1. Chapter Four Political and Regulatory Climate

2. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide2 A host country is any country that contains an operational unit (marketing, sales, manufacturing, R&D) of an international company.

3. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide3 Political Motivations of Host Country Governments Self-preservation Security Prosperity Prestige Ideology Cultural identity

4. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide4 Self-Preservation Sovereignty concerns Restricted markets –Media –Airspace, landing and docking rights –Control over resources

5. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide5 National Security Defense industry

6. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide6 Fostering National Prosperity Employment Exports

7. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide7 Promoting Ideology Self-reliance Non-alignment Communism in China - Threatened by market liberalization?

8. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide8 Protecting Cultural Identity Resisting foreign brand names Protecting cultural content in movies and TV programming (France)

9. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide9 Host Country Actions Government subsidies Ownership restrictions Operating conditions –Work permits –Local content requirements –Local labor requirements –Local investment requirements

10. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide10 Boycotts of Firms Government-sponsored boycotts –Arab Boycott of Israel and US firms (Coke) Ad-hoc consumer boycotts –The new Arab Boycott

11. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide11 Takeovers Takeovers = Host-government actions that result in a firm’s loss of ownership or direct control over assets An expropriation is a formal seizure of an operation A confiscation is an expropriation without compensation

12. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide12 Home Country Actions Trade Embargos –U.S. embargo of Cuba –U.S. anti-Arab boycott legislation

13. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide13 Home Country Pressure Groups Firms come under pressure at home for their –Choice of foreign markets – Methods of doing business Even state law can impact international business practices –Massachusetts passes law to deny state contracts with firms operating in Myanmar

14. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide14 International Legal Systems Common law Civil (or code or “codified”) law Islamic law Socialist (Marxist) law

15. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide15 Key Changing Legal Arenas Product liability Bankruptcy Regulating cyberspace

16. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide16 Regulatory Environments Vary Among Countries ESTABLISH A BUSINESS 153 days in Mozambiqueversus 3 days in Canada STEPS TO REGISTER COMMERCIAL PROPERTY 21 steps in Nigeriaversus3 steps in Finland New Zealand, USA, Singapore = Least regulated countries

17. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide17 Heavy Regulation in Japan: Steps to Qualify as an Official University Own your own building Have your own sports field and gym Operate on <25% debt-equity ratio Get government approval for new programs

18. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide18 Attitudes Toward Rules Attitudes toward rules are affected by two criteria: 1.Level of power distance 2.Type of Human Nature Orientation (HNO)

19. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide19 Human Nature Orientation (HNO) Positive HNO – assume people can be trusted to obey the rules Negative HNO – assume people cannot be trusted to obey the rules

20. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide20 Laws challenged to a certain degree Italy, France Pragmatic rules; most people respect and obey USA Formal, unrealistic rules. Often discrepancy between law and what people actually do or what is enforced by authorities Many developing countries Society does not trust people to obey laws. Compliance is insured with explicit sanctions Germany, Switzerland HNO HIGHLOW + _ Power Distance

21. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide21 Another Perspective on Attitudes Toward Rules Tight cultures – many rules, norms and standards for correct behavior. –Criticize and punish rule breakers severely. (Singapore, China) –More isolated and less influenced by other cultures Loose cultures – few rules, norms and standards for correct behavior

22. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide22 How might a society’s attitude toward rules affect the activities of international marketers in that society?

23. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide23 Regulatory Change vs. Political Risk Regulatory Change – More moderate and predictable changes in the business environment Political risk – More unexpected and drastic changes

24. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide24 Predicting Regulatory Change Look at neighboring countries, allies and potential allies Analyze economic implications of changes Listen for signals

25. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide25 Managing Regulatory Change A lter Bargain to get government to change regulations A void Move to bypass the impact of the regulation A ccede Comply A lly Avoid some risks by seeking strategic alliances

26. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide26 Strategic Approaches to Regulatory Change Put Figure 4.1, p. 114 here

27. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide27 A Typology of Political Risk Government RisksInstability Risks Firm- Specific Risks Discriminatory regulations Expropriation / Confiscation Breach of contract Sabotage Kidnappings Terrorism Firm-specific boycotts Country- Level Risks Mass nationalizations Regulatory changes Currency inconvertibility Mass labor strikes Urban rioting Civil wars Source: Wagner, Daniel. 2000. “Defining ‘Political Risk’” http://www.irmi.com/Expert/Articles/2000/Wagner10.aspx

28. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide28 Managing Political Risk Fighting the battle on two fronts: 1.Perfect intelligence systems to avoid being caught unaware when changes disrupt operations 2.Develop risk-reducing strategies that help limit exposure should a sudden change occur

29. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide29 Managing Political Risk (cont’d) Questions companies should ask: 1.How stable is the host country’s political system? 2.How strong is the host government’s commitment to specific rules of the game, given its ideology and power position? 3.How long is the government likely to remain in power?

30. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide30 Questions Companies Should Ask: 4. If the present government is succeeded by another, how will the specific rules of the game change? 5.What would be the effects on our business of any unexpected changes in the specific rules of the game? 6.In light of those effects, what should we be doing now? Managing Political Risk (cont’d)

31. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide31 Political Risk Profiles Not Risky ModerateRisky USA PolandAfghanistan United Kingdom HungaryIraq Switzerland ChinaCongo Canada TunisiaSudan Germany MexicoGeorgia France EgyptCuba Sweden ThailandArmenia Japan IndiaRussia Singapore Turkey Source: Euromoney

32. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide32 Business Environment Risk Intelligence http://www.beri.com http://www.beri.com Political Risk Index Operations Risk Index Remittance and Repatriation Factor Composite Score

33. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide33 Business Environment Risk Intelligence (cont’d) http://www.beri.com http://www.beri.com Political Risk Index –Measures (Examples) Internal Causes of Political Risk – Fractionalization of political spectrum and power of factions – Mentality, including xenophobia, nationalism, corruption, nepotism, willingness to compromise – Fractionalization of language, ethnic, or religious groups – Social conditions, e.g., population density and wealth distribution – Restrictive (coercive) measures required to retain power – Organization and strength of forces for a radical government External Causes of Political Risk – Dependence on and/or importance to a major hostile power – Negative influence of regional political forces Symptoms of Political Risk – Societal conflict involving demonstrations, strikes and street violence – Instability as perceived by non-constitutional changes, assassinations, and guerilla wars –Method 100 experts rate 0-7; sum to 70 Prohibitive risk (0-39 points), high risk (40-54 points), moderate risk (55-60 points), low risk (70-100 points)

34. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide34 Operations Risk Index –Measures (Examples) Policy continuity Currency convertibility Labor costs/production Short-term credit; Long-term loans and venture capital Enforcement of contracts Attitudes toward foreign investors and profits Degree of privatization Monetary inflation; Balance of payments Communication and transportation Bureaucratic delays –Method 100 experts rate 0-7; sum to 70 Prohibitive risk (0-39 points), high risk (40-54 points), moderate risk (55-60 points), low risk (70-100 points) Business Environment Risk Intelligence (cont’d) http://www.beri.com http://www.beri.com

35. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide35 Remittance and Repatriation Factor –Measures (Examples) Legal framework (20%) Foreign exchange generation (30%) Accumulated international reserves (30%) Foreign debt assessment (20%) –Method “Produced by a large computer program that manipulates over 14,000 cells of data and makes hundreds of calculations” Business Environment Risk Intelligence (cont’d) http://www.beri.com http://www.beri.com

36. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide36 Risk Reduction Strategies Sharing Risks –Joint ventures, alliances, licensing, franchising, management contracts, countertrade –Finance projects in local (host country) currency Minimizing Assets at Risk –Demand payment in cash, in home currency if possible Insuring Against Risks –Governments (e.g., OPIC) –Private firms –Forward Contracts (for currency movements)

37. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide37 OPIC Formed by US government to facilitate the participation of private US firms in the development of less-developed countries Offers project financing and political risk insurance in 100 developing countries Covers losses caused by currency inconvertibility, expropriation, and bellicose activities, such as war and revolution

38. Copyright © Houghton Mifflin Company. All rights reserved.Chapter 4 | Slide38 Terrorism Affects International Marketing Starbucks pulled out of Israel because they feared a terrorist attack GE criticized by a senator for taking “blood money” from a state that supports terrorism (Iran) Global tourism and education are affected –Americans spend more on domestic and nearby tourism; less spent on overseas tourism. –Fewer Middle Easterners are visiting America. –Tighter visa controls in America have created an opportunity for non-U.S. countries to increase their share of international students. Governments and companies grudgingly spend lots of money to protect infrastructure, plant, equipment, and people