the political environment: a critical concern. 6 - 2 learning objectives what the sovereignty of...
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The Political Environment:A Critical Concern
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Stability of Government Policies
• Issues that can affect the stability of a government:- Radical shifts in government philosophy when an opposing political party
ascends to power.- Pressure from nationalist and self-interest groups.- Weakened economic conditions- Bias against foreign investment- Conflicts between governments
• Five main political causes of instability in international markets:- 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 themselves
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Forms of Government
• Ancient Greeks Circa 500 B.C. criticized three fundamental forms of government:
- Rule by one (monarchy)- Rule by few (aristocracy)- Rule by many (democracy)
• Following the collapse of communism circa 1990 the world seemed to have agreed that free-enterprise democracy was the best solution.
• Of the more than 200 sovereign states on the planet almost all have at least nominally representative governments with universal suffrage for those 18 years and older.
• In about 10% of the states voting is required, in the rest it is voluntary.
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A Sampling of Government Types
• Insert Exhibit 6.1
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A Sampling of Government Types
• Insert Exhibit 6.1
Women Wait to Vote in Iran
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Economic Risks
• Exchange controls- Stem from shortages of foreign exchange held by a country.
• Local-content laws- Countries often require a portion of any product sold within the
country to have local content.
• Import restrictions- Selective restrictions on the import of raw materials to force foreign
industry to purchase more supplies within the host country and thereby create markets for local industry
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Economic Risks (continued)
• Tax controls- A political risk when used as a means of controlling foreign
investments.
• Price controls- Essential products that command considerable public interest
• Pharmaceuticals• Food• Gasoline
• Labor problems- Labor unions have strong government support that they use
effectively in obtaining special concessions from business.
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Political Risks of Global Business
• Confiscation – the seizing of a company’s assets without payment.
• Expropriation – where the government seizes an investment but some reimbursement for the assets is made.
• Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s management.
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Political and Social Activists
Korean Students Protest Daewoo Sale to GM
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Political and Social Activists
Bharatiya Party Protesting in Bhopal
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Nongovernmental Organizations
• Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments.
- Protests- Lobbying- Collaborations with governmental organizations
• Many also are involved in mitigating much of the human misery plaguing parts of the planet.
- Red Cross- Red Crescent- Amnesty International- Oxfam- UNICEF- Care- Habitat for Humanity
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U.S. State Department Travel Warnings
• Insert Exhibit 6.3
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Violence and Terrorism
• The State Department reported 3,200 terrorist incidents worldwide in 2004.
• Goals of terrorism- Multinationals are targeted to embarrass a government and its
relationship with firms- To generate funds by kidnapping executives to finance terrorist goals- To use as pawns in political or social disputes not specifically
directed at them- To inflict terror within a country as did September 11
• In the past 30 years, 80% of terrorist attacks against the U.S. have been aimed at American businesses.
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Cyberterrorism and Cybercrime
• The internet is a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught.
• It is hard to determine if a cyber attack has been launched by a rogue state, a terrorist, or by a hacker as a prank.
• Each wave of viruses gets more damaging and spreads so rapidly that considerable harm is done before it can be stopped.
• Tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a country’s infrastructure.
• Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of Eight conference.
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Forecasting Political Risk
• Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions.
• The greater the risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets.
• Risk assessment is used to estimate the level of a risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept.
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Top 20 States in Danger of Failing (Ranked)
• Insert Exhibit 6.4
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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- Create jobs- Make tax contributions
• Political parties seeking publicity or scapegoats for their failure often serve their own interests by focusing public opinion on the negative aspects of MNCs whether true or false.
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Lessening Political Vulnerability
French Farmers toss Tomatoes at McDonalds to Protest the Company’s Fast Food.
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Lessening Political Vulnerability
Taiwanese Fishermen Protest Japanese Fishing
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Lessening Political Vulnerability (continued)
• Strategies that MNCs use 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
• The most important reason to encourage foreign investment is to accelerate the development of an economy.
• The U.S. government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries worldwide, including those that are politically risky.
• Agencies that provide assistance to U.S. companies include:- Export-Import Bank (Ex-Im Bank)- Foreign Credit Insurance Association (FCIA)- The Agency for International Development (AID)- The Overseas Private Investment Corporation (OPIC)