THE POLITICAL ENVIRONMENT

No matter how attractive the economic prospects of a particular country or region

are, doing business there might prove to be financially disastrous if the host
government(s) inflicts heavy financial penalties on a company or if unanticipated
events in the political arena lead to the loss of income-generating assets.

The political environment in which the firm operates (or plan to operate) will have
a significant impact on a company's international marketing activities. The greater
the level of involvement in a foreign markets, the greater the need to monitor the
political climate of the countries business is conducted. Changes in government
often result in changes in policy and attitudes towards foreign business. Bearing in
mind that a foreign company operates in a host country at the discretion of the
government concerned, the government can either encourage foreign activities by
offering attractive opportunities for investment and trade, or discourage its
activities by imposing restrictions such as import quotas, etc. An exporter that is
continuously aware of shifts in government attitude will be able to adapt export
marketing strategies accordingly.

Nearly all governments today play active roles in their countries' economies.
Although evident to a greater or lesser extent in most countries, government
ownership of economic activities is still prevalent in the former centrally planned
economies, as well as in certain developing countries which lack a sufficiently well
developed private sector to support a free market system.

The implications of government ownership to a company marketing abroad might

be that certain sectors of the foreign market are the exclusive preserve of
government enterprise or that the company is obliged to sell directly to a state
trading organization. In either case, the company's influence on the market is
greatly reduced. Similarly, if an exporter is seeking to establish a subsidiary in a
country where there is a high degree of state influence over the factors of
production, the investor should bear in mind that marketing activities in the
country concerned may be restricted and that the so-called controllable elements of
the marketing mix will be less controllable.

Of primary concern to an exporter should be the stability of the target country's

political environment. A loss of confidence in this respect could lead to a company
having to reduce its operations in the market or to withdraw from the market
altogether. One of the surest indicators of political instability is a frequent change
in regime. Although a change in government need not be accompanied by
violence, it often heralds a change in policy towards business, particularly
international business. Such a development could impact harshly on a firms long-
term international marketing programmer.

Reflected in a government's attitudes and policies towards foreign business are its
ideas about how best to promote national interest in the light of the country's
economic and political resources and objectives. Foreign products and investment
seen to be vital to the growth and development of the economy often receive
favorable treatment from the government in the form of reduced tax, exemption
from quotas, etc. On the other hand, products considered by a government to be
non-essential, undesirable, or a threat to local industry are frequently subjected to a
variety of import restrictions such as quotas and tariffs. It is also important to be
aware of the nature of the relationship between South Africa and the foreign target
market. This was a major consideration during South Africa's political isolation.
Fortunately, South Africa's international relations have normalized and today
South Africa is viewed very favorably, from a political perspective, by the rest of
the world. The political environment is connected to the international business
environment through the concept of political risk.
 EMERGING COUNTRY LIKE INDIA

ECONOMY OF INDIA

India's diverse economy in based on some conventional methods like the

traditional village farming, modern agriculture, handicrafts, a wide range of
modern industries, and other wide range of services. The overall economic growth
of India is not as proportional to the labour efforts that are put in. The various
services that are provided by the country are the basic foundation of economic
growth. A major portion of the population is involved in the agricultural sector.
Due to the indulgence of a major percentage of the population in the agricultural
and rural industries like the cottage industries, the government is trying to increase
the basic and essential infrastructure that is used in the development of the rural
life and the increase in overall standard of living in these regions. The government
of India has reduced controls and taxes on foreign trade and investment for the
betterment of the people. The difference between the economy and politics of India
is minute but definitely has the attention of people all over the country.

POLITICS IN INDIA

India is one of the largest democratic countries in the world. India provides the
biggest number of provisions to the people of this country. These provisions
include franchise rights and the largest number of political parties. The percentage
of the population that votes for the periodical elections was high previously but has
depleted in recent times. Elections are held at different strata. The two important
governments that are formed after the elections are the national level elections and
the state level elections. The National government is established after the national
elections while the state government is established after the state elections. There
are various other elections that are held at city, town and village level. The
economy and politics of India have interested people all over the world.

