CHAPTER TWO

POLITICAL ENVIRONMENT

 Environmental forces influence organization marketing. Some of these forces are external to the

firm, while others come from within. There isn't much that management can do about controlling

the external forces, but it generally can control the internal ones.

 These uncontrollable external forces that influence an organization's marketing activities

includes: Political and legal forces, Social and cultural forces, Economic condition,

Demography, Competition, and Technology

 The political environment that a firm operating in international market face is a complex one

because they must cope with the politics of more than one nation. The complexity forces to

consider that environment as composed of three different types of political environment: foreign,

domestic and international.

TYPES OF POLITICS

1. Foreign politics
 Foreign politics are the politics of host country. This part of international business

environment can range from being favorable and friendly to being hostile and dangerous.

The host country’s political and economic circumstances determine the kind of political

climate a company faces.

2. Domestic politics

 Domestic politics that exists in the company’s home country, also known as the parent or

source county, At first glance, it would seem that domestic politics should pose no threat and

that a company should have minimal problems at home. This is often not the case. Although a

company’s major political problems usually derive form political developments at home.
3. International politics

 International politics are the interaction of the overall environmental factors of two or more

countries. The complexity of the political environment increases significantly when the

interest of the company, the host country, and the home country do not coincide.

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Government Types
a) Political System
 One way to classify governments is to consider them as either parliamentary (open) or

absolutist (closed). Parliamentary governments consult with citizens from time to time for the

purpose of learning about opinions and preferences. Government policies are thus intended to

reflect the desire of the majority of the society. Most industrialized nations and all democratic

nations can be classified as parliamentary.

 In an absolutist, system, the ruling regime dictates government policy without considering

citizens’ needs or opinions. Frequently, absolutist’s countries are newly formed nations or

those undergoing some kind of political transition. Many countries political systems do not

fall neatly into one of these two categories. Some monarchies and dictatorship (E.g. Saudi

Arabia and South Korea) have parliamentary elections.

b) Number of Parties
 Another way to classify governments is by number of political parties. This classification

results in four types to governments: two – party, multi-party, single party, and dominant

one party.
i) Two party
 In a two party system, there are typically two strong parties that take turns controlling the

government, although other parties are allowed. The USA & UK are prime examples. The two

parties generally have different philosophies, resulting in a change in government policy when

one party succeeds the other. I.e. in USA, the Republican Party is often viewed as

representing business interests, whereas the Democratic Party is often viewed as representing

labor interests, as well as the poor and disaffected.

ii) Multiparty
 In a multiparty system there are several political parties, none of which is strong enough to

gain control of the government. Even though some parties may be large, their elected

representatives fall short of a majority. A government must then be formed through coalitions

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 between the various parties, each of which wants to protect its own interests.

 Countries operating with this system include Germany, France and Israel.
iii) Single party
 In a single party system, there may be several parties, but one party is so dominant that there

is little opportunity for others to elect representatives to govern the country.

 Egypt has operated under single – party rule for more than three decades. Countries often use

this form of government in the early stages of the development of a line parliamentary system.
iv) Dominated one party

 In a dominated one party system, the dominant party does not allow any opposition, resulting

in no alternative for the people. In contrast, a single party system does allow some opposition

party.

 The former Soviet Union, Cuba, and Libya are good examples of dominated one party

system. Such a system may easily transform itself into a dictatorship. The party, to maintain

its power, is prepared to use force or any necessary means to eliminate the introduction and

growth of other parties.

c) Economic Systems

 Economic systems provide another basis for classification of governments. These systems

serve to explain whether businesses are privately owned or government owned, or whether

there is a combination of private and government ownership. Basically these systems can be

identified: Communism, Socialism and Capitalism.

i) Communism

 A movement toward communism is accompanied by an increase in government interference

and more control of factors of production. A movement toward capitalism is accompanied

by an increase in private ownership.

 Communist theory holds that all resources should be owned and shared by all the people (I.

e. not by profit seeking enterprises) for the benefit of the society. In practice, it is the

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 government that controls all productive resources and industries, and as a result the

government determines jobs, production, price, education, and just about anything else.

 E.g. China, Soviet Union, Eastern Europe, Vietnam, North / Korea:

ii) Socialism
 The degree of government control that occurs under Socialism is somewhat less than under

communism.

 A socialist government owns and operates the basic, major industries but leaves small

business to private ownership. Socialism is a matter of degree, and not all socialist countries

are the same.

