UNIT 5

Unit 5 Political and Legal Environment
Structure
5.1 Analysing the Political and Legal Environment
5.2 The Political System
5.2.1 Political System Stability
5.2.2 Form of Government
5.2.2.1 Two-party System
5.2.2.2 Multiparty System
5.2.2.3 Single Party System
5.2.2.4 Dominated One-party System
5.2.3 Classification of Government based on Economic Systems
5.2.3.1 Communism
5.2.3.2 Socialism
5.2.3.3 Capitalism
5.3 Political Risks
5.3.1 Confiscation
5.3.2 Expropriation
5.3.3 Nationalisation
5.3.4 Domestication
5.3.5 Creeping Expropriation
5.4 Privatisation
5.5 Indicators of Political Instability
5.5.1 Social Unrest
5.5.2 Attitude of Nationals
5.5.3 Policies of the Host Government

5.6 Management of Political Risk
5.6.1 Measures to Minimise Political Risk
5.6.1.1 Stimulation of the Local Economy
5.6.1.2 Employment of Nationals
5.6.1.3 Sharing Ownership
5.6.1.4 Political Neutrality
5.6.1.5 Behind-the-Scenes Hobby
5.6.1.6 Observation of Political Mood and Reduction of Exposure
5.6.2 Political Insurance
5.6.2.1 Private Insurance
5.6.2.2 Government Insurance
5.7 Legal Environment
5.7.1 Legal Systems
5.7.1.1 Common Law System
5.7.1.2 Statute Law System
5.8 Bribery
5.8.1 Reasons for Bribery
5.9 Branch Versus Subsidiary
5.9.1 Reasons why a Subsidiary is a Prefered Structure
5.9.1.1 Recruitment of Management
5.9.1.2 Quick access to a market
5.9.1.3 Flexibility
5.9.1.4 Tax Benefits
5.9.1.5 Limited Liability
5.10 Intellectual Property
5.10.1 Patent
5.10.2 Trade Mark
5.10.3 Copyright
5.10.4 Trade Secret

5.11 Counterfeiting
5.12 Grey Market

Learning objectives:
After studying this unit you will be able to
 Discuss the importance of the stability of the political and legal environment
to a firm.
 Explain the effects of a governments political objectives on an international
marketers business.
 Classification of Governments based on number of parties and economic
systems.
 Understand the meaning of political risks and its importance to international
marketers.
 Identify various sources of political instabilities.
 Understand the measurement of political risks and various measures to
reduce political risks.
 Understand legal system and the importance of legal system to international
marketer.
 Understand the meaning and importance of bribery for international
marketers.
 Understand how intellectual property could be protected in various countrymarkets.
 Understand the meaning and dangers of grey market for an international
marketer.

5.1 Analysing the Political and Legal Environment
The political systems of the countries served or being considered by an
international marketer are an important part of the firm’s macro-environment.
Most companies are not able to influence their political and legal environment

directly but their opportunities for successful business activities largely depend
on its structure and content. A marketer serving international markets or planning
to do so, therefore has to assess carefully the political and legal environments of
the current or potential markets to lead to successful managerial consequences.
Such consequences may be resource investments, adaptations of competitive
strategy, policies and actions, or even divestments.

Fig. 5.1 shows various steps in assessing the political and legal environments.
The first step in assessing the political and legal environments of countrymarkets
is to determine which parts or characteristics of the political or legal
environment are relevant to the product-market(s) of the company.
Having determined the relevant factors of influence from the political and legal
environment, the marketer may analyse their current state in the country-markets
under consideration. To fully assess the potential impact of the relevant factors
on the success of the firm, their potential states of development at the planning
horizon will need to be anticipated.
An evaluation of the impact of the current state and future potential development
of all relevant characteristics of the political and legal environment in the countrymarkets
under consideration will allow the international marketer to decide how
to manage those environments. That is, the company’s management will decide
how to react to the expected development. For example, it may decide to
withdraw from a market, to search for a local business partner to improve its
situation, or to invest heavily in order to profit from a promising development.

5.2 The Political System
The political system is characterised by the form of government, which may take
various forms between the two extremes of democracy and dictatorship. But for
doing business successfully it is more important for the international marketers to
know what political parties and interest groups exist in a specific country-market,
what their goals are and how much influence they can exert on the local
government.


