Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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records, trademark, copyright and patent, and

enforcement of judgments.

Whenever possible and practical, companies

should consider commercial arbitration in place of

judicial trials. Arbitration proceedings provide such

advantages as an impartial hearing, a quick result,

and a decision made by experts. Both IBM and

Fujitsu seemed satisﬁed with the ruling of their two

arbitrators in settling a copyright dispute. Intel, in

contrast, did not want arbitration and was frustrated

by the pace of its copyright lawsuit against NEC.

Three important multilateral agreements on

international arbitration address the enforcement of

agreements to arbitrate and judicial assistance in the

execution of arbitral awards. The New York

Convention has received broad worldwide accep-

tance and is now in force in eighty-two countries.

The Inter-American Convention, closely paralleling

the framework of the New York Convention, states

that parties which have agreed to arbitrate may be

compelled to do so, and that arbitral awards shall

be recognized and enforced in the same manner as

ﬁnal judicial decisions. The ICSID Convention

(The Convention on the Settlement of Investment

Disputes between States and Nationals of Other

States) has established the International Center

for the Settlement of Investment Disputes (ICSID)

in Washington, D.C. to facilitate the arbitration

of disputes between foreign investors and host

governments.As of 1994, ICSID has 139 members.

Many Latin American countries adhere to the

Calvo Doctrine (after the Argentine jurist Carlos

Calvo), which is generally hostile to international

arbitration. Under the Calvo Doctrine, disputes

between foreign investors and a host government

must be submitted to the domestic courts of

the host government instead of to an independent

third party. The general inclination of Latin

American countries against ratiﬁcation or accession

to the New York Convention or adoption of ICSID

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LEGAL ENVIRONMENT

Figure 5.1 International law ﬁrm

demonstrates the historical aversion those countries

have had to arbitration as a substitute for judicial

resolution of disputes.

One aspect of the law that does not have univer-

sal acceptance involves extraterritorial applica-

tion of the law.A nation wishing to protect its own

interests often applies its laws to activities outside

its own territory. Spanish laws allow crimes such

as genocide to be tried in Spain even though

such crimes were not committed there. In 2003, a

Spanish judge asked the government to seek the

extradition of forty Argentines, including two

former leaders of the military junta. Judges in

France, Sweden, and Italy also sought the extradi-

tion of several former military ofﬁcers.

Not as clear-cut and much more controversial

are the activities of an MNC’s foreign subsidiaries

and afﬁliates. In the case of US ﬁrms’ foreign sub-

sidiaries on foreign soil, it is questionable whether

these subsidiaries must comply with the US gov-

ernment’s decrees. In response to the US govern-

ment’s prohibition of US ﬁrms from doing business

with Libya,American ﬁrms have complied with the

order but do not forbid their foreign subsidiaries

from doing business as usual with Libya, as long as

American personnel were not stationed there.

According to an Equal Opportunity Commission

(EEOC) lawyer, “employers can’t go around dis-

criminating, discharging, and harassing people

simply because they’re overseas.” Ali Bouresland, a

Lebanese-born naturalized US citizen, claimed that

his supervisor at the Arabian American Oil Co.

harassed him, denied him time off for Muslim

holidays, and ﬁred him because of his race, religion,

and national origin. But the Supreme Court stated

that a provision of the 1964 Civil Rights Act barring

employment bias based on race, sex, religion, and

national origin does not apply to US citizens

working abroad for American ﬁrms. The ruling

stressed a principle of American law that limits

federal legislation to US territory. As a rule,

American courts will not apply laws beyond their

border (i.e., extraterritorially) unless Congress

expresses a different intent. John Pfeiffer, a high-

ranking executive for Wrigley Corp. in the USA,

was protected under US law from discrimination

based on his age. After his transfer to a high posi-

tion in Wrigley’s German ofﬁce, Pfeiffer turned 65

and was immediately ﬁred on the basis of his age.

Because of the transfer, he had no recourse.

