The Political Environment: A Critical Concern

Chapter 6

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

PowerPoint presentation prepared by:Professor Rajiv MehtaAssociate Professor of MarketingNew Jersey Institute of TechnologyNewark, N.J.

Chapter Learning Objectives

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

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

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

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

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

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

Chapter Learning Objectives

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

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

5. Assessing and reducing the effect of political vulnerability

5. Assessing and reducing the effect of political vulnerability

6. How and why governments encourage foreign investment 6. How and why governments encourage foreign investment

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

• 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

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

• A change in government, whether by election or coup, does not always mean a change in the level of political risk

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

• A change in government, whether by election or coup, does not always mean a change in the level of political risk

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

• 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

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

• Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well

• Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well

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, and3. Price Controls

1. Confiscation, Expropriation, and Domestication

2. Economic Risks, and3. 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

exchanged) 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

exchanged) 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:

1. effect on the environment, 2. exchange rates 3. national and economic security 4. affect public health, e.g., genetically

modified (GM) foods

• Politically sensitive products include those that:

1. effect on the environment, 2. exchange rates 3. national and economic security 4. affect public health, e.g., genetically

modified (GM) 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 resourcesuses locally produced resources

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

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

makes tax contributionsmakes 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