CHAPTER 6

POLITICS AND LAW

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Copyright 2011 John Wiley & Sons

Chapter 6

1. Understand the importance of the

Learning Objectives

political and legal environments in both the home and host countries to the international business executive through legislation and regulations expose firms to international risks

2. Learn how governments affect business 3. See how the political actions of countries 4. Examine the differing laws regulating

international trade found in different countries

5. Understand how international political

relations, agreements, and treaties can affect international business

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Introduction
Politics and laws play a critical role in

international business

Unexpected political and legal influences can adversely affect business strategies

This chapter outlines three areas of the external

business environment:
HomeCountry perspective
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Host-Country perspective
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Bi-lateral & Multilateral Relations

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The Home-Country Perspective

Laws and regulations have a major impact on

international business even when not intended:

Minimum wage laws affect international competitiveness Domestic safety regulations affect pricing policies of firms

Some laws and regulations are designed to help

firms in their international efforts Nations attempt extraterritoriality Setting policy outside territorial limits

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The Home-Country Perspective

Sanctions

Methods of Controlling International Business:

Embargoes

Export Controls

Behavior Regulation

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Sanctions and Embargoes

Sanctions
Specific coercive trade

Embargoes
Government actions

measures Purpose Adversarial or political rather than economic Examples

Cancellation of trade financing Prohibition of high-tech trade

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that usually prohibit trade entirely Purpose Often used in times of war Example: U.S. trade embargo with Cuba

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Use of Sanctions
After World War I, the League of Nations set a

precedent for the legal justification of economic sanctions Use of sanctions was incorporated by the United Nations, with greater emphasis on the enforcement process Flaws of the UN enforcement of sanctions:

Not enforceable Do not produce the desired result

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UN Sanctions Against Iran

In June 2010, the United Nations Security Council voted to impose a fourth round of UN sanctions against Iran, while demanding that the country suspend its uranium enrichment activities. The Council has imposed several rounds of sanctions on Iran since 2006, including a ban on all items which could contribute to the countrys enrichment of uranium. The latest text resolution 1929 builds on previous sanctions by deciding that Iran shall not acquire an interest in any commercial activity in another State involving uranium mining, production or use of nuclear materials and technology.

Source: United Nations News Centre -- http://www.un.org/apps/news/story.asp?NewsID=34970&Cr=iran&Cr1= Chapter 6

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Export Control
To deny or delay the acquisition of strategically

important goods by adversaries

Controlled by export licenses issued by

Department of Commerce compared with the critical commodities list Most items in international business are done under NLR (No License Required) conditions

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New Environment for Export Control

Terrorist attacks have highlighted the importance of

export controls Third World is area of principle focus Loosening of mutual bonds among allied nations Changes due to increased foreign availability of high technology products

Increased pace of their development and dissemination Miniaturization of technology makes control more difficult

Disagreements over what constitutes military-use items

Implementation is more difficult with the growth of

economic unions (EU and NAFTA)

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U.S. Export Control

The Bureau of Industry and Security (BIS) is responsible for implementing and enforcing the Export Administration Regulations (EAR), which regulate the export and re-export of most commercial items. A relatively small percentage of total U.S. exports and re-exports require a license from BIS. License requirements are dependent upon an item's technical characteristics, the destination, the end-user, and the end-use. Commerce Control List Categories include nuclear materials and equipment, microorganisms and toxins, sensors and lasers, navigation and avionics, and propulsion systems.

Source: Bureau of Industry and Security, U.S. Department of Commerce http://www.bis.doc.gov/licensing/exportingbasics.htm Chapter 6

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Regulating International Business Behavior

Countries regulate international behavior within

moral and ethical boundaries considered appropriate by that country

What is considered appropriate may vary from one country to another

Methods of regulation include:

Laws against Bribery and Corruption

Boycotts

Anti-trust Laws

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Regulating International Business Behavior

Foreign Corrupt Practices Act passed in the U.S.

in 1977 makes it a crime for U.S. executives to bribe a foreign official in order to obtain business The 1988 Trade Act clarifies the applicability of the Foreign Corrupt Practices legislation General Standards of Behavior and Ethics Not the same in every country

Environmental protection Global warming Pollution Moral behavior

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Focus on Politics: Marketing Incentive or Anticompetitive Violation?

