20111125 session 5 - political environment
TRANSCRIPT
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Political Environment
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Session Objectives
Political Systems Political Risk Analysis
Definition
Empirical relationships
Evaluation and Management
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PEST Framework for Country Analysis
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Country Attractiveness
BenefitsSize of Economy
Likely Economic Growth
Costs
CorruptionLack of Infrastructure
Legal Costs
Risks
Political Risks: Social Unrest/Anti-Business TrendsEconomic Risks: Economic Mismanagement
Legal Risks: Failure to Safeguard Property Rights
OverallAttractiveness
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Political System
Political system includes the structures,processes, and activities by which a nation
governs itself.
Political systems can be assessed according totwo dimensions
Degree to which they emphasize collectivism as opposedto individualism - Socialism
Degree to which they are democratic
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The Political Spectrum
TotalitarianismDemocracy
Democratic
Government
Nondemocratic
Government
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Totalitarianism
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Either theocratic (religion-based) or secular
Neither recognizes nor permits opposition
Single party, group, or individual (dictator) monopolizes political
power
Power sustained via secret police, propaganda, regulation of free
discussion and criticism.
Order is often imposed through military power
Lack of constitutional guarantees
Common in the 20th century, command economies proved so
inefficient that most have gradually died out. Examples: China (19491980s), Germany (19331945), Soviet
Union (19181991), Spain (19391975) certain countries in
Central Asia, Eastern Europe, and Middle East.
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Government controls all economic and political matters.
The state is responsible for making all decisions: what goods
and services the country produces; quantity of production;
prices at which they are sold; and distribution.
The state owns all wealth, land, and capital, and allocates
resources based on which industries they want to develop.
Prices play little or no role in resource allocation
National plan gives road map with output targets for
industries and firms
Input-output analysis often used in devising the national plan
Inconsistencies in plans and failure to anticipate real consumer
wants often lead to unwanted production
Many ex-totalitarian states have much government
intervention, red tape, and bureaucracyMay 5, 2012 Session 5 - Political Environment 8
Totalitarianism
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Democracy Freedom of opinion, expression, press and organization
Associated mainly with capitalism
Elections and Limited terms for elected officials
Independent court system
High regard for individual rights
Respect for property
Nonpolitical bureaucracy and defense infrastructure
Accessibility to the decision-making process
Price acts as signals to both consumers and producers
Profits aid resource allocation Direct resources to the most profitable activities
Reward risk taking
Encourage productive efficiency (minimum costs)
Provide resources (ploughed back profits)
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Features of authoritarianism and democracy
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Degrees of democracy States vary in democratic accountability, participation
and civil rights.
Most modern societies are pluralistic politically
Arise due to differences in languages, ethnicbackground, tribal groups or religions
Many transition economies are building democraticinstitutions alongside market structures; however,
legacies of authoritarianism remain.
Mixed economies have features of both market and
command economies, combining state intervention andmarket mechanisms (e.g., Sweden, Singapore)
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Political Ideologies
Both private and publicgroups need to balance
each others power
Every aspect ofpeoples lives must be
controlled to preserve order- No individual liberties
Only individuals andprivate groups can
preserve personal liberties
Totalitarianism AnarchismPluralism
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Types of Political Systems
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The Spread of Democracy
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Definition of Political Risk
The probability that political forces willnegatively affect a multinationals profit orimpede the attainment of other criticalbusiness objectives. Expropriation
Corruption
Breach of contracts
No contract law, no property right, or no enforcement
Examples
In China, the government censors material thatcriticizes the government. Yahoo must monitorthe information that appears on its Web site toprevent the Chinese government from shuttingdown its China operations
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Sources of Political Risks
Unstable Political System
Political involvement of religious ormilitary leader
Frequent changes in government
Corrupt or poor leadership
Civil disorder due to: Economic conditions
Human rights violations
Conflict among races, religions & ethnics
Group animosityMay 5, 2012 Session 5 - Political Environment 17
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Effects of Political Risks
Procurement difficulties
Work stoppages
Shipment delays
Property damage
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I t l liti l i k
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Internal political risks
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International political risks
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Levels of political risk
Macro political risk: a risk that affects all
foreign enterprises in the same way.
Micro political risk: a risk that affects selected
sectors of the economy or specific foreign
businesses
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Types and levels of political risk
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Types of Political Risk
PoliticalRisks
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Arises from:Peoples resentment
toward government
Territorial disputes
between nations
Ethnic, racial orreligious disputes
Reduces ability to: Obtain materials
and equipment
Manufacture and
distribute products
Protect employees livesand firms assets
Conflict and Violence
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Terrorism and Kidnapping Kidnapping and the taking of hostages may be used
to fund a terrorist groups activities. Executives of
large international companies are prime targets.
