THE POLITICAL ENVIRONMENT

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
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
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.
STABILITY OF GOVERNMENT
POLICIES
Radical shifts in government philosophy can occur when:
 Pressure from nationalist and self-interest groups.
 An opposing political party ascends to power.
 Weakened economic conditions.
 Bias against foreign investment or conflicts between
governments.

 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.
POLITICAL RISKS OF GLOBAL
BUSINESS
Risks of global business include:
 Confiscation, Expropriation, and Domestication.
 Economic Risks, and
 Price Controls
CONFISCATION, EXPROPRIATION, AND
DOMESTICATION
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.

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:
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 company’s
intelligence network in order to advise and forewarn
corporate decision makers about political and
economic situations.
 E
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THE POLITICAL AND ECONOMIC
ENVIRONMENT
 One important aspect is the phenomenon of
ethnicity
-Driving force behind political instability
 Firms must assess political risks
-Government actions that could adversely affect the
long-run profitability or value of a firm.
 POLITICAL RISK – 7 TYPICAL
RISK EVENTS
 Expropriation of corporate assets without prompt
and adequate compensation
 Forced sale of equity to host-country nationals,
usually at or below depreciated book value
 Discriminatory treatment against foreign firms in the
application of regulations or laws
 Barriers to repatriation of funds (profits or equity)
 Loss of technology or other intellectual property
(such as patents, trademarks, or trade names)
 Interference in managerial decision making
 Dishonesty by government officials, including
canceling or altering contractual agreements,
extortion demands, and so forth.
 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
• 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

MNC’s can use the following strategies to

minimize political vulnerability and risk:
• Joint Ventures
• Expanding the Investment Base
• Licensing
• Planned Domestication
• Political Payoffs

POLITICAL ENVIRONMENT
The Middle East:
• Doing business requires knowledge of
– Regulations
– Legal environment
– Tax regimes
– Accounting methods
 – Business structures
– Import/export regulations
– Manpower and labor regulations
– Restrictions on foreign capital investment
• Doing business in Middle Eastern countries is risky
and potentially dangerous
– War on terrorism
– Afghanistan and Iraq wars
– Israel—Arab conflicts
– Rising tensions
• Business requires knowledge of Islam
– Religion and way of life
– Framework of life and society
– Islamic fundamentalists have become aggressive
toward U.S. and its allies.
POLITICAL ENVIRONMENT
CHINA:
 Emerging economic power
 Government’s desire to balance:
a)National, immediate needs
b) Challenge of a free market economy and
globalization
 Government attempting to open up the
economy:
 Speed up conversion of state enterprises
into corporations
 Expand capital markets by authorizing new
stock listings
 Sell off most of the 305,000 state enterprises
(or let go bankrupt)
 Worker retraining, low-cost housing and
other programs
  Reduce tariffs to 10 percent

CENTRAL AND EASTERN EUROPE

• Many of these countries have joined the EU
• Movement from centrally planned to market
economy plagued with problems in many countries
– High unemployment
– Economic slowdown
– Large trade deficits
• Some countries more successful in economic reforms
– Estonia
– Latvia
– Lithuania

RUSSIA:
 Neglect, corruption, and confusing changes in
economic policy
 Infrastructure is weak and a political quagmire
  Legal
 Financial
 Trade sectors
 Corruption interferes with attraction of more
foreign investment.

Key Elements of Russia’s WTO Accession Deal with the

EU:
Tariffs:
Russia will not exceed an average’ tariff level of 7.6% for
industrial goods, 11% for fishery products, and 13 % for
agricultural goods.
Energy:
Russian gas prices to domestic industrial users will
gradually be increased.Russia’s state gas corporation,
Gazprom, will retain its export monopoly. Export duties
on gas will be capped at 30%.
Airlines:
Russia will revamp the charges currently applied to EU
airlines flying over Siberia to make them cost-based and
nondiscriminatory.
Banking:
Russia will maintain a ban on foreign banks opening
branches.
Under existing rules, foreign banks are allowed to open
only wholly or partly owned subsidiaries.
Services:
Russia has committed to cross-border provision and
commercial establishment of certain services.
Sectors include telecoms, transport, financial services,
postal, construction, distribution, environmental, news
agency, and tourism.
EUROPE:
 Privatization and economic liberalization
reinforce EU-wide political and economic integration
 Political power is variable and complex
 Strong opposition to U.S.-led intervention in Iraq
sometimes spill over into business relationships and
dealings
 Europe is a large interwoven region
economically, but contains vast cultural differences