When a nation attempts to apply its laws

extraterritorially, it may upset its trading or politi-

cal partners. The USA has been placed in this

awkward position a number of times in the past.The

USA angered Canada when the US government

tried to prevent US ﬁrms’ Canadian subsidiaries

from selling products to Cuba. The USA created

another uproar in Europe when it prohibited

European subsidiaries of American ﬁrms from par-

ticipating in a Soviet pipeline project. In spite of the

past mistakes, the USA has once again greatly upset

its allies by passing the so-called Helms-Burton

law in 1996.The law attempts to tighten economic

sanctions against Cuba by penalizing foreign com-

panies investing in Cuba. Mexico, Canada, and the

European Union have voiced their strong objection

to the extraterritorial measures of the US law which

interfere with the foreign policies of the other coun-

tries. Reacting to their plans to enact retaliatory

laws, the USA has assured these trading partners

that the controversial law will not be enforced.

Jurisdiction is crucial for a number of reasons.

Plaintiffs want to ﬁle lawsuits in countries that give

them judicial advantages and maximum compensa-

tion. Defendants want to minimize any damage

amounts that can be collected. In general, a

company prefers a lawsuit in its own home country,

but in some cases it is more advantageous to shift

the legal action to somewhere else. For example, a

lawyer representing ﬁfty-eight Mexicans argued that

the accident cases against Bridgestone/Firestone

and Ford Motor should be heard in Nashville

where the headquarters of Bridgestone/Firestone

is located. Furthermore, regarding Firestone and

Ford hiding the information that Ford Explorers

equipped with Firestone tires were more prone to

crash, these allegations took place in the USA.The

defendants, on the other hand, argued that the acci-

dents occurred in Mexico and that it would be

impractical to take witnesses and plaintiffs to the

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LEGAL ENVIRONMENT

USA, not to mention the need to have translators

to help English-speaking jurors understand the

Spanish-language testimony.The defendants did not

mention, however, that plaintiffs could not seek

punitive damages in Mexico.

There seems to be a trend toward extraterrito-

riality. Belgium’s law of universal jurisdiction allows

its legal system to exert criminal authority over war

crimes, genocide, and crimes against humanity that

took place anywhere in the world, and it does not

matter whether Belgium has any connection with

the matter.

In other words, the law gives Belgian

courts “universal jurisdiction” and allows them to

try any person accused of having committed war

crimes and genocide anywhere in the world. Cases

have been brought against such heads of states as

George W. Bush, Tony Blair, and Ariel Sharon.

Because of the controversy, Belgium repealed this

war crimes law in 2003.

Nations have negotiated a treaty to establish

an International Criminal Court. This permanent

Court in The Hague is empowered to try individu-

als accused of genocide, war crimes, and crimes

against humanity. The Court should bring order to

such ad-hoc tribunals as the ones in Rwanda and

Yugoslavia underwritten by the USA.For ﬁfty years,

the USA has supported the idea, but when the time

came to ratify it, the Bush administration refused.

Likewise, those countries targeted for investiga-

tions refused to sign, and they include India (for

Kashmir), China (for Tibet), Russia (for Chechnya),

Iraq, Libya, and Israel. Since sixty-six nations have

ratiﬁed the treaty, the Court came into existence on

July 1, 2002. However, the non-ratiﬁers are out of

reach, unless their crimes occurred in a ratiﬁer’s

country.

MNCs, by operating in a number of countries,

are particularly vulnerable to countries and courts

that want to exert their jurisdiction. For instance,

the Alien Tort Claims Act was passed in 1789 by the

ﬂedgling USA to assure Europe that it would not

harbor pirates or assassins. The law allows foreign-

ers to sue in US courts for violations of the “law of

nations.” Nobody would have thought that the law

could be used in 1976 by a Paraguayan doctor who

asked the US court to try a former Paraguayan

police ofﬁcial for the murder of the doctor’s son. A

federal appeals court ruled in 1980 that this law per-

mitted foreigners to bring a lawsuit in a US court

over acts committed overseas. Now it is Unocal’s

turn. Burmese citizens asserted that Unocal relied

on the Burmese Army to force villagers to clear

jungle for this Californian energy giant’s natural gas

pipeline.Those peasants who resisted were tortured

or killed. Unocal denied any knowledge of these

acts. It also argued that it had no control over the

Burmese military and that it did not actively partic-

ipate in the alleged human rights violations (unlike

the Nazis and their active collaborators at the

Nuremberg Trials). According to the Ninth Circuit

US Court of Appeals, Unocal could be liable if it

“provided practical assistance or encouragement to

the Burmese military or if it simply knew that

the crimes were taking place.”The justices continue

to be divided on whether the international or US

common law should be used to assess a private cor-

poration’s liability of this type.

