The Political Environment: A Critical Concern

Chapter 6

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Introduction

• The political environment of countries is a critical concern for the international marketer.

• International law recognizes the sovereign right of a nation to allow or deny foreign firms to conduct business.

• Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members.

• A sovereign state is independent and free from all external control; enjoys full legal equality with other states; and governs its own territory.

Stability of Government Policies

Radical shifts in government philosophy can occur when:Radical shifts in government philosophy can occur when:

1. An opposing political party ascends to power;

2. Pressure from nationalist and self-interest groups;

1. An opposing political party ascends to power;

2. Pressure from nationalist and self-interest groups;

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

conflicts between governments.

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

conflicts between governments.

Stability of Government Policies

• The stability or instability of prevailing government policies is a major concern of foreign businesses.

• The stability or instability of prevailing government policies is a major concern of foreign businesses.

• Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade.

• Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade.

• The ideal political climate for a multinational firm to conduct business is a stable, friendly government.

• The ideal political climate for a multinational firm to conduct business is a stable, friendly government.

Nationalism

• Nationalism refers to feelings of national pride and unity. • Nationalism refers to feelings of national pride and unity.

Feelings of nationalism are manifested by:

1. Call to “buy our country’s products only,” e.g., “Buy American”.

2. Restrictions on imports, restrictive tariffs, and other barriers to trade.

Feelings of nationalism are manifested by:

1. Call to “buy our country’s products only,” e.g., “Buy American”.

2. Restrictions on imports, restrictive tariffs, and other barriers to trade.

Political Risks of Global Business

• Risks of global business include: • Risks of global business include:

1. Confiscation, Expropriation, and Domestication;

2. Economic Risks, and;3. Price Controls.

1. Confiscation, Expropriation, and Domestication;

2. Economic Risks, and;3. Price Controls.

Confiscation, Expropriation, and Domestication

• Confiscation, the most severe political risk, is the seizing of a company’s assets without payment.

• Confiscation, the most severe political risk, is the seizing of a company’s assets without payment.

• Expropriation is where the government seizes an investment, but some reimbursement for the assets is made; often the expropriated investment is nationalized to become a government run entity.

• Expropriation is where the government seizes an investment, but some reimbursement for the assets is made; often the expropriated investment is nationalized to become a government run entity.

• Domestication occurs when the government mandates local ownership and greater national involvement in a foreign company’s management.

• Domestication occurs when the government mandates local ownership and greater national involvement in a foreign company’s management.

Economic Risks

• International firms face a variety of 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 foreign

exchange;d) Raise revenue;e) Retaliate against unfair trade

practices.

Governments can impose restraints on business activity to:

a) Protect national security ; b) Protect an infant industry ;c) To conserve scarce foreign

exchange;d) Raise revenue;e) Retaliate against unfair trade

practices.

Forecasting Political Risk

• Decide if risk insurance is necessary.• Devise an intelligence network and an early warning system.

• 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 events for use in predicting future problems.

• Interpret the data gathered by a company’s intelligence network in order to advise and forewarn corporate decision makers about political and economic situations.

• Develop contingency plans for unfavorable future political events.

• Build a database of past political events for use in predicting future problems.

• Interpret the data gathered by a company’s intelligence network in order to advise and forewarn corporate decision makers about political and economic situations.

Other Political Risks of Global Business

2. Political and Social Activists

2. Political and Social Activists

3. Violence and Terrorism

3. Violence and Terrorism 4. Cyberterrorism4. Cyberterrorism

1. Political Sanctions1. Political Sanctions

Assessing Political Vulnerability

• No absolute guidelines to assess if a firm faces political risks. • No specific guidelines to determine a product’s political

vulnerability, but there are some generalizations.

• No absolute guidelines to assess if a firm faces political risks. • No specific guidelines to determine a product’s political

vulnerability, but there are some generalizations.

• Politically sensitive products include those that affect:

1. the environment; 2. national and economic security; 3. public health, e.g., genetically

modified foods.

• Politically sensitive products include those that affect:

1. the environment; 2. national and economic security; 3. public health, e.g., genetically

modified foods.

Reducing Political Vulnerability

Relations between governments and MNCs are generally positive if the investment: 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;

improves the balance of payments by increasing exports or reducing imports through import substitution;

uses locally produced resources;uses locally produced resources;

transfers capital, technology, and/or skills;transfers capital, technology, and/or skills;

creates jobs, and/or; creates jobs, and/or;

makes tax contributions.makes tax contributions.

Reducing Political Vulnerability

MNC’s can use the following strategies to minimize political vulnerability and risk:MNC’s can use the following strategies to minimize political vulnerability and risk:

Joint Ventures Joint Ventures

Expanding the Investment Base Expanding the Investment Base

LicensingLicensing

Planned DomesticationPlanned Domestication

Political Payoffs Political Payoffs