Chapter 6 by Professor Riaz Khan

The Political Environment: A Critical Concern

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.

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

Chapter Learning Objectives

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

5. Assessing and reducing the effect of political vulnerability

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:

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

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

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

Nationalism
Nationalism refers to feelings of national pride and unity

Feelings of nationalism are manifested by: 1. Call to buy our countrys 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:

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 companys 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

Domestication occurs when the government mandates local ownership and greater national involvement in a foreign companys management

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

Forecasting Political Risk

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 companys intelligence network in order to advise and forewarn corporate decision makers about political and economic situations

Other Political Risks of Global Business 1. Political Sanctions 2. Political and Social Activists

3. Violence and Terrorism

4. Cyberterrorism

Assessing Political Vulnerability

No absolute guidelines to assess if a firm faces political risks No specific guidelines to determine a products political vulnerability, but there are some generalizations

1. 2. 3. 4.

Politically sensitive products include those that: effect on the environment, exchange rates national and economic security affect public health, e.g., genetically modified (GM) foods

Reducing 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 creates jobs, and/or

makes tax contributions

Reducing Political Vulnerability

MNCs can use the following strategies to minimize political vulnerability and risk:

Joint Ventures
Expanding the Investment Base Licensing

Planned Domestication Political Payoffs