Chapter Eight

Political Forces

McGraw-Hill/Irwin

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Identify ideological forces that affect business Understand that most governments own businesses that they are privatizing Explain terrorisms changing sources, reasons, methods, and growing power Explain steps that traveling international business executives should take to protect themselves from terrorists Evaluate government stability and policy continuity

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Learning Objectives

Explain country risk assessment Discuss the arguments for imposing trade restrictions Explain the differences between tariff and nontariff barriers Appreciate the changing importance of tariff and non-tariff barriers to managers

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Ideological Forces

Communism Government should own all the major factors of production Labor unions are government-controlled This ideology persists in few countries Capitalism An economic system in which the means of production and distribution are for the most part privately owned and operated for private profit
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Ideological Forces

Socialism In an extreme form socialist governments can control public utilities and some basic means of production Socialist governments rarely perform in ways consistent with a pure doctrine Many European countries including Great Britain, France, Spain, Greece, Germany, Italy, Austria, and others have practiced a form of socialism

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Conservative or Liberal

Conservative In recent U.S. terms a conservative believes in minimizing government oversight of economic activity and maximizing the independence of the private sector Liberal In recent U.S. terms a liberal urges greater government regulation and oversight of the economy These terms usually have entirely different meanings outside the U.S.
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Why Firms are Nationalized

The government suspects that the firms are concealing profits To increase the firms profitability For ideological reasons - countries have national, government run utility companies, control strategic industries (petroleum in Mexico), etc. To preserve jobs by supporting failing industries that are important to the economy As a consequence of previous governments support to protect the public investment
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Unfair Competition?

Privately owned companies complain that government owned companies Can cut prices because maximizing profit is not their main purpose Get cheaper financing Get government contracts Get export assistance Can hold down wages with government assistance
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Privatization Anywhere Any Way

Privatization does not always refer to ownership transfer from government to private entities Activities previously conducted by the state may be contracted out Governments may lease state-owned plants to private entities Governments may combine a joint venture with a management contract with a private group to run a previously governmentoperated business
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Government Protection

Any government, regardless of ideology, must protect the nations economic welfare National defense Protection from banditry, piracy Terrorism

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Government Protection

Terrorism Unlawful acts of violence committed for a wide variety of reasons, Economic gain: ransom To overthrow a government To gain release of imprisoned colleagues To exact revenge for real or imagined wrongs To punish nonbelievers of the terrorists' religion

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Government Protection

World wide terrorist groups: a new trend Government-sponsored terrorism: act of war Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them

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Government Protection

Kidnapping for Ransom Victims held for large ransoms Columbia and Peru are dangerous places for American executives U.S. executives practice commando management to avoid kidnap risk Arrive secretly, meet for a few days and fly off before kidnappers learn of their presence Such behavior is suggested when operating in countries that are on the U.S. State Departments warning list

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Countermeasures by Industry

KRE (kidnap, ransom, and extortion) Insurance to cover ransom payments, antiterrorist schools Cassidy and Davis The worlds largest kidnapping and extortion underwriting firm is located in London Antiterrorist Schools

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Extreme Travel Checklist for Executives

Personal and legal affairs in order prior to departure Tell others about your travel plans on a need-toknow basis Sanitize all documents from company logos Prepare for host countrys culture and political environment Be sure that someone in your company knows the where, when and how of your trip Have an established code of communication in case of extreme circumstances Use State Department sources prior to your trip to learn about the host political environment
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Terrorism Developments

Nuclear Terrorism Failing security standards at former Soviet installations permit uranium to be stolen, then sold to terrorists Chemical and Biological Terrorism Recipes from self-taught terrorists that can be downloaded from the Internet

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Government Stability

Stable Government Maintains itself in power and whose fiscal, monetary and political policies are predictable and not subject to sudden, radical changes Unstable Government Cannot maintain itself in power or makes sudden, unpredictable, or radical policy changes

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Traditional Hostilities

Traditional hostilities refer to long-standing enmities between tribes, races, religions, ideologies, or countries Arab countries -Israel Hutus and Tutsis in Burundi and Rwanda Tamils and Sinhalese in Sri Lanka

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International Companies and Political Forces

International companies are powerful and can influence their destiny make decisions about where to invest, where to conduct research and development, and where to manufacture products The financial size of many international companies relative to the host economy or economic sector gives them a strong negotiating position

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Country Risk Assessment

A country risk assessment (CRA) is an evaluation by the firm that assesses a countrys economic situation, policies and politics to determine how much risk exists of losing an asset or not being paid

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Country Risk Assessment

Types of Country Risks Political: wars, revolutions, coups Economic Financial: BOP deficits Labor: low productivity, militant unions Legal: underdeveloped laws concerning business Terrorism

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Information Content for CRA

Information needed to conduct CRA Nature of business - the needs of the company Length of time required by economic activity being considered Utility of risk analyses of social, political, and economic factors decreases precipitously over longer time spans

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Trade Restrictions

Government officials sensitive to interest groups that are being hurt by international competition Arguments for trade restrictions National defense Sanctions to punish offending nations Protect infant or dying industry Protect domestic jobs from cheap foreign labor Scientific tariff or fair competition

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Dumping

Dumping is within the domain of the WTO The WTO defines dumping as selling a product abroad for less than the average cost of production at home home market price the price to third countries

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Dumping

Dumping is used by a manufacturer to sell excess production without disrupting prices in the home market as a response to cyclical or seasonal factors as a way to raise market share Predatory dumping occurs when the manufacturer lowers the export price to force the importing nations domestic producers out of business The manufacturer expects to raise prices once the objective is met
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New Types of Dumping

Social dumping occurs when firms in developing nations capitalize on low wages and poor working conditions no worker benefits undermines social support systems Environmental dumping refers to lax environmental standards that lower costs

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New Types of Dumping

Financial services dumping refers to low requirements for bank capital-asset ratios Cultural dumping occurs when cultural barriers aid local firms Tax dumping refers to special tax rates or related breaks

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Subsidies and Countervailing Duties

Subsidies are economic actions by a government to support exports or hinder imports Countervailing duties are additional import taxes levied by the importing nations government on imports that have benefited from export subsidies offered by the exporting nations government

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Tariff Barriers

Tariffs or import duties are taxes levied on imported goods to reduce their competitiveness Ad valorem duties are assessed as a percentage of invoice value Specific duties are assessed as a fixed sum per unit Compound duties are a combination of ad valorem and specific duties A variable levy may guarantee the market price of the import is equal to that of the domestic product
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NonNon-Tariff Barriers

Forms of discrimination against imports other than import duties such as Specifications Customs procedures Quotas are numerical limits on specific classes of imports Absolute: once number is reached imports stop Global: no regard to source Allocated or discriminating: assigned to specific countries
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NonNon-Tariff Barriers
Voluntary export restraints (VERs) are export quotas imposed by the exporting country Orderly marketing arrangements are VERs based on formal agreements between exporting and importing countries

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NonNon-Quantitative NonNon-Tariff Barriers

Government participation in trade Procurement policies Local content requirements Customs and other administrative procedures Standards

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