Political, Legal, and Regulatory Environment (chapter 5)

1. Political, Legal, and
Regulatory
Environment

2. WHAT IS POLITICAL ?
 The activities associated with the governance of a
country or area, especially the debate between parties
having power.

3. WHAT IS LEGAL?
 Relating to the law/ Appointed or required by the
law.

4. WHAT IS REGULATORY ENVIRONMENT?
 Consists of a variety of governmental and
nongovernmental agencies that enforce laws or set
guidelines for conducting business.

5. ELEMENT OF POLITICAL
ENVIRONMENT.
 Political Culture
 Nation- states and Sovereignty.
 Political Risk.
 Taxes
 Seizure of Assets.

6. POLITICAL CULTURE
 Set of attitudes, beliefs and sentiments.
 Give order and meaning to political process and
underlying assumptions and rules that govern
behavior in the political system.
 Encompasses both the political ideals and the
operating norms of a polity.

7. NATIONS-STATES AND
SOVEREIGNTY
 Sovereignty: Supreme and independent political
authority
 Classified economies of individual Nations:
* Industrialized
* Newly Industrialized
*Develop
 Elements of market and non-market systems
*Political power
*Global Phenomenon
 Privatization
*Ex: Mexico

8. POLITICAL RISK
 Risk of change in political environment or in
government policy that would adversely affect
a company’s ability to operate effectively
and profitably.
 When perceived political risk is high, a country
will have a difficult time attracting foreign
direct investment.
 Some governments offer political risk
insurance.
• Some examples of political risk include:
– War
– Tax discrimination
– Exchange controls, tariff barriers

9. TAXES
 Government taxation policies
 High taxation can lead to black market growth and
cross-border shopping
 High taxes in China leads to smuggling of oil, cigarettes, PCs,
film
 In Great Britain, cars returning from France bring on average
80 bottles of wine back
 Corporate taxation
 Companies attempt to limit tax liability by shifting
location of income

10. SEIZURE OF ASSETS
 Expropriation–governmental action to dispossess a foreign
company or investor
 Compensation should be provided in a “prompt,
effective, and adequate manner”
Confiscation occurs when no
compensation is provided
 Nationalization–a government takes control of some or all of the
enterprises in an entire industry
 Acceptable according to international law if:
 satisfies public purpose
 includes compensation
• Creeping expropriation–limits economic activities of
foreign firms
• May include:
– Limits on repatriation of profits, dividends, or royalties
– Technical assistance fees
– Increased local content laws

11. WHAT IS INTERNATIONAL LAW ?
 Rules and principles that nation-states consider binding
upon themselves.
 Pertains to property, trade, immigration and other areas
 Disputes between nations are issues of public international
law
 World Court or International Court of Justice ICJ (The
Hague Netherland)
- Settle dispute between other nations
- Offers advice on legal issues submitted by various
international agencies

12. TYPES OF LEGAL SYSTEMS FOUND IN
DIFFERENT PARTS OF THE WORLD.
 1) Common Law:
 2) Civil Law
 3) Islamic Law

13. COMMON LAW
 Disputes are decided by reliance on the authority
of past judicial decisions
 Based on “concept precedent” called stare decisis
 Companies are legally incorporated by state
authority
 Asia countries that use common law India,
Pakistan, Malaysia, Singapore, and Hong Kong

14. CIVIL LAW
 Legal system reflects the structural concepts and
principles of the Roman Empire
 Companies are formed by contract between two or
more parties who are fully liable for the actions of
the company
 Japan, Korea, Thailand, Indochina, Taiwan,
Indonesia, and China are civil-law jurisdictions

15. ISLAMIC LAW
 Legal system in many Middle Eastern
countries
 Sharia–a comprehensive code governing
Muslim conduct in all areas of life, including
business
 Koran–Holy Book; like code law
 Hadith–like common law
Based on life, sayings, and practices of
Muhammad
Identifies forbidden practices “haram

16. HOW TO AVOID LEGAL ISSUES
• Look and ask for legal expert
• A sharp and proactive marketers can prevent conflicts from
arising in the first place
• Prevent conflicts:
- Establish jurisdiction
- Protect intellectual property
- Protect licenses and trade secrets
- Avoid bribery
- Advertising & promotion

17. JURISDICTION
• Refers to a court’s authority to rule on particular types of issues arising
outside of a nation’s borders or to exercise power over individuals or
entities from different countries.
• Employees of foreign companies should understand the extent to
which they are subject to the jurisdiction of host-country courts.

