GLOBAL PROTECTINSIM -POLITICAL AND LEGAL SYSTEMS-Notes- Business Management, Study notes of Business Administration

Download GLOBAL PROTECTINSIM -POLITICAL AND LEGAL SYSTEMS-Notes- Business Management and more Study notes Business Administration in PDF only on Docsity! POLITICAL AND LEGAL SYSTEMS The global environment of business continues to pose new challenges for managers. Today businesses are pursuing a variety of international business activities (not just exporting and direct investment) in order to achieve a complex set of motives. The global marketplace is becoming increasingly crowded by a constant flow of new entrants from new countries. Managers are busily forming international partnerships in search of synergistic alliances in procurement, distribution, marketing, and technology. T he se d yna mic e le me nt s o f t he g lo ba l mar ket p lace ar e co mpe lling f ir ms t o r et hink t he ir o r ga nizat io na l st r uct ur es, bu s ine s s pr o cesse s, a nd mar k et po s it io ning. T he mo r e a ler t ma nage me nt s t ur n to mar ket r es ear c h a nd int e llige nce fo r st a ying a br ea st o f cust o mer and pr o duct mar ket s. Ma ny ar e s ear c hing f o r best pr act ice s, a n d t he y be nc hmar k aga inst t he ver y be st in t he ir in dust r y g lo ba lly. I n a n er a o f su bst ant ia l o ut so ur cing a nd co lla bo r at io ns, ma nager s ar e a lso s har pe ning t he ir int er o r ganizat io na l par t ner ing s k ills. There are several stages through which a firm may go as it becomes increasingly involved across borders. A purely domestic firm focuses only on its home market, has no current ambitions of expanding abroad, and does not perceive any significant competitive threat from abroad. Such a firm may eventually get some orders from abroad, which is seen either as an irritation (for small orders, there may be a great deal of effort and cost involved in obtaining relatively modest revenue) or as "icing on the cake." As the firm begins to export more, it enters the export stage, where little effort is made to market the product abroad, although an increasing number of foreign orders are filled. Such firms which are involved in international marketing are suggested to various types of legal and political systems which pose many opportunities as well as threats. All firms entering international business start with just exporting and later on reach to the international stage. As certain country markets begin to appear especially attractive with more foreign orders originating there, the firm may go into countries on an ad hoc basis—that is, each country may be entered sequentially, but with relatively little learning and marketing efforts being shared across countries. In the multi- national stage, some efficiency is pursued by standardizing across a region (e.g., Central America, West Africa, or Northern Europe). Finally, in the global stage, the focus centers on the entire World market, with decisions made optimize the product‘s position across markets —the home country is no longer the center of the product. An example of a truly global company is Coca Cola. The various political and legal systems and environment confronted by the multinational market firms has been discussed below: The Political Environment An international business entity is a guest of the host country and, therefore, the host country reserves the right of not only allowing it access but also of expropriating it. It also can influence the scale and dimensions of the operations through its policies. Political risk is thus the vulnerability of returns of a project to the political acts of a sovereign government. While the economic and financial environments are of critical importance to the MNC, the political environment and the prevailing legal systems also influence most international business activities. Almost from the beginning of multinational business operations, MNCs have been regarded as threats to national sovereignty, and while the zenith of this outlook probably occurred in the 1970s, it is still alive and flourishing in the 1990s. Naturally, different ideologies will be reflected in different economic systems, with the People‘s Republic of China and the USA being at opposite ends of the spectrum. While the number of centrally planned The immediate association of political risk is with developing countries in terms of nationalization and expropriation of assets, but it is also present in industrialized countries, as the following examples may demonstrate: F 0 B 7 The election of conservative Prime Minister Thatcher in the United Kingdom in 1979. F 0 B 7 The election of socialist President Mitterrand in France in 1981. F 0 B 7 The accession of Portugal and Spain to the EC in 1986. F 0 B 7 The accession of Portugal and Spain to the EC in 1986. F 0 B 7 The reunification of Germany in 1990. F 0 B 7 The great mass of political decisions by member states upon which the whole concept of the Single European Market (1992) rests. Perhaps the most difficult political risk assessment the MNC must make is when it contemplates its initial entry into a particular country. Daniels and Radebaugh (1986) suggest a simple check-list for the primary appraisal: 1. What is the political structure of the country? 2. Under what type of economic system does the country operate? 3. Is my industry in the public or private sector? 4. If it is in the public sector, does the government also allow private competition in that sector? 5. If it is in the private sector, is there any tendency to move it toward public ownership? 6. Does the government view foreign capital as being in competition or in partnership with public or local private enterprises? 7. In what ways does the government control the nature and extent of private enterprise? 