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

Dr. John V. Padua

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 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 and why governments encourage foreign investment

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Global 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 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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Stability of Government Policies

• 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

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Forms 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 TypesExhibit 6.1

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Political 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

• 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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Nationalism• 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 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 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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Economic 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 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 Sanctions

• One or a group of nations may boycott another nation– Stopping all trade between the countries – Issuing sanctions against trade of specific products

• History indicates that sanctions are often unsuccessful in reaching desired goals– Particularly when ignored by other major nations’

traders

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Violence and Terrorism

• 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

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Cyberterrorism 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 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

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Government Encouragement

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

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Summary

• 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