5.2.1 Political System Stability
For the international marketer the most important factor of the political
environment is the stability of the served markets political systems. The extent of political stability can have a major impact on the economic development of a
country or region because it influences the perceived risk of potential investors.

5.2.2 Form of Government
A knowledge of the form of Governments can take, can be useful in appraising
the political climate. On 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 segment of the society.
At the other end of the spectrum are absolutist Governments, which include
monarchies and dictatorships. In an absolutist system, the ruling regime dictates
Government policy without considering citizens needs or opinions.
Many countries political systems do not fall neatly into one of these categories.
Some monarchies and dictatorships (e.g. Saudi Arabia and North Korea) have
Parliamentary elections. The former Soviet Union had elections and mandatory
voting but was not classified as Parliamentary because the ruling party never
allowed on alternative on the ballot.
Another way to classify governments is by number of political parties. This
classification results in four types of Governments:
a) two-party system
b) multiparty
c) single party and
d) dominated-one party.

5.2.2.1 Two-Party System
In a two party system, there are typically two strong parties that takes turns
controlling the Government, although other parties are allowed. The United
States and the United Kingdom are prime examples. The two parties generally have different philosophies, resulting in a change in Government policy when one
party succeeds the other. In United States, the Republican party is often viewed
as representing business interests, where as the Democratic party is often
viewed as representing labour interests as well as the poor and disaffected.

5.2.2.2 Multiparty System
In a multiparty system, there are several political parties, none of which is strong
enough to gain control of the Government. Eventhough some parties may be
large, their elected representatives fall short of a majority. A Government must
then be formed through coalitions between the various parties, each of which
wants to protect its own interest. The present Indian government is a good
example of such coalition Government.

5.2.2.3 Single-Party System
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.

5.2.2.4 Dominated One-Party System
In such a system, the dominant party does not allow any opposition, resulting in
no alternative for the people. The former Soviet Union, Cuba and Libya are good
examples of dominated one-party systems.

5.2.3 Classification of Governments based on 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. Based on Government control of business activity, the
various economic systems can be classified into three categories:

a) Communism
b) Socialism and
c) Capitalism

5.2.3.1 Communism
Communist theory holds that all resources should be owned and shared by all
the people for the benefit of the society. In practice, it is the Government that
controls all productive resources and industries and as a result the Government
determines jobs, production, price, education and just about anything else. The
emphasis is on human welfare. Because profit making is not the Government’s
main motive, there is a lack of incentive for workers and managers to improve
productivity.
The term centrally planned economies is often used to refer to the former Soviet
Union, Eastern European countries, China, Vietnam and North Korea. These
economies tend to have the following characteristics: a Communist Philosophy,
an active government role in economic planning, a non market economy, a weak
economy, large foreign debt, and rigid and bureaucratic political/economic
systems. For example, South Korea's GDP of $ 289 billion dwarfs North Korea's
GDP of $ 20 billion. North Korea's exports of $ 935 million are no match for South
Korea’s exports of $ 81 billion. It should be noted that North Korea is much better
endowed than South Korea in terms of natural resources.

5.2.3.2 Socialism
In case of Socialism, the degree of Government control is somewhat less than
under Communism. A Socialist Government owns and operates the basic, major
industries but leaves small businesses to private ownership. A Socialist country
such as Poland used to learn towards 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.


5.2.3.3 Capitalism
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 decentralised decision making, risk
taking and innovation. The results include product variety, product quality,
efficiency, and relatively lower prices. United States and Japan are good
examples of capitalistic countries. Japan when compared to United States, is
relatively less capitalistic. Although practically all Japanese businesses are
privately owned, industries are very closely supervised by state. Japan has
various Government agencies that vigorously advice companies what to produce,
buy, sell and so on. Japan’s aim is to allocate scarce resources in such a way as
to efficiently produce those products that have the best potential for the country
overall.
No nation operates under pure Communism or pure capitalism and most
countries find it necessary to make some compromise between the two
extremes. China allows farmers to sell directly to consumers in local market. The
United State is also not a perfect model of capitalism. It has support prices for
many dairy and farm products and has imposed price control from time to time.
Furthermore, the U.S. economy is greatly affected by the Federal Reserve
Boards control of the money supply and interest rates haizzes faire, the purest
form of capitalism, is rare.
Perhaps the only place that bears a great resemblance to an ideal free-trade
market is Hong Kong. It does not even have a Central Bank, and the legal tender
notes are issued by private commercial banks.


