im chapter 6pp

7/30/2019 IM Chapter 6PP

1/15

The Political Environment: A Critical Concern

Chapter 6 by Professor Riaz Khan

.


2/15

Chapter Learning Objectives

1. What does the sovereignty of nations mean and how can it affectthe stability of government policies, political parties and

nationalism.

2. The political risks of global business andthe factors that affect stability

3. The importance of the political system to international marketingand its effect on foreign investments


3/15

Chapter Learning Objectives

4. The impact of political and social activists, violence and

terrorism on international business

5. Assessing and reducing the effect of politicalvulnerability

6. How and why governments encourage foreign investment


4/15

Introduction

The political environment of countries is a critical

concern for the international marketer

International law recognizes the sovereign right ofa nation to allow or deny foreign firms to conduct

Sovereignty refers to both the powers exercisedby a state in relation to other countries and thesupreme powers exercised over its own members

A sovereign state is independent and free from allexternal control; enjoys full legal equality withother states; and governs its own territory


5/15

Stability of Government Policies

Q: Radical shifts in government philosophy can occur when:

1. An opposing political party ascends topower

2. Pressure from nationalist and self-interestgroups

3. Weakened economic conditions.4. Bias against foreign investment or

conflicts between governments


6/15

Stability of Government Policies

The stability or instability of prevailing government policies isa major concern of foreign businesses

A change in government, whether by election or coup, does notalways mean a change in the level of political risk

The ideal political climate for a multinational firm to conductbusiness is a stable, friendly government

Be knowledgeable about the philosophies of all major politicalparties and their attitudes towards trade

Conversely, radical changes in

policies toward foreign businesscan occur in the most stablegovernments as well


7/15

Nationalism

Nationalism refers to feelings of national pride and unity

Feelings of nationalism are

manifested by:1. Call to buy our countrys

products only, e.g., BuyAmerican

2. Restrictions on imports,

restrictive tariffs, and otherbarriers to trade


8/15

Political Risks of Global Business

Risks of global business include:

1. Confiscation, Expropriation,and Domestication

2. Economic Risks, and

3. Price Controls


9/15

Confiscation, Expropriation, and Domestication

Confiscation, the most severe political risk, is the seizing of a

companys assets without payment

Expropriation is where the governmentseizes an investment, but some

reimbursement for the assets is made;often the expropriated investment isnationalized to become a government runentity

Domestication occurs when the government mandates localownership and greater national involvement in a foreigncompanys management


10/15

Economic Risks

International firms face a variety of economic risks

Governments can impose restraints

on business activity to:a) Protect national security

b) Protect an infant industry

c) To conserve scarce foreignexchange

d) Raise revenue

e) Retaliate against unfair tradepractices


11/15

Forecasting Political Risk

Decide if risk insurance is necessary

Devise an intelligence network and an early warning system

Develop contingency plans for

unfavorable future political events

Build a database of past political eventsfor use in predicting future problems

Interpret the data gathered by a companysintelligence network in order to adviseand forewarn corporate decision makersabout political and economic situations


12/15

Other Political Risks of Global Business

2. Political and Social

Activists

3. Violence andTerrorism

4. Cyberterrorism

1. Political Sanctions


13/15

Assessing Political Vulnerability

No absolute guidelines to assess if a firm faces political risks

No specific guidelines to determine a products politicalvulnerability, but there are some generalizations

Politically sensitive products includethose that:

1. effect on the environment,

2. exchange rates

3. national and economic security

4. affect public health, e.g., geneticallymodified (GM) foods


14/15

ReducingPolitical Vulnerability

Relations between governments and MNCs are generallypositive if the investment:

improves the balance of payments by increasingexports or reducing imports through importsubstitution

uses locally produced resources

transfers capital, technology, and/or skills

creates jobs, and/or

makes tax contributions


15/15

Reducing Political Vulnerability

MNCs can use the following strategies to minimize politicalvulnerability and risk:

Joint Ventures

Expanding the Investment Base

Licensing

Planned Domestication

Political Payoffs

im chapter 6pp

Documents