The Political Environment: A Critical Concern. 6 - 2 Learning Objectives What the sovereignty of nations means and how it can affect the stability of.

The Political Environment:A Critical Concern

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Stability 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 instability in international markets:- 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

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

- Rule by one (monarchy)- Rule by few (aristocracy)- Rule by many (democracy)

• Following the collapse of communism circa 1990 the world seemed to have agreed that free-enterprise democracy was the best solution.

• Of the more than 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 Types

• Insert Exhibit 6.1

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A Sampling of Government Types

• Insert Exhibit 6.1

Women Wait to Vote in Iran

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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 (continued)

• 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 Risks of Global Business

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

• Expropriation – where the government seizes an investment but some reimbursement for the assets is made.

• Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s management.

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Political and Social Activists

Korean Students Protest Daewoo Sale to GM

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Political and Social Activists

Bharatiya Party Protesting in Bhopal

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Nongovernmental 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

• Insert Exhibit 6.3

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Violence and Terrorism

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

• Goals of terrorism- Multinationals are targeted to embarrass a government and its

relationship with firms- To generate funds by kidnapping executives to finance terrorist goals- To use as pawns in political or social disputes not specifically

directed at them- 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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Cyberterrorism and Cybercrime

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

• It is hard to determine if a cyber attack has been launched by a rogue state, a terrorist, or by a hacker as a prank.

• Each wave of viruses gets more damaging and 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, or a country’s infrastructure.

• Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of Eight conference.

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Forecasting Political Risk

• Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions.

• The greater the risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets.

• Risk assessment is used to estimate the level of a risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept.

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Top 20 States in Danger of Failing (Ranked)

• Insert Exhibit 6.4

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Lessening 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- Create jobs- Make tax contributions

• Political parties seeking publicity or scapegoats for their failure often serve their own interests by focusing public opinion on the negative aspects of MNCs whether true or false.

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Lessening Political Vulnerability

French Farmers toss Tomatoes at McDonalds to Protest the Company’s Fast Food.

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Lessening Political Vulnerability

Taiwanese Fishermen Protest Japanese Fishing

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Lessening Political Vulnerability (continued)

• 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 Encouragement

• The most important reason to encourage foreign investment is to accelerate the development of an economy.

• The U.S. government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries worldwide, including those that are politically risky.

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