5.3 Political Risks
There are a number of political risks with which marketers must contend.
Hazards based on a host Governments actions include:
a) Confiscation
b) Expropriation
c) Nationalisation
d) Domestication and
e) Creeping Expropriation

5.3.1 Confiscation
Confiscation is the process of a Governments taking ownership of a property
without compensation. An example of confiscation is the Chinese Governments
seizure of American property after the Chinese Communists took power in 1949.

5.3.2 Expropriation
It differs somewhat from confiscation in that there is some compensation. More
often than not, a company whose property is being expropriated agrees to sell its
operation not by choice but rather because of some explicit or implied coercion.
Example of expropriation could be Coca-Cola, when it was asked to wind up its
operations from India in 1970s.

5.3.3 Nationalisation
Nationalisation involves Government ownership, and it is the Government that
operates the business being taken over. Good example for nationalisation is the
nationalisation of private banks in India. Another example is the nationalisation of
private petrolium companies in India.

5.3.4 Domestication
In the case of domestication, foreign companies relinquish control and
ownership, either completely or partially, to the nationals. The result is that
private entities are allowed to operate the confiscated or expropriate property.


5.3.5 Creeping Expropriation
It is defined as a set of actions whose cumulative effect is to deprive investors of
their fundamental rights in the investments. Laws that affect corporate ownership,
control, profit and reinvestment (e.g. Currency inconvertibility or cancellation of
import license) can be easily enacted. Because countries can change the rules in
the middle of the game, companies must adopt adequate safeguards.

5.4. Privatisation
Both multinational and local firms should notice a trend toward privatisation and
its competitive implications among the objectives of privatisation are: promotion
of competition and efficiency, reduction of debt and subsidies, return of flight
capital, and broadening domestic equity ownership.
Countries which are likely to pursue privatisation tend to have the following
characteristics: high budget deficits, high foreign debt, and high dependence on
such international agencies as the World Bank and International Monetary Fund.
In Latin America and Asia, countries pursuing privatisation are those which have
overused state enterprises and those with the private sector growing faster than
average, making them more ready to assume tasks once assigned to state
enterprises.

5.5 Indicators of Political Instability
To assess a potential marketing environment, a company should identify and
evaluate the relevant indicators of political difficulty. Potential sources of political
complication are:
a) Social unrest
b) Attitude of nationals and
c) Policies of the host government


5.5.1 Social Unrest
Social disorder is caused by such underlying conditions as economic hardship,
internal dissension and insurgency, and ideological, religious, social and cultural
differences. Labanon has experienced conflict among the Christians, Muslims
and other religious groups. The Hindu-Muslim conflict in India continues
unabated. A company may not be directly involved in local disputes, but its
business can still be severely disrupted by such conflicts. Recent incident of
Gujarath is a good example of how industries are affected by religious clashes.

5.5.2 Attitude of Nationals
An assessment of political climate is not complete without an investigation of the
attitudes of the citizens and government of the country-market(s). The national’s
attitude toward foreign enterprises and citizens can be quite inhospitable.
Nationals are often concerned with foreigner’s intensions regarding exploitation
and colonialism.

5.5.3 Policies of the Host Government
Unlike citizens inherent hostility, a Governments attitude toward foreigners is
often relatively short-lived. The mood can change either with time or change in
leadership, and it can change for either the better or the worse. Government
policy formulation can affect business operations either internally or externally.
The effect is internal when the policy regulates the firm’s operations within the
home country. The effect is external when the policy regulates the firm’s activities
in another country.
Although an external Government policy is irrelevant to firm’s doing business
only in one country, such a policy can create complex problems for firms doing
business in countries that are in conflict with each other. For example, a dispute
over the boundary between Chile and Argentina prompted Argentina to restrict
traditional exports to Chile, including petrochemicals, pharmaceuticals vehicles
and vehicle replacement parts. The restriction disrupted the marketing plans of General Motors, Puegeot, Renault, all of which supplied Chili with automobile
parts from Argentina plants.