In 2009, the European Commission fined Intel a record 1.06 billion for unfair business practices that violate EU antitrust laws. In its action, the EU has demonstrated that it w ill actively enforce its antitrust law s against dominant players in the technology market. Antitrust rulings are on the rise in other parts of the w orld as well. Some practices may be legal in some countries and not in others, so firms need to learn to work with these differences.
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The Host-Country Perspective

Political Action and Risk

Areas of consideration:

Influencing of Politics and Laws

Economic Risk

Legal Differences & Restraints

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Political Action and Risk

Political risk depends on the stability of the country Ownership risk Exposes property and life Operating risk Interference with ongoing operations Transfer risk Attempts to transfer funds between countries Coup dtat Results in drastic changes in

government Transfer of ownership may occur through:

Expropriation Confiscation

Domestication

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Expropriation in Venezuela
Doing business in Venezuela has often proved risky for international businesses. In January 2010, the countrys trade minister Eduardo Saman announced that the government began to expropriate six Hipermercado Exito stores. According to Venezuelan President Hugo Chavez, the FrenchColombian owned retailer broke the law by raising prices. Chavez threatened that he would seize businesses that raised prices following the countrys first currency devaluation since 2005. According to Saman, the government plans to convert the retailers into socialist mega-stores administered by the state and Exito workers.

Source: Bloomberg.com -- http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahIaUhzBMt2A Chapter 6

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Focus on Politics: Pirates: Not just in the Caribbean

Off the coast of East Africa, piracy has grown at an alarming rate. In many cases, the cargo and crew are held hostage until a ransom payment is made. Research evidence indicates that the key approach to reducing piracy is to constantly challenge the pirates. The cost for the pirates must go up and their rewards must go down in order to reduce piracy in the East African region.

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Economic Risk
Some nations impose controls on the movement of capital into and out of the country:
Exchange Controls Limit the flow of foreign currency out of a country Controls multinational corporations and their capital Control the prices of imported products or services
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Tax Policy

Price Controls
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Managing the Risk

Managers can take actions to reduce the risk of

confiscation, expropriation, domestication, and other government interference :

Demonstrate concern with host countrys society and become a part of the country, not an exploiter of it Closely monitor political developments Purchase insurance to cover losses

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Legal Differences and Restraints

The way laws are used varies by country and culture Theocracy Law according to God, scripture,

prophetic utterances and practices, and scholarly interpretations Common law Based on tradition, precedent, and custom more than written statues and codes (England and U.S.) Code law Based on comprehensive set of written statutes (most developed countries)
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The Influencing of Politics and Laws

Options for influencing politics and laws: Option 1: Ignore prevailing rules and expect to get away with it (high-risk) Option 2: Provide input to trade negotiators and expect any problem areas to be resolved in multilateral negations Option 3: Develop coalitions an constituencies that can facilitate change Categories of firm-level political behavior: Lobbying Influencing decisions of policymakers Public/government relations Industry alliances and associations Political incentives
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International Relations and Laws

Policies and events occurring among countries affect international business
International Politics Determined by bilateral political relations and by multilateral agreements Although no enforceable body of law exists, certain treaties and agreements are respected by a number of countries.
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International Laws

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International Law
World Trade Organization (WTO) defines internationally acceptable

economic practices World Intellectual Property Organization (WIPO) promotes the protection of intellectual property The Patent Cooperation Treaty (PCT) provides procedures for filing one international patent application European Patent Office examines applications, issues national patents Codes and guidelines for international business developed by the UN and the Organization for Economic Cooperation & Development Bilateral Treaties of Friendship, Commerce, and Navigation (FCN) define the rights of firms doing business in the host country

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International Conflict
In the event of conflict, firms are restricted by both

home and host country laws

Conflicts can be resolved through:

Jurisdiction clause Following laws of the country of agreement Following laws of the country in which the contract is fulfilled Arbitration Litigation as a last resort

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