The Political Environment

I. Sources of Political Problems 1) Political Sovereignty a) Conflicting laws b) Freedom of contact issues 2) Political Conflict “Marketing decisions in the international context are deeply affected by the political perspectives of both the home and host countries.”

The Political Environment II. Political Intervention III. Political Risk - Factors indicating high risk include: unstable, inconsistent history; public unrest, government crises; politically motivated assassinations; guerilla warfare; irregular changes. Methods of Assessment 1) Grand Tour 2) Old Hand 3) Delphi 4) Quantitative Methods

Typical Forms of Host Country Controls §Expropriation l Taking of private property with compensation §Confiscation l Taking of private property without compensation §More subtle forms of control l Domestication l Local-content l Exchange controls l “Over investment” l Tax policies l Price controls

International Terrorist Incidents By Region SOURCE:

Irwin/McGraw-Hill Forecasting Political Risk 6-8 ● 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

Strategies to Lessen Political Risk § Joint Ventures § Investment Base Expansion § Marketing and Distribution § Licensing § Planned Demonstration § Other

Country Risk Assessment Criteria Index AreaCriteria Stability of the political system Political and economic Degree of control of economic system environmentConstitutional guarantees Effectiveness of public administration Labor relations and social peace

Country Risk Assessment Criteria Index AreaCriteria Population size Per capita income Domestic economic Economic growth during previous 5 years conditions Inflation during previous 2 years Accessibility of domestic capital market to foreigners Availability of high-quality local labor Possibility of giving employment Traffic system and communication channels

Country Risk Assessment Criteria Index AreaCriteria Restrictions imposed on imports Restrictions imposed on exports Restrictions imposed on foreign investments in the country External economicLegal protection for brands and products relationsRestrictions imposed on monetary transfers Revaluations of currency during previous 5 years Drain on foreign funds through oil or other energy imports Restrictions on the exchange on local money into foreign currencies

Examples of Country Risk Ratings Country*Political RiskFinancial Risk Economic RiskComposite Risk 1.Switzerland Germany Japan U.S Canada U.K France Italy Mexico Hong Kong China India Argentina Romania** Liberia** Note:*Lower scores represent higher risk (Highest Risk=1…100=Lowest Risk). **Data from Source: Extracted from International Country Risk Guide, 1996, reprinted in Claude B. Erb, Campbell R. Harvey, and Trades E.Viskanta, “Expected Returns and Volatility in 135 Countries,” Journal of Portfolio Maanagement, 22(Spring 1996), p.46.