Chapter Openers A Chapter Outline provides students an at-a-glance overview of chapter topics, while Chapter Learning Objectives summarize the chapter’s goals and focus. Each chapter is introduced with a Global Perspective, a real-life example of company experiences that illustrates significant issues discussed in the chapter. Companies featured in the Global Perspective vignettes range from exporters to global enterprises. PART ONE Global Perspective GLOBAL COMMERCE CAUSES PEACE 1 Chapter PART TWO 6 Chapter The Political Environment: A CRITICAL CONCERN Global Perspective WORLD TRADE GOES BANANAS CHAPTER LEARNING OBJECTIVES What you should learn from Chapter 6: LO1 What the sover`eignty of nations means and how it can affect the stability of government policies LO2 How different governmental types, political parties, nationalism, targeted fear/animosity, and trade disputes can affect the environment for marketing in foreign countries LO3 The political risks of global business and the factors that affect stability LO4 The importance of the political system to international marketing and its effect on foreign investments LO5 The impact of political and social activists, violence, and terrorism on international business LO6 How to assess and reduce the effect of political vulnerability LO7 How and why governments encourage foreign investment CHAPTER OUTLINE Global Perspective: World Trade Goes Bananas The Sovereignty of Nations Stability of Government Policies Forms of Government Political Parties Nationalism Targeted Fear and/or Animosity Trade Disputes Political Risks of Global Business Confiscation, Expropriation, and Domestication Economic Risks Political Sanctions Political and Social Activists and Nongovernmental Organizations Violence, Terrorism, and War Cyberterrorism and Cybercrime Assessing Political Vulnerability Politically Sensitive Products and Issues Forecasting Political Risk Lessening Political Vulnerability Joint Ventures Expanding the Investment Base Licensing/Franchising Planned Domestication Political Bargaining Political Payoffs Government Encouragement Rather than bruising Chiquita Bananas, the wrath of politics instead hammered Prosciutto di Parma ham from Italy, hand-bags from France, and bath oils and soaps from Germany. These and a host of other imported products from Europe were all slapped with a 100 percent import tariff as retali-ation by the U.S. government against EU banana- import rules that favored Caribbean bananas over Latin American bananas. Keep in mind that no bananas are exported from the United States, yet the United States has been engaged in a trade war over the past 7 years that has cost numerous small businesses on both sides of the Atlantic millions of dollars. But how can this be, you ask? Politics, that’s how! One small business, Reha Enterprises, for example, sells bath oil, soaps, and other supplies imported from Germany. The tariff on its most popular product, an herbal foam bath, was raised from 5 percent to 100 percent. The customs bill for 6 months spiraled to $37,783 from just $1,851—a 1,941 percent tax increase. For a small business whose gross sales are less than $1 million annually, it was crippling. When the owner of Reha heard of the impending “banana war,” he called everyone—his congressperson, his senator, the United States Trade Representative (USTR). When he described his plight to the USTR, an official there expressed amazement. “They were surprised I was still importing,” because they thought the tariff would cut off the industry entirely. That was their intention, which of course would have meant killing Reha Enterprises as well. In effect, he was told it was his fault that he got caught up in the trade war. He should have attended the hearings in Washington, just like Gillette and Mattel, and maybe his products would have been dropped from the targeted list, just as theirs were. Scores of European products, from clothing to stoves to glass Christmas ornaments, dolls, and ballpoint pens, that were originally targeted for the retaliatory tariffs escaped the tariff. Aggressive lobbying by large corpora-tions, trade groups, and members of Congress got most of the threatened imported products off the list. The USTR had published a list of the targeted imports in the Federal Reg-ister, inviting affected companies to testify. Unfortunately, the Federal Register was not on Reha’s owner’s reading list. In that case, he was told, he should have hired a lobbyist in Washington to keep him briefed. Good advice—but it doesn’t