4

Political and
Regulatory Climate
Learning Objectives
• List and explain the political motivations behind
government actions that promote or restrict international
marketing. Identify pressure groups that affect
international marketing.
• Discuss specific government actions salient to
international marketing, such as boycotts and takeovers.
• List and compare the four basic legal traditions that
marketers encounter worldwide.
• Cite examples illustrating how national laws can vary
and change.
• Differentiate between the steps involved in managing
political risk and those involved in planning for
regulatory change.
Host Country Defined

A host country is any country that contains

an operational unit (marketing, sales,
manufacturing, R&D) of an international
company.
Home Country
• A home country is the country where a
multinational enterprise is
headquartered.
• A home country expects multinational
enterprises based within its borders to
demonstrate social responsibility
Political Motivations of Host
Countries

• Self-preservation
• Security
• Prosperity
• Prestige
• Ideology
• Cultural identity
Self-Preservation

• Sovereignty concerns
• Restricted markets
– Media
– Airspace and landing rights
National Security

• Defense industry
• Telecommunications

Royalty Free World

Host Government Goals and
Policy Actions
 Fostering National Prosperity

• Employment
• Exports
Promoting Ideology

• Self-reliance
– “Juche”
• Non-alignment
• Communism in China - Threatened by
market liberalization?
Protecting Cultural Identity

• Resisting foreign brand names

• Protecting cultural content in movies and
TV programming
 Host Country Pressure Groups

• Labor unions
• Political parties
• Environmental groups
• Local business community
 Host Country Actions

• Government subsidies
• Ownership restrictions
• Operating conditions
– Work permits
– Local content requirements
The new restrictions come from legislation passed in 2019 that says foreigners can own
no more than 49 percent of any company. When the law was first enacted, Iraqi
policymakers indicated that exemptions would be given.

https://www.iraqoilreport.com/news/foreign-investors-recoil-as-iraq-restricts-
company-ownership-44073
 NPR Segment:
Chinese Oil Company Pulls Unocal Bid

• The Chinese oil company CNOOC says it has

abandoned its controversial attempt to buy
Unocal, a California-based oil producer. CNOOC
says a hostile political environment doomed its
bid.
– Listen to it at
http://www.npr.org/templates/story/story.php?storyId=
4782101
Operating Conditions

• Operating conditions can also be

affected by what governments fail to do
– Kidnappings!
Boycotts of Firms

• Government boycotts
– Arab Boycott

• Ad-hoc consumer
boycotts
– The new Arab Boycott
Takeovers

• Takeovers = Host-government actions

that result in a firm’s loss of ownership
or direct control
• An expropriation is a formal seizure of
an operation
• A confiscation is an expropriation
without compensation
Examples of Expropriations

In January 2010, Hugo Chavez expropriated 6

hypermarkets and 35 supermarkets owned by French
Casino, because they raised prices after the Venezuelan
currency devaluated. Later Chavez said he would
consider a partnership with Casino.

The Venezuelan government forced Banco Santander

to sell their its stake in Banco de Venezuela for $1.05
billion in mid 2009.
Home Country Actions

• Guided by the same six interests as host

countries
– U.S. embargo of Cuba
– U.S. anti-Arab boycott legislation
• Often home countries seek multilateral
actions to increase their bargaining
power
Home Country Pressure Groups

• Firms come under pressure at home for

their
– Choice of markets
– Methods of doing business
• Massachusetts passes law to deny state
contracts with firms operating in
Myanmar
International Legal Tradition

• Common law
• Civil (or code) law
• Islamic law
• Socialist law
• Mix Legal System

Royalty Free World

 Legal Evolution

• Product liability
• Bankruptcy
• Regulating cyberspace
Regulatory Environments Vary
Among Countries

ESTABLISH A BUSINESS
153 days in Mozambique versus 3 days in Canada

STEPS TO REGISTER COMMERCIAL PROPERTY

21 steps in Nigeria versus 3 steps in Finland

New Zealand, USA,

Singapore =
Least regulated countries
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
Attitudes Toward Rules

• Attitudes toward rules are affected by

two criteria:
1. Level of power distance
2. Type of human nature orientation
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
 Power Distance

HIGH LOW
Laws challenged to a Pragmatic rules; most
certain degree people respect and obey
+
HNO

Italy, France USA

Formal, unrealistic rules. Society does not trust
Often discrepancy between people to obey laws.