 I.e. a socialist country such as Poland leans toward communism, as evidenced by its rigid

control over prices and distribution. France’s socialist system, in comparison, is much closer

to capitalism than it is to communism.

iii) Capitalism
 At the opposite end of the continuum from communism is Capitalism.

 The philosophy of capitalism provides for a free – market system that allows business

competition and freedom of choice for both consumers and companies.

 It is a market – oriented system in which individuals, motivated by private gain, are allowed

to produce goods or services for public consumption. Under competitive conditions. Product

price is determined by demand and supply. This system serves the needs of society by

encouraging decentralized decision- making, risk taking, and innovation. The results include

product variety, product quality, efficiency, and relatively lower price.

 Successful economic reform requires several critical policy principles, including establishing

private property rights and privatization of public enterprises, promoting domestic

competition, and reducing and reforming the role of government.

Political Risks

 According to Charles De Gaulle, there are a number of political risks with which marketers

must contend. Hazards based on a host government’s action include confiscation,

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 expropriation, nationalization and domestication.

a. Confiscation: Is a process of a government taking ownership of a property without

compensation. An example of confiscation is the Chinese government’s seizure of

American property after the Chinese communists took power in 1949. The US congress

did not approve the normalization of economic relations with China until a satisfactory

claim settlement had been negotiated.

b. Expropriation: Differs somewhat from confiscation in that there is some compensation,

though not necessarily just compensation. More often than not, a company whose

property is being expropriated agrees to sell its operations – not by choice but rather

because of some explicit or implied coercion.

c. Nationalization: After property has been confiscated or expropriated it can be either

nationalized or domesticated. Nationalization involves government ownership, and it is

the government that operates the business being taken over. Burma’s foreign trade, for

example, is completely nationalized. Generally, this action affects a whole industry rather

than just a single company.

d. Domestication: In the case of domestication, foreign companies renounce control and

ownership, either completely or partially to the nationals. The result is that private

entities are allowed to operate the confiscated or expropriated property

Another classification system of political risk is the one used by Root: based on this classification,

four sets of political risk can be identified: general instability risk, ownership / control risk, operation

risk and transfer risk.

a. General instability risk: Is related to the uncertainty about the future feasibility of a host

country’s political system. The Iranian revolution that overthrew the shah is an example of

the kind of risk.

b. Ownership / control risk: Is related to the possibility that a host government might take

actions (e.g. expropriation) to restrict an investor’s ownership and control of a subsidiary

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 in that host country.

c. Operation risk: Proceeds from the uncertainty that a host government might constrain the

investor’s business operations in all areas, including production, marketing and finance.

d. Transfer risk: Applies to any future acts by a host government that might constrain the

ability of a subsidiary to transfer payments, capital or profit out of the host country back

to the parent firm.

Indicators of Political Risks

Potential source of political complications include social unrest, the attitudes of nationals, and the

policies of the host government.

a. Social unrest

 Social disorder is caused by such underlying conditions as economic hardship, internal

dissension and insurgency and ideological, religious, racial and cultural differences. Lebanon

has experienced conflict among the Christians, Muslims and other religious groups.

 A company may not be directly involved in local disputes, but its business can still be severely

disrupted by such conflicts.

b. Attitudes of nationals

 The national’s attitude toward foreign enterprises and citizens can be quite unfriendly.

Nationals are often concerned with foreigners’ intentions in regard to exploitation and

colonialism, and these concerns are often linked to concerns over foreign governments’

actions that may be seen as improper.

 Such attitudes may arise out of local socialist or nationalist philosophies which may be in

conflict with the policy of the company’s home country government.

c. Policies of the host government

 Government policy formulation can affect business operations either internally or externally.

The effect is internal when the policy regulates the firm’s operations with in the home

country. The effect is external when the policy regulates the firm’s activity in another country.

a company in one country may be prohibited from doing business with other countries that are

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 viewed as hostile.

Measures to Curb Political Risks

 Political risk though impossible to eliminate, can at the very least be minimized. There are

several measures that MNCs can implement in order to discourage a host country from taking

control of MNCs assets. Some strategies used by MNCs:

a) Stimulation of the local economy

 One defensive investment strategy calls for a company to link its business activities with the

host country’s national economic interest. A local economy can be stimulated in a number of

different ways. One strategy may involve the company’s purchasing local products and raw

materials for its production and operations. By assisting local firms, it can develop local allies

who can provide variable political contacts. A modification of this strategy would be to use

subcontractors.

