Global Marketing
Contemporary Theory, Practice, and Cases
By Ilan Alon, Eugene Jaffe, Christiane Prange, and Donata Vianelli
© Taylor & Francis 2016
Chapter 4
Analyzing Political and Legal Environments
© Taylor & Francis 2016
Learning Objectives
After reading this chapter you should be able to:
Understand some of the legal barriers to using a global, standardized marketing
mix.
Identify legal issues of international marketing.
Relate how the use of the Internet for the international sale of goods raises
legal problems.
Discuss how intellectual property disputes can be resolved.
Understand the forms of political risk and how political risk can be managed.
Discuss the efforts of the WTO to liberalize trade.
© Taylor & Francis 2016
World Legal Systems
• The world is ordered by five different legal systems. They are civil, common, and Islamic Law.
• Civil Law: Found in Europe, Asia, and Central and South America. Consists of codified legislation
interpreted by judges.
• Common Law: Adopted in most states of North America. Court adjudications are the primary
source of law, although governments pass statutes and legislation. Each case that raises new
issues is considered on its own merits and then becomes a precedent for future decisions on that
same issue.
• Muslim Law - There are five types of conduct under Muslim law (Shari'a): mandatory,
recommended, permitted, recommended against, and banned. Given the intricacies of Islamic
law, expert legal advice is a necessity in practically all areas of business behavior.
• For example, engaging in commerce is recommended, but taking interest is banned.
• There are areas where Islamic law is vague, such as how to treat intellectual property.
• Multinational companies operating in Muslim countries face many challenges in the
management of human resources.
© Taylor & Francis 2016
Legal Issues for Global Marketing
• Global marketers must understand the legal systems in which they operate. Common legal
scenarios include:
• Sales agencies
• Distributorship agreements
• Customs and international trade regulation
• Export incentives and controls
• Arbitration
• Patents
• Trademarks
• Intellectual property rights
• International technology transfer
• Political vulnerability of the product in the target market
• Parallel importing
• Marketing mix regulations
• Consumer protection
• Employment practices
• Environmental regulations.
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Intellectual Property Issues: Trademarks, Copyrights, and Patents
• All intellectual property law is based on the principle of territoriality. Each state or country
determines for its own territory what is to be protected, who should benefit from such
protection and for how long, and how the protection should be enforced.
• Changing international relations between states may present legal problems relating to
intellectual property.
• The main issues to be analyzed are related to:
• Trademarks
• Patents
• Software piracy
• Copyrights
• Trade secrets.
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Intellectual Property Issues: Trademarks
• Companies regard their trademarks as being among their most valuable assets. Trademarks
protect words, names, symbols, sounds, or colors that distinguish goods™ and servicesSM.
• Trademarks, unlike patents, can be renewed forever, as long as they are being used. The rights
to a trademark are gained by registration in most countries, “first to file,” or by their use,
“first to use,” depending on country legislation.
• International trademark disputes may arise from a number of causes.
• For example, the same term regarded as distinctive in one country may not be in another
because of different consumer perceptions of a brand from one country to another.
• Another cause of disputes is the mistaken belief that a trademark covers similar products or
services.
• The importance of protecting one’s trademark is illustrated by the example of a lawsuit
initiated by the Hershey Company, which prohibited a New Jersey (U.S.) company called Let's
Buy British from importing UK-made Cadbury chocolates. The reason for the lawsuit was that
the imported product too closely resembled a similar product and package manufactured by
Hershey in the U.S. under license from Cadbury. The contention of Hershey was that there is a
significant difference in the composition of the Cadbury (UK) and the Cadbury (U.S.) products.
• Some legal experts suggest registration in the local language as well, e.g. China, Muslim
countries.
© Taylor & Francis 2016
Intellectual Property Issues: Patents
• Patent is a form of protection that provides a person or legal entity with exclusive rights for making, using, or
selling a concept or invention and excludes others from doing the same for its duration:
• Patents can be maintained for a maximum of twenty years
• Decision to grant or reject a patent rests with each country’s authority
• Patent treaties provide the option of submitting one patent for protection in several nations.
