Chapter 6

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 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 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 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 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

Causes of Instability in international markets 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 \chronological list of disputes cases - World Trade Organization 7

olombia — Measures Concerning Imported Spirits (Complainant: European Union) Consultations requested: 13 January 2016 Current status: In consultations DS501China — Tax Measures Concerning Certain Domestically Produced Aircraft (Complainant: United States) Consultations requested: 8 December 2015 Current status: In consultations DS500South Africa — Provisional Anti- Dumping Duties on Portland Cement from Pakistan (Complainant: Pakistan) Consultations requested: 9 November 2015 Current status: In consultations DS499Russian Federation — Measures affecting the importation of railway equipment and parts thereof (Complainant: Ukraine) Consultations requested: 21 October 2015 Current status: In consultations DS498India — Anti-Dumping Duties on USB Flash Drives from the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Complainant: Chinese Taipei) Consultations requested: 24 September 2015 Current status: In consultations DS497Brazil — Certain Measures Concerning Taxation and Charges (Complainant: Japan) Consultations requested: 2 July 2015 Current status: Panel composed

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 Bangladeshi” 2.Restrictions on imports, restrictive tariffs, and other barriers to trade Feelings of nationalism are manifested by: 1.Call to “buy our country’s products only,” e.g., “Buy Bangladeshi” 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 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 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 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

Economic Risks International firms face a variety of economic risks Exchange Controls Local- Content Laws Import Restrictions Tax Controls Price Controls Labor Problems Exchange Controls Local- Content Laws Import Restrictions Tax Controls Price Controls Labor Problems

Other Political Risks of Global Business 2.Political and Social Activists 3.Violence and Terrorism 4.Cyberterrorism 1.Political Sanctions

Politically Sensitive Products and Issues Politically sensitive products –Are 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 hormone- treated beef for more than a decade 16Roy Philip

Cyberterrorism and Cybercrime (1 of 2) 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 –A terrorist –A hacker as a prank 17Roy Philip

Cyberterrorism and Cybercrime (2 of 2) 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 country’s infrastructure 18Roy Philip

Irwin/McGraw-Hill 6-7

Politically Risky Countries Not Risky ModerateRisky USA PolandAfghanistan United Kingdom HungaryIraq Switzerland ChinaCongo Canada TunisiaSudan Germany MexicoGeorgia France EgyptCuba Sweden ThailandArmenia Japan IndiaRussia Singapore Turkey Source: Euromoney

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

Free Trade The absence of barriers to the free flow of goods and services between countries.