Chapter-4

The Political Environment

Nafisa Newaz
Assistant Professor
Department of Business Administration
 Global firm

A firm that, by operating in more than one

country, gains R&D, production, marketing
and financial advantages that are not available
to purely domestic competitors.
 Major decision in international marketing

Deciding
Deciding Deciding Deciding
how to Deciding on
whether which on the
enter marketing
marketing
to go markets organization
the program
abroad to enter
market
 Deciding whether to go abroad

1.Larger profit opportunities: Some international

marketers presents higher profit opportunities
than the domestic market.

2. economies of scale: The company needs a large

customer base to achieve economies of scale.

3. Reduce dependence: The company wants to

reduce its dependence on any one market.
4. Attack global competitors: The company
decides to counterattack global competitors in
their home markets.
5.Customers international service: Customers
are going abroad and require international
service
 Several risk before making a decision
to go abroad
1. The company might not understand foreign
preferences & could fail to offer a competitively
attractive product.
2. The company might not understand the foreign
country’s business culture.
3. The company might underestimate foreign
regulations & incur unexpected costs.
4. The company might lack managers international
experience.
5. The foreign country might change its commercial
laws, devalue its currency, or undergo a political
revolution & expropriate foreign properties.
 Deciding which markets to enter
In deciding to go abroad, the company needs to define its
marketing objectives and policies. Most companies start
small when they venture abroad. Some plan to stay
small, others have bigger plans.

1. How many markets to enter-typically entry strategies

are waterfall approach, gradually entering countries in
sequence, & the sprinkler approach, entering many
countries simultaneously.
2. Develop Vs developing markets
3. Evaluating potential markets
 Deciding how to enter the market/
Or, Market entry strategies/
Or, Mode of entry into international market

Exporting Foreign Production Ownership Entry

Strategies analysis
Indirect Exporting -Licensing
Direct Exporting -Franchising -Joint Venture Sales
-Contract Manufacturing -Alliance Costs
-Management contracting -Acquisitions Assts
-Assembly Profitability
-Fully integrated product Risk factor

Entry strategy decision

Exit Strategy Reentry strategy

 Exporting

Entering a foreign market by selling goods produced in the

company’s home country, often with little modification.

1. Indirect Exporting: Indirect exporting occurs when a

firm sells its product to a domestic customer, which in
turn export the products, in either its original form or a
modified form.
A company can exporting goods indirectly in several ways:

i) Domestic-based export merchants-buy the

manufacturer’s products and sell them abroad.
ii) Domestic-based export agents- seek and negotiate
foreign purchases for a commission.
iii) Cooperative organization-carry on exporting
activities on behalf of several producers and are
partly under their administrative control.
iv) Export management companies- agree to
manage a company’s export activities for a fee.

2. Direct Exporting: Direct exporting occurs through

sales to customer- either distributors or end users
located outside the firms home country.
 Foreign Production

• -Licensing : All intellectual properties(patent, TM,

copyrights) transfer to the licensee from licensor for a
specific period and royalty fee. Licensor have no
controlling power.
• -Franchising: In this form not only sells intellectual
properties to franchisee but also the franchisee agree to
abide by strict rules and regulation as to how it does
business. Franchisor have controlling power for product
quality.
• -Contract Manufacturing: The company contracts with
manufacturers in the foreign market to produce its
product or provide its service. They have only production
control power rather than product quality control.
• Management contracting: The domestic firm supplies
management know-how to a foreign company that
supplies the capital. The domestic firm exports
management services rather than products.
• -Assembly: It can assemble many parts of a product
from different countries & make to useful product for
the customer. It is more costly form.
• -Fully integrated product: In this form of strategy the
firm will go to abroad & set up a plant for production. It
is more risky & costly mode of entry.
 Ownership Strategies

• -Joint Venture: Two or more firm join together to create

a new business entity that is legally separate and distinct
from its parents. It involves shared ownership. It
provides strength in terms of required capital. It is less
risky.
• -Alliance: It follow only production alliance, technology
alliance, process alliance, or distribution alliance. It is
less risky mode of entry, but it has no control in overall
firms.
• -Acquisitions: It is more costly & risky mode of entry.
Domestic company may purchase the foreign company
and acquires its ownership and control.
 Advantages and disadvantages of different
modes of entry
❖ Licensing
Advantages SL Disadvantages

Little or no investment 1 Lack of control

Rapid entry 2 Potential opportunity cost

Means to bridge import 3 Need for quality control

barriers
Low risk 4 Limited market development
 Join venture
Advantages SL Disadvantages

Risk sharing 1 Risk of conflicts with partner or

partners

Less demanding on resources( 2 Lack of control

compared with wholly owned)

Potential with synergies(e.g. access to 3 Risk of creating competitor

local distribution network)
 The Political Environment

• The political environment refers to the actions taken by

the government, which potentially affect the daily
business activities of any business or company.

