Chapter Eight

Political Forces

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives

 Identify ideological forces that affect business

 Understand that most governments own
businesses that they are privatizing
 Explain terrorism’s changing sources, reasons,
methods, and growing power
 Explain steps that traveling international
business executives should take to protect
themselves from terrorists
 Evaluate government stability and policy
continuity

8-2

1-2
 Learning Objectives

 Explain country risk assessment

 Discuss the arguments for imposing trade
restrictions
 Explain the differences between tariff and non-
tariff barriers
 Appreciate the changing importance of tariff and
non-tariff barriers to managers

8-3

1-3
 Ideological Forces

 Communism
 Government should own all the major
factors of production
 Labor unions are government-controlled
 This ideology persists in few countries
 Capitalism
 An economic system in which the means of
production and distribution are for the most
part privately owned and operated for
private profit

LO1
8-4

1-4
 Ideological Forces

 Socialism
 In an extreme form socialist governments can
control public utilities and some basic means of
production
 Socialist governments rarely perform in ways
consistent with a “pure” doctrine
 Many European countries including Great Britain,
France, Spain, Greece, Germany, Italy, Austria,
and others have practiced a form of socialism

LO1
8-5

1-5
 Conservative or Liberal

 Conservative
 In recent U.S. terms a conservative believes in
minimizing government oversight of economic
activity and maximizing the independence of the
private sector
 Liberal
 In recent U.S. terms a liberal urges greater
government regulation and oversight of the
economy
 These terms usually have entirely different meanings
outside the U.S.
LO1
8-6

1-6
 Why Firms are Nationalized

 The government suspects that the firms are concealing

profits
 To increase the firm’s profitability
 For ideological reasons - countries have national,
government run utility companies, control strategic
industries (petroleum in Mexico), etc.
 To preserve jobs by supporting failing industries that
are important to the economy
 As a consequence of previous government’s support to
protect the public investment

LO2
8-7

1-7
 Unfair Competition?

 Privately owned companies complain that

government owned companies
 Can cut prices because maximizing profit is
not their main purpose
 Get cheaper financing
 Get government contracts
 Get export assistance
 Can hold down wages with government
assistance

LO2
8-8

1-8
 Privatization
Anywhere Any Way

 Privatization does not always refer to

ownership transfer from government to private
entities
 Activities previously conducted by the state
may be contracted out
 Governments may lease state-owned plants
to private entities
 Governments may combine a joint venture
with a management contract with a private
group to run a previously government-
operated business
LO2
8-9

1-9
 Government Protection

 Any government, regardless of ideology,

must protect the nation’s economic welfare
 National defense
 Protection from banditry, piracy
 Terrorism

LO3
8-10

1-10
 Government Protection

 Terrorism
 Unlawful acts of violence committed for a wide
variety of reasons,
 Economic gain: ransom
 To overthrow a government
 To gain release of imprisoned colleagues
 To exact revenge for real or imagined wrongs
 To punish nonbelievers of the terrorists' religion

LO3
8-11

1-11
 Government Protection

 World wide terrorist groups: a new trend

 Government-sponsored terrorism: act of war
 Countries finance, sponsor, and train
terrorists and/or provide sanctuaries for
them

LO3
8-12

1-12
 Government Protection
 Kidnapping for Ransom
 Victims held for large ransoms
 Columbia and Peru are dangerous places
for American executives
 U.S. executives practice “commando
management” to avoid kidnap risk
 Arrive secretly, meet for a few days and
fly off before kidnappers learn of their
presence
 Such behavior is suggested when operating in
countries that are on the U.S. State
Department’s warning list LO3
8-13

1-13
 Countermeasures by Industry

 KRE (kidnap, ransom, and extortion)

 Insurance to cover ransom payments, antiterrorist
schools
 Cassidy and Davis
 The world’s largest kidnapping and extortion
underwriting firm is located in London
 Antiterrorist Schools

LO3
8-14

1-14
 Extreme Travel
Checklist for Executives
 Personal and legal affairs in order prior to departure
 Tell others about your travel plans on a need-to-
know basis
 “Sanitize” all documents from company logos
 Prepare for host country’s culture and political
environment
 Be sure that someone in your company knows the
where, when and how of your trip
 Have an established code of communication in case
of extreme circumstances
 Use State Department sources prior to your trip to
learn about the host political environment
LO4
8-15

1-15
 Terrorism Developments

 Nuclear Terrorism
 Failing security standards at former Soviet
installations permit uranium to be stolen, then sold
to terrorists
 Chemical and Biological Terrorism
 Recipes from self-taught terrorists that can be
downloaded from the Internet

