Political Forces McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. chapter nine

9-3 Learning Objectives  Identify the ideological forces that affect business  Discuss the fact that although most governments own businesses, they are privatizing them in growing numbers  Explain the changing sources and reasons for terrorism  Explain steps that traveling international business executives should take to protect themselves from terrorists  Evaluate the importance to business of government stability and policy continuity  Explain country risk assessment by international businesses

9-4 Ideological Forces  Communism  The belief that the government should own all the major factors of production  Production in these countries is at state- owned factories and farms (some exceptions)  Labor unions are government-controlled

9-5 Communism Conceived by Karl Marx as “classless society” –Developed by his successors into control of society by the Communist Party and an attempted worldwide spread of communism Expropriation and Confiscation –Government seizure of property within its borders owned by foreigners, followed by prompt, adequate, and effective compensation to the former owners –Generally expropriated becomes confiscation (no compensation)

9-6 Ideological Forces Capitalism –An economic system in which the means of production and distribution are for the most part privately owned and operated for private profit Ideal capitalism Government restricted to functions that the private sector cannot perform –National defense –Police, fire, and other public services –Government-to-government international relations

9-7 Ideological Forces Socialism  Public, collective ownership of the basic means of production and distribution, operating for use rather than profit  Socialist governments frequently perform in ways not consistent with the doctrine  Many European countries have practiced socialism: Great Britain, France, Spain, Greece, Germany

9-8 Socialism Socialism in Developing Countries  Government typically owns and controls most of the factors of production  Shortages of capital, technology, and skilled management and labor are characteristic  Many of the educated citizens connected with government

9-9 Conservative or Liberal  Conservative  A person, group, or party that wishes to minimize government activities and maximize private ownership and business  Right wing is a more extreme conservative position

9-10 Conservative or Liberal  Liberal  In the contemporary U.S., a person, group, or party that urges greater government involvement in business and other aspects of human activities  Left wing is a more extreme liberal  Careful! Terms may have entirely different meanings outside the U.S.

9-11 Government Ownership of Business  Why Firms are Nationalized –To extract more money from the firms –To increase the firm’s profitability –For ideological reasons –To preserve jobs –To follow previous government support (control follows money) –happenstance

9-12 Unfair Competition?  Private-owned companies complain that government owned companies –Can cut prices unfairly –Get cheaper financing –Get government contracts –Get export assistance –Can hold down wages with government assistance

9-13 Privatization The transfer of public sector assets to the private sector, the transfer of management of state activities through contracts and leases, and the contraction out of activities previously conducted by the state Britain’s Margaret Thatcher, leader of privatization movement Airports, garbage, postal services frequent examples

9-14 Privatization in on the Move Trend all over the world China is allowing state-run enterprises to diversify ownership Usually the buyers have financial success

9-15 Privatization Anywhere Any Way  Not always ownership transfer from government to private entities  Activities previously conducted by the state may be contracted out  Governments may lease state-owned plants to private entities  Governments may combine a joint venture with a management contract with a private group to run a previously government- operated business

9-16 Privatizations by Region

9-17 Government Protection  Terrorism  Unlawful acts of violence committed for a wide variety of reasons, including for ransom, to overthrow a government, to gain release of imprisoned colleagues, to exact revenge for real or imagined wrongs, and to punish nonbelievers of the terrorists' religion  Since the 1970s, the world has been plagued by terrorism

9-18 Government Protection  World Wide Terrorist Groups  Al Qaeda, IRA, Hamas, other Islamic fundamentalist groups, ETA, Japanese Red Army, German Red Army Faction  Government-Sponsored Terrorism: Act of War Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them –Iran, Iraq, Libya, Syria, Afghanistan, Cuba, Lebanon, North Korea, and Sudan

9-19 Traditional Hostilities  Long-standing enmities between tribes, races, religions, ideologies, or countries  Arab Countries—Israel  Hutus and Tutsis in Burundi and Rwanda  Tamils and Sinhalese in Sri Lank

9-20 Government Stability  Stable Government  Maintains itself in power and whose fiscal, monetary and political policies are predictable and not subject to sudden, radical changes  Unstable Government  Cannot maintain itself in power or makes sudden, unpredictable, or radical policy changes

9-21 ICs and Political Forces International Companies (ICs) –Make decisions about where to invest, where to conduct research and development, and where to manufacture products –The financial size of many ICs provides them with a strong negotiating position

9-22 Country Risk Assessment (CRA) An evaluation that assesses the country’s economic situation and policies and its politics to determine how much risk exists of losing an asset or not being paid

9-23 Country Risk Assessment (CRA) Types of Country Risks –Political Wars, revolutions, coups –Economic –Financial BOP deficits –Labor Low productivity, militant unions –Legal Laws may be changed –Terrorism

9-24 Country Risk