• Government actions which affects the operations of a

company or business. These actions may be on local,
regional, national or international level. Business owners
and managers pay close attention to the political
environment to gauge how government actions will affect
their company.
 Political Risk of Global Business

A. Some costly/ severe political risk:

1. Confiscation: Confiscation is the seizing of a company’s

assets without payment. It was most prevalent in the
1950s & 1960s when many underdeveloped countries
saw confiscation, albeit ineffective, as a means of
economic growth.
2. Expropriation: Less drastic, but still severe, when the
government seizes an investment but some
reimbursement for the assets.
3. Domestication: Domestication occurs when host
countries gradually cause the transfer of foreign
investments to national control & ownership
through a series of government decrees by
mandating local ownership & greater national
involvement in a company’s management.
B. Economic risk:

1. Exchange controls: Exchange control stem from

shortages of foreign exchange held by a country.

2. Local-content laws: Countries often require a portion of

any product sold within the country to have local
content, that is, to contain locally made parts.

3. Import restriction: Selective restrictions on the import of

raw materials, machines, & spare parts are common
strategies to force foreign industry to purchase more
supplies within the host country.
4. Tax controls: It is classified as a political risk when
used as a means of controlling foreign
investment. In such cases, it is raised without
warning & in violation of formal agreement.
5. Price controls: Essential products that command
considerable public interest, i.e. food, gasoline, &
cars often subjected to price control.
C. Political sanctions: Other than economic risk, one or a
group of nations may boycott another nation, thereby
stopping all trade between the countries, or may issue
sanctions against the trade of a specific products.

D. Political and social activist: Albeit not official sanctioned

by the government, the impact of a political and social
activists(PSAs) can also interrupt the normal flow of
trade.
E. Violence and terrorism: Violence and terrorism are
related risk for MNCs to consider in assessing the political
vulnerability of their activities.
 Reducing Political Vulnerability
1. Improves the balance of payment by increasing
exports or reducing imports through import
substitution
2. Uses locally produced resources
3. Transfers capital, technology, or skill
4. Creates jobs
5. Makes tax contributions
 Selecting a target market or international
marketing
Step 1: Select indicators and collect data-
Choose a set of socioeconomic and political indicators
you believe are critical. Selected indicators are, to a large
degree, driven by the strategic objectives spelled out in
the company global mission.
Step 2: Determine the importance of country indicators-
Determine the importance weights of each of the
different country indicators identified in the previous step.
“Constant-sum” allocation technique.
Step 3: Rate the countries in the pool on each
indicator-
Give each country score on each of the indicator.
E.g. seven-point or five-point scale.
Step 4: Compute the overall score for each
country-
The weighted scores of each prospect country
obtained on each indicator are summed.
 Criteria for choosing the mode of entry
/Entry analysis
1. Market size & growth: The size of the market is the
key determinant of entry choice decision. Larger markets
justify major resource commitments in the form of joint
ventures or wholly owned subsidiaries.

2. Risk: Risk relates to the instability in the political &

economic environment that may affect the company’s
business prospects.
3. Government regulations: Government regulations
heavily constrain the set of available options. Trade
barriers of different kinds restrict the entry choice
decision.
4. Competitive environment: The nature of the competitive
situation in the local market is another driver.

5. Local infrastructure: The physical infrastructure of a

market refers to the country’s distribution system,
transportation network, & communication system.
6. Company objective: key influence in choosing modes of
entry. Firms that have limited aspirations will typically
prefer entry options that involve a minimum of
commitment(e.g. licensing).

7. Internal resources, assets & capabilities: Companies

with tight resources (human or financial) or limited assets
are constrained to low commitment entry modes, i.e.
exporting & licensing, that are not too demanding on
their resources.
8. Flexibility:
 Timing of entry
1. The higher the level of international experience
2. The larger the firm size
3. The broader the scope of product & service
4. When competitors have already entered the
market
5. The more favorable the risk(political, business)
conditions
6. When nonequity modes of entry(e.g. licensing,
exporting, nonequity alliances) are chosen
 Reasons for exit
1: Sustained losses: Most companies recognize that an
immediate payback of their investments is not realistic and
are willing to absorb losses for many years.
2. Volatility: Companies often underestimate the risk of the
host country’s economic and political environment.
Unfortunately, countries with high-growth potential often
are very volatile.
3. Premature entry: Entering a market too early is usually
an expensive mistake. Entries can be premature for
reasons such as an underdeveloped marketing
infrastructure(low buying power & lack of strong local
partners).
4. Ethical reasons: The bad publicity brewed up by human
rights campaigners can tarnish the company’s image.
Rather than running the risk of ruining its reputation, the
company may decide to pull out of the country.
5. Intense competition: The outcome is often overcapacity,
triggering price wars & loss-loss situations for all players
that types of circumstance company should leave the
market.
6.Resource reallocation:
 Assignment
• Difference between Licensing & Franchising
• Advantages and disadvantages of direct exporting
• Advantages and disadvantages of indirect exporting
• Advantages and disadvantages of franchising
• Advantages and disadvantages of acquisition
• Advantages and disadvantages of contract
manufacturing.
• Ways of Reducing Political Vulnerability
• Risks of exit.