The Political Environment:

A Critical Concern

6-1
Learning Objectives
LO1Know the concept sovereignty of nations and how it can affect the
stability of government policies
LO2 Discuss different governmental types, political parties, nationalism,
targeted fear/animosity, and trade disputes can affect the environment for
marketing in foreign countries
LO3 Understand political risks of global business and the factors that
affect stability
LO4 Know the importance of the political system to international
marketing and its effect on foreign investments
LO5 Know impact of political and social activists, violence, and terrorism
on international business
LO6 How to assess and reduce the effect of political vulnerability
LO7 How and why governments encourage foreign investment

6-2
World Trade Goes Bananas!
 The Banana wars and conflict between the U.S. and
Europe started out as a simple tariff dispute between
France and U.S. companies exporting bananas from
Latin American countries to France
 France gave preferential treatment for bananas
coming from its former colonies in the Caribbean and
Africa
 The rest is history and politics, see more here:
“Banana Wars”

6-3
Sovereignty of Nations
 A sovereign state is independent and free from all
external control
• enjoys full legal equality with other states
• governs its own territory
• selects its own political, economic, and social systems and
• has the power to enter into agreements with other
nations.
 Sovereignty refers to both the powers exercised by a
state in relation to other countries and the supreme
powers exercised over its own members.

6-4
Stability of Government Policies
 Radical shifts in government philosophy
can occur when:
• An opposing political party ascends to power
• Pressure from nationalist and self-interest
groups
• Weakened economic conditions
• Bias against foreign investment or conflicts
between governments

6-5
 Instability of Governments and Policies:
Political Reasons
• Some forms of government seem to be
inherently unstable
• Changes in political parties during elections
can have major effects on trade conditions
• Nationalism
• Animosity targeted toward specific countries
• Trade disputes

6-6
Political Systems

 the system of government in a nation.

 can be assessed according to two
dimensions:
o emphasized on collectivism as opposed to
individualism.
o to which they are democratic or
totalitarian.

6-7
COLLECTIVISM

 a political system that stresses the

primacy of collective goals over
individual goals.
 an individual right may be restricted on
the grounds that it may run counter to
“common good”.
 advocates can be traced to “Plato”(427-
347 BC)
6-8
COLLECTIVISM:
SOCIALISM

 Modern socialist trace their intellectual roots

to Karl Marx (1818- 83)
 he argued that few benefit at the expense of
many in a capitalist society where individual
freedoms are not restricted.
 while capitalist accumulate considerable
wealth, he postulated that the wages earned
by the majority of workers in capitalist society
would be forced down to subsistence level.
6-9
COLLECTIVISM:
Socialism

 he argued that capitalist expropriate

for their own use the value created
by workers, while paying workers
only subsistence wages.
 He advocated state ownership of
basic production, distribution and
exchange.
6-10
COLLECTIVISM:
Socialist ideology:

 Communists – believed that

socialism could be achieved only
through violent revolution and
totalitarian dictatorship.
 Social democrats – committed
themselves to achieving socialism
through democratic means.
6-11
COLLECTIVISM:
INDIVIDUALISM

 refers to philosophy that an

individual should have freedom in
his/her economic and political
pursuits.
 stresses that the interests of
individual should take precedence
over the interests of the state.
6-12
COLLECTIVISM:
INDIVIDUALISM

 traced to Aristostle (384- 322 BC)

 argued that individual diversity and
ownership is desirable.
 argued that private property is more
highly productive than communal
property.

6-13
COLLECTIVISM:
INDIVIDUALISM : 2 Central Tenets

1. Importance of guaranteeing
individual freedom and self
expression.
2. Welfare of society is best served by
letting people pursue their own
economic self interests.

6-14
COLLECTIVISM:
INDIVIDUALISM

Central Message:
“ Individual economic and political
freedoms are the ground rules on which
society should be based.”

