The Political Environment:

a Critical Concern
Chapter 6

What Should You Learn?

What the sovereignty of nations means and how it can
affect the stability of government policies
How different governmental type, political parties,
nationalism, targeted fear/animosity, and trade disputes
can affect the environment for marketing in foreign
countries
The political risks of global business and the factors that
affect stability
The importance of the political system to international
marketing and its effect on foreign investments
The impact of political and social activists, violence, and
terrorism on international business
How to assess and reduce the effect of political
vulnerability
How and why governments encourage foreign
investment
6-2

Global Perspective

A crucial reality of international business

Both host and home governments are integral
partners

A government controls and restricts a companys

activities
By encouraging and offering support
By discouraging and banning or restricting its
activities

International law recognizes the sovereign right of

a nation
To grant or withhold permission to do business within
its political boundaries
To control where its citizens conduct business
6-3

The Sovereignty of Nations

A sovereign state
Independent
Free from all external control

Sovereignty
Powers exercised by a state in relation
to other countries
Supreme powers exercised over its own
members

6-4

The Sovereignty of Nations

Nations can and do abridge specific aspects
of their sovereign rights in order to coexist
with other nations
NAFTA North America Free Trade Agreement
NATO North Atlantic Treaty Organization
WTO World Trade Organization

The United States involvement in

international political affiliations is
surprisingly low
The WTO is considered by some as the
biggest threat so far to national sovereignty
6-5

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 international

market instability
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
6-6

Forms of Government
Circa 500 B.C Ancient Greeks criticized three
fundamental forms of government
Rule by one (monarchy)
Rule by few (aristocracy)
Rule by many (democracy)

Circa 1990 Collapse of communism

Free-enterprise democracy considered the best solution

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

6-7

A Sampling of Government
Types
Exhibit 6.1

6-8

Political Parties
In countries where two strong political parties
typically succeed one another, it is important to
know the direction each party is likely to take

Great Britain

The Labour Party vs. the Conservative Party

Unpredictable and drastic shifts in government

policies deter investments, whatever the cause
of the shift
A current assessment of a countrys political
philosophy and attitudes is important in
gauging their stability and attractiveness in
terms of market potential
6-9

Nationalism
An intense feeling of national pride and unity

An awakening of a nations people to pride

in their country

National interest and security are more important

than international relations
Countries use nationalism to protect themselves
against intrusions

Threats from outside forces

Declines in the domestic economy

Nationalism comes and goes

As conditions and attitudes change

Foreign companies welcomed today may
be harassed tomorrow and vice versa
6-10

Targeted Fear and/or

Animosity
Marketers should not confuse nationalism
with
a widespread fear or animosity directed at a
particular country
Toyota in the U.S. (1980s)
Animosity toward the United States in France
The unhappiness of citizens and politicians in many other
countries concerning the war in Iraq

No nation-state, however secure, will tolerate

penetration by a foreign company into its
market and economy
If it perceives a social, cultural, economic, or political threat to
its well-being

Trade disputes

6-11

Political Risks of Global

Business
Confiscation the seizing of a companys
assets without payment
Expropriation where the government seizes
an investment but makes some reimbursement
for the assets
Domestication when host countries gradually
cause the transfer of foreign investments to
national control and ownership through a series
of government decrees

Mandating local ownership

Greater national involvement in a
companys management
6-12

How Complicated Things Can

Get
Exhibit 6.2

6-13

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
6-14

Economic Risks
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
6-15

Political Sanctions
One or a group of nations may boycott
another nation
Stopping all trade between the countries
Issuing sanctions against trade of specific products
U.S. boycotts of trade with Cuba/Iran

History indicates that sanctions are often

unsuccessful in reaching desired goals
Particularly when ignored by other major nations
traders

6-16

Political and Social Activists

Not usually government sanctioned
Can interrupt the normal flow of trade
Range from those who seek to bring
about peaceful change to those who
resort to violence and terrorism to effect
change
Worldwide boycott of Nestle products

The Internet has become an effective

tool of PSAs to spread the word
Protest rallies against the U.S. Iraq War
6-17

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
6-18

U.S. State Department

Travel Warnings
Exhibit 6.3

6-19

Violence and Terrorism

The State Department reported 3,200
terrorist incidents worldwide in 2004
Goals of terrorism against multinationals
To embarrass a government and its relationship
with firms
To generate funds by kidnapping executives
To use as pawns in political or social disputes
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
6-20

Cyberterrorism and
Cybercrime
The internet is a vehicle for terrorist
and criminal attacks to inflict damage
on a company with little chance of
being caught
By foreign and domestic antagonists

It is hard to determine if a cyber attack

has been launched
By a rogue state
A terrorist
A hacker as a prank
6-21

Cyberterrorism and
Cybercrime
Each wave of viruses

Gets more damaging

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
A countrys infrastructure

Mounting concern over the rash of attacks

Business leaders and government officials
addressed a Group
of Eight conference

6-22

Politically Sensitive
Products and Issues
Politically sensitive products
Perceived to have an effect on the
environment, exchange rates, national and
economic security, and the welfare of people
Are publicly visible or subject to public debate

Health is often the subject of public debate,

and products that affect or are affected by
health issues can be sensitive to political
concern
The European Union has banned hormonetreated beef for more than a decade
6-23

Forecasting Political Risk

Political risk assessment

An attempt to forecast political instability

To help management identify and evaluate political
events
To predict their potential influence on current and
future international business decisions

Government failure is greatest risk to

international marketers

Causing chaos in the streets and markets

Risk assessment of investments

Used to estimate the level of a risk a company is

assuming
Helps determine the amount of risk a firm is
prepared to accept
6-24

Top 20 States in Danger of Failing

(Ranked)
Exhibit 6.5

6-25

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
Makes tax contributions

Political parties often focus public opinion on the

negative aspects of MNCs whether true or false
As scapegoats for their own failure
To serve their own interests

6-26

Lessening Political
Vulnerability
Strategies that MNCs use to minimize
political vulnerability and risk
Joint ventures
Expanding the investment base
Licensing
Planned domestication
Political bargaining
Political payoffs
6-27

Government
Encouragement
Most important reason to encourage foreign
investment
To accelerate the development of an economy

U.S. government motivated for economic as well

as political reasons
Encourages American firms to seek business opportunities in
countries worldwide including those that are politically risky
Department of Commerce
International Trade Administration

Agencies that provide assistance to U.S.

companies

Export-Import Bank (Ex-Im Bank)

Foreign Credit Insurance Association (FCIA)
The Agency for International Development (AID)
The Overseas Private Investment Corporation (OPIC)
6-28