I n t e r n a t i o n a l M a r k e t i n g I n t e r n a t i o n a l M a r k e t i n g

The Political Environment:

a Critical Concern

Chapter 6

1 4 t h E d i t i o nP h i l i p R. C a t e o r a

M a r y C. G i l l yJ o h n L . G r a h a m

McGraw-Hill/IrwinInternational Marketing 14/e

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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What Should You Learn?What Should You Learn?

• What the sovereignty of nations means and how it can affect the stability of government policies

• How different governmental type, political parties, nationalism, targeted fear/animosity, and trade disputes can affect the environment for marketing in foreign countries

• The political risks of global business and the factors that affect stability

• The importance of the political system to international marketing and its effect on foreign investments

• The impact of political and social activists, violence, and terrorism on international business

• How to assess and reduce the effect of political vulnerability

• How and why governments encourage foreign investment

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Global PerspectiveGlobal Perspective

• A crucial reality of international business

– Both host and home governments are integral partners

• A government controls and restricts a company’s activities

– By encouraging and offering support – By discouraging and banning or restricting its activities

• International law recognizes the sovereign right of a nation

– To grant or withhold permission to do business within its political boundaries

– To control where its citizens conduct business

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The Sovereignty of NationsThe Sovereignty of Nations

• A sovereign state – Independent – Free from all external control

• Sovereignty – Powers exercised by a state in relation to other countries – Supreme powers exercised over its own members

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• Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other nations

– NAFTA – North America Free Trade Agreement– NATO – North Atlantic Treaty Organization– WTO – World Trade Organization

• The United States involvement in international political affiliations is surprisingly low

• The WTO is considered by some as the biggest threat so far to national sovereignty

The Sovereignty of NationsThe Sovereignty of Nations

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Stability of Government PoliciesStability of Government Policies

• Issues that can affect the stability of a government– Radical shifts in government philosophy when an opposing political

party ascends to power– Pressure from nationalist and self-interest groups– Weakened economic conditions– Bias against foreign investment– Conflicts between governments

• Five main political causes of international market instability – Some forms of government seem to be inherently unstable– Changes in political parties during elections can have major effects on

trade conditions– Nationalism– Animosity targeted toward specific countries– Trade disputes themselves

6-7

Forms of GovernmentForms of Government

• Circa 500 B.C – Ancient Greeks criticized three fundamental forms of government

– Rule by one (monarchy)

– Rule by few (aristocracy)

– Rule by many (democracy)

• Circa 1990 – Collapse of communism

– Free-enterprise democracy considered the best solution

• 200+ sovereign states on the planet

– Almost all have at least nominally representative governments with universal suffrage for those 18 years and older

– In about 10% of the states voting is required, in the rest it is voluntary

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A Sampling of Government TypesA Sampling of Government Types

Exhibit 6.1

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Political PartiesPolitical Parties

• In countries where two strong political parties typically succeed one another, it is important to know the direction each party is likely to take– Great Britain

► The Labour Party vs. the Conservative Party

• Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift

• A current assessment of a country’s political philosophy and attitudes is important in gauging their stability and attractiveness in terms of market potential

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NationalismNationalism

• An intense feeling of national pride and unity– An awakening of a nation’s people to pride in their country

• National interest and security are more important than international relations

• Countries use nationalism to protect themselves against intrusions – Threats from outside forces – Declines in the domestic economy

• Nationalism comes and goes – As conditions and attitudes change– Foreign companies welcomed today may be harassed tomorrow

and vice versa

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Targeted Fear and/or AnimosityTargeted Fear and/or Animosity

• Marketers should not confuse nationalism with a widespread fear or animosity directed at a particular country– Toyota in the U.S. (1980s)– Animosity toward the United States in France– The unhappiness of citizens and politicians in many other countries

concerning the war in Iraq

• No nation-state, however secure, will tolerate penetration by a foreign company into its market and economy – If it perceives a social, cultural, economic, or political threat to its well-

being

• Trade disputes

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Political Risks of Global BusinessPolitical Risks of Global Business

• Confiscation – the seizing of a company’s assets without payment

• Expropriation – where the government seizes an investment but makes some reimbursement for the assets

• Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees

– Mandating local ownership – Greater national involvement in a company’s management

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How Complicated Things Can GetHow Complicated Things Can Get

Exhibit 6.2

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Economic RisksEconomic Risks

• Exchange controls

– Stem from shortages of foreign exchange held by a country

• Local-content laws

– Countries often require a portion of any product sold within the country to have local content

• Import restrictions

– Selective restrictions on the import of raw materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry

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Economic RisksEconomic Risks

• Tax controls

– A political risk when used as a means of controlling foreign investments

• Price controls

– Essential products that command considerable public interest ► Pharmaceuticals► Food► Gasoline

