chapter four political and regulatory climate. copyright © houghton mifflin company. all rights...

Chapter Four

Political and Regulatory

Climate

Copyright © Houghton Mifflin Company. All rights reserved. Chapter 4 | Slide2

A host country is any country that contains an operational unit (marketing, sales, manufacturing, R&D) of an international company.


Political Motivations of Host Country Governments

• Self-preservation• Security• Prosperity• Prestige• Ideology• Cultural identity


Self-Preservation

• Sovereignty concerns• Restricted markets

– Media– Airspace, landing and docking rights– Control over resources


National Security

• Defense industry


Fostering National Prosperity

• Employment• Exports


Promoting Ideology

• Self-reliance • Non-alignment• Communism in China - Threatened by

market liberalization?


Protecting Cultural Identity

• Resisting foreign brand names• Protecting cultural content in movies

and TV programming (France)


Host Country Actions

• Government subsidies• Ownership restrictions• Operating conditions

– Work permits– Local content requirements– Local labor requirements– Local investment requirements


Boycotts of Firms

• Government-sponsored boycotts– Arab Boycott of Israel and US firms

(Coke)

• Ad-hoc consumer boycotts– The new Arab Boycott


Takeovers

• Takeovers = Host-government actions that result in a firm’s loss of ownership or direct control over assets

• An expropriation is a formal seizure of an operation

• A confiscation is an expropriation without compensation


Home Country Actions

• Trade Embargos– U.S. embargo of Cuba– U.S. anti-Arab boycott legislation


Home Country Pressure Groups

• Firms come under pressure at home for their – Choice of foreign markets– Methods of doing business

• Even state law can impact international business practices – Massachusetts passes law to deny state

contracts with firms operating in Myanmar


International Legal Systems

• Common law• Civil (or code or “codified”) law• Islamic law• Socialist (Marxist) law


Key Changing Legal Arenas

• Product liability• Bankruptcy• Regulating cyberspace


Regulatory Environments Vary Among Countries

ESTABLISH A BUSINESS

153 days in Mozambique versus 3 days in Canada

STEPS TO REGISTER COMMERCIAL PROPERTY

21 steps in Nigeria versus 3 steps in Finland

New Zealand, USA, Singapore =

Least regulated countries


Heavy Regulation in Japan:Steps to Qualify as an Official University

• Own your own building• Have your own sports field and gym• Operate on <25% debt-equity ratio• Get government approval for new

programs


Attitudes Toward Rules

• Attitudes toward rules are affected by two criteria:1.Level of power distance

2.Type of Human Nature Orientation (HNO)


Human Nature Orientation (HNO)

• Positive HNO – assume people can be trusted to obey the rules

• Negative HNO – assume people cannot be trusted to obey the rules


Laws challenged to a certain degree

Italy, France

Pragmatic rules; most people respect and obey

USA

Formal, unrealistic rules. Often discrepancy between law and what people actually do or what is enforced by authorities

Many developing countries

Society does not trust people to obey laws. Compliance is insured with explicit sanctions

Germany, Switzerland

HN

O

HIGH LOW+

_

Power Distance


Another Perspective on Attitudes Toward Rules

• Tight cultures – many rules, norms and standards for correct behavior. – Criticize and punish rule breakers

severely. (Singapore, China)– More isolated and less influenced by other

cultures

• Loose cultures – few rules, norms and standards for correct behavior


How might a society’s attitude

toward rules affect the activities of

international marketers in that society?


Regulatory Change vs. Political Risk

• Regulatory Change– More moderate and predictable

changes in the business environment

• Political risk– More unexpected and drastic changes


Predicting Regulatory Change

• Look at neighboring countries, allies and potential allies

• Analyze economic implications of changes

• Listen for signals


Managing Regulatory Change

• AlterBargain to get government to change regulations

• AvoidMove to bypass the impact of the regulation

• AccedeComply

• AllyAvoid some risks by seeking strategic alliances


Strategic Approaches to Regulatory Change

Put Figure 4.1, p. 114 here


A Typology of Political Risk

Government Risks Instability Risks

Firm-Specific

Risks

•Discriminatory regulations•Expropriation / Confiscation•Breach of contract

•Sabotage•Kidnappings•Terrorism•Firm-specific boycotts

Country-Level Risks

•Mass nationalizations•Regulatory changes•Currency inconvertibility

•Mass labor strikes•Urban rioting•Civil wars

Source: Wagner, Daniel. 2000. “Defining ‘Political Risk’” http://www.irmi.com/Expert/Articles/2000/Wagner10.aspx


Managing Political Risk

• Fighting the battle on two fronts:1. Perfect intelligence systems to avoid

being caught unaware when changes disrupt operations

2. Develop risk-reducing strategies that help limit exposure should a sudden change occur


Managing Political Risk (cont’d)

• Questions companies should ask: 1.How stable is the host country’s political

system?

