Political

Environment

Sumit Upadhyay
Political System

Ideology
Capitalist system
 Socialist system

Capitalist System
- Private ownership of business is encouraged
Socialist System
- Public ownership of business is the norm
The Political &
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

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Political Environment
Major Players:

1. Home Governments

2 . Host Governments

3. International Agencies (WTO, World Bank, IMF)

Issues

Governments conform to international

agreements, treaties and laws.

Political and legal climates related:

 because laws are derived from a country’s political
processes.
Political Environment- Home Govt.
Government affects many aspects of business life in a
country.
Taxation
National politics affect business environment directly,
through changes in policies, regulations, and laws.
Operating conditions
The political stability and mood in a country affect the
actions a government will take.
Home Governments: Actions
Incentives and Government Programs
Government Procurement
Trade Laws
Tariff and Nontariff Barriers
Embargoes and Sanctions
Export License Requirements
Home Governments: Actions
Investment Regulations (ownership & financial
controls)
Macroeconomic Policies (governments’ monetary
& fiscal policies such as the cost of capital, level of
economic growth, rates of inflation & international
exchange rates)
International Agreements
G7 (Group of Seven)

economic policy coordination group Canada, UK, France,

Germany, Italy, Japan, and the United States.

G8 (Group of Eight) - G7 and Russia.

COCOM (The Coordinating Committee for Multilateral Controls)
founded in 1949
stop the flow of Western technology to the former Soviet Union;
includes Australia, Japan and the NATO countries except Iceland.
Social Pressures and Political Risk
Social Pressures and Special Interests
Lobby groups
Environmentalists
Managing the Political Environment:
Expropriation/Confiscation
Nationalization
Domestication Policy/Phase-Out Policy
Countertrade
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)

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Political Risk – 7 Typical risk events
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

© 2006 Prentice Hall 1-12

Managing Political Risk
Avoidance – either the avoidance or withdrawal of
investment in a particular country
Adaptation – adjust to the political environment
Dependency – keeping the host nation dependent
on the parent corporation
Hedging – minimizing the losses associated with
political risk events

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Impact on Marketing Mix
1. Product :
 product liability;
 product safety;

 environmental regulations

 packaging/labelling

2. Price :
 high inflation → price controls
 VAT ---- hidden or separate
3. Place :
 tyingcontracts are illegal in Canada,
 but not so in many countries.

 exclusive sales territories illegal in HOST COUNTRIES

4. Promotion :

Deceptive/misleading

Fraudulent advertising

Nudity !!!