make much sense to a company that grosses less than $1 million a year. Other advice received from an official of the USTR included the off-the-record suggestion that he might want to change the customs number on the invoice so it would appear that he was importing goods not subject to the tariff, a decision that could, if he were caught, result in a hefty fine or jail. Smaller businesses in Europe faced similar problems as their export business dried up because of the tariffs. How did this banana war start? The European Union imposed a quota and tariffs that favored imports from former colonies in the Caribbean and Africa, distributed by European firms, over Latin American bananas distributed by U.S. firms. Chiquita Brands International and Dole Food Company, contending that the EU’s “illegal trade barriers” were costing $520 million annually in lost sales to Europe, asked the U.S. government for help. The government agreed that unfair trade barriers were damaging their business, and 100 percent tariffs on selected European imports were lev-ied. Coincidentally, Chiquita Brands’ annual political cam-paign contributions increased from barely over $40,000 in 1991 to $1.3 million in 1998. A settlement was finally reached that involved high tar-iffs on Latin America bananas and quotas (with no tariffs) on bananas from Europe’s former colonies. But the bruising over bananas continued, and not in a straightforward way! In 2007 the issue shifted to banana bending. That is, bananas from Latin America tend to be long and straight, while those from the non-tariff countries are short and bent. Because the latter are not preferred by the shippers or retailers (the bend-ier ones don’t stack as neatly and economically), the bananas from the former colonies were still not preferred. And new regulations were adopted by the European Commission that mandated that bananas must be free from “abnormal curvature of the fingers.” So the bendy banana producers threatened to renege on the whole agreement. Circa 2007 everyone involved found this prospect very unappealing. The tale does have a happy ending though. In 2009, after marathon meetings among all parties in Geneva, the 16-year banana split was finally healed: The European Union cut import tariffs on bananas grown in Latin America by U.S. firms. Most recently, there’s also an epilogue. Chiquita has now become a Brazilian brand. The U.S. corporation was purchased recently by two South American investors for $742 million. Sources: “U.S. Sets Import Tariffs in Latest Salvo in Ongoing Battle over Banana Trade,” Minneapolis Star Tribune, March 4, 1999; Timothy Dove, “Hit by a $200,000 Bill from the Blue,” Time, February 7, 2000, p. 54; Geneva Agreement on Trade in Bananas, signed May 31, 2010, http://www.ec.europa.eu.; “Chiquita’s Top Banana? Two Brazilians Win Bid,” Associated Press, October 27, 2014, online. PART OPENER PHOTO The Scope and Challenge of International Marketing Global commerce thrives during peacetime. The economic boom in North America during the late 1990s was in large part due to the end of the Cold War and the opening of the formerly communist countries to the world trading system. However, we should also understand the important role that trade and international marketing play in producing peace. Boeing Company, one of America’s largest exporters, is perhaps the most prominent example. Although many would argue that Boeing’s military sales (aircraft and missiles) do not exactly promote peace, over most of the company’s his-tory, that business has constituted only about 20 –25 percent of the company’s commercial activity. The company still counts customers in more than 150 countries, and its 169,000 employees work in 65 countries.1 The new 787 Dreamliner uses parts from around the world, including Australia, France, India, Italy, Japan, Russia, and Sweden. Its more than 12,000 commercial jets in service worldwide carry about 1 billion travelers per year. Its NASA Services division is the lead con-tractor in the construction and operation of the 16-country International Space Station, first manned by an American and two Russians in the fall of 2000. The Space and Intelligence Systems Division also produces and launches communica-tions satellites affecting people in every country. All the activity associated with the development, produc-tion, and marketing of commercial aircraft and space vehi-cles requires millions of people from around the world to work together. Moreover, no company does more2 to enable people from all countries