POLITICAL ISSUES AND DISPUTES

There exist different political issues in Indian politics, which are at national level
or at the regional level. Some communities demand more rights for their
communities, which can be classified as economical and social rights. Some
communities in particular regions ask for autonomous status while some ask for
independent state itself. Even after facing so many political problems, India still
survives as a democratic state. The main office holders are President, Vice-
president and the Prime minister. The various political parties that exist in
democratic India can be categorized as National Democratic Alliance, United
Progressive Alliance, Left front and others.

POLITICAL RISK

Political risk can be defined as the impact of political change on the export firm's
operations and decision-making process. Political risk is determined differently for
different companies, as not all of them will be equally affected by political
changes. For example, industries requiring heavy capital investment are generally
considered to be more vulnerable to political risk than those requiring less capital
investment. Vulnerability stems from the extent of capital invested in the export
market, e.g. capital-intensive extracting or energy-related businesses operating in
the foreign market are more vulnerable than manufacturing companies.

Political risk is of a macro nature when politically inspired environmental changes

affect all foreign investment. It is of a micro nature when the environmental
changes are intended to affect only selected fields of business activity or foreign
firms with specific characteristics, (possibly by expropriation).

When business is conducted in developing countries, the risks of greatest concern

are civil disorder, war and expropriation. When business is conducted in
industrialized countries, labour disruptions and price controls are generally seen to
pose the greatest threats to a company's profitability.Expropriation is the take-over
of a foreign firm located in a host country, by the host country's government.
All organizations doing business abroad should be aware of the fact that what they
do could be the object of some political action. Hence, they need to recognize that
their success or failure could depend on how well they cope with political
decisions, and how well they anticipate changes in political attitudes and policies.
INDIA WEIGHING POLITICAL IMPACT OF TOUGH ECONOMIC
DECISIONS

The Reserve Bank of India (RBI) did take one rapid decision to cut the cash
reserve ratio, which has already unleashed about Rs. 600 billion (around $13
billion) in the market, but frantic bankers are saying this is just not enough to
contain the crisis. With the global crisis getting worse every day, there seems to be
no end in sight to the bloodbath on Wall Street or Dalal Street. And the proposed
committee on liquidity has been given a week to submit proposals which seems to
be seven days too long during this unprecedented global financial crisis.

Described as the worst banking crisis of the last century, the current financial
turmoil is even being compared with the Great Depression of 1929 but there is a
critical difference - the global reach of the situation in today' times. Globalization
has meant financial markets all over the world are interconnected. Thus markets
from Russia to Thailand, China to Iceland are facing grave pressures on the
economy.

Even India, which was considered immune to the fever consuming the US and
European bourses, has fallen prey to the virus in a much greater degree than had
been imagined by an stock market analyst and expert. Concerns in this country for
the last few months had centered round inflation and excess liquidity in the
markets. The situation has now completely reversed and the central bank suddenly
has to worry about shortfall in liquidity.

The apparently slow response of the Indian government to the crisis despite many
soothing comments made by Finance Minister P. Chidambaram has much to do
with the political outlook for the next few months. A virtual mini-general election
is on the cards in November with as many as six states going to the polls. This is
likely to be a kind of referendum to next year's general elections and the state of
the economy is going to be a key factor in winning or losing.

Inflation at double digit levels has already hit the common man hard. So policy
makers have till now been strenuously trying to ensure that price rise remains
contained to the extent possible. Their efforts have largely been stymied by the
phenomenally high world crude oil prices that have had their impact on the Indian
economy inspite of the minimal pass-on to the consumers at the retail level.

Even so, inflation seems to have peaked and is now hovering around 11.5 per cent
but moderation to single digit levels is expected only by the end of the year. In this
backdrop, the latest crisis with the stock markets crashing and rupee falling to
record lows against the dollar has come as yet another blow to a government
looking forward to reap the benefits of its achievements before the elections.
Instead of triumphantly hailing the signing of the Indo-US nuclear deal, Prime
Minister and finance minister have had to make calming announcements about the
continued stability of the banking system, stock markets and the economy in
general. It is all the more disturbing for them since the banking system in this
country has not been exposed directly to the sub-prime crisis in the US and is
actually only suffering from the indirect impact of the ills facing the entire global
regime. In fact, it was the inherent strength of Indian banks that made most
analysts confident that the sub-prime crisis would blow over without having a
significant impact on this country.