Conceivably, MNCs

can be held liable for foreign government’s human

rights abuses.

Given the fact that cyberspace and e-commerce

are inherently international, any attempts to regu-

late and tax their activities on the Internet through

the existing territorial jurisdiction will be problem-

atic.Any successful governance regime will need to

involve international public–private sector cooper-

ation.The cooperation may combine self-regulation

with government oversight and enforcement.

LEGAL FORM OF ORGANIZATION

Firms doing business in Great Britain have three

primary choices for the legal form of organization:

British branch, limited company, or partnership. If

a limited company is the choice, more decision is

needed. A limited company may be either a public

limited company (PLC), which can raise capital

by selling securities to the public, or a private

company (ltd.), which is not allowed to offer shares

or debentures to the public. In general, a public

company must meet a number of requirements in

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LEGAL ENVIRONMENT

terms of registration and capital structure, sub-

scription for shares, and proﬁts and assets available

for distribution.

In the USA, a business is able to select from

among these forms: sole proprietorship, partner-

ship, and corporation. For ﬁrms involved in inter-

national trade, the most common choice is the

corporation due to the limited liability associated

with the corporate form, its relatively permanent

structure, and its ability to raise money by selling

securities. Most large US ﬁrms have a Corp. or Inc.

nomenclature as part of their trade names.

The nomenclature indicating incorporation is

different in other countries. For most British

Commonwealth countries, corporate names

include ltd. or ltd. co. to indicate that the liability

of the company is “limited.” Equivalencies in civil

law countries include the following: in France,

S.A. (société anonyme or sociedad anónima) for a

“formal” corporation/stock company and SARL

(société a responsabilité limitée or sociedad de respons-

abilidad limitada) for an “informal” corporation/

limited liability company; in Germany and

Switzerland, A.G. (aktiengesellschaft) for a stock

company and GmbH (Gesellschaft mit beschrankter

Haftung) for a limited liability company; in Japan,

K.K. (kabushiki kaisha) for a stock company; in

Sweden, A.B.; and in the Netherlands, N.V. To elim-

inate confusion and to ensure some uniformity,

European countries are now encouraging the use of

PLC instead of other nomenclature to indicate that

a company is incorporated.

BRANCH VS. SUBSIDIARY

One legal decision that an MNC 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 independent. It is considered a separate

legal entity in spite of its ownership by another

corporation.

A subsidiary may either be wholly owned (i.e.,

100 percent owned) or partially owned. GE

receives some $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. Although a

parent company has total control when its sub-

sidiary is wholly owned, it is difﬁcult to generalize

about the superiority of one approach over the

other.

As a rule, multinationals prefer subsidiaries to

branches. Fiat has 432 subsidiaries and minority

interests within 130 companies in sixty countries.

The question that must be asked is why Fiat, like

other MNCs, would go through the trouble and

expense of forming hundreds of foreign companies

elsewhere.When compared to the use of branches,

the use of subsidiaries adds complexity to the cor-

porate structure.They are also expensive, requiring

substantial sales volumes to justify their expense.

There are several reasons why a subsidiary is

the preferred structure. One reason has to do with

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.”

Another reason for forming a subsidiary may

involve gaining quick access to a particular market

by acquiring an existing company within the

market and making it a subsidiary.The Swiss-based

Ciba-Geigy Corporation acquired Airwick, a US

ﬁrm, with two goals in mind: gaining access to the

US consumer market and acquiring a well-known

brand.

Furthermore, subsidiaries are preferred because

of the ﬂexibility created, which may allow the parent

company to take advantage of legal loopholes or

the opportunity to circumvent certain government

requirements. Since 1987, the USA has banned

imports of Iranian crude oil. In reality, some $3.5

to $4 billion of Iranian oil have found their way

into the USA annually. Exxon bought 250,000 to

300,000 barrels daily from Iran for reﬁneries in

Europe and Asia.American oil companies were able

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LEGAL ENVIRONMENT

to circumvent the ban by using their overseas sub-

sidiaries to buy and sell Iranian crude.