2.How strong is the host government’s commitment to specific rules of the game, given its ideology and power position?

3.How long is the government likely to remain in power?


• Questions Companies Should Ask: 4. If the present government is succeeded

by another, how will the specific rules of the game change?

5. What would be the effects on our business of any unexpected changes in the specific rules of the game?

6. In light of those effects, what should we be doing now?

Managing Political Risk (cont’d)


Political Risk Profiles

Not Risky Moderate RiskyUSA Poland AfghanistanUnited Kingdom Hungary IraqSwitzerland China CongoCanada Tunisia SudanGermany Mexico GeorgiaFrance Egypt CubaSweden Thailand ArmeniaJapan India RussiaSingapore Turkey

Source: Euromoney


Business Environment Risk Intelligence http://www.beri.com

• Political Risk Index• Operations Risk Index• Remittance and Repatriation Factor• Composite Score

http://www.beri.com/


Business Environment Risk Intelligence (cont’d) http://www.beri.com

• Political Risk Index– Measures (Examples)

• Internal Causes of Political Risk– Fractionalization of political spectrum and power of factions– Mentality, including xenophobia, nationalism, corruption,

nepotism, willingness to compromise– Fractionalization of language, ethnic, or religious groups– Social conditions, e.g., population density and wealth distribution– Restrictive (coercive) measures required to retain power– Organization and strength of forces for a radical government

• External Causes of Political Risk– Dependence on and/or importance to a major hostile power– Negative influence of regional political forces

• Symptoms of Political Risk– Societal conflict involving demonstrations, strikes and street

violence– Instability as perceived by non-constitutional changes,

assassinations, and guerilla wars– Method

• 100 experts rate 0-7; sum to 70• Prohibitive risk (0-39 points), high risk (40-54 points), moderate risk

(55-60 points), low risk (70-100 points)



• Operations Risk Index– Measures (Examples)

• Policy continuity• Currency convertibility• Labor costs/production• Short-term credit; Long-term loans and venture capital• Enforcement of contracts• Attitudes toward foreign investors and profits• Degree of privatization• Monetary inflation; Balance of payments• Communication and transportation• Bureaucratic delays

– Method• 100 experts rate 0-7; sum to 70• Prohibitive risk (0-39 points), high risk (40-54 points),

moderate risk (55-60 points), low risk (70-100 points)




• Remittance and Repatriation Factor– Measures (Examples)

• Legal framework (20%)• Foreign exchange generation (30%)• Accumulated international reserves (30%)• Foreign debt assessment (20%)

– Method• “Produced by a large computer program that manipulates

over 14,000 cells of data and makes hundreds of calculations”




Risk Reduction Strategies

• Sharing Risks– Joint ventures, alliances, licensing, franchising,

management contracts, countertrade– Finance projects in local (host country) currency

• Minimizing Assets at Risk– Demand payment in cash, in home currency if possible

• Insuring Against Risks– Governments (e.g., OPIC)– Private firms– Forward Contracts (for currency movements)


OPIC

• Formed by US government to facilitate the participation of private US firms in the development of less-developed countries

• Offers project financing and political risk insurance in 100 developing countries

• Covers losses caused by currency inconvertibility, expropriation, and bellicose activities, such as war and revolution


Terrorism Affects International Marketing

• Starbucks pulled out of Israel because they feared a terrorist attack

• GE criticized by a senator for taking “blood money” from a state that supports terrorism (Iran)

• Global tourism and education are affected– Americans spend more on domestic and nearby tourism; less

spent on overseas tourism. – Fewer Middle Easterners are visiting America.– Tighter visa controls in America have created an opportunity for

non-U.S. countries to increase their share of international students.

• Governments and companies grudgingly spend lots of money to protect infrastructure, plant, equipment, and people

chapter four political and regulatory climate. copyright © houghton mifflin company. all rights...

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