Unfortunately, India can no longer remain immune to worldwide financial panic

and this has been reflected in the country's bourses that have crashed during the
past week. One of the major factors for this has been the pullout of foreign
institutionalinvestors (FIIs) who have had to deploy their funds elsewhere owing to
the worldwide meltdown.

To add to the misery of investors, the rupee has fallen to historic lows against the
dollar. This is again an anomaly since there have been more concerns about the
rupee appreciating strongly against the dollar in recent months, especially as it had
affected export efforts. And the final blow, of course was industrial growth data
showing a minimal 1.3 percent rise, clearly indicating that recessionary conditions
have crept into the manufacturing sector.

On the plus side, the government has made all the right noises to soothe the stock
markets, which are generally prone to move nervously in times of financial crisis.
The crash of bourses globally is being described as panic selling and the situation
is no different in this country.

But on the negative side, the central bank and the government have not moved fast
enough to deal with this completely new and unexpected reality of stock markets
moving down in alignment with exchanges in the rich countries. They will have to
take decisions such as interest rate cuts to release more liquidity into the system
and allow the corporate sector to make further investments in infrastructure and
manufacturing to prevent the onset of a recession.
Some say the government is in denial and is unwilling to face the reality of the
current crisis.
The fact is that it is alive to the reality but is uncomfortably aware of the political
impact of the decisions that will have to be made in the next few days and weeks.
And that has slowed down its response. But the very fact that Chidambaram has
cancelled his trip to the annual meeting of the International Monetary Fund (IMF)
has raised hopes that palliative measures will be taken sooner rather than later.

IMPACT OF ELECTIONS

Emboldened by the results, Left parties said the victory strengthened their role in
national politics and warned the Congress not to take its support at the Centre for
granted.Thefirstcasualty could well be the Congress-led United Progressive
Alliance government’s move to hike fuel prices, including that of cooking gas.

Kerala and West Bengal have brought “big responsibilities” for his party. The CPI
was more vocal. Making it clear that the Congress should not ignore the concerns
of the Left parties on economic and foreign policies, CPI secretary D Raja said the
Congress should draw a lesson from the people’s mandate.

Finance minister P Chidambaram, often under Left attack on his reforms agenda,
put up a brave front. There was no reason to assume the Left would be
unreasonable in its triumph and Congress unnecessarily timid, he said. “Both have
their strengths and have worked together for two years. There is no reason for the
two sides not to be able to work together for the next three years,”

Positive Outlook the BSE Sensex and the Nifty are likely to continue to move
upwards on a buoyant mid-to-long term economic outlook, short-term fall in crude
oil price and a possibility of a muted hike in retail petroleum product prices. The
real stars, however, could be the small and the mid-cap stocks. The institutional
and retail investors are queuing up for these equities as a large majority of them are
perceived to be dramatically transforming their profile. It would notbe surprising if
the BSE Mid Cap and Small Cap indices outperform the bellwether index in the
short-term.

As country's infrastructure spend is increasing, the cascading effect on the balance

sheets of a whole range companies are becoming more and more visible. Though,
concerns have been expressed, by some global investment firms and multilateral
financing institutions, about the country's ability to absorb oil shock, so far the
liquidity - driven the domestic stock remained unaffected.
Global investor community is gradually veering round the idea that India's growth
momentum could actually accelerate despite external negatives and internal
inadequacies. The signals from investment banking and private equity circles
suggest that apart growing portfolio money, India could witness a quantum leap in
overseas investments in the country this fiscal.
Political environment is another factor affecting the foreign market. It is necessary
for an international marketer to assess the political environment since this affect
has success as well as existence in such markets. The study and assessment of the
political environment include the following:

a) Political System: The type of government i.e. whether it is Socialistic,

Capitalistic, Democratic etc. must be analyzed, since the philosophy of the
government is reflected in its policies.

