The Political Environment: A Critical Concern Chap 6

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

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

Radical shifts in government philosophy can occur when: ▫ An opposing political party ascends to power ▫ Radical shift in philosophies of previous and current governments ▫ Italy-Unstable Government, stable foreign business ▫ India-Unstable Government, unstable foreign trade ▫ Mexico-Stable government but unstable foreign business environment.

 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

 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

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

 Nationalism refers to feelings of national pride and unity  Feelings of nationalism are manifested by  Call to “buy our country’s products only,” e.g., “Buy American”  Restrictions on imports, restrictive tariffs, and other barriers to trade

Nationalism Targets all foreign countries Animosity Targets specific nations

 Confiscation  Expropriation  Domestication

Confiscation the most severe political risk, is the seizing of a company’s assets without payment 1960: All US Businesses in Cuba are nationalized without compensation. US breaks all trade relations with Havana and imposes a trade embargo with Cuba in response to Castro’s Reforms (bbcnews.com) 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 “Loot the Looters” Mexico expropriated all the major foreign oil companies around 1938 and had negative consequences on its exports of all as the other oil companies boycotted Mexican exports of oil. 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 company’s management An example of domestication is given on the next slide

A good example of domestication can be seen in the nationalization of Air-India (formerly called as Tata Airlines). Tata owned and operated Air-India and Indian Airlines until they were nationalized by the Indian Government, much to Tata’s chagrin. Very recently, the Indian government has asked Mr. Ratan Tata, chairman of the Tata group, to head an advisory panel to revive Air India. e&sid=ag_NJBLk6TVo e&sid=ag_NJBLk6TVo

 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

 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.

 Cuban crisis of the 1960s  The Iranian revolution in the 1980s  The Persian Gulf War in the 1990s

 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.

 Violence and terrorism may be closely related to politics  War-torn regions are areas of concern for foreign businesses to operate in

 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

 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.

 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

 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

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 resourcestransfers capital, technology, and/or skillscreates jobs, and/ormakes tax contributions