There is an inherent conﬂict among corporate

interests, government policy, and consumer

welfare. A company must decide whether it should

comply fully with the intention or spirit of the law

designed to enhance foreign policy or whether it

should look after the interests of consumers or its

stockholders. Such a legal loophole probably does

not exist if a company’s operations abroad are struc-

tured as branches rather than subsidiaries. Laws

could be changed to close loopholes by requiring

foreign subsidiaries and foreign-owned operations

to adhere to the same rules. However, the effec-

tiveness of such attempts is questionable, and there

is the issue concerning the extraterritorial applica-

tion of the law.

Another advantage in favor of maintaining

subsidiaries is the tax beneﬁt. When formed in a

foreign country, a subsidiary is considered as a local

company, enabling it to receive tax beneﬁts granted

to other national companies. Moreover, a subsidiary

provides the parent company with some ﬂexibility

in terms of when the parent has to pay tax on the

income generated by its subsidiary. With a foreign

branch, the income is immediately taxable through

the parent ﬁrm, regardless of whether there is the

remittance for the proﬁt. Given this situation, there

is no opportunity for the parent to defer any proﬁt

or loss.

The limited liability advantage may be one of the

most important reasons why a subsidiary is formed.

With this organizational 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. In

addition, the formation of a separate company pro-

vides some protection against hostile acts. During

World War II, for example, Philips formed North

American Philips (NAP) as a separate entity by

placing its US operations in a trust in order to

protect the company from takeover attempts by the

Nazis.The problem in this case was that NAP even-

tually grew to be too independent and would not

even buy the parent’s video cassette recorders for

sale in the US market. Philips ﬁnally dissolved the

trust in 1986, reclaiming the 58 percent interest in

NAP in order to have “one face to the world, one

central policy.”

MNCs generally believe that they are protected

against their subsidiaries’ actions and liabilities due

to the separate incorporation of parent ﬁrms and

subsidiaries, making them separate legal entities.

This precept has come under severe test in a lawsuit

ﬁled by India against Union Carbide over an indus-

trial disaster at Bhopal, India. A gas leak at a Union

Carbide plant on 3 December 1984 killed 3800

people and injured 200,000 more. In addition to the

lawsuit against Union Carbide, victims’ lawyers,

alleging plant design defects as a contributing factor,

sued Humphreys & Glasgow Consultants Pvt. Ltd.,

Union Carbide’s prime contractor. This Bombay-

based ﬁrm is afﬁliated with Humphreys & Glasgow

Ltd., a London engineering ﬁrm, which in turn is

owned by Enserch Corp., a Dallas diversiﬁed energy

company.

The main legal issue in the Bhopal case is

whether the parent company is also responsible for

the damage caused by its subsidiary. The issue in

most cases could probably be decided easily if the

parent company owns 100 percent of its subsidiary’s

voting stock.With full control over a wholly owned

subsidiary, there is little question about whether the

parent and its foreign subsidiary are indeed inde-

pendent and separate. In the Union Carbide case,

the issue was complicated by the fact that Union

Carbide India Ltd. is not a wholly owned subsidiary.

Although theoretically and legally autonomous in

terms of decision making and responsibility, the

subsidiary does not function independently in prac-

tice, since its authority is granted by the parent.This

is exactly the issue that was legally raised in India in

regard to who was responsible for the disaster.

India’s contention was that MNCs that are

engaged in hazardous activities should not be

insulated from their subsidiaries’ actions.The liabil-

ity issue hinged largely on the extent of Union

Carbide’s involvement in managing its Indian sub-

sidiary. According to India, the two should not be

considered legally separate because of their close

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LEGAL ENVIRONMENT

links. Evidence included the Indian subsidiary’s

inability to spend large sums of money without

authorization from the Connecticut headquarters.

Union Carbide’s defense was that, although it had

the power to veto large outlays as a majority share-

holder, the day-to-day operations were run locally.

A settlement between India and Union Carbide

was ﬁnally reached, but many legal issues as well as

lawsuits are yet to be resolved.

Warren M. Anderson, the company’s chairman,

rushed to Bhopal to personally take moral respon-

sibility. He was arrested as soon as he stepped off

the airplane.The US government intervened, and he

was released on bail after six hours. Union Carbide

believed it had settled the matter in 1989 when it

paid $470 million to the Indian government to settle

a civil suit. Many Bhopal residents were unhappy

with the settlement, and much of the money has still

to reach the victims. Claimants received about $600

for injuries and about $3000 in case of death.