b). Philosophy of the Government: It is essential to study government’s philosophy

in particular about, policy towards private sector and foreign business. Many rules
exist in different countries. For example in India Foreign Exchange Regulation Act
1973, specifies guidelines for foreign private investment. From all this view points,
it is essential for an international marketer to assess the philosophy of the
government in power, as well as the long run political prospective.

c). Permanency and Stability of the Policy of the Government: It is necessary to

examine the extent of permanency and stability of government policy of the target
foreign market. The marketer must always be careful about such changes in policy
that lead to its destabilization. The policy of a government in the field of trade may
be rendered unstable, because of any one of the following factors:

1. Change in Governments.
2. Growing aspirations of nationalism. Shifting of political parties reaching the
government at different levels.

IMPACT OF POLITICS IN INTERNATIONAL MARKETING

Given today’s climate of global economic and political change and the experience
of with- spread nationalizations and expropriations in the 1960s and 1970s, there is
a growing recognition in the business world of the need for a company to “look
before it leaps” when considering entry into a foreign country. Any multinational
marketer would be well advised to make a thorough analysis of political risks as
well as risks peculiar to the company’s industry in foreign settings. History shows
that far and away the riskiest ventures are those in developing countries, where
appeals to nationalism are most damaging to multinationals. On the other hand,
international
Marketers cannot simply ignore these countries. For the U.S., the developing
countries are increasingly important both economically and politically. During the
recessionary period of the early 1990s, while U.S. exports to industrial countries
stagnated or declined, exports to developing countries continued to expand.
Without that demand for U.S. goods, unemployment and production figures would
have been far worse. The political perspectives of a nation should be examined
according to
· Type of government
· Stability of government
· Quality of host government’s economic management
· Change in government policy
· Host country’s attitude toward foreign investment
· Host country’s relationship with the rest of the world
· Host country’s relationship with parent company’s home government
· Attitude toward assignment of foreign personnel
· Extent of anti-private-sector influence or influence of state controlled industries
· Fairness and honesty of administrative procedures
· Closeness between government and people

The importance of these factors varies from country to country. Nevertheless, it is

desirable to consider them all to ensure a complete knowledge of the political
outlook for doing business in a particular country.

TYPE OF GOVERNMENT
World governments can be grouped in four categories: democratic republics,
communist dictatorships, dictatorships and monarchies. In each category there is a
spectrum of variation. Democratic republics are formed through regular elections
and have party systems. In the U.S. and England, two major political parties are
active. Italy and France have several political parties. In Mexico, one dominant
party controls. Communist dictatorships control all business activity. Such
governments exist in Cuba, the People’s Republic of China, Vietnam, North Korea,
and Burma. Communist countries maintain various types of ties with foreign
business. Because China desires to achieve economic progress through using
western technology and skills, the business climate there has been favorable.
Dictatorships are authoritarian regimes. These governments are run either by
military dictators as in Pakistan or by civilian dictators as in Libya. Military
dictators often eventually adopt a civilian posture, usually by holding an election
that gives the appearance of a government elected by popular vote. Authoritarian
governments can be further categorized according to economic philosophy. They
may be left wing or Marxist oriented, or right wing and directed toward for
enterprise. Finally, monarchies are governments in which the ruler derives power
through inheritance. A country may have a monarchy and yet be democratic such
as Great Britain, where Queen Elizabeth II is titular head of the country but not
head of the British Government. But in many countries, the government is actually
run by the monarch. Saudi Arabia and Jordan have monarchies. The shah of Iran
was a reigning monarch. A monarch may have political inclinations to either the
left or the right. Any review of a country’s political system and its impact on
foreign business must remain free of stereotyped notions. Both current and
emerging perspectives need to be changed.