• Labor problems

– Labor unions have strong government support that they use effectively in obtaining special concessions from business

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Political SanctionsPolitical Sanctions

• One or a group of nations may boycott another nation

– Stopping all trade between the countries – Issuing sanctions against trade of specific products

► U.S. boycotts of trade with Cuba/Iran

• History indicates that sanctions are often unsuccessful in reaching desired goals

– Particularly when ignored by other major nations’ traders

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Political and Social ActivistsPolitical and Social Activists

• Not usually government sanctioned

• Can interrupt the normal flow of trade

• Range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change

– Worldwide boycott of Nestle products

• The Internet has become an effective tool of PSAs to spread the word

– Protest rallies against the U.S. – Iraq War

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Nongovernmental OrganizationsNongovernmental Organizations

• Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments– Protests– Lobbying– Collaborations with governmental organizations

• Many also are involved in mitigating much of the human misery plaguing parts of the planet

– Red Cross– Red Crescent– Amnesty International– Oxfam– UNICEF– Care– Habitat for Humanity

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U.S. State Department Travel Warnings

U.S. State Department Travel Warnings

Exhibit 6.3

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Violence and TerrorismViolence and Terrorism

• The State Department reported 3,200 terrorist incidents worldwide in 2004

• Goals of terrorism against multinationals

– To embarrass a government and its relationship with firms– To generate funds by kidnapping executives – To use as pawns in political or social disputes – To inflict terror within a country as did September 11

• In the past 30 years, 80% of terrorist attacks against the U.S. have been aimed at American businesses

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Armed Conflicts Around the WorldArmed Conflicts Around the World

Exhibit 6.4

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Cyberterrorism and CybercrimeCyberterrorism and Cybercrime

• The internet is a vehicle for terrorist and criminal attacks to inflict damage on a company with little chance of being caught– By foreign and domestic antagonists

• It is hard to determine if a cyber attack has been launched – By a rogue state – A terrorist– A hacker as a prank

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Cyberterrorism and CybercrimeCyberterrorism and Cybercrime

• Each wave of viruses – Gets more damaging – Spreads so rapidly that considerable harm is done before it can

be stopped

• Tools for cyberterrorism – Can be developed to do considerable damage

► To a company, ► An entire industry► A country’s infrastructure

• Mounting concern over the rash of attacks– Business leaders and government officials addressed a Group

of Eight conference

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Politically Sensitive Products and IssuesPolitically Sensitive Products and Issues

• Politically sensitive products

– Perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people

– Are publicly visible or subject to public debate

• Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern

• The European Union has banned hormone-treated beef for more than a decade

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Forecasting Political RiskForecasting Political Risk

• Political risk assessment – An attempt to forecast political instability – To help management identify and evaluate political events – To predict their potential influence on current and future

international business decisions

• Government failure is greatest risk to international marketers – Causing chaos in the streets and markets

• Risk assessment of investments– Used to estimate the level of a risk a company is assuming– Helps determine the amount of risk a firm is prepared to accept

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Top 20 States in Danger of Failing (Ranked)

Top 20 States in Danger of Failing (Ranked)

Exhibit 6.5

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Lessening Political VulnerabilityLessening Political Vulnerability

• Relations between governments and MNCs are generally positive if the investment

– Improves the balance of payments by increasing exports or reducing imports through import substitution

– Uses locally produced resources

– Transfers capital, technology, and/or skills

– Creates jobs

– Makes tax contributions

• Political parties often focus public opinion on the negative aspects of MNCs whether true or false

– As scapegoats for their own failure – To serve their own interests

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Lessening Political VulnerabilityLessening Political Vulnerability

• Strategies that MNCs use to minimize political vulnerability and risk– Joint ventures– Expanding the investment base– Licensing – Planned domestication– Political bargaining– Political payoffs

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Government EncouragementGovernment Encouragement

• Most important reason to encourage foreign investment – To accelerate the development of an economy

• U.S. government motivated for economic as well as political reasons– Encourages American firms to seek business opportunities in countries

worldwide including those that are politically risky ► Department of Commerce► International Trade Administration

• Agencies that provide assistance to U.S. companies – Export-Import Bank (Ex-Im Bank)– Foreign Credit Insurance Association (FCIA)– The Agency for International Development (AID)– The Overseas Private Investment Corporation (OPIC)

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SummarySummary

• The foreign firm – Must strive to make its activities politically acceptable or it may be

subjected to a variety of politically condoned harassment

• The foreign marketer frequently faces the problem of uncertainty of continuity in government policy

• Marketing firms accepted under one administration might find its activities undesirable under another – As governments change political philosophies

• Unfamiliar or hostile political environment does not necessarily preclude success for foreign marketers– If the company becomes a local economic asset and responds creatively

to the issues raised by political and social activities– If a company is considered vital to achieving national economic goals, the

host country often provides an umbrella of protection