Incoterms 2010 and International Business - 101
International Business: Environments and Operations, 15e (Daniels et al.)
CHAPTER THREE: THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS
CHAPTER THREE: THE POLITICAL AND LEGAL ENVIRONMENTS FACING BUSINESS
OPENING CASE: CHINA: COMPLICATED RISKS, BIG OPPORTUNITIES [See Map 3.1.]
During its thirty years of communist rule, China prohibited foreign investment and restricted foreign trade. Then, China enacted the Law on Joint Ventures using Chinese and Foreign Investment in 1978. China’s subsequent transformation has been fueled by a landslide of foreign investments made in response to the country’s market potential, market performance, improved infrastructure, enormous resources, and strategic position. Frustrating this process, however, have been the politics of China’s elaborate bureaucracy, as well as its ill-defined legal system and pervasive corruption. Historically China has relied upon “the rule of man” and the belief that legal rights are derived from the power of the individual. Upon joining the WTO, China agreed to continue to reform its business environment and to move toward transparent, rules-based, enforcement-oriented standards. But the business reality is far from the WTO obligations specifically in the continued controversy over the protection of intellectual property. Coming full circle, today’s fully-owned Chinese enterprises are themselves becoming global investors, both by acquiring foreign firms and investing in foreign lands.
Questions
3.1 Identify three compelling economic reasons to invest in China. Then identify three compelling reasons not to do so. Recommend a criterion one could use to trade off the opportunities of operating in China versus the risk of doing so.
Economic reasons for investing in China include the following: (1) While China’s GDP growth is slowing, it remains among the top performers in the world. In response to this growth, exports to China have increased, (2) China’s rapid economic growth has led to a booming consumer market for goods and services, (3) China’s well educated population creates a pool of productive labor, at rates that are often less than those in many other countries.
Compelling reasons not to invest in China can include: (1) China’s current legal and regulatory system can be inconsistent and arbitrary, (2) Lack of effective protection of intellectual property rights can be a particularly damaging issue to American companies, (3) China relies heavily on export growth, and for this reason the government still seeks to protect local firms, and especially state-owned enterprises from imports, while encouraging exports.
Growing global trade in counterfeit goods is a threat to America’s economy, the competitiveness of companies, and livelihood of their workers. To combat that problem, the STRATEGY FOR TARGETING ORGANIZED PIRACY (STOP) was developed to stop the trade in these goods around the world, and help businesses secure and enforce their rights overseas. (LO: 1, Learning Outcome: Discuss the philosophies and practices of the legal system, AACSB: Dynamics of the Global Economy)
3.2 What sort of operating safeguards would you advise a company to adopt to better manage the risks of China’s legal environment?
Success in China requires a strong understanding of your business capabilities, development of long-term relationships, and in-depth knowledge of this market. Before making a decision to enter China, companies should consider their own resources, past experiences, and willingness to commit a significant amount of time assessing and cultivating opportunities. Successful entry strategies need to be targeted, require well-qualified partners, measures to minimize non-payment risks, and a program for protection of intellectual property rights. (LO: 4, Learning Outcome: Explain political risk management, AACSB: Analytical Skills)
CLOSING CASE: It’s a Knockoff World
Software technology is plagued by the problem of digital piracy—the illegal copying and/or distribution of software for personal or business use. An explosive issue, it increasingly cuts to the perception, protection, and enforcement of intellectual property rights. Presently software piracy ranges from a single individual’s making an unauthorized copy of a software product for use, sale, or free distribution to a company’s mismanagement of its software license. Principal types of piracy include: end-user piracy, pre-installed software, Internet piracy, counterfeiting, and online auction piracy. Countries where piracy rates were the highest in 2008 include Georgia, Bangladesh, Armenia, and Zimbabwe. Countries where piracy rates were the lowest in 2008 include the United States (20%), Japan (21%), Luxembourg (21%) and New Zealand (22%). The pervasiveness and tenacity of software piracy in the face of an ever-expanding set of intellectual property rights laws, policies, and treaties raises profound questions for the software industry in particular and intellectual property rights in general. The case ends with a legitimate question questioning the inevitability of piracy.