GOVERNMENT STABILITY
Many countries have frequent changes of government. In such a climate, a foreign
business may find that by the time it is ready to implement an agreement, the
government with whom the initial agreement was arranged has changed to one that
is not sympathetic to the commitments made by its predecessor. In a democratic
situation, the incumbent party’s strength or the alternative outcomes of the next
election can be weighed to assess the likelihood of change. In other situations, a
variety of symptoms could point toward governing instability.
· Public unrest (demonstrations, riots, or other demonstrations of social tension)
· Government crises (opposition forces trying to topple the government)
· Armed attacks by one group of people on another, or by groups from a
neighboring country
· Guerrilla warfare
· Politically motivated assassinations
· Irregular change in top government leaders
A report covering these points should be prepared to present evidence of a
government’s stability or instability.

GOVERNMENT ECONOMIC MANAGEMENT

Another factor is to examine the quality of the host government’s economic

management. The economic environment of a country should be studied in the
political context with reference to
· The ability of the government to sustain its internal and external debt.
· The country’s pursuit of stable and diversified economic growth. The country’s
ability to generate an adequate amount of foreign exchange.
· The nature of the various fiscal and monetary means used to steer the economy.
· The quality of the long-term planning of economic policy and its implementation.

An example, a country that continues to live on borrowed funds, either from

private sources or international agencies like the IMF, and frequently defaults on
payments demonstrates poor economic management. Change in Government
Policy

More than anything else, MNCs dislike frequent policy changes by host countries.
Policy changes may occur even without a change in government. It is important,
therefore, for the foreign business to analyze the mechanism of government policy
changes.

ATTITUDE TOWARD FOREIGN INVESTMENT

Many nations look upon foreign investment with suspicion. This is true of both
developed and developing countries. Developing countries are usually afraid of
domination and exploitation by foreign business. In response to national attitudes,
these nations legislature put a variety of laws and regulations to prescribe the role
of foreign investment in their economies. Indirectly, the success of other
multinational business in a country indicates a favorable climate

INTERNATIONAL STANCE OF GOVERNMENT

Countries that maintain amicable political relationships with the rest of the world
and have respect for international law and order show political maturity. These
countries can be expected to behave in a responsible fashion. For less spectacular
situations, membership in regional and international organizations as well as
adherence to bilateral and multilateral principles and agreements provides evidence
of a country’s relationship with other nations.

RELATIONSHIP WITH PARENT COMPANY’S HOME GOVERNMENT

In theory, MNCs have no political alignment. Yet a company originating in the

U.S. will continue to be known as a U.S. Company even though it may derive a
major portion of its revenues and profits from operations outside the U.S. The best
example for this is Nestle Company. Thus, the relationship between the host
country government and the parent company government will affect, either directly
or indirectly, the MNC. International marketers should therefore trace the history
of the relationship between the host country’s government and the home country
government before deciding to enter a market.

UNDERSTANDING THE IMPACT OF POLITICAL RISK ON BUSINESS

STRATEGY:

The link between politics and big business is as old as time. Over 200 years ago,
The East India Company led the British acquisition of India. In the early years of
the last millennium, the US was busy colonizing the farm produce of Central and
South American nations. In the 1960s, The Shah of Iran was a friend of USA.
More recently, the currency crash of the Asian Tigers in 1997 exposed the
systemic rot of crony capitalism, which resulted in the change of government in at
least two nations, Indonesia and Thailand. And just a few years ago, in the US,
certain firms had advance knowledge of the imminent assault on Iraq and were
busy preparing rebuilding plans for Baghdad even before the first missiles of Gulf
War II were fired. Closer to home, a favourite topic of debate in the cocktail
circuits is the involvement of politicians in big business. One hears stories of Chief
Ministers in distress announcing economic development projects to shore up their
political fortunes. However as we have seen of late, the best laid plaques and
foundation stones are routinely ravaged by the changed political climate that
follows. Even so, the private sector is known to participate in these situations with
their eyes wide open. Yet, some good occasionally comes out of the political-
private industry “nexus”. In certain parts of India, the real-estate boom has often
been the result of a working relationship between political gain and private
initiative. In this article we shall examine the consequences of the nexus between
politics and the corporate world and assess the comparative importance of political
insight. While I am not going to delve in to the ethics of where economic
opportunities and political motives comfortably intersect, we shall examine how a
business strategist can assess and assign political risk.

