Political and Regulatory Environment

Political and Regulatory Environment

Political stability, trade blocs, tariffs, and expropriation are risks that should be evaluated prior to marketing in foreign countries.

Political and Regulatory Environment

The nationalistic spirit that encourages self-reliance in many nations has led them to engage in practices that have been very damaging to other countries’ marketing organizations.

For example, foreign governments can intervene in marketing programs in the following ways:

• Contracts for the supply and delivery of goods and services
• The registration and enforcement of trademarks, brand names, and labeling
• Patents
• Marketing communications
• Pricing
• Product safety, acceptability, and environmental issues

Political Stability

Business activity tends to grow and thrive when a nation is politically stable. When a nation is politically unstable, multinational firms can still conduct business profitably. Most firms prefer to engage in the export business rather than invest considerable sums of money in investments in foreign subsidiaries. Inventories will be low and currency will be converted rapidly. The result is that consumers in the foreign nation pay high prices, get less satisfactory products, and have fewer jobs.

Trading Blocs and Agreements

US companies make one-third of their revenues from products marketed abroad, in places such as Asia and Latin America. The North American Free Trade Agreement (NAFTA) further boosts export sales by enabling companies to sell goods at lower prices because of reduced tariffs.

NAFTA Member Countries: Events, such as the signing of the North American Free Trade Agreement (NAFTA), highlight the differences among special interest groups and the competition that takes place between them to capture policymakers’ attention.

Regional trading blocs represent a group of nations that join together and formally agree to reduce trade barriers among themselves. The Association of Southeast Asian Nations (ASEAN) is an example of a regional trading block. This agreement allows for the free exchange of trade, service, labor, and capital across the 10 independent member nations. In addition, ASEAN promotes the regional integration of transportation and energy infrastructure.

One of the potentially interesting results of trade agreements like ASEAN or NAFTA is that many products previously restricted by dumping laws, which are laws designed to keep out foreign products, would be allowed for sale.

Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area, customs union or customs market. Free trade areas and customs unions eliminate trade barriers between member countries while maintaining trade barriers with non-member countries. Customs unions maintain common tariffs and rates for non-member countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.

The creation of the single European market in 1992 was expected to change the way marketing is done worldwide. It meant the birth of a market that was larger than the United States, and the introduction of European Currency Units (Euros) in place of the individual currencies of member nations. Experience in multilingual marketing would help non-European companies succeed in this gigantic market. With new technologies such as multilingual processing programs, it would be possible to target potential customers anywhere in Europe, in any language, with the same marketing campaign.

Progress toward European unification has been slow, so many doubt that complete unification will ever be achieved. However, on January 1, 1999, 11 of the 15 member nations took a significant step toward unification by adopting the Euro as the common currency. These 11 nations represented 290 million people and a USD 6.5 trillion market. Still, with 14 different languages and distinct national customs, it is unlikely that the European Union (EU) will ever become the “United States of Europe.”

Tariffs

Most nations encourage free trade by inviting firms to invest and to conduct business there, while encouraging domestic firms to engage in overseas business. These nations do not usually try to strictly regulate imports or discriminate against foreign-based firms. There are, however, some governments that openly oppose free trade. For example, many Communist nations desire self-sufficiency, so they may restrict trade with non-Communist nations.

The most common form of restriction of trade is the tariff, which is a tax placed on imported goods. Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business tradition in a foreign country may support tariffs to discourage entry by other US competitors.

Expropriation

All multinational firms face the risk of expropriation. That is, the foreign government takes ownership of plants, sometimes without compensating the owners. However, in many expropriations there have been payment, and it is often equitable. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable, and which can change the laws they enforce at any point in time to meet their needs.