8-16

1-16
 Government Stability

 Stable Government
 Maintains itself in power and whose fiscal,
monetary and political policies are
predictable and not subject to sudden,
radical changes
 Unstable Government
 Cannot maintain itself in power or makes
sudden, unpredictable, or radical policy
changes

LO5
8-17

1-17
 Traditional Hostilities

 Traditional hostilities refer to long-standing

enmities between tribes, races, religions,
ideologies, or countries
 Arab countries -Israel
 Hutus and Tutsis in Burundi and Rwanda
 Tamils and Sinhalese in Sri Lanka

LO5
8-18

1-18
 International Companies
and Political Forces

 International companies
 are powerful and can influence their destiny
 make decisions about where to invest, where to
conduct research and development, and where to
manufacture products
 The financial size of many international companies
relative to the host economy or economic sector
gives them a strong negotiating position

LO5
8-19

1-19
 Country Risk Assessment

 A country risk assessment (CRA) is an evaluation by

the firm that assesses a country’s economic
situation, policies and politics to determine how
much risk exists of losing an asset or not being paid

LO6
8-20

1-20
 Country Risk Assessment

 Types of Country Risks

 Political: wars, revolutions, coups
 Economic
 Financial: BOP deficits
 Labor: low productivity, militant unions
 Legal: underdeveloped laws concerning
business
 Terrorism

LO6
8-21

1-21
 Information Content for CRA

 Information needed to conduct CRA

 Nature of business - the needs of the
company
 Length of time required by economic
activity being considered
 Utility of risk analyses of social,
political, and economic factors
decreases precipitously over longer
time spans

LO6
8-22

1-22
 Trade Restrictions

 Government officials sensitive to interest groups that

are being hurt by international competition
 Arguments for trade restrictions
 National defense
 Sanctions to punish offending nations
 Protect infant or dying industry
 Protect domestic jobs from cheap foreign labor
 Scientific tariff or fair competition

LO7
8-23

1-23
 Dumping

 Dumping is within the domain of the WTO

 The WTO defines dumping as selling a product abroad
for less than
 the average cost of production at home
 home market price
 the price to third countries

LO7
8-24

1-24
 Dumping

 Dumping is used by a manufacturer

 to sell excess production without disrupting
prices in the home market
 as a response to cyclical or seasonal factors
 as a way to raise market share
 Predatory dumping occurs when the manufacturer
lowers the export price to force the importing
nation’s domestic producers out of business
 The manufacturer expects to raise prices once
the objective is met
LO7
8-25

1-25
 New Types of Dumping

 Social dumping occurs when firms in

developing nations capitalize on low wages
and poor working conditions
 no worker benefits
 undermines social support systems
 Environmental dumping refers to lax
environmental standards that lower costs

LO7
8-26

1-26
 New Types of Dumping

 Financial services dumping refers to low

requirements for bank capital-asset ratios
 Cultural dumping occurs when cultural barriers aid
local firms
 Tax dumping refers to special tax rates or related
breaks

LO7
8-27

1-27
 Subsidies and
Countervailing Duties

 Subsidies are economic actions by a

government to support exports or hinder
imports
 Countervailing duties are additional import
taxes levied by the importing nation’s
government on imports that have benefited
from export subsidies offered by the exporting
nation’s government

LO7
8-28

1-28
 Tariff Barriers

 Tariffs or import duties are taxes levied on

imported goods to reduce their competitiveness
 Ad valorem duties are assessed as a
percentage of invoice value
 Specific duties are assessed as a fixed sum
per unit
 Compound duties are a combination of ad
valorem and specific duties
 A variable levy may guarantee the market price
of the import is equal to that of the domestic
product

LO8
8-29

1-29
 Non-Tariff Barriers

 Forms of discrimination against imports other than

import duties such as
 Specifications
 Customs procedures
 Quotas are numerical limits on specific classes of
imports
 Absolute: once number is reached imports stop
 Global: no regard to source
 Allocated or discriminating: assigned to specific
countries

LO8
8-30

1-30
 Non-Tariff Barriers

 Voluntary export restraints (VERs) are

export quotas imposed by the exporting
country
 Orderly marketing arrangements are VERs
based on formal agreements between
exporting and importing countries

LO8
8-31

1-31
 Non-Quantitative
Non-Tariff Barriers

 Government participation in trade

 Procurement policies
 Local content requirements
 Customs and other administrative procedures
 Standards

LO8
8-32

1-32