6-15
DEMOCRACY

- refers to a political system in

which government is by the
people, exercised either directly
or through elected
representatives.

6-16
DEMOCRACY

belief that citizens should be

directly involved in decision
making.
In representative democracy, elected
representatives then form a government
whose functions is to make decisions on
behalf of electorate.
6-17
DEMOCRACY
Safeguards in Constitutional Law

1. an individual right to freedom of expression, opinion and

organization.
2. a free media
3. regular elections in which all eligible citizens are allowed to
vote.
4. universal adult suffrage
5. limited terms of elected representatives
6. a fair court system that is independent from political system
7. a nonpolitical state bureaucracy
8. a nonpolitical police force and armed service
9. Relatively free access to state information.

6-18
TOTALITARIANISM

- form of government in which

one person or political party
exercise absolute control over
all spheres of human life and
prohibits opposing political
parties.
6-19
TOTALITARIANISM
Theocratic Totalitarianism

found in states where a party or group

or individual that governs according to
religious principles monopolizes power.
Example:
Iran, Saudi Arabia

6-20
TOTALITARIANISM
Tribal Totalitarianism

- occurs when a political party

that represents the interests of
a particular tribe and not always
the majority tribe monopolizes
power.

6-21
TOTALITARIANISM
Right- Wing Totalitarianism

- generally, permits some

individual economic freedom
but restricts individual political
freedom frequently on the
ground that it would lead to rise
of communism
6-22
Forms of Government
• Democracy or market
directed government
ideology
• Communist governments
• Theocratic Republic
– Islamic Law countries
where political parties can
exist but have little power
– The religious leader
controls government and
all governmental decisions

6-23
Political Parties
 Be knowledgeable about the philosophies of all
major political parties and their attitudes towards
trade

6-24
Economic Systems

Pure market economy

Command Economy
Mixed Economy

6-25
Legal Systems

 refers to the rules, or laws that

regulate behavior along with
processes by which the laws are
enforced and through which redress
for grievances is obtained

6-26
Legal Systems:
Common Law
 based on tradition, precedent and customs
*tradition- refers to the country’s legal history
*precedent- to cases that have come before
the court in the past
*customs – to the ways in which laws applied
in specific situations

6-27
Legal Systems:
Civil Law
 based on a detailed set of laws organized into
codes.
 tends to be less adversarial, judges rely upon
detailed legal codes rather than interpreting
tradition, precedent and customs.

6-28
Legal Systems:
Theocratic Law
 law is based on religious teachings.
 Islamic law is primarily a moral rather than a
commercial law and is intended to govern all
aspects of life.
 Foundation of Islamic law is the holy book of
Islam, the Koran along with Sunnah.

6-29
Contract Law

 Contract- is a document that specifies the conditions

under which an exchange is to occur and details the
rights and obligations of the parties involved.
 Contract Law- the body of law that governs contract
enforcement.
 United Nations Convention on Contracts for the Sale
of Goods (CIGS) – establishes a uniform set of rules
governing certain aspects of the making and
performance of everyday commercial contracts
between sellers and buyers who have their places of
business in different nations.
6-30
Property Rights and Corruption

 Property- refers to a resource over which an

individual or business holds a legal title.

 Property Rights- refer to the legal rights over the use

to which a resource is put and over the use of any
income that maybe derived from that resource.

6-31
Private Action

 - refers to theft, piracy, blackmail and

the like by private individual or
groups.

6-32
Public Action and Corruption

 Public action to violate property

rights occur when public officials
such politician and government
bureaucrats extorts income,
resources or the property itself from
property holders.

