’ Purchasing: Marketing Management Implications from a Study of Two Nations,” Journal of International Marketing 9, no. 2 (2001), pp. 73–96.

25Muammar el Qaddafi, the leader of Libya, has changed his approach to international relations from supporting terrorism to supporting trade, for example. See “Rehabilitating Libya,” The New York Times (editorial), January 8, 2007, p. 14.

26Floyd Norris, “French’s Has an Unmentioned British Flavor,” The New York Times, March 28, 2003. The news release failed to mention that French’s is a subsidiary of Reckitt Benckiser P.L.C., a British firm—but the British did support the U.S. position.

27James T. Areddy, “Yuan’s Surge Unlikely to Halt U.S. Criticism,” The Wall Street Journal Online, December 31, 2007.

28“Japanese Food Chains Ask for Easing of U.S. Beef Rules,” Prism Insight, December 26, 2006.

29“WTO Launches Formal Probe into Alleged Chinese Subsidies,” Associated Press, August 31, 2007.

30Simon Romero, “Chavez Takes over Foreign-Controlled Oil Projects in Venezuela,” The New York Times, May 2, 2007, p. A3.

31Marla Dickerson, “Woes Mount for Mexico’s State Oil Titan,” Los Angeles Times, January 2, 2008, pp. C1, C4.

32“Union Loses Bid to Reopen Wal-Mart,” Montreal Gazette, May 12, 2005, p. A11.

33Vivienne Walt, “Iran Looks East,” Fortune, February 21, 2005, pp. 88–95.

34Roger Thurow, “As U.S., EU Clash on Biotech Crops, Africa Goes Hungry,” The Wall Street Journal, February 26, 2002, p. A1.

35Mary Brown Malouf, “Web Unites Peace Rallies across Globe,” Salt Lake Tribune, February 18, 2003.

36Hildy Teegen, Jonathan P. Doh, and Sushil Vachani, “The Importance of Non-Governmental Organizations (NGOs) in Global Governance and Value Creation: An International Business Research Agenda,” Journal of International Business Studies 35, no. 6 (2004), pp. 463–83.

37See the excellent book by John A. Quelch and Nathalie Laidler-Kylander, The New Global Brands: Managing Non-Governmental Organizations in the 21st Century (Mason, OH: South-Western, 2006).

38Tim Reid, “The 28,000 Victims of Terrorism,” The Times of London, July 7, 2005, p. 36.

39“Who Do We Trust?” Condé Nast Traveler, March 2005, pp. 53–62.

40“Disharmony in the Spheres,” The Economist, January 19, 2008, pp. 25–28.

41Samuel P. Huntington, The Clash of Civilizations and the Remaking of the World Order (New York: Simon and Schuster, 1996); Fouad Ajami, “The Clash,” The New York Times, January 6, 2008.

42“Overseas Security Threats to U.S. Business Cited,” Los Angeles Times, December 28, 2007, p. C2.

43For more information, see http://www.silicondefense.com.

44The Group of 8 consists of government representatives from Britain, Canada, France, Germany, Italy, Japan, Russia, and the United States who convene periodically to examine issues that affect the group.

45See http://www.prsgroup.com for a wealth of information on political risk assessments.

46“The Failed States Index,” Foreign Policy, July/August 2007, pp. 54–65.

47Jennifer D. Chandler and John L. Graham, “Using Formative Indicators to Discern the Meaning of Corruption and Its Impact on International Marketing,” working paper, University of California, Irvine, 2008.

48David Shook, “Merck Is Treating the Third World,” BusinessWeek Online, October 10, 2002.

49Susan E. Reed, “Business; Technology Companies Take Hope in Charity,” The New York Times, March 23, 2003, p. 17.

50Amy J. Hillman and William P. Wan, “The Determinants of MNE Subsidiaries’ Political Strategies: Evidence of Institutional Duality,” Journal of International Business Studies 36, no. 3 (2005), pp. 322–40.

51“Mattel Apologizes to China over Recall,” Associated Press, September 21, 2007.

52“Toyota May Raise Prices to Avoid Backlash,” Associated Press, April 26, 2005.