5.6. Management of Political Risk
To manage political risk, an international marketer can pursue a strategy of either
avoidance or insurance. Avoidance means screening out politically uncertain
countries. Insurance, in contrast, is a strategy to shift the risk to other parties.
There are other strategies that international marketers can use to safeguard their
foreign investments. They may want to come to an understanding with a foreign
Government as to their rights and responsibilities. They can increase and
maintain their bargaining power when their technical, operational and managerial
complexity requirements are not within reach of a host country’s abilities. A firm
may try to gain control of the situation through political activities, market power,
exchange of threats, vertical integration, and horizontal mergers and acquisitions.
Furthermore, it may pursue product and/or geographic diversification to gain
flexibility. Also operational flexibility can be achieved through flexible input
sourcing and multinational production.


5.6.1 Measures to Minimise Political Risk
Political risk, though impossible to eliminate, can at the very least be minimised.
Some of the measures to minimise political risk are explained below:


5.6.1.1 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 valuable political contacts. A modification of this strategy is to use subcontractors. Governments may require products to contain locally
manufactured components because local content improves the economy in two
ways: (1) it stimulates demand for domestic components, and (2) it saves the
necessity of a foreign exchange transaction. Finally, the company should attempt
to assist the host country be being export oriented.

5.6.1.2 Employment of Nationals
Frequently, international marketers make the simple but costly mistake of
assuming that citizens of less developed countries are poor by choice. Firms
should also carefully weigh the impact of automation in a cheap-labour, highemployment
area. For example, automation does not go over well in India, where
job creation, not job elimination, is national policy. Also using intermediate
technology, accompanied by additional labor, is less expensive, and it promotes
goodwill by increasing employment.

5.6.1.3 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 to a public one or from a foreign company to a local one.
One of the most common techniques for shared ownership is to simply form a
joint venture (e.g. Maruti – Suzuki, Toyota – Kirloskar). In some overseas
business ventures, it is not always necessary to have local firms as partners.
(e.g.: when cogntrix of U.S. wanted to set-up a powerplant near Padubidri,
Karnataka it had tied up with China Light and Power Company). 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 intensive
portions of the investment.


5.6.1.4 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 discretely state that it is not in the political business and that its
primary concerns are economic in nature.

5.6.1.5 Behind the Scenes Lobby
Companies as well as special interest groups have varying interest, and each
party will want to make its opinion known. When the U.S. Mushroom Industry
asked for a quota against imports from China, Pizza Hut came to China’s rescue
by claiming that most domestic and other foreign suppliers could not meet its
specifications. Lobbying activities can be undertaken, and it is wise to lobby
quietly behind the scenes in order not to cause unnecessary political clamor.
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. Their
Government can be requested to apply pressure against foreign Governments.

5.6.1.6 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 exposure.

5.6.2 Political Insurance
Multinational marketers can employ the strategy of risk shifting. Insurance
coverage can be obtained from a number of sources.


5.6.2.1 Private Insurance
It is wiser for international marketers to shift political risk to a third party through
the purchase of political insurance. Although property expropriation seems to be
the most common reason for obtaining political insurance, the policy should
include coverage for kidnapping, terrorism and creeping expropriation.

5.6.2.2 Government Insurance
Multinational marketers do not have to rely solely on private insurers. There are
non-profit public agencies that can provide essentially the same kind of
coverage. In India Government agencies such as Export Credit Guarantee
Corporation of India, EXIM Bank etc. provide some kind of risk coverage for
international marketers.

5.7 Legal Environment
Regulations can sometimes be ambiguous. Because regulations do not allow
marketers to plead ignorance, they must themselves somehow try to take control
of the situation. They must attempt to conform to the legal requirements for each
of the product categories they are selling in the country-markets.

5.7.1 Legal Systems
There are two major legal systems:
a) Common law system and
b) Statute law system

5.7.1.1 Common Law System
There are some twenty-five common law or British law countries. A common law
system is a legal system that relies heavily on precedents and conventions.
Judge’s decisions are guided not so much by statutes as by previous court
decisions and interpretations of what certain laws are or should be. As a result, these countries laws are tradition-oriented. Countries with such a system include
the United States, Great Britain, Canada, India and other British colonies.