_ law and what people

actually do or what is
Compliance is insured
with explicit sanctions
enforced by authorities

Many developing countries Germany, Switzerland

Another Perspective on Attitudes
Toward Rules

• Tight cultures – many rules, norms and

standards for correct behavior.
– Criticize and punish rule breakers severely.
– More isolated and less influenced by other
cultures
• Loose cultures – few rules, norms and
standards for correct behavior
Power distance refers to the way in which power is
distributed and the extent to which the less powerful
accept that power is distributed unequally. Put simply,
people in some cultures accept a higher degree of
unequally distributed power than do people in other
cultures.
Predicting Regulatory Change

• Analyze economic basis of changes

• Listen for signals
Managing Regulatory Change

• Alter
Bargain to get government to change regulations

• Avoid
Move to bypass the impact of the regulation

• Accede
Comply

• Ally
Avoid some risks by seeking strategic alliances
Strategic Approaches to
Regulatory Change
Political Risk

Political risk is the possibility that an

unexpected and drastic change due to
political forces will result in adverse
circumstance for business operations
Regulatory Change Versus
Political Risk

• Regulatory Change
– More moderate and predictable changes in
the business environment
• Political risk
– More unexpected and drastic changes
 Politically Risky Countries
Not Risky Moderate Risky
USA Poland Afghanistan
United Kingdom Hungary Iraq
Switzerland China Congo
Canada Tunisia Sudan
Germany Mexico Georgia
France Egypt Cuba
Sweden Thailand Armenia
Japan India Russia
Singapore Turkey
Source: Euromoney
A Typology of Political Risk
Government Risks Instability Risks

Firm-Specifi Discriminatory Sabotage

c Risks regulations Kidnappings
“Creeping” expropriation Firm-specific boycotts
Breach of contract

Country-Le Mass nationalizations Mass labor strikes

vel Risks Regulatory changes Urban rioting
Currency inconvertibility Civil wars

Source: Wagner, Daniel. 2000. “Defining ‘Political Risk’”

http://www.irmi.com/Expert/Articles/2000/Wagner10.aspx
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 their exposure, or the losses they
would sustain, should a sudden change
occur
Managing Political Risk (cont.)

• 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?
Managing Political Risk (cont.)

• Questions companies should ask:

1. If the present government is succeeded by
another, how will the specific rules of the
game change?
2. What would be the effects on our business of
any unexpected changes in the specific rules
of the game?
3. In light of those effects, what decisions and
actions should we take now?
Political Risk Intelligence
Systems

• The Evolution of the Political Risk

Industry
– Grand Tours Approach
– Old Hands Approach
– Political Risk Firms
Business Environment
Risk Intelligence

• Political Risk Index

• Operations Risk Index
• Remittance and Repatriation Factor
• Composite Score

• BERI S.A. is the private source for

comprehensive ratings, analyses, and
forecasts for over 140 countries.
http://www.beri.com
Business Environment
Risk Intelligence (cont.)
• 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)
Business Environment
Risk Intelligence (cont.)
• 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.)
• 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”
Control Risks Group

• Planning
• Implementing
• Managing
• Solving

Control Risks is an independent, specialist risk consultancy. They provide advice

and services that enable clients to accelerate opportunities and manage strategic
and operational risks. With 27 offices worldwide Control Risks offers consultancy,
advice and assistance to a diverse range of corporate, governmental and
non-governmental clients worldwide.
http://www.crg.com
Risk Reduction Strategies

Risk Reduction Strategies

• Sharing Risks
– Joint ventures, alliances, licensing, franchising,
management contracts, countertrade
– Project finance
• Minimizing Assets at Risk
• Insuring Against Risks
– Governments (e.g., OPIC)
– Private firms
 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
www.opic.gov
Selected OPIC Projects
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 spend lots of money to protect
infrastructure, plant, equipment, and people