1. International Marketing Chapter 6
The Political Environment

2. Stability of Government Policies
Q: Radical shifts in government philosophy can occur when:
An opposing political party ascends to power
Pressure from nationalist and self-interest groups
Weakened economic conditions.
Bias against foreign investment or conflicts between governments

3. Instability of Governments and Policies: Political Reasons
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

4. 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
Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well
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

5. Forms of Government Democracy or market directed government ideology
Communist governments
Theocratic Republic
Islamic Law countries where political parties can exist but have little power
The religious leader controls government and all governmental decisions

6. 6-6

7. Nationalism Nationalism refers to feelings of national pride and unity
Feelings of nationalism are manifested by:
Call to “buy our country’s products only,” e.g., “Buy American”
Restrictions on imports, restrictive tariffs, and other barriers to trade

8. Targeted Fear and/or Animosity
Nationalism
Targets all foreign countries
Animosity
Targets specific nations
6-8

9. Trade Disputes: Examples
Undervalued Chinese currency (ongoing problem)
Ban on beef imports into Japan
Chinese subsidies in apparent violation of WTO rules
Farm subsidies in developed countries
AIRBUS–Boeing battle over subsidies

10. Political Risks of Global Business
Risks of global business include:
Confiscation, Expropriation, and Domestication
Economic Risks, and
Price Controls

11. 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

12. Economic Risks International firms face a variety of economic risks
Governments can impose restraints on business activity to:
Protect national security
Protect an infant industry
To conserve scarce foreign exchange
Raise revenue
Retaliate against unfair trade practices

13. Economic Risks Exchange Controls Local Content Laws
Import Restrictions
Tax Controls
Price Controls
Labor Problems

14. Forecasting Political Risk
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

15. Assessing Political Vulnerability
No absolute guidelines to assess if a firm faces political risks
No specific guidelines to determine a product’s political vulnerability, but there are some generalizations
Politically sensitive products include those that:
effect on the environment,
exchange rates
national and economic security
affect public health, e.g., genetically modified (GM) foods

16. 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

17. 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