Subsequently, the Indian Supreme Court, probably

bowing to public pressure, reinstated criminal

charges of “culpable homicide” against Anderson.

Victims’groups have used the Alien Torts Claims Act

to sue American companies in the USA for actions

taking place overseas. The lawsuit, charging that

Union Carbide violated international law and

human rights, states: “the defendants are liable for

fraud and civil contempt for their total failure to

comply with the lawful orders of the courts of both

the USA and India.”

LITIGATION VS. ARBITRATION

Litigation, no matter where it takes place, is never

an easy thing. In certain countries, it can be much

more complicated. Courts in India have twenty-ﬁve

million cases pending, and it will take more than

300 years to get through this backlog.

In the USA, a lawyer can be found at virtually

every corner. Actually, the USA has about 900,000

lawyers, and there is one lawyer for every 400

Americans. According to former Vice-President

DanQuayle,Americans spend more than $80 billion

a year on direct litigation costs and higher insurance

premiums. Indirect costs which include the expense

of avoiding legal liability add another $300 billion

a year.

In Japan, there are about 18,000 lawyers,

amounting to one lawyer per 7000 Japanese. Japan’s

legal approach is different.To be a lawyer one must

pass the national bar exam, among the world’s

toughest. Only one attempt per year is allowed.

For decades, only the top 500 people passed the bar

exam each year.As a non-litigious, consensus-based

society, Japan limits the number of attorneys passing

the bar exam to only 1 or 2 percent of applicants.

On average, a person makes ﬁve attempts before

successfully passing the bar exam. Not surprisingly,

fewer than 1000 new lawyers, judges, and prosecu-

tors are certiﬁed annually.

Also in Japan, plaintiffs must pay their lawyers

an up-front fee of up to 8 percent of damages

sought.The system prohibits contingency fees, class

actions, and other fee-sharing devices that encour-

age ﬁling a lawsuit. Judges, not juries, set damage

awards. Even when a victim is killed, awards rarely

exceed $150,000. Also in Japan, there is no “dis-

covery,” thus denying plaintiffs access before trial to

an opponent’s evidence. In addition, the Japanese

culture discourages confrontation and does not view

those who sue positively. While the American

system encourages excessive and frivolous lawsuits,

the Japanese system does not fully protect the rights

of the victims. Incidentally, when Hitachi Ltd. was

sued by IBM for industrial spying in 1982, Hitachi

was shocked to ﬁnd that its ﬁrst bill alone from its

US law ﬁrm exceeded its total payments for legal

services in Japan since the founding of the company

in 1920.

To save time, expenses, and relationships, it may

be wise to look at litigation as the last resort. To

resolve a dispute in China, a company has three

options: negotiation, arbitration, and litigation (see

Marketing Strategy 5.1). Negotiation is usually best

because it is quick and inexpensive while preserv-

ing a working relationship with one’s partner.

In fact, most business contracts in China require

companies to employ negotiation before pursuing

other dispute settlement mechanisms. Chinese

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LEGAL ENVIRONMENT

government ofﬁcials may be requested to negotiate

a solution. Time limit for this process should be

speciﬁed. Arbitration is the second best method.

Contracts allowing arbitration should specify a

choice of arbitration body as well as a choice of law.

Because of China’s accession to the United Nations

Convention on the Recognition and Enforcement

of Foreign Arbitral Awards (the New York

Convention), arbitral awards rendered in other

signatory countries are recognized and enforceable

in China, and vice versa.

BRIBERY

At ﬁrst glance, bribery is both unethical and illegal.

A closer look, however, reveals that bribery is not

really that straightforward an issue.There are many

questions about what bribery is, how it is used, and

why it is used.The ethical and legal problems asso-

ciated with bribery can also be quite complex.

Legal dimension

According to the Foreign Corrupt Practices

Act (FCPA) of 1977, bribery is “the use of inter-

state commerce to offer, pay, promise to pay, or

authorize 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 is also

known as a “payoff,” “grease money,” “lubricant,”

“little envelope,” mordida, or “bite” (Mexico), and

“under-the-table payment,” as well as by other

terms.A bribe may take the form of cash, gifts, jobs,

and free trips. Figure 5.2 describes a bribe as a

transaction.