Questions
- Collectivism and individualism, democracy and totalitarianism, rule of law and rule of man: What do these concepts say about the intellectual property rights of software and the legitimacy of its protection?
Theoretical positions can be used to take a position on the issue of protection but the reality still remains that no region of the world is exempt from piracy and in 2009 it continued to rise. The pervasiveness and tenacity of software piracy shines a light on the most basic issues such as the accepted legitimacy of piracy. Even with increased criminalization and transnational institutions focusing on piracy, it has not slowed. (LO: 4, Learning Outcome: To discuss the philosophy and practices of the legal system, AACSB: Dynamics of the Global Economy)
- What is the relationship among governments, transnational institutions, organizations, and MNEs fighting piracy? Do they share similar or different motivations?
Technically, the standards of software piracy are unequivocal. Thus, parties have been hopeful that collective political arrangements and legal actions by companies, associations, governments, and institutions would lead to a decline in global software piracy. However, coordinated anti-piracy initiatives such as high-profile legal proceedings against companies using illegal software, increased government cooperation in providing legal protection for intellectual property, and the criminalization of software piracy have proven to be largely ineffective. Even efforts at the transnational level to get nations to sign treaties and to require them to protect and enforce intellectual property rights according to global, not local, standards have not yielded the desired results. Unfortunately, the ease with which software can be duplicated, sold, and distributed continues to baffle the industry. (LO: 6, Learning Outcome: To explain legal issues facing international companies, AACSB: Analytical Skills)
- Can MNEs stop piracy without government help? Why would they prefer greater government assistance? Why would they oppose it?
If the software industry could successfully develop technical and business measures to thwart counterfeiters, government intervention would be unnecessary. Thus far, the industry’s best efforts have been unsuccessful. Given the value of the products involved, the “global” appeal of pirated software, and the relative ease with which counterfeiting occurs on a worldwide basis, the temptation for counterfeiters to continue their activities is irresistible. In spite of the need for assistance and cooperation from all stakeholders, the software industry could presumably object to greater government regulation; while innovation moves at lightning speed, regulation tends to lag well behind technological developments and market realities. (LO: 6, Learning Outcome: To explain legal issues facing international companies, AACSB: Analytical Skills)
- Do you think consumers in wealthier countries versus those in poorer countries justify piracy with similar relationships? Why?
Consumers in high theft countries tend to share a collectivist mindset; they see property as being common to all and existing for the benefit of all—often they do not understand the basic concept of intellectual property rights. As with many other products, they want to acquire them at the lowest possible cost. On the other hand, consumers in lower theft countries tend to share an individualist mindset; the concept of intellectual property rights is well understood and long established within their countries and cultures. IPRs are seen to be a necessity for economic development and growth; royalties and profits are seen as the just fruits of creativity and investment. (LO: 5, Learning Outcome: To describe trends in contemporary legal systems, AACSB: Ethical Understanding and Reasoning Ability)
- Can you envision a scenario where companies and consumers of IP develop a relationship that eliminates the profitability of piracy?
A great example that can serve as a basis for discussion is the evolution of music piracy. Napster and other sites were eventually shut down for making illegal piracy of music available. Consumers will find what they want and use it often even if it is illegal. The industry solved the problem with alternative technology that benefited both the companies and the consumers, for example iTunes. Consumers are willing to pay the 99 cents for the benefit and availability of a song. So when the conditions are right for both the companies and the consumers, solutions that protect IBRs can be agreed upon. (LO: 5, Learning Outcome: To describe trends in contemporary legal systems, AACSB: Reflective Thinking Skills)
3-8 Put yourself in the place of a poor individual in a poor country struggling to improve the quality of your life. What thoughts might shape how you interpret the legality of IPRs?
An argument can be made that workers in these countries are in need of opportunities. However, because of the nature of many products, workers in many of these countries are also susceptible to exploitation. Student responses to these questions can vary and be a subject of discussion. (LO: 5, Learning Outcome: To describe trends in contemporary legal systems, AACSB: Ethical Understanding and Reasoning Ability)
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