5.7.1.2 Statute Law System
Also known as code or civil law, include most continental European countries and
Japan. Most countries over seventy are guided by a statute law system. As the
name implies, the main rules of the law are embodied in legislative codes. Every
circumstance is clearly spelled out to indicate what is legal and what is not. There
is also a strict and literal interpretation of the law under this system.
There are many products that can not be legally imported into most countries.
Examples include counterfeit money, illicit drugs, pornographic materials, and
espionage requirement. It is usually also illegal to import live animals and fresh
fruit unless accompanied by the required certificates.
There is no international law per se that prescribes acceptable and legal
behaviour of international business enterprises. There are only national laws.
This complexity creates a special problem for those companies that do business
in various countries, where various laws may demand contradictory actions.

5.8 Bribery
Bribery is the use of interstate commerce to offer, pay, promise to pay, or
authorise giving anything of value to influence an act or decision by a foreign
government, politician or political party to assist in obtaining, retaining or directing
business to any person. A bribe may take the form of cash, gifts, jobs and free
trips. Bribing is illegal in most of the countries. Hence international marketers
have to be very careful while operating in various country markets.
In India bribery issues are very common. Recently, Xerox Corp. revealed that
they have used bribery in Indian market for their business purposes. We are all
well aware of Bofors scam.


5.8.1 Reasons for Bribery
Following are the reasons why business persons are willing and even eager to
offer a bribe.
a) To speed up the required work or processing.
b) To secure a contract.
c) To avoid the cancellation of the contract.
d) To prevent the competitors from getting the contract.
Whether bribery is ethical or unethical differs from one culture to another. Bribery
may thus be acceptable in some countries. In many less developed countries the
practice of providing bribes is so common that not to do so may be interpreted as
an insult or a lack of respect. The Japanese, viewing payments to foreign officials
to secure business deals as a normal practice, had a hard time understanding
why there was such an uproar when an advisor to President Regan, Richard
Allen, accepted a watch as a gift from a Japanese magazine and why he had to
resign over this common courtesy.
International marketers need to develop strategies to deal with bribery problems.
Good strategies should include having corporate codes of ethics, sensitisation of
ethics in managers through training and education, and conducting ethics audits.

5.9 Branch Versus Subsidiary
One legal decision that international marketers must make is whether to use
branches or subsidiaries to carry out its plans and to manage its operations in a
foreign country. A branch is the company’s extension or outpost at another
location. Although physically detached, it is not legally separated from its parent.
A subsidiary, in contrast, is both physically and legally separated from its parent.
It is considered a separate legal entity inspite of its ownership by another
corporation.

A subsidiary may be either wholly owned (i.e. 100% owned) or partially owned.
GE receives about $ 1 billion in revenues from its wholly owned and partially
owned subsidiaries in Europe. The usual practice of Pillsbury, Coca-Cola and
IBM is to have wholly owned subsidiaries. As a rule international marketers
prefer subsidiaries to branches.

5.9.1 Reasons why a Subsidiary is a Preferred Structure


5.9.1.1 Recruitment of Management
Titles mean a great deal in virtually all parts of the world. A top administrator of
an overseas operation wants a prestigious title of President, Chief Executive, or
Managing Director rather than being merely a “Branch Manager”.

5.9.1.2 Quick Access to a Market
Acquiring an existing company within the country-market and making it a
subsidiary helps the international marketer to access the market quickly.

5.9.1.3 Flexibility
When subsidiaries are formed, flexibility is created, which may allow the parent
company to take advantage of legal loopholes or of the opportunity to circumvent
certain government requirements. For example, when United States banned the
imports of crude oil from Iran in 1987, American companies are able to
circumvent the ban by using their overseas subsidiaries to buy and sell Iranian
crude.

5.9.1.4 Tax Benefits
When formed in a foreign country a subsidiary is considered a local company,
enabling it to receive tax benefits granted to other national companies. With a
foreign branch, the income is immediately taxable through the parent firm,
regardless of whether there is the remittance for the profit. Given their situation,
there is no opportunity for the parent company to defer any profit or loss.


5.9.1.5 Limited Liability
The limited liability advantage may be one of the most important reasons why a
subsidiary is formed. With this organisational structure, the parent firm’s liability is
limited to its investment in the foreign subsidiary. That is, its maximum loss can
be no greater than the assets invested in its subsidiary.

5.10 Intellectual Property
Individuals and firms have the freedom to own and control the rights to
intellectual property (i.e., inventions and creative works). The four basic forms of
intellectual property are:
a) Patent
b) Trademark
c) Copyright and
d) Trade Secret

5.10.1 Patent
A patent is a government grant of certain rights given to an inventor for a limited
time in exchange for the disclosure of the invention. The most important of these
rights is the one under which the patented invention can be made, used, or sold
only with the authorisation of the patent owner. Hence patent protects an
invention of a scientific or technical nature.