Instances of ﬁrms paying bribes are numerous.

The US government learned in 1995 of almost

ninety cases of foreign ﬁrms paying bribes to under-

cut American ﬁrms’ efforts to win international

contracts worth $45 billion. Germany’s Siemens,

France’s Alcatel Alsthom, and Airbus Industrie are

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LEGAL ENVIRONMENT

There are several ways to deal with a trade dispute

with a foreign buyer. One of them is mediation (also

known as conciliation).This is a process in which both

parties to a dispute appoint a neutral third party to

assist them in resolving their disputes. Unlike a judge

or an arbitrator, the mediator does not have the power

to compel the parties to accept a recommended solu-

tion. The goal of mediation is a voluntary negotiated

settlement.

One common method of dispute resolution is arbi-

tration. Arbitration is a primary form of alternative

dispute resolution. The parties agree to submit their

disputes to an arbitrator or a panel of arbitrators.

Arbitrators have binding authority to render awards

that are enforceable in the courts of most countries.

Arbitration is often less costly, less litigious, and less

time-consuming, and offers more privacy to the

parties than litigation.

The parties agree to arbitration in the event of a

dispute in the contracting stage by including an arbi-

tration clause in their contract. Depending on what the

parties have agreed to, either the parties will choose

their own arbitrators and procedures (ad-hoc arbitra-

tion) or submit their dispute to an arbitral institution.

There are many different arbitral institutions to which

parties may turn in the event of a dispute.

Source:

Jim Robb, “Legal Resources and Options for the

Exporter,”

Export America

, January 2001.

MARKETING STRATEGY 5.1 DISPUTE RESOLUTION

Bribe maker

as giver

Improper payment

Bribe taker

as receiver

Bribe maker

as receiver

Bribe taker

as giver

Favor

Intermediary

Figure 5.2 The anatomy of a bribe

Source:

Sak Onkvisit and John J. Shaw, “International

Corporate Bribery: Some Legal, Cultural, Economic, Ethical,

Philosophical, and Marketing Considerations,”

Journal of

Global Marketing

4 (No. 2, 1991): 6.

among the major practitioners. Germany found

1500 cases of public ofﬁcials on the take between

1987 and 1995 in Frankfurt, adding 20 to 30

percent to the cost of a building contract. Lockheed

Corp. admitted paying $38 million in bribes, kick-

backs, and other questionable payments to foreign

ofﬁcials to facilitate aircraft sales between 1970 and

1975. The FCPA was passed as a result of the

company’s bribery scandal. Also in 1995, Lockheed

was forced to admit that it paid $1 million to a

member of the Egyptian Parliament so that she

would help the company sell three C-130 Hercules

transport planes to Egypt. Subsequently, the

company paid a record $24.8 million in penalties

and for violating the FCPA, and a former vice-pres-

ident was sentenced to eighteen months in prison.

There are several reasons why a bribe is solicited,

offered, and accepted. Low salaries of public ofﬁ-

cials is one reason; simple greed is another.The loy-

alties and commitments public servants have to their

political parties, families, and friends can cause

them to ask for favors that will beneﬁt those groups.

The proliferation of bureaucratic regulations seems

to be another cause. Complex regulations create the

opportunity for bribery because by paying a bribe a

company can cut through bureaucratic red tape

quickly. Brazil’s governmental system is so compli-

cated that it even has the Debureaucratization

Ministry. Some of the reasons why businesspeople

are often willing and even eager to offer a bribe are:

■ To speed up the required work or processing

■ To secure a contract

■ To avoid the cancellation of the contract

■ To prevent competitors from getting the

contract.

Bribery is not always an absolute; rather it may

be a matter of degree.What may seem like a bribe

to one person may not be to another – especially to

the one who accepts the payment.This problem of

interpretation can perhaps be better understood by

considering the tipping system that is so prevalent

in the Western world. When viewed in this light,

there is a ﬁne line between a bribe and a gratuity.

The tip is given “to ensure promptness” – the same

purposes for which a bribe is tendered.Those who

provide services expect a tip, and this is true even

when the service given may be routine and of poor

quality.

The determination of whether or not something

is a bribe is complicated further by particular types

of payments.When a businessperson gives a public

employee a few dollars for extra services so that a

delay can be avoided,is this payment a tip or a bribe?