• There are a number of international patent agreements in Europe, Asia, the U.S., and Africa.
• The Patent Cooperation Treaty (PCT) is administered by the World Intellectual Property Organization. It addresses
procedural requirements for obtaining a patent and aims to simplify filing, searching, and publication of
international patent applications. All EU countries are members of the treaty.
• The Eurasian Patent Organization (EAPO) members include Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan,
Moldova, the Russian Federation, Tajikistan, and Turkmenistan. Under the Eurasian Convention a single patent
application designating all of the member countries is filed in a single language (Russian) in a central patent
office in Moscow. Administration of that application is similar to that of the European Patent Office. Maximum
duration of a patent is twenty years.
• Of all countries, the United States had the most patent applications, followed by Japan and China. There are a
number of factors that account for the number of patent filings in a given country. One of these is the amount of
money invested in R&D and education.
• In Africa, there are two intellectual property organizations, The African Regional Intellectual Property
Organization (ARIPO), whose members are mainly English-speaking, and the African Intellectual Property
Organization for French-speaking nations. © Taylor & Francis 2016
Patents as Measure of Innovation
• Of all countries, the United States granted COUNTRY NUMBER OF APPLICATIONS
the most patents, followed by Japan and APPLICATIONS PER MILLION
Germany. PEOPLE
• Yet when viewed by number of patents per USA 1 57,239 630 3
million people, which takes the size of Japan 2 43,918 2,836 1
country into consideration, the U.S. was in China 3 21,516 51 10
third place, after Japan and South Korea. Germany 4 17,927 586 4
Republic of 5 12,386 2,814 2
Korea
France 6 7,899 235 8
UK 7 4,865 314 5
Switzerland 8 4,367 251 7
Netherlands 9 4,198 134 9
Sweden 10 3,960 306 6
Patent Applications by Country (2013)
© Authors
© Taylor & Francis 2016
Intellectual Property Issues: Software Piracy
• Software piracy is the unauthorized reproduction and illegal distribution of software,
whether for business or personal use. While software publishers have methods of
countering illegal copyright infringement, it is costly to do so.
• Software piracy is endemic throughout the world, but especially so in the emerging
economies.
• According to agreements by the World Trade Organization (WTO) and the Trade-Related
Aspects of Intellectual Property Rights (TRIP), any written software has an automatic
copyright.
© Taylor & Francis 2016
Top 20 Economies
Country Pirated Value ($M) Legal Sales ($M) Piracy Rate (
in Commercial percent)
USA 9,773 41,664 19
Value of Pirated PC China 8,902 2,559 77
Russia 3,227 1,895 63
Software, 2011 India 2,930 1,721 63
Brazil 2,848 2,526 53
France 2,754 4,689 37
Germany 2,265 6,447 26
Italy 1,945 2,107 48
UK 1,943 5,530 26
Japan 1,875 7,054 21
Indonesia 1,467 239 86
Mexico 1,249 942 57
Spain 1,216 1,548 44
Canada 1,141 3,085 27
Thailand 852 331 72
Adapted from : South Korea 815 1,223 40
http://globalstudy.bsa.org/2011/downloads/study_pdf/2
011_BSA_Piracy_study-InBrief.pdf. Retrieved Australia 763 2,445 23
November 2, 2014 Venezuela 668 91 88
Malaysia 657 538 55
Argentina 657 295
© Taylor & Francis 2016 69
Intellectual Property Issues: Trade Secrets
• Trade secrets are information that companies keep secret to give them an
advantage over their competitors:
• Not protected in the same way as trademarks or patents
• Must be guarded by non-disclosure and confidentiality agreements initiated by the
global marketer
• Unfortunately, lack of formal protection means that a third party can duplicate and use
secret information if revealed.
© Taylor & Francis 2016
Intellectual Property Issues: Copyrights
• Copyrights give ownership to "original works of authorship," such as literary works,
paintings, and video games:
• In U.S. and EU, copyrights are registered for the life of the author, plus 70 years
• Copyrights extend to other countries if they are part of an international copyright treaty,
convention, or organization
• In Canada, copyrights extend 50 years after the life of the author.
