McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Political Environment:A Critical Concern

Chapter 6

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Learning Objectives

LO1What the sovereignty of nations means and how it can affect the stability of government policiesLO2 How different governmental types, political parties, nationalism, targeted fear/animosity, and trade disputes can affect the environment for marketing in foreign countriesLO3 The political risks of global business and the factors that affect stabilityLO4 The importance of the political system to international marketing and its effect on foreign investmentsLO5 The impact of political and social activists, violence, and terrorism on international businessLO6 How to assess and reduce the effect of political vulnerabilityLO7 How and why governments encourage foreign investment

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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”

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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

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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

CHAOTIC CONDITIONS: On the first Sunday after the quake, at 9:00 a.m., the streets of downtown Port-au-Prince were filled with people scavenging. Onlookers add to the crowd.

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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

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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

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Political Parties

Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade

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Nationalism

Nationalism refers to feelings of national pride and unity • Feelings of nationalism are manifested by:

• Disaster (e.g. 9/11)• War• Recession

• Call to “buy our country’s products only,” e.g., “Buy American”

• Restrictions on imports, restrictive tariffs, and other barriers to trade

Targeted Fear and/or Animosity

Nationalism• Targets all foreign countriesAnimosity• Targets specific nations

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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

Political Risks of Global Business

Confiscation

Expropriation

Domestication

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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

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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

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Economic Risks Exchange Controls Local Content Laws Import Restrictions Tax Controls Price Controls Labor Problems

The consequences of the U.S. embargo of Cuba: A relatively new Chinese Chery Q (red provisional plate), and one of the newest American cars you can find on the island, a 1957 Chevy (yellow citizen’s plate), certainly with a refurbished engine. A variety of other European and Asian brands ply the streets of Havana, almost all recent models. No new American models are in sight.

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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

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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.

Political Activism Apparently they pay attention in Taiwan. Most recently, fishermen pitched perch in Taipei to protest the Japanese fishing fleet’s presence in their waters.

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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

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Cyberterrorism and Cybercrime

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

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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.

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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

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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

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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 contributions6-29

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

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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