The same question in a broader sphere may be asked

about compensation and commissions for middle-

men. Lockheed paid large sums of money for the

services of Prince Bernhardt of the Netherlands

and Prime Minister Tanaka of Japan. Under normal

circumstances, payments to middlemen pose

no problem whatsoever. In the Lockheed case,

however, the two middlemen happened to be well-

known personalities – a prince and a prime minis-

ter – who were in the position of being able to

secure favorable treatment for the company.The US

Securities and Exchange Commission (SEC) takes

the position that payments made to low- and

middle-level ofﬁcials for tasks performed routinely

by such ofﬁcials are not illegal but that payments to

high-level government ofﬁcials for special favors are

unlawful.

Another kind of questionable payment involves

political contributions. When Gulf Oil was forced

to contribute $4 million toward the re-election of

Korea’s President Park, this was viewed by the

Koreans as a political contribution and by US ofﬁ-

cials as extortion. It is rather ironic that US senators

and congressmen would be upset by Gulf’s compli-

ance with the Koreans’ request when such politi-

cians routinely solicit corporate contributions for

their own re-election in the USA. Many attempts to

reform political donations in the USA have been

slow and difﬁcult.

There has also been debate about gifts. Tradi-

tionally, US ﬁrms provide Christmas gifts for their

customers, employees, and those who have assisted

the ﬁrm. In foreign countries, gifts may be given for

other occasions, such as a New Year holiday or birth-

day.These gifts are often considered by Westerners

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as bribes when in reality they serve the same

purpose as Christmas gifts.

To answer clearly the question of whether a bribe

is illegal and unethical is difﬁcult for two reasons –

legal and cultural. Legally speaking, bribery is not

an either/or proposition.There are several kinds of

payments that fall on the borderline of legality and

illegality. To provide clariﬁcation, Sections 5001 to

5003 of the 1988 Trade Act amended the FCPA

in many respects. The primary change concerns

payments to third parties by a US ﬁrm “knowing or

having reason to know” that the third party would

use the payment for prohibited purposes. Under the

new law, the US ﬁrm must have actual knowledge

of or willful blindness to the prohibited use of the

payment.

The Act also clariﬁes the types of payments that

are permissible. For example, under the FCPA as

originally enacted, although payments to low-level

ofﬁcials who exercise only “ministerial” or “clerical”

functions were exempt, the provision provided little

guidance to exporters in determining whether a

given foreign ofﬁcial exercised discretionary author-

ity. The fact that the Middle East and Africa have

part-time ofﬁcials complicates the matter even

more. The Trade Act provides guidance by specify-

ing the types of payment that are permissible

rather than which individuals may receive them.

A payment for a routine governmental action (e.g.,

processing papers, stamping visas, and scheduling

inspections) may be made without subjecting

the exporter to the worry of whether this type

of payment may lead to criminal liability. In spite

of the clariﬁcation, the law still contains several

gray areas.

In addition, the interpretation of legality depends

on the particular laws of a particular country.What

is illegal in one country is not necessarily so else-

where. In the former Soviet Union, a simple gift –

such as clothing for a public ofﬁcial – was consid-

ered a bribe. Unlike US laws, the laws of France,

Japan, Germany, and Great Britain do not deal

speciﬁcally with foreign bribery. Canada takes the

position that Canadian ﬁrms should comply with the

host country’s law.

Most countries do not provide for legal sanctions

for the bribery of foreign ofﬁcials by their com-

panies or nationals to obtain or retain business.The

USA feels that it is important to have equitable com-

petitive conditions. As such, there should be inter-

nationally recognized standards of behavior to

which marketers may refer so as to be able to refuse

to engage in illicit practices.While OECD members

have agreed with the US government that inter-

national cooperation is needed to discourage com-

panies and public ofﬁcials from resorting to bribery,

it took several years before the twenty-six OECD

countries agreed in 1996 to prevent bribes (often

listed as fees) from being tax deductible.

The USA has been pushing the OECD members

to take a concerted action in criminalizing the

bribery of foreign ofﬁcials in international business

transactions. It took more than twenty years for the

majority of the leading industrial countries to ratify

the OECD Anti-Bribery Convention.

