The Political Environment: A Critical Concern Chapter 6 McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights re
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The Political Environment: A Critical Concern
Chapter 6
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
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
4
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Curbing Child Labor– Boycotts, Rallies, and Demonstration Get Attention, but Is There a Better Way?
● Set of Stage: Pakistan● Ten-year-old children bend over soccer balls● Whirlpool, General Electric, Godiva, and etc.● 250 million children, between the ages of 4 and 15, are obliged to work.● Boycotts?●World Bank introduced programs that pay poor mothers to keep their teenage and younger children in school and out of the labor force.●Example: PROGRESA in Mexico
Irwin/McGraw-Hill
6-3
Against Child Labor
• UNICEF sponsored this advertising campaign against child labor. The field of consumer behavior plays a role in addressing important consumer issues such as child exploitation.
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
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