• One of the most contentious issues is the question of data bases, digital recordings,
and websites.
• Producers of sound recordings must have the right to prevent the unauthorized
reproduction of recordings for a period of 50 years.
© Taylor & Francis 2016
Trade Regulations
1947–1994
• GATT codified rules for trade liberalization. Its major goal was to work towards lowering tariff
restrictions.
• One of the major problems of the GATT agreement was that services were not included even
though they had become a significant component of overall world trade.
• Another problem was an increasing protectionist policy among many nations in order to
subsidize their agricultural exports.
1995
• GATT was replaced by the World Trade Organization (WTO)
• a forum for governments to negotiate trade agreements and to settle trade disputes
• Approximately 150 nations are members of the WTO
• 75 percent are developing countries
• Unlike the GATT agreement, the WTO covers services, including intellectual property. In
addition, non-tariff barriers such as discriminatory product standards are also included in the
agreement.
© Taylor & Francis 2016
Resolution of Trade Disputes: Arbitration and Mediation
• Disputes can arise between private parties such as businesses, between two countries, or
between an individual and a country.
• There are three ways to settle a dispute:
• Litigation through a court: it can be very costly and time consuming
• Arbitration: is a course of action by which a dispute is submitted by the parties to one or more
arbitrators whose decision is binding.
• Mediation: it is a process where two parties agree on a mediator who tries to guide them to a
satisfactory settlement of the dispute. It is not binding.
• There are a number of international organizations that provide arbitration, mediation services,
or both. Examples of arbitration centers include the International Center for Settlement of
Investment Disputes (ICSID), the World Intellectual Property Organization (WIPO) Arbitration and
Mediation Center, the London Court of International Arbitration, and the International Chamber
of Commerce (ICC)
© Taylor & Francis 2016
Marketing Mix Regulations: Product Standards
• A key concern for global marketers is the presence of different
product regulations and standards on global, regional, or national
levels: multinational manufacturers must adapt product strategy The International
when necessary to meet standards. Organization for
• Product planning Standardization (ISO)
is a NGO headquartered in
• Products must meet standards in each target country
Geneva (Switzerland)
• How does a company efficiently and cost-effectively accomplish
consisting of a network of
this task?
national standards
• Do the standards represent an achievable goal?
institutes of over 160
• How can changes to regulations be anticipated before the product countries. Its primary task
is marketed?
is to develop international
• Worldwide regulations differ in scope and intensity. product standards based
• Achieving a worldwide or region-wide agreement for product on consensus with its
standardization is a difficult task: the EU has begun a process of members. Compliance
harmonization of standards that will apply to all its members. with ISO standards is
• The term “harmonization” refers to a process by which the technical voluntary.
requirements of various standards have been made equivalent or
identical.
© Taylor & Francis 2016
Regulation of Communication
Advertising regulations
• Advertising regulations are nationally and locally determined: every country determines how to regulate
advertising that is perceived to be fraudulent or misleading.
• In the European Union, advertising is self regulated. According to the European Standards Advertising Alliance,
self-regulation (SR) is “a system by which the advertising industry actively polices itself. The three parts of the
industry (advertisers, advertising agencies, and media) work together to agree standards and to set up a system
to ensure that advertisements which fail to meet those standards are quickly corrected or removed.”
Cyber Law
• Difficulties in the regulation of cyberspace, because a single transmission may involve regulations in three
countries:
• regulations of the country in which the recipient resides,
• regulations of the country where the server is located,
• regulations of the country in which the transaction takes place.
• The Council of Europe’s Convention on Cybercrime was signed to harmonize computer crime laws on the
international level. The convention is intended to outlaw computer intrusion, child pornography, commercial
copyright infringement, and online fraud.
• The treaty is a tool to fight against terrorism, attacks on computer networks, and the sexual exploitation of
children over the Internet. Both European and non-European countries are signatories of the treaty, such as the
United States, Canada, Japan, and South Africa.
© Taylor & Francis 2016
Political Risk
Political risk cannot be eliminated, but it can, in some cases, be reduced or managed. The political risk
management process consists of three stages: Identification of political risks, measurement of the risk, and
managing the risk.