53“China to Put Quotas on Textile Exports,” Reuters, June 22, 2005.

54Don Lee and Ching-Ching Ni, “China Revalues Currency in Action Sought by U.S.,” Los Angeles Times, July 22, 2005, pp. A1, A4.

55Daniel Franklin, “Just Good Business,” The Economist, January 18, 2008, pp. 1–24.

(Cateora 160)

Cateora. International Marketing, 14th Edition. McGraw-Hill Learning Solutions, 112008. .

7: The International Legal Environment: PLAYING BY THE RULES

CHAPTER OUTLINE

Global Perspective: The Pajama Caper

Bases for Legal Systems

Common vs. Code Law

Islamic Law

Marxist–Socialist Tenets

Jurisdiction in International Legal Disputes

International Dispute Resolution

Conciliation

Arbitration

Litigation

Protection of Intellectual Property Rights: A Special Problem

Counterfeiting and Piracy

Inadequate Protection

Prior Use versus Registration

International Conventions

Other Managerial Approaches to Protecting Intellectual Property

Commercial Law within Countries

Marketing Laws

Green Marketing Legislation

Foreign Countries’ Antitrust Laws

U.S. Laws Apply in Host Countries

Foreign Corrupt Practices Act

National Security Laws

U.S. Antitrust Laws that Apply in Foreign Markets

Antiboycott Law

Extraterritoriality of U.S. Laws

Cyberlaw: Unresolved Issues

Domain Names and Cybersquatters

Taxes

Jurisdiction of Disputes and Validity of Contracts

CHAPTER LEARNING OBJECTIVES

What you should learn from Chapter 7:

• The four heritages of today’s legal systems

• The important factors in the jurisdiction of legal disputes

• Issues associated with the jurisdiction of legal disputes and the various methods of dispute resolution

• The unique problems of protecting intellectual property rights internationally

• How to protect against piracy and counterfeiting

• The legal differences between countries and how those differences can affect international marketing plans

• The different ways U.S. laws can be applied to U.S. companies operating outside the United States

• The many issues of evolving cyberlaw

Global Perspective: THE PAJAMA CAPER

Six headlines illustrate the entanglements possible when U.S. law, host-country law, and a multinational company collide:

• “Wal-Mart’s Cuban-Made Pajamas Defy Embargo”

• “Wal-Mart Ignites Row by Pulling Cuban Pajamas off Shelves in Canada”

• “Canada, U.S. Wager Diplomatic Capital in a High-Stakes Pajama Game”

• “Cuban Quandary: Wal-Mart in Hot Water for Yanking Pajamas”

• “Canada Probes Wal-Mart Move against Cuban Pajamas”

• “Wal-Mart Puts Cuban Goods Back on Sale”

The controversy arose over a U.S. embargo forbidding U.S. businesses to trade with Cuba and concerned whether or not the embargo could be enforced in Canada. Wal-Mart was selling Cuban-made pajamas in Canada. When Wal-Mart officials in the United States became aware of the origin of manufacture, they issued an order to remove all the offending pajamas because it is against U.S. law (the Helms-Burton Act) for a U.S. company or any of its foreign subsidiaries to trade with Cuba. Canada was incensed at the intrusion of U.S. law on Canadian citizens. The Canadians felt they should have the choice of buying Cuban-made pajamas.

Wal-Mart was thus caught in the middle of conflicting laws in Canada and the United States and a Canada–U.S. foreign policy feud over the extraterritoriality of U.S. law. Wal-Mart Canada would be breaking U.S. law if it continued to sell the pajamas, and it would be subject to a million-dollar fine and possible imprisonment of its managers. However, if the company pulled the pajamas out of Canadian stores as the home office ordered, it would be subject to a $1.2 million fine under Canadian law. After discussion with Canadian authorities, Wal-Mart resumed selling the pajamas. Canada was upset with the United States for attempting to impose its laws on Canadian companies (Wal-Mart Canada is a subsidiary of Wal-Mart U.S.), while the United States says that Wal-Mart was violating its laws in not abiding by the boycott against Cuba. The situation illustrates the reality of the legal environment and international marketing—companies are subject to both home-country laws and host-country laws when doing business in another country. The federal government finally settled with Wal-Mart in 2003, and the pajama caper was finally closed.

