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The Political Environment: A Critical Concern
Chapter 6
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Learning Objectives
1. What does the sovereignty of nations mean and how can it affect the stability of government policies, political parties and nationalism.
2. The political risks of global business and the factors that affect stability
3. The importance of the political system to international marketing and its effect on foreign investments
Chapter Learning Objectives
4. The impact of political and social activists, violence and terrorism on international business
5. Assessing and reducing the effect of political vulnerability
6. How and why governments encourage foreign investment
Introduction
• The political environment of countries is a critical concern for the international marketer
• International law recognizes the sovereign right of a nation to allow or deny foreign firms to conduct
• Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members
• A sovereign state is independent and free from all external control; enjoys full legal equality with other states; and governs its own territory
Stability of Government Policies
Q: Radical shifts in government philosophy can occur when:
1. An opposing political party ascends to power
2. Pressure from nationalist and self-interest groups
3. Weakened economic conditions.
4. Bias against foreign investment or conflicts between governments
Stability of Government Policies
• The stability or instability of prevailing government policies is a major concern of foreign businesses
• A change in government, whether by election or coup, does not always mean a change in the level of political risk
• The ideal political climate for a multinational firm to conduct business is a stable, friendly government
• Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade
• Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well
Nationalism
• Nationalism refers to feelings of national pride and unity
Feelings of nationalism are manifested by:
1. Call to “buy our country’s products only,” e.g., “Buy American”
2. Restrictions on imports, restrictive tariffs, and other barriers to trade
Political Risks of Global Business
• Risks of global business include:
1. Confiscation, Expropriation, and Domestication
2. Economic Risks, and
3. Price Controls
Confiscation, Expropriation, and Domestication
• 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
Economic Risks
• International firms face a variety of economic risks
a) Exchange Controls
b) Local-Content Laws
c) Import Restrictions
d) Price Controls
e) Tax Controls
f) Labor Problems
Economic Risks
• Governments can impose restraints on business activity to:
a) Protect national security
b) Protect an infant industry
c) To conserve scarce foreign exchange
d) Raise revenue
e) Retaliate against unfair trade practices
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
Other Political Risks of Global Business
2. Political and Social Activists
3. Violence and Terrorism
4. Cyberterrorism
1. Political Sanctions
Curbing Child Labor– Boycotts, Rallies, and
Demonstration Get Attention, but Is There a Better Way?
● Set of Stage: Pakistan
● Ten-year-old children bend over soccer balls
● Whirlpool, General Electric, Godiva, and etc.
● 250 million children, between the ages of 4 and 15, are
obliged to work.
● Boycotts?
●World Bank introduced programs that pay poor mothers
to keep their teenage and younger children in school and
out of the labor force.
●Example: PROGRESA in Mexico
Irwin/McGraw-Hill
6-3
Against Child Labor
• UNICEF sponsored this advertising campaign against child labor. The field of consumer behavior plays a role in addressing important consumer issues such as child exploitation.
Assessing Political Vulnerability
• No absolute guidelines to assess if a firm faces political risks
• No specific guidelines to determine a product’s political vulnerability, but there are some generalizations
• Politically sensitive products include those that:
1. effect on the environment,
2. exchange rates
3. national and economic security
4. affect public health, e.g., genetically modified (GM) foods
Reducing 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
Reducing 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 Payoffs
Any Query?
Thanks…for staying with me…