• Political risk may be defined as the probability • Assessing political risk is important if the
that a set of unwanted events may occur: company has:
• "Unwanted events" are those that can impact • High ratios of international to domestic
upon a firm's performance to the extent that revenues
they threaten the firm's value.
• Significant amounts of capital invested abroad
• Firm-specific risks are directed at a particular
company (micro): for example, expropriation • Dependence on a global supply chain
of the firm's assets, kidnapping employees. • Significant concentration of assets or
• Country-specific risks are nationwide and operations in a single region or country
impact all firms in a given industry (macro): • Dependence on international growth
for example, civil unrest, currency
inconvertibility.
© Taylor & Francis 2016
Categories of Political Risk
Government Risks Instability Risks
Firm-Specific Risks Discriminatory regulations Sabotage
"Creeping" expropriation Kidnappings
Breach of contract Firm-specific boycotts
Country-Level Risks Mass nationalizations Mass labor strikes
Regulatory changes Urban rioting
Currency inconvertibility Civil wars
Adapted from Daniel Wagner (2000), "Defining 'Political Risk'", International Risk Management Institute.
www.irmi.com/IrmiCom/Export/Articles/2000/Wagner10.aspx. Retrieved March 21, 2007.
© Taylor & Francis 2016
Measuring Political Risk (1)
• The major issues that concern political risk are its measurement and management.
• Risk is determined by the exercise of political power, either by government or groups such as unions and
activists.
• The probability that political risk may occur can be measured by monitoring whether political unrest and
instability may occur and eventually threaten the firm's performance.
• Political risk assessment is done by risk management experts employed in transnational firms, banks, or
consulting firms.
• Methods for assessing political risk range from comparative techniques of rating and mapping systems to
analytical techniques such as expert systems and probability determination. There are two approaches to
measure political risk:
• (1) Qualitative, based on expert (economists, union officials, politicians, local businessmen) analysis using Delphi-type techniques,
• (2) Quantitative, which begins with the identification of quantifiable factors that affect political risk.
• Two well-known providers of political risk assessment using quantitative methods are the Economist
Intelligence Unit (the EIU model) and the Business Environment Risk Intelligence (BERI) model. The BERI
model includes a Profit Opportunity Recommendation, which is a macro risk measure, based on an average
of three ratings:
• Political Risk Index composed of ratings on political and social variables.
• Operations Risk Index, composed of political, financial, and structural (economic) variables
• R Factor (Remittance and Repatriation, a weighted index of the country's legal framework, foreign exchange, hard currency reserves,
and foreign debt.
© Taylor & Francis 2016
Political and Operating Risks: Country Risk Measures
RISK RATINGS BRAZIL RUSSIA INDIA CHINA FRANCE
Overall Assessment C D C C B
Security Risk C D C B B
Political Stability Risk B D A C B
Government Effectiveness Risk D E D D B
Legal and Regulatory Risk C D C C A
Macroeconomic Risk C C B B C
Foreign Trade and Payments Risk B C C B A
Financial Risk B D B B A
Tax Policy Risk C C E B B
Labor Market Risk C C C C B
Infrastructure Risk C C C B A
Note: E=most risky
Adapted from the Economist Intelligence Unit. http://viewswire.eiu.com/index.asp?layout=RKCountryVW3&country_id=1350000135. Retrieved October 12, 2014.
© Taylor & Francis 2016
Political Risk
Assessment
Matrix
Adapted from Alon, I, Gurumoothy,
R., Mitchell, M. and T. Steen (2006),
“Managing Micropolitical Risk: A
Cross-Sector Examination, “
Thunderbird International Business
Review, 48, 5, pp. 623-642.
© Taylor & Francis 2016
Measuring Political Risk (2)
• Each nation or region must be looked upon as a unique operating environment.
• For instance, while companies seeking to operate in the Middle East, South Asia, and certain
parts of Africa face a heightened threat of terrorism and corruption, companies seeking to
expand into the Scandinavian countries do not face a similar threat.