18. INTELLECTUAL PROPERTY
• Intellectual property must be registered in
each country where business is conducted.
– Patent–gives an inventor exclusive right to make, use,
and sell an invention for a specified period of time
– Trademark–distinctive mark, motto, device, or emblem
used to distinguish it from competing products
– Copyright–establishes ownership of a written, recorded,
performed, or filmed creative work
“Counterfeiting, imitation, piracy is the act of breaking the
laws”

19. PROTECTING INTELLECTUAL
PROPERTY
• World Intellectual Property Organization
– Governed by Madrid Agreement and Madrid Protocol
– Specialized unit of UN: In (Geneva, Switzerland)
– Misson : “Promote and protect intellectual property worldwide”
-Easy-to-understand booklets can be printed directly from its
website
• International Convention for the Protection of Industrial Property
– Also known as the Paris Convention
– Honored by almost 100 countries
– Facilitates multi-country patent registration, ensures that once a
company files, it has a “right of priority” in other countries for one year
from that date
• Patent Cooperation Treaty
– Over 100 countries cooperate with patent applications
• European Patent Convention
– the EU and Switzerland

20. ANTITRUST
 To combat restrictive business practices and
encourages competition
 U.S. Federal Trade Commission, Japan Fair Trade
commission, European Commission execute
antitrust laws
 Global competition increased incidence of price
fixing and collusion among companies

21. LICENSING
• Contractual agreement
• Licensor

22. TRADE SECRETS
 Trade secrets are confidential information or
knowledge that has commercial value and is not in
the public domain and for which steps have been
taken to keep it secret

23. BRIBERY AND CORRUPTION
 Bribery is the corrupt business practice of demanding or
offering some type of consideration—typically a cash
payment—when negotiating a cross-border deal.
 The Foreign Corrupt Practices Act (FCPA) is a legacy of the
Watergate scandal during Richard Nixon’s presidency. In the
course of his investigation, the Watergate special prosecutor
discovered that more than 300 American companies had
made undisclosed payments to foreign officials totaling
hundreds of millions of dollars. The act was unanimously
passed by Congress and signed into law by President Jimmy
Carter on December 17, 1977.
 After U.S. companies complained that their activities abroad
were severely curtailed, President Reagan signed the OTCA in
1988.

24. CONFLICT RESOLUTION, DISPUTE
SETTLEMENT AND LITIGATION
 What is Dispute Settlement ?
- Disagreement
- An official agreement intended to resolve a
dispute or conflict
 What is Litigation?
The process of taking legal action

25. CONFLICT RESOLUTION,
DISPUTE SETTLEMENT,
LIGATION
•During 1995, Cuban government abruptly cancel contract with
Endesa
•Endesa choose International Arbitration Tribunal in Paris than
Cuban court to seeking damages of 12 million
•This show alternative dispute resolution (ADR) methods allows
parties to settle international commercial dispute without resorting
to the court system.
•Formal Arbitration:
-Settling international business dispute outside courtroom
•Arbitration
-Negotiation process that the two parties have, by prior agreement,
committed themselves to using

26. REGULATORY ENVIRONMENT
 Consists of a variety of governmental and
nongovernmental agencies that enforce
laws or set guidelines for conducting
business.
 Its address a wide range of marketing
issues, including price control, valuation of
imports and exports, trade practices,
labeling, food and drug regulations,
employment conditions, collective
bargaining, advertising content and
competitive practices

27. CONTINUE..
 Each nation’s regulations reflect and
reinforce its brand of capitalism
 For example : Its more easier to open a new
business in the U.S than in Germany. This is
because Germans value social consensus
above risk taking, but its harder to hire
people

28. REGIONAL ECONOMIC ORGANIZATIONS:
THE EUROPEAN UNION
 The Treaty of Rome established the
European Community which became the EU
 It created the Council of Ministers which is
the main decision-making body along with
the European Commission, the European
Parliament, and the European Court of
Justice
 The European Council guides integration-
related issues, i.e, monetary union