The Political Environment Chapter 6

Sovereignty What is sovereignty? Stability Trade agreements Political parties Nationalism Powers exercised by a state in relation to other powers and the powers TA- Can be seen as a way of losing sovereignty. How stable is the government? How stable is the gov’t. Just because a gov’t is stable now, doesn’t mean it will be stable later. If circumstances change rapidly, the gov’t might take control or force company out. Must know the viewpoints of the political parties- which one is more for international trade. US? Republicans. Nationalism- An intense feeling of national and unity, an awakening of a nation’s people to pride their country. Buy that country’s products only, and possibly harass other countries’ companies. Tariffs, quotas maybe done to “protect home companies.” Japanese would not import rice because wanted to be self-sufficient. Freedom fries?

Political Risks of Global Business Confiscation Expropriation Domestication Economic Risks Exchange controls Local-Content Import Restrictions Tax controls Price Controls Labor Problems Con- Taking of a company’s assets w/o reimbursement. Cuba & Iran Exp- Pay back for part of the assets, so it can become government-operated Domestication- Host countries gradually cause the transfer through a series of decrees/ laws saying certina industries must be home operated ER- Restrictions on business placed there by home company. EC- Tying the currency to a set rate in order to keep currency in the country. It can’t be sent uot of the country w/o bearing a financial loss L-C- A certain percentage of a product must be made locally. Import Restrictions- Restrict imports so company has to buy them locally Tax controls- Developing countries which need money seek to tax corporations to get money Price controls- Tell you how much you can charge LP- Ensure no layoffs or added benefits

Political Risks of Global Business Political Sanctions Political and Social Activists Violence and Terrorism Cyberterrorism PS- One nation boycotting another PSA- Draw attention to certain issues within countries. Think of Mike and sweatshops. VT- Could attack multinationals to prove a point to American government; stage kidnappings for money CT- Worms, viruses, bring down databases, companies, government files.

Assessing Political Vulnerability Uncertainty Politically Sensitive Products and Issues Forecasting Political Risk It is hard to know what companies are the most likely to be targeted in any given country. PSPI- More likely if: environmental impact, excahnge rates, national and economic security, welfare of people, publicly visible. Europe- Won’t use genetically enhanced materials. FPR- Evaluation tools to forecast rsk. Higher risk is better for bigger companies which can sustain L-T and/or possible failure.

Reducing Political Vulnerability When does it work? Increases exports over imports (balance of payments) Locally-produced resources are used Transfers capital, technology, or skills Create jobs Makes tax contributions

Reducing Political Vulnerability Corporate Philanthropy Joint Ventures Expanding the Investment Base Licensing Planned Domestication Political Payoffs What is it? Supporting causes important to country. Microsoft donating $$$ for technical advancement in Mexico Political parties may still scapegoat MNC’s. JV- Working together with a local company, reduces exposure of corporation. Inv.- Get banks to finance so they are a part of the company and will help if gov’t topples. Lic- Let another company use technology or recipe for a fee- no involvement by the MNCC. BUT could steal idea and not pay PD- A gradual process of working with nationals in all phases. Better than gov’t-forced handing over. PP- Pay the heads of state off in order to be left alone.

Government Encouragement Why is foreign investment good? Promotes industrialization More jobs More technology Generate exports