5.10.2 Trademark
A trademark relates to any work, name or symbol which is used in trade to
distinguish a product from other similar goods. Trademark, when accepted by the
Trademark office for registration, it becomes registered trademark. Trademark
laws are used to prevent others from making a product with a confusingly similar
mark.


5.10.3 Copyright
A copyright offers protection against unauthorised copying by others to an author
or artist for his or her literary, musical, dramatic and artistic works. More recently,
computer software works are included within the protection of copyright laws.
Copyright protects the form of expression rather than the subject matter.

5.10.4 Trade Secret
The term trade secret refers to know-how (e.g. manufacturing methods, formulas,
plans etc.) that is kept secret within a particular business. This know-how,
generally unknown in the industry, may offer the firm a competitive advantage.
Infringement occurs when there is commercial use (i.e. copying or imitating)
without owner’s consent, with the intent of confusing or deceiving the public. For
example, Texas Instruments charged that eight Japanese firms made memory
chips based on its patents after the expiration of license agreements, and the
U.S. company was able to force the Japanese firms to pay nearly $ 300 million in
royalties.

5.11 Counterfeiting
Counterfeiting is the practice of unauthorised and illegal copying of a product. A
counterfeit trademark is a spurious trademark which is identical with, or
substantially indistinguishable from a registered trademark. U.S. Trademark Act
prohibits imports of counterfeit goods into the United States. It is estimated that
counterfeit goods account for nearly 5 percent of world sales. Since 95 percent of
computer softwares used in China are illegal copies, software marketers lost
$ 351 million there is 1994.
Counterfeit is a serious business problem. In addition to the direct monetary loss,
companies face indirect loss as well, counterfeit goods injure the reputation of
companies whose brand names are placed on law-quality products. Certain
countries tend to specialise in counterfeiting certain products. The major sources

of counterfeits come from Italy, Taiwan, Hong Kong, South Korea and various
Southeast Asian countries.

5.12 Grey Market (Parallel Distribution)
A grey market exist when a manufacturer ends up with an unintended channel of
distribution that performs activities similar to the planned channel. Through this
extra channel, gre ymarket goods move internationally as well as domestically. In
India we have “Chor Bazaars” (also referred to as Burma Bazaars) in most of the
big cities where grey market goods are sold. Products notably affected by this
method of operations include watches, cameras, automobiles, perfumes and
electronic goods. Grey marketing of trademarked products occurs for several
reasons (1) Grey marketers can easily locate sources of supply because many
trademarked products are available in markets throughout the world (2) Price
differences among these sources of supply are great enough and (3) The legal
and other barriers to moving goods are low.
There is no justification for the existence of the grey market unless price in
atleast two domestic markets differ to the extent that even with extra
transportation costs reasonable profits can be made. Grey market goods can be
purchased, imported and resold by unauthorised distributor at prices lower than
those charged by manufacturer’s authorised importers/distributors. As a result,
identical items can carry two different retail prices. This could spoil the image of
the company’s product in that market. The most effective way to eliminate grey
market is to eliminate the cause price discrepancy between markets. Price
matching can put grey retailers out of business. But, this method requires the
manufacturer to reduce prices in most profitable markets.


Questions
1. What is the necessity of analysing the political and legal environments in
international marketing ?
2. What are the steps in assessing the political and legal environment ?
3. How the governments could be classified based on number of political
parties ?
4. How the governments could be classified based on economic systems ?
5. What are the various types of political risks ? Explain how these hazards
affect an international marketer ?
6. What is meant by privatisation ? What is the importance of privatisation for
an international marketer ?
7. What are the sources of political instability ? Explain how political instability
is dangerous for an international marketer ?
8. What is meant by management of political risk ?
9. What are the various measures available for an international marketer to
reduce political risk ?
10. What is the difference between common law system and statute law
system?
11. What are the reasons for bribery ? Why an international marketer should
have corporate code of ethics ?
12. Why subsidiaries are preferred to branches by international marketers ?
13. How an international marketer could protect the intellectual property ?
14. What is meant by grey market ? What are the dangers of grey market to an
international marketer ?