6-33
Public Action and Corruption
 Can be done through legal mechanisms such
as levying excessive taxation, requiring
expensive licenses or permits from property
holders, taking assets into state ownership
without compensating the owners.
 Can be done through illegal means or
corruption by demanding bribes from business
in return for the rights to operate in a country,
industry and location.
6-34
Foreign Corrupt Practices Act
 The Foreign Corrupt Practices Act (FCPA) is a
U.S. statute that prohibits firms and
individuals from paying bribes to foreign
officials to further business deals.
- Philippines
 Anti-Graft and Corrupt Practices Act (Republic
Act No. 3019)

6-35
Protection of Intellectual Property

 Intellectual Property – refers to the

property that is a product of
intellectual activity.
Example: Patents, Copyrights,
Trademarks

6-36
Product Safety and Product Liability

 Product Safety laws– sets certain

safety standards to which product
must adhere.
 Product Liability – involves holding a
firm and its officers responsible
when a product causes injury, death
or damage.
6-37
Nationalism
 Nationalism refers to feelings of national pride and unity
• Feelings of nationalism are manifested by:
• Disaster
• War
• Recession
• Call to “buy our country’s products only,” e.g., “Buy Filipino Product”
• Restrictions on imports, restrictive tariffs, and other barriers to trade

6-38
Trade Disputes: Examples
 Undervalued Chinese currency (ongoing problem)
 Ban on beef imports into Japan
 Chinese subsidies in apparent violation of WTO rules
 Farm subsidies in developed countries
 AIRBUS–Boeing battle over subsidies

6-39
Political Risks of Global Business
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

6-40
Economic Risks
 International firms face a variety of economic risks
 Governments can impose restraints on business activity to:
• Protect national security
• Protect an infant industry
• To conserve scarce foreign exchange
• Raise revenue
• Retaliate against unfair trade practices
 Exchange Controls
 Local Content Laws
 Import Restrictions
 Tax Controls
 Price Controls
 Labor Problems
6-41
Political Sanctions:
Examples from the U.S.
 Cuban crisis of the 1960s
 The Iranian revolution in the 1980s
 The Persian Gulf War in the 1990s  

6-42
Political and Social Activists
The most entertaining
protest technique was
pioneered by French
farmers. French farmers like
to throw their food. Here
they tossed tomatoes and
such at McDonald’s; they’ve
also lobbed lamb chops at
their own trade ministers.

6-43
Exhibit 6.2 U.S. State Department Travel Warnings
(in order of date of posting, most recent first)

Source: http://travel.state.gov/travel/cis_pa_tw/tw/tw_1764.html.
6-44
Violence, Terrorism and War
 Violence and terrorism may be closely related to politics
 War-torn regions are areas of concern for foreign businesses
to operate in

 Cyber terrorism is in its infancy

 The Internet provides a vehicle for terrorist and criminal attacks
 Internet Virus attacks can disrupt businesses
• “I Love You”
• Melissa
• Slammer
• Goner Worm
6-45
Assessing Political Vulnerability
 No absolute guidelines
 No specific guidelines to determine a product’s
political vulnerability
 Countries seeking investments in high-priority
industries may well excuse companies from taxes,
customs duties, quotas, exchange controls, and other
impediments to investment.

6-46
Politically Sensitive Products and Issues
 Politically sensitive products include those that have
an effect on:
• the environment,
• exchange rates
• national and economic security
• public health, e.g., genetically modified (GM) foods

6-47
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

6-48
 Exhibit 6.4 Top 20 States in Danger of Failing
(ranked in order of closest to failure)

Source: From Foreign Policy, “Failed States Index,” May/June 2011, online.
Copyright 2011 by Foreign Policy. Reproduced with permission of Foreign Policy via Copyright Clearance Center. 6-49
Lessening 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

6-50
Lessening 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 Bargaining
• Political Payoffs

6-51
Government Encouragement
 Governments can both encourage and discourage
foreign investment
 The key reason to encourage foreign investment is to
accelerate the country’s economic growth
 During the recent economic downturn, the U.S.
government has been particularly creative in helping
promote American exports

6-52
Processing Questions
 What is sovereignty?
 What the two dimensions of political system? Briefly
discuss each.
 What the three political risks of global business?
 Why government encourage foreign investments.

6-53