 Sometimes local sourcing is compulsory. Governments may require products to contain

locally manufactured components because local content improves the economy in two ways:

o It stimulates demand for domestic components and

o It saves the necessities of foreign exchange transaction. Further investment in local

production facilities by the company will please the government that much more.
b) Employment of nationals

 Frequently foreigners make the simple but costly mistake of assuming that citizens of least

developing countries are poor by choice. It serves no useful purpose for a company to assume

the local people are lazy, unintelligent, unmotivated or uneducated. Such an attitude may

become a self – fulfilling prophecy. Thus the hiring of local workers should go beyond the

filling of labor positions. I.e. united Brand’s policy is to hire only locals as managers
c) Sharing ownership
 Instead of keeping complete ownership for itself, a company should try to share ownership

with others, especially with local companies. One method is to convert from a private company

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 to a public one or form a foreign company to local one (Joint venture).

 In some overseas business ventures, it is not always necessary to have local firms as partners.

Sometimes having co owners’ form other nations can work almost as well. Having multiple

nationalities for international business projects not only reduces exposures, it also makes it

difficult for the host government to take over the business venture without attending a number

of nations all at once.

 A wise strategy may be for the company to retain the marketing or technical side of the

business while allowing heavy local ownership in the physical assets and capital investment

portion of the investment.

d) Being civic minded

 To shed the undesirable perception, multinationals should combine investment projects with

civic projects. Corporations rarely undertake civic projects out of total generosity, but such

projects make economic sense in the long run. It is highly desirable to provide basic

assistance because many civic entities exist in areas with slight or non-existent municipal

infrastructures that would normally provide these facilities

e) Political neutrality
 For the best long – term interest of the company, it is not wise to become involved in political

disputes among local groups or between countries. A company should clearly but discreetly

state that it is not in the political business and that its primary concerns are economic in nature.
f) Behind the scene lobby
 Companies may not only have to lobby in their own country, but they also may have to lobby

in the host country. Companies may want to do the lobbying themselves, or they may let their

government do it on their behalf. This government can be requested to apply pressure against

foreign government.
g) Observation of political mood and reduction of exposure

 Marketers should be sensitive to changes in political mood. A contingency plan should be in

readiness when the political climate turns hostile, when measures are necessary to reduce

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 exposure.

LEGAL ENVIRONMENT
 Government set rules and regulation to normalize the business activities while
safeguarding the societal well-being. Many of the rules set by the government may
have an adverse effect on the business.
 The legal forces on marketing can be the following:-
 Monetary and fiscal policies- Government spending, tax legislation etc.
 Social legislation and regulation-Anti pollution law.
 Government relationship with industries- Tariffs and import quotas etc.
LEGAL SYSTEM
To understand and appreciate the varying legal philosophies among countries, it is useful
to distinguish between the two major legal systems: common law and statue law.
1. A common law system
 A common law system is a legal system that relies heavily on guides and
agreements. Not so much as statues guide Judges Decisions as by previous court
decisions and interpretations of what certain laws are or should be. Countries with
such a system include the United States, Great Britain, Canada, India and other
British colonies.
2. A statue law system
 Countries employing a statue law system, also known as code or civil law, included most

continental European countries and Japan.

 Most countries over 70 are guided by a statue law legal system.

 As the name implies, the main rules of the law are embodied in legislative codes. Every

circumstance is clearly spelled at to indicate what is legal and what is not.

 There is also a strict and literal interpretation of the law under this system. Therefore, the

only major distinction between the systems is the freedom of the judge in interpreting laws.

 A common law country, the judge’s ability to interpret laws in a personal way gives the

judges a great deal of power to apply the laws as it fits the situation. In contrast, a judge in a

civil law country has a lesser role in using personal judgment to create or interpret laws

because the judge must strictly follow the “letter of the law”.

MULTIPLICITY OF THE LEGAL SYSTEMS

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Much like the political environment discussed, there are a multiplicity of legal environments:

domestic, foreign, and international.

1) Domestic legal environment

 In the domestic environment, a businessperson must abide by the laws of the home country. Such
laws can affect both imports and exports. Various countries design their legal system on which
one system differs with others. For e.g. in the case of the united states, items that are ‘restricted’
but not ‘prohibited’ include automobiles, cultural treasures, more than $5000 of cash, firearms,
wildlife and fish. Counterfeit products and illegal drugs cannot be imported.
2) Foreign legal environment
 Once a product crosses a national border, it becomes subject to both an entirely different set of
laws and a new enforcement systems. Example: in China, all joint ventures with foreigners
must be audited by the Chinese CPA. This simple requirement is difficult to satisfy because
there are only about 1000 registered accountants in the country..
3) International legal environment
 In many cases, agreements between nations must be secured before marketers can enter a

particular market. The airline business provides a good illustration of such agreements. Treaties

among nations govern international air routes.