Terrorist acts infrequent, but spectacular
L. America #1 esp. kidnappings
U.S. owned corps. Esp. targets, U.S. public
institutions
China, India, Turley, Israel etc.
-sept 11, Iraq
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Property Seizure
ConfiscationThe forced transfer of assets
from a companyto the government without
compensation
ExpropriationThe forced transfer of assets
from a company to thegovernment withcompensation
NationalizationWhen expropriation involves
one or a small number ofcompanies in an industry,the government may take
over an entireindustry
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Property SeizureExpropriation
Peaked in the mid-70s; almost nil now Mostly Africa till 1980, then Latin America
Declined since:
- Key sectors already nationalized- Economic need = > privatization
- Regulate rather than expropriate
Many hosts have joined MIGA (MultilateralInvestment Guarantee Agency)
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Local Content Requirements
Laws stipulating that a specified amount of a
good or service be supplied by producers in
the domestic market. These requirements can
force companies to use locally available rawmaterials, procure parts from local suppliers,
or employ a minimum number of local
workers.
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Political Risks
Investment Restrictions
Sectoral restrictions
Requirements for JVs, local ownership
Transparency of licensing procedures
Requirements for disclosure of technology
Requirements for forced divestiture
Operating Restrictions
limits on expansion, ownership of land, etc.
Discriminatory access to labour, inputs Restrictions on local market access
Performance requirements (e.g. employment & exportlevels, etc.)
Unequal access to government procurement
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Political Risks
Restrictions on Cross-Border Transfer of Resources
Tariffs, NTBs inhibit sourcing, exporting FX controls limit repatriation
Capital controls
Labour regulations
Taxation Concerns
Restrictions on transfer pricing
Unitary taxation policies Withholding taxes
Availability of tax holidays and other incentives
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Political Risks
Crossfire Problems
Activities may lead to international or home countrysanctions or consumer boycotts against the country or
firms that deal there
- human rights abuses (e.g. imprisonment, torture or murder of
political opponents; use of prison labor; persecution of
minority groups; not abiding by election results)
- conflicts with neighboring countries
- lack of concern for the environment, endangered species, etc.
- disregard for international agreements (e.g. re nuclear non-
proliferation)
- the misuse of social issues as means of protectionism
Political Risk Index 2011
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Political Risk Index 2011
http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/ -
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Political Risk Atlas
Includes 41 risk indices evaluating 196
countries
political risk areas
conflict,
terrorism,
the rule of law,
the regulatory and
business environment.
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Managing Political Risk
InfluencingLocal
Politics
InformationGathering
Adaptation
Avoidance
Risks
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Managing Political Risk
Adaptation
Incorporate risk intobusiness strategies
Localization
Development assistance
Local equity / debt
Insurance
Partnerships
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Managing Political Risk
Agencies specializingin political-risk services
Current employees
with relevant information
Information gathering
Gather data to betterpredict and manage risk
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Forecasting Techniques
OLD HANDS = ask experts for gut instinct, personal
evaluations- taps expertise, but may be dated, subjective orirrelevant
GRAND TOUR = send executives for personal visits- access to top decision makers, first-hand exposure, but
superficial- may hear self-interested pleading
QUANTITATIVEDelphi: obtain expert views, aggregate and give to same experts forchance to revise their views given what others think; repeat untilconsensus
-tends towards conventional predictions- econometric: use historical data, macro-orientation, butlow-cost, may be helpful for initial screening
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Managing Political Risk
CorruptionForeign Corrupt Practices Act
Lobbying
Influencing local lawmakers
Influence local politics
Present firms viewson political matters
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Political Strategies for International Businesses
Identify the exact issue
Trade barrier?
Environmental standards?
Workers rights, etc?
Define/determine the political aspect of the issue Assess the potential political action of other companies
Identify important institutions and individuals
Formulate strategies
Key objectives
Alternatives
Probable effectiveness
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G Zero
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G - ZeroG-Zero refers to an emerging vacuum of power in
international politics created by a decline ofWestern
influence and the domestic focus of the governments of
developing states. It is a reference to a perceived shift away
from the pre-eminence of the Group of Seven industrialized
countries and the expanded Group of Twenty, whichincludes major emerging powers like China, India, Brazil,
Turkey and others. It is also a rejection of terms like G2,
often used to identify a possible strategic partnership
between the US and Chinese governments, or G3, whichrepresents an attempt to align US, European and Japanese
interests to defend free market democracy from the rise of
Chinese-inspired state-dominated capitalism.May 5, 2012 Session 5 - Political Environment 40
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Thank you
M 5 2012 S i 5 P li i l E i 41