to meet face-to-face for both rec-reation and commerce. All this interaction yields not just the mutual gain associated with business relationships but also personal relationships and mutual understanding. The latter are the foundation of global peace and prosperity. Another group of companies that promotes global dia-logue and therefore peace is the mobile phone industry. By 2015, the number of mobile phone subscribers exceeded 7.0 billion. Samsung (South Korea), Nokia (Finland), and Apple (United States) are the market leaders. Individuals and small companies also make a differ-ence— perhaps a subtler one than large multinational companies, but one just as important in the aggregate. Our favorite example is Daniel Lubetzky’s company, PeaceWorks. Mr. Lubetzky used a fellowship at Stanford Law School to study how to foster joint ventures bet ween Arabs and Israelis. Then, following his own advice, he cre-ated a company that combined basil pesto from Israel with other raw materials and glass jars supplied by an Arab part-ner to produce the first product in a line he called Moshe & Ali’s Gourmet Foods. The company now sells four dif-ferent product lines in 15,000 stores in the United States and has its headquarters on Park Avenue in New York, as well as business operations in Israel, Egypt, Indone-sia, Turkey, and Sri Lanka. Again, beyond the measurable commercial benefits of cooperation between the involved Arabs, Israelis, and others is the longer-lasting and more fundamental appreciation for one another’s circumstances and character. International marketing is hard work. Making sales calls is no vacation, even in Paris, especially when you’ve been there 10 times before. But international marketing is impor-tant work. It can enrich you, your family, your company, and your country. And ultimately, when international marketing is done well, by large companies or small, the needs and wants of customers in other lands are well understood, and prosperity and peace are promoted along the way.3 Sources: For more details, see http://boeing.com; http://airbus.com; http://peaceworks.com; Heidi Vogt, “Making Change: Mobile Pay in Africa,” The Wall Street Journal, January 2, 2015, p. B6. Cell phone sales data are available at http://www.mobithinking.com. CHAPTER LEARNING OBJECTIVES What you should learn from Chapter 1: LO1 The benefits of international markets LO2 The changing face of U.S. business LO3 The scope of the international marketing task LO4 The importance of the self-reference criterion (SRC) in international marketing LO5 The increasing importance of global awareness LO6 The progression of becoming a global marketer CHAPTER OUTLINE Global Perspective: Global Commerce Causes Peace The Internationalization of U.S. Business International Marketing Defined The International Marketing Task Marketing Decision Factors Aspects of the Domestic Environment Aspects of the Foreign Environment Environmental Adaptation Needed The Self-Reference Criterion and Ethnocentrism: Major Obstacles Developing a Global Awareness Stages of International Marketing Involvement No Direct Foreign Marketing Infrequent Foreign Marketing Regular Foreign Marketing International Marketing Global Marketing The Orientation of International Marketing 1Boeing’s 2014 Annual Report (http://www.boeing.com). 2The European commercial aircraft manufacturer Airbus is beginning to catch up, employing 63,000 people around the world (see Airbus’s 2014 Annual Report, http://www.airbus.com). 3In response to criticisms of globalization catalyzed by the riots in Seattle in 1999, a growing literature argues for trade as a fundamental cause of peace. For a variety of such arguments, see Jagdish Bhabwati, In Defense of Globalization (Oxford: Oxford University Press, 2004); Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus, and Giroux, 2005); Clifford J. Schultz III, Timothy J. Burkink, Bruno Grbac, and Natasa Renko, “When Policies and Marketing Systems Explode: An Assessment of Food Marketing in the War-Ravaged Balkans and Implications for Recovery, Sustainable Peace, and Prosperity,” Journal of Public Policy & Marketing 24, no. 1 (2005), pp. 24–37; William Hernandez Requejo and John L. Graham, Global Negotiation: The New Rules (New York: Palgrave Macmillan, 2008), Chapter 13; Steven Pinker, The Better Angels of Our Nature: Why Violence Has Declined (New York: Viking, 2011; Hernando de Soto, “The Capitalist Cure for Terrorism,” Wall Street Journal, October 10, 2014, online.)
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