8. How much of a contribution is the private sector expected to make in helping the government formulate overall economic objectives? If the situation is especially complex, or if the new foreign investment is very large, most MNCs would move beyond such a simple assessment and call on the assistance of specialist political risk assessment consultants, most of whom have had extensive previous experience working with or within government or international bodies like the UN or the World Bank. Assessing Political Risks It has been observed that internationalmanagers when entering new markets recognize the existence of political risk but refuse to give it the required significance. This is more so because although the existence of political risk has been widely accepted, the definition of political risk does not explain whether such risk is country specific or firm specific. Here the discussion entails assessment of both country specific risk and firm specific risk. Country Specific Risks Country specific risk refers to risk arising out of doing business with a specific country. F 0 B 7 What is the current political system in existence? F 0 B 7 What is the stability and permanency of government policy? F 0 B 7 What are the encouragements the business firms will receive as a result of political activity? Firm Specific Risk Although business units undertake country risk assessment they have realized that political risk does not manifest itself equally among various firms. This is the major assumption underlying country risk assessment. It has been observed that sometimes firms in the same country receive differential treatment. regulations show a bewildering variety from one country to another, with no individual country's standards being acceptable in another. F 0 B 7 Product liability: this has been a boom area for the legal profession in many industrialized countries in the last ten years, though this is hardly surprising when the long list of product manufacturing problems is considered. Again, the pharmaceutical industry could be quoted as a case in point, although the most spectacularly disastrous example must be the Bhopal incident. In 1984, an explosion occurred at Union Carbide's plant at Bhopal in India, as a result of which poisonous emissions killed over 2,000 people. As a result; not only were Indian regulations tightened up, but also there was a wave of environmental legislation throughout the industrialized world. F 0 B 7 Monopoly and restrictive trades practices: this type of legislation is common throughout the developed world. US regulations are regarded as tightest, followed by Germany, However, unlike other areas of legislation, there is a move towards uniformity here, with the EC taking the lead in the approach to the Single European Market. Home-Country Legislation This includes all legislation passed in a particular country to regulate the activities of MNCs based in that country while operating overseas. The best-known example is the US Foreign Corrupt Practices Act, which was passed following a number of highly publicized bribery cases in the 1970s involving American multinationals. It forbids US firms giving bribes or any other questionable payments anywhere in the world as these are regarded as 'ethically repugnant' (President Carter's words) and bad for the international reputation of American business. International Marketing and the Legal Systems Every business operates within the jurisdiction of legal system. The legal system is an inevitable component of the environment within which a business operates. The commercial law existing within any country influences not only each and every variable of marketing mix but also the environment within which a business operates. This has a direct bearing on the management of global marketing plan. Thus for example, the advertising laws in West Germany are so strict that it is best advised for the international marketer to get himself good legal counsel before framing his advertising strategy in West Germany. In fact all over Europe, there exists different set of laws preventing promotion of products through price discounting. These laws are based on the premise that such practices differentiate buyers. This example reflects the influence on only one of the variable of marketing mix. Laws may exist for other variables of marketing mix viz. product, price, and place. Thus monitoring the legal environment is also essential. International business came out with an article indicating areas where The field of international law is wide and cannot be dealt with fully here. However, certain issues like entering into contract, the method at seeking recourse, protecting property rights, tax laws, and foreign exchange are some of the major issues facing the international marketer. These issues can be illustrated as under: The decision to market product across the national frontier imply that agreements have to be entered into with parties on the other side. For this legal counsels advice on contract act as it exists in the foreign land is absolutely essential. Not only must the marketer be aware of laws regarding contract, and termination of contracts but he must also be aware of the legal formalities that he is subjecting himself to. Thus as per Coelso Doctrine a person desirous of doing business in Latin America must agree to subject himself as a national. This has important bearings for an executive doing business with Latin American countries. The entry decision may be influenced to a great extent by such laws as they exist in that country. A marketer must also be aware of and monitor laws regarding product quality, packaging, price control, retail price maintenance, after sales service. If it he wishes to continue his marketing efforts in that country. SUMMARY Although a firm regards it as an economic entity it is drawn and affected by political developments. It therefore becomes necessary for the firm, particularly an international firm to monitor not only the domestic but also the international political environment. Since the international business firm operates in a host country and as a guest of that country, it becomes particularly important for it to monitor the developments taking place in the domestic political environment of the host country. The three main concerns facing any international business entity are political stability, the government‘s orientation and nationalism. While political stability is necessary for a business entity, it is particularly important for an international marketing firm because they reflect the success or failure of any business concern, for political stability is often associated with stability of economic policies. The other concerns facing international business are orientation of the government and nationalism. The orientation of the government can very often reveal whether international marketing can survive in that country or not. Nationalism also influences this variable because the business entity has to exist and operate within that country. These concerns, through their impact, give rise to political risks. The legal systems in different countries of he world are by no means identical. This difference between code law and common law puts the international marketing firms into various types of legal complications. A marketer must also be aware of and monitor laws regarding product quality, packaging, price control, and retail price maintenance and after sales service etc.