Chapter 10 The political environment

Lecture overview

Introduction The importance of analysing the political environment The four political sub-environments Political risk and international marketing Political and country risk assessment Strategic responses to manage political risk

Learning outcomes
Explain the importance of assessing the political environment from an international marketing perspective Describe the influence of the four different subenvironments on international business Identify key political concepts in the context of international marketing Explain why political risk assessment is important Examine the different risk assessment tools Evaluate the strategic marketing responses to political risk

Introduction
The importance of understanding the political environment:
Businesses are subject to ever-changing political risk that affects business operations This is particularly relevant to international marketing Shawn Fanshier (UPS) remarked: as for the threats to our investments, the biggest are government policies and regulations.

The importance of analysing the political environment

Businesses are increasingly operating across international borders More volatile world due to increased international political violence Businesses are increasingly moving their manufacturing operations to countries with higher political risk The nature of todays global political economy encourages executives and government leaders to be more aware of political risk measures and consider these when making strategic plans.

The four political sub-environments

The international marketer needs to centre attention on the components of the political environment that affect the business

The political environment can be divided into four basic sub-environments:

Host-country Home-country International Global.

The four political sub-environments

Political risk and international marketing

Political risk defined:
Risk of a change in government policy that would adversely impact on a companys ability to operate effectively and profitably

Key questions to be considered

What is the extent of the support for the current government?
Is there a possibility that the current government will not be re-elected? Is there a possibility of a military coup, civil war, political violence or civil disorder? Are there any religious or ethnic tensions that are politically destabilizing? Is the judiciary independent of political influences?

Key questions to be considered

Are private property rights protected by law Is there a risk of expropriation or government intervention Is the country engaged in any military cross border conflicts Are there any irregular payments in public utilities, taxes, permits or licenses What is the attitude of government to foreign businesses What is the current legislation for foreign businesses.

Concerns facing international marketers:

Political stability
Sovereignty Political intervention Political turmoil

Political stability
Political stability means that political change has minimal adverse effect on business operations and is seen to be gradual and predictable Some characteristics of a stable political environment:
Government unity Consistent and predictable government policy Legislative strength Popular support Sound international reputation.

Sovereignty
The central idea of sovereignty is that government is the ultimate source of political authority
Important to distinguish between internal and external sovereignty
Internal sovereignty is when a government is able to determine its own system of political, economic and social control on business External sovereignty refers to the independence or autonomy of a country.

Political intervention
Political intervention is when action by government force businesses to change [their] strategies, policies or operations.

Political intervention can take on a number of forms, including:

Confiscation Expropriation Domestication Repatriation restrictions Sanctions.

Political turmoil
Political turmoil can be referred to as any actions by political, government, religious and ethnic groups that can result in the harming of the business Political turmoil can include a whole host of different actions, including:
Civil conflict Military and guerrilla activities Religious tensions Political violence International conflict Riots Ethnic tensions Social activism.

Response to political violence

Political and country risk assessment

Businesses can potentially use two established techniques for political and country risk assessment:
Political risk indices Scenario planning

A risk index involves the systematic measurement of current and possible future events Scenario planning involves creating credible alternative stories about the future to aid business decisions

Political risk forecasts for selected countries

Highly stable countries posses the following characteristics:

Efficient state institutions Government effectiveness High degree of political legitimacy Sound economic performance and policies Absence of significant anti-state opposition Rare instance of political violence Low level of social, ethnic, or religious tensions Infrequent occurrence of humanitarian emergencies and capacity to mitigate natural disasters

Strategic responses to political risk

It is necessary for international marketers to:
Recognise risk Prioritise risk

Mobilise resources to deal with the risk

Strategic responses to manage political risk

Seven basic responses to political risk:
Tolerate risk Minimise risk Diversify risk Hedge risk Concentrate risk Transfer risk Insure against risk.