Ethical dimension

Ethical considerations about bribery are even more

ambiguous than legal deﬁnitions. Generally, ethics

precede law.What is illegal is almost always consid-

ered unethical, whereas what is unethical may not

be illegal. Whether or not bribery is unethical

depends on the standards used. Morality exists only

in the context of a particular culture.As such, many

foreign ofﬁcials view the holier-than-thou attitude

of the USA as being naive and hypocritical.To South

Koreans, bribes are part of life. Korean business

executives feel obligated to pay each cabinet minis-

ter “rice-cake expenses” as holiday gifts.

What is unethical in one culture is not necessar-

ily so in 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 view payments to

foreign ofﬁcials to secure business deals as normal

practice.

There is also another side to ethics. If a company

tries to be ethical by refusing to make questionable

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payments, it may risk having its cargo left on the

dock or in a customs warehouse where its goods

can easily be damaged or stolen. Moreover, to

refuse giving a bribe may result in the loss of a con-

tract, thus harming stockholders and employees.

Generally, it is a good idea for a company to main-

tain its integrity. However, this may be difﬁcult

if the company’s efforts are adversely affected by

competitors that routinely offer bribes and thus

take advantage of the company’s ethical conduct.

Despite the lack of agreement about what a bribe

is and whether bribes are always undesirable, com-

panies must nevertheless cope with the practice. A

good rule of thumb may be to be discreet and not

to pursue a bribe too aggressively. It may be prudent

to wait for the other party either to bring up the

issue or to provide a hint. Perhaps occasions for

giving should be considered, and holidays can often

provide an appropriate excuse. In fact, the absence

of a gift at major holidays can be quite conspicuous.

In some cultures a gift is acceptable upon being

introduced or on meeting someone for the ﬁrst

time. In other cultures an occasion for gift giving is

upon the consummation of a deal or when depart-

ing. If a US ﬁrm decides not to comply with a

request for a bribe, it should cite the Foreign

Corrupt Practices Act as a legitimate excuse. In

any case, no matter how distasteful bribery may

appear to be, marketers must realize that it is part

of the international “game” that many businesspeo-

ple play.

International marketers need to develop strate-

gies to deal with bribery problems (see Figure 5.3,

and Exhibits 5.1 and 5.2). Good strategies should

include having corporate codes of ethics, sensitiza-

tion of ethics in managers through training and edu-

cation, and conducting ethics audits.

Regarding

the usage and contents of corporate codes of ethics,

US ﬁrms are more likely than their European coun-

terparts to have adopted codes of ethics. In Europe,

adoption of such codes is a relatively new phenom-

enon, and many of these codes have made their way

into Europe via subsidiaries of US ﬁrms.

One study found a variation of perceptions

of ethical issues by country and type of ﬁrm.

Therefore, all corporate ethics policies should not

look alike since a code of ethics developed in a

country in which a ﬁrm’s headquarters is located

may not match the perceptions of ethical issues of

the ﬁrm’s employees in another country. However,

country differences do not necessarily preclude a

formulation of universal ethical principles.

In any

case, it is encouraging that companies seem to take

ethical behavior more seriously than before.

Marketing professionals’ divergence in ethical

behavior and attitudes may be attributed to differ-

ences in perceptions regarding the importance of

ethics and social responsibility. Such perceptions

are due to country differences (cultural, economic,

and legal/political environments), organizational

ethical climate, and demographic variables (gender

and age). On the one hand, American, Australian,

and Malaysian marketers exhibited different levels

of idealism and relativism. On the other hand, irre-

spective of country, corporate ethical values were

positively related to marketers’ idealism and nega-

tively related to their relativism. In addition, rela-

tivism increased with age, and women were more

idealistic than men.

As stated by Peter Eigen, Chairman of

Transparency International, “corruption takes many

forms and is a universal cancer.” As the world’s

leading anti-corruption organization, Transparency

publishes its Corruption Perceptions Index (CPI)

and Bribe Payers Index (BPI) annually (see Tables

5.1 and 5.2). Figure 5.4 shows countries’ relative

positions in terms of corruption control.

One possible solution is for a government

to scale down its role in the economy so as to

reduce the opportunities for ofﬁcials to engage

in corruption. Such a campaign may have to be a

multiple-step process.The focus of a country’s anti-

corruption efforts should begin with consciousness

raising, shift to making the government less suscep-

tible, and then address the problems of a corrupt

system.

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