Sources: Boston Globe, March 3, 1997; St. Louis Post-Dispatch, March 9, 1997; Washington Post, March 14, 1997, p. A6; The Wall Street Journal, March 14, 1997, p. B4; John W. Boscariol, “An Anatomy of a Cuban Pyjama Crisis,” Law and Policy in International Business, Spring 1999, p. 439; Pablo Bachelet, “Hard-Liner Backs Easing Cuba Travel Ban,” Miami Herald, March 22, 2007.

How would you like to play a game in which the stakes were high, there was no standard set of rules to play by, the rules changed whenever a new player entered the game, and, when a dispute arose, the referee used the other players’ rules to interpret who was right? This game fairly well describes the international legal environment. Because no single, uniform inter-national commercial law governing foreign business transactions exists, the international marketer must pay particular attention to the laws of each country within which it operates.1 An American company doing business with a French customer has to contend with two jurisdictions (United States and France), two tax systems, two legal systems, and other supranational sets of European Union laws and WTO regulations that may override commercial laws of the countries. The situation is similar when doing business in Japan, Germany, or any other country. Laws governing business activities within and between countries are an integral part of the legal environment of international business.

The legal systems of different countries are so disparate and complex that it is beyond the scope of this text to explore the laws of each country individually. There are, however, issues common to most international marketing transactions that need special attention when operating abroad. Jurisdiction, dispute resolution, intellectual property, the extraterritoriality of U.S. laws, cyberlaw, and associated problems are discussed in this chapter to provide a broad view of the international legal environment. Although space and focus limit an in-depth presentation, the material presented should be sufficient for the reader to conclude that securing expert legal advice is a wise decision when doing business in another country. The foundation of a legal system profoundly affects how the law is written, interpreted, and adjudicated. The place to begin is with a discussion of the different legal systems.

Bases for Legal Systems

Four heritages form the bases for the majority of the legal systems of the world: (1) common law, derived from English law and found in England, the United States, Canada,2 and other countries once under English influence; (2) civil or code law, derived from Roman law and found in Germany, Japan, France, and non-Islamic and non-Marxist countries; (3) Islamic law, derived from the interpretation of the Koran and found in Pakistan, Iran, Saudi Arabia, and other Islamic states; and (4) a commercial legal system in 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 each 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. China has announced that it will adopt a constitution-based socialist legal system with Chinese characteristics.

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 legal system.

One measure of the importance of the legal system in each country is the number of attorneys per capita. Please see Exhibit 7.1. Judging by that metric, the legal system is called upon to settle commercial disputes much more frequently in the United States than in China. As Japan continues to become more integrated in the global market, the need for attorneys is burgeoning. There are approximately 23,000 attorneys there now, and the Japanese government intends to grow that number to 50,000 by 2018.3

Exhibit 7.1: Lawyers per 100,000 People in Selected Countries

Sources: Council of Bars and Law Societies of Europe (www.ccbe.org), 2005; “More than 2000 Counties Have No Lawyers,” People’s Daily Online, June 10, 2005; Kana Inagaki, “Major Legal Reforms Expected to Bring Wave of New Lawyers in Japan,” Associated Press, August 22, 2007.

Common vs. Code Law

The basis for common law 4 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 ,5 in contrast, is based on an all-inclusive system of written rules (codes) 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. For example, under the commercial code in a code-law country, the law governing contracts is made inclusive with the statement that “a person performing a contract shall do so in conformity with good faith as determined by custom and good morals.” Although code law is considered all-inclusive, it is apparent from the foregoing statement that some broad interpretations are possible in order to include everything under the existing code.

Steps are being taken in common-law countries to codify commercial law even though the primary basis of commercial law is common law, that is, precedents set by court decisions. An example of the new uniformity is the acceptance of the Uniform Commercial Code by most states in the United States. Even though U.S. commercial law has been codified to some extent under the Uniform Commercial Code, the philosophy of interpretation is anchored in common law.