THE LAW AND THE MARKETING MIX

Government regulations are designed to serve societal interest by preserving business competition on the one

hand and protecting consumers on the other. Such regulations not only increase a company’s cost of doing

business, but also affect its marketing strategies. Any one of the 4p’s of marketing can be affected as

illustrated.

i.Product
 There are many products that cannot be legally imported into most countries. Examples include
fake money, illicit drugs, pornographic materials, etc.
 It is usually also illegal to import live animals and fresh fruits unless accompanied by the required
certificates. Furthermore, many products have to be modified to conform to local laws before
these products are allowed to cross the border.
ii. Place
 In various countries the restriction in regards to distribution channels differs. As a result it
affects the firms marketing activities. I.e. in the USA a manufacturer has a number of
distribution channels from which to choose as long as competition is not stifled in the process.

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 In most other countries, the manufacture does not have such freedom.
iii.Promotion
 There are virtually no limits on how much an advertiser can spend for promotion in the USA,

but free spending is usually regarded as improper elsewhere.

 Taking the view that advertising is not necessary for doing business, many countries have

direct tax on advertising billings, agencies or media.

 Some governments use advertising tax to discourage advertising so that demand and inflation

can be cured. Other government use advertising restrictions as a non-tariff barrier to foreign

exports.

iv. Price
 The general policy for using price control is to protect consumers’ interests or to control

inflation. Generally the company has no choice but to obey the wage and price control

imposed by the government.

 Despite the need for price control form time to time, many countries also recognize the

important role of price competitions. As such, certain practices that can interfere with market

prices are prohibited.

INTELLECTUAL PROPERTY
Intellectual property is a general term that describes inventions or other discoveries that have been

registered with government authorities for the sale or use by their owner. Such terms as patent,

trademark, copyright or trade secret fall in to the category of intellectual property.

1. Trade mark
 A trademark is a symbol, work or thing used to identify a product made or marketed by a
particular firm. It becomes a registered trademark when the mark is accepted for registration by
the trademark office.
2. Copy right
 A copy right which is the responsibility of the copyright office in the library of congress, offers
protection against unauthorized copying by others to an author or artist for his / her literary,
musical, dramatic and artistic works. A copyright protects the form of expression rather than the
subject matter.
3. Patent

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 A patent protects an invention of a scientific or technical nature, it is a statutory grant from the
government (the patent office) to an inventor in exchange for public disclosure giving the patent
holder exclusive right to the functional and design inventions patented and excluding other firm
using those inventions for a certain period of time.
4. Trade secret
 The term trade secret refers to know how (i.e. manufacturing methods, formulas, plans and so on)

that is kept secret with in a particular business. This knowhow, generally unknown in the industry,

may offer the firm competitive advantages.

UNFAIR COMPETITION
The government role in the free market economy is to regulate unfair competition by preserving of
the intellectual properties. Some of the unfair competition takes the following forms:
1. Infringement
Infringement occurs when there is commercial use (i.e. recopying or imitating) without owner's
agreement, with the intent of confusing or deceiving the public.
2. Counterfeiting
Counterfeiting is the practice of unauthorized and illegal copying of a product. In essence, it involves
infringement on a patent or trademark or both. There is several level of counterfeiting.
1. The true counterfeit: product, which uses the name of the original and looks like it.
2. A look: a l i k e or knock off, which duplicates the organize design but does not use
its name.
3. Reproduction or replica, a close but not exact copy and
4. Imitation or associative counterfeit, which is a cheap but poor copy of the original.
3. Gray market
 A gray market exists when a manufacture ends up with unintended channel of distribution that performs
activities similar to the planned channel hence the term parallel distribution.

 Through this extra channel, gray market goods move, internationally as well as domestically. In an

international context, a gray market product is one imported by an unauthorized party.

4. Bribery
 Bribery (corruption) is both unethical and illegal.
 A closer look, however, reveals that bribery is not really that straight forward an issue.
 There are many questions about what bribery is, how it is used, and why it is used.
 The ethical and legal problems associated with bribery can also be quiet complex.

Prepared By Mr. Thomas Tadesse (MA)