Unfortunately, India can no longer remain immune to worldwide financial panic

and this has been reflected in the country's bourses that have crashed during the
past week. One of the major factors for this has been the pullout of foreign
institutional investors (FIIs) who have had to deploy their funds elsewhere owing
to the worldwide meltdown.
To add to the misery of investors, the rupee has fallen to historic lows against the
dollar. This is again an anomaly since there have been more concerns about the
rupee appreciating strongly against the dollar in recent months, especially as it had
affected export efforts. And the final blow, of course was August's industrial
growth data showing a minimal 1.3 percent rise, clearly indicating that
recessionary conditions have crept into the manufacturing sector.

On the plus side, the government has made all the right noises to soothe the stock
markets, which are generally prone to move nervously in times of financial crisis.
The crash of bourses globally is being described as panic selling and the situation
is no different in this country.

But on the negative side, the central bank and the government have not moved fast
enough to deal with this completely new and unexpected reality of stock markets
moving down in alignment with exchanges in the rich countries. They will have to
take decisions such as interest rate cuts to release more liquidity into the system
and allow the corporate sector to make further investments in infrastructure and
manufacturing to prevent the onset of a recession.

This may not be the best move politically as it may push up inflation for the time
being, but clearly there is little option right now. And since there is no room to
maneuver, the government might as well act as fast as possible before any more
damage takes place.

Some say the government is in denial and is unwilling to face the reality of the
current crisis.

The fact is that it is alive to the reality but is uncomfortably aware of the political
impact of the decisions that will have to be made in the next few days and weeks.
And that has slowed down its response. But the very fact that Chidambaram has
cancelled his trip to the annual meeting of the International Monetary Fund (IMF)
has raised hopes that palliative measures will be taken sooner rather than later.

POLITICAL FACTOR WHICH AFFECT THE GROWTH RATE

ECONOMY:
Political systems can be classified based on the party system in the society, and
mode in which governments attain power. Based on the way governments come
into power, they can be classified into parliamentary type or absolutist type. The
citizens elect parliamentary governments. Absolutist governments are not elected.
They come into power by force.

Based on the number of parties active in a country, the political establishment can
be classified into four types: single-party, two-party, multiparty, and one-party
dominated systems. In a single-party system there is only party. This party has
absolute power. In a two-party system two major groups with differing political
philosophies compete for control of the government. In a multiparty system no
single party may have the strength to form the government.

As a result, parties enter into coalitions with many small parties to form the
government. In a system dominated by a single-party, although there are many
parties, only one party is strong enough to form the government. To understand
and assess the political environment of a company it is necessary to identify and
evaluate factors that can cause political instability. Social unrest, attitudes of
nationals, and policies of the host government are some factors that can cause
social instability. Political risk refers to political actions that have a negative
impact on a firm's value. Companies operating internationally have to deal with
foreign politics, domestic politics, and international politics.

The political environment in the host country is referred to as foreign politics. A

company may face problems due to a political crisis in its parent country also. This
crisis is confined to domestic politics. Political relations between two or more
countries also affect business relations between the countries. A company can face
problems if the relations between the country in which the firm operates and the
country from which it hails are not good.

The process of establishing a cause-and-effect relationship between political

factors and business income is called political risk analysis. Some government
policies that adversely affect the business environment include non-convertibility
of currency, preventing the repatriation of profits, nationalization and inadequacy
of compensation, and domestic political violence. Political risk analysis is an
ongoing function and is not restricted to the initial investment decision.
Publications of political analysts, international rating agencies and the views of
employees of the foreign subsidiaries are some of the sources of information on
political risk.

Companies operating internationally employ different strategies to reduce their

political risk.
The strategic techniques are: Integrative technique, Protective/Defensive
techniques. A company adopting the Integrative Technique tries to blend with the
host country’s ethos. Companies can minimize the political risk they face by
adopting Protective Techniques. A company can locate its key operations beyond
the control of the host country government.