• Every company should adopt political risk assessment at two or three levels.
• The assessment team at the corporate headquarters can be assigned the task of creating a general
model that identifies broad macro-variables applicable for all international operations
• On the other hand, assessment teams at each international location can create sub-models that
incorporate country-specific macro- and micro-variables.
• Large multinational corporations can take it a step further by creating region-specific models as well.
© Taylor & Francis 2016
Terrorism
• Direct and indirect threats to the operations of the firm:
• Market imperfection increases transaction costs
• Creates barriers to the free flow of goods
• Generates negative perceptions of the country market to potential trading
partners and consumers
• Consequently, reduces the total volume of trade
• Three components of terrorism risk:
1. Threat to a target: it can be measured as the probability that a specific target
is attacked in a specific way during a specified period
2. Target’s vulnerability to the threat: it can be measured as the probability that
damage occurs, given a threat.
3. Consequences of successful attack, which are the magnitude and type of
damage resulting, given a successful terrorist attack. Risk is a function of all
three components: threat, vulnerability, and consequences.
© Taylor & Francis 2016
Top Ten High Risk Countries
RANK PRS # SACE # EIU
1 Somalia 1 Somalia 1 Zimbabwe
2 Congo, D.R. 2 Iraq 2 Chad
3 Iraq 3 Afghanistan 3 Congo, D.R.
4 Sudan 4 Congo, D.R. 4 Cambodia
5 Cote d'Ivoire 5 Zimbabwe 4 Sudan
6 Haiti 6 Korea, North 6 Iraq
7 Guinea 7 Sudan 7 Cote d'Ivoire
8 Zimbabwe 8 Myanmar 7 Haiti
9 Nigeria 9 Uzbekistan 7 Pakistan
10 Myanmar 10 Liberia 7 Zambia
10 Pakistan 11 Eritrea 7 Afghanistan
PRS = Political Risk Services;
SACE = Servizi Assicurativi per il Commercio Estero;
EIU = Economist Intelligence Unit
© Taylor & Francis 2016
Managing Political Risk
• While political risk cannot be eliminated, it can, in some cases, be reduced:
• Insurance against some political risks is offered by both governmental and private
agencies
• Share ownership with host country nationals
• Participating in community projects such as promoting social welfare and rural
development projects
• Entering markets via non-equity methods such as licensing and franchising reduce
the financial risk of operating in high political risk countries.
• Local sourcing of components and hiring resident managers as much as possible
who can create goodwill toward the company rather than employing expatriates.
• In short, it may be possible to do business in countries where at first glance political
risk seems to be excessive. However, careful use of appropriate tools for the
identification, measurement, and management of political risk can result in the
selection of markets that otherwise might be overlooked.
© Taylor & Francis 2016
Risk Management Strategies
JOINT BUSINESS VENTURES Partner with local company or individual who understand the local
(Equity Sharing) environment.
LICENSING A non-equity contract to manage production.
ADAPTATION Adjustments required to lessen the harmful impact of unwanted events.
FLEXIBLE SUPPLY CHAIN Diversifying supply chains to respond to disruptions.
LOCALIZATION Modification of the subsidiary's name, brands, to suit local tastes and to
appear as a local rather than a foreign firm.
DEPENDENCY Keeping the host nation dependent on the subsidiary by controlling
distribution, assigning some key positions to host managers.
LOBBYING AND PROMINENT ALLIANCES Legitimate influencing of government policy through trade associations
or professional lobbyists.
COMMUNITY INITIATIVES Contributing to local social endeavors such as education and health.
INSURANCE Policies covering risks of expropriation, political violence, etc.
© Taylor & Francis 2016
Discussion Questions
1. How can intellectual property rights be protected in China?
2. Select four EU countries. Explain how the advertising of alcoholic beverages is
regulated.
3. Explain some of the pitfalls faced by a multinational manufacturer when trying to
have its products conform to a universal standard.
4. You are responsible for risk management in your firm. How would you go about
forecasting the political risk for investment in emerging markets? How can a SME
assess and manage political risk?
© Taylor & Francis 2016
