Chapter 6

The Political Environment: A Critical Concern

PowerPoint presentation prepared by:

Professor Rajiv Mehta
Associate Professor of Marketing
New Jersey Institute of Technology
Newark, N.J.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

 Chapter Learning Objectives
1.
1. What
What does
does the
the sovereignty
sovereignty of
of nations
nations mean
mean and
and how
how can
can itit affect
affect
the
the stability
stability of
of government
government policies,
policies, political
political parties
parties and
and
nationalism.
nationalism.

2.
2. The
The political
political risks
risks of
of global
global business
business and
and
the
the factors
factors that
that affect
affect stability
stability

3.
3. The
The importance
importance of
of the
the political
political system
system toto international
international
marketing
marketing and
and its
its effect
effect on
on foreign
foreign investments
investments
 Chapter Learning Objectives

4.
4. The
The impact
impact of
of political
political and
and social
social activists,
activists, violence
violence and
and
terrorism
terrorism on
on international
international business
business

5.
5. Assessing
Assessing and
and reducing
reducing the
the effect
effect of
of political
political
vulnerability
vulnerability

6.
6. How
How and
and why
why governments
governments encourage
encourage foreign
foreign investment
investment
 Introduction

• The political environment of countries is a critical

concern for the international marketer

• International law recognizes the sovereign right of

a nation to allow or deny foreign firms to conduct

• Sovereignty refers to both the powers exercised

by a state in relation to other countries and the
supreme powers exercised over its own members
• A sovereign state is independent and free from all
external control; enjoys full legal equality with
other states; and governs its own territory
 Stability of Government Policies

Q:
Q: Radical
Radical shifts
shifts in
in government
government philosophy
philosophy can
can occur
occur when:
when:

1.
1. An
An opposing
opposing political
political party
party ascends
ascends toto
power
power
2.
2. Pressure
Pressure from
from nationalist
nationalist and
and self-interest
self-interest
groups
groups

3.
3. Weakened
Weakened economic
economic conditions.
conditions.
4.
4. Bias
Bias against
against foreign
foreign investment
investment or
or
conflicts
conflicts between
between governments
governments
 Stability of Government Policies
•• The
The stability
stability or
or instability
instability of
of prevailing
prevailing government
government policies
policies is
is
aa major
major concern
concern of of foreign
foreign businesses
businesses
•• AAchange
change inin government,
government, whether
whether by by election
election or
or coup,
coup, does
does not
not
always
always mean
mean aa change
change in in the
the level
level of
of political
political risk
risk

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

•• The
The ideal
ideal political
political climate
climate for
for aa multinational
multinational firm
firm to
to conduct
conduct
business
business is
is aa stable,
stable, friendly
friendly government
government
•• Be
Be knowledgeable
knowledgeable aboutabout the
the philosophies
philosophies of
of all
all major
major political
political
parties
parties and
and their
their attitudes
attitudes towards
towards trade
trade
 Nationalism

•• Nationalism
Nationalism refers
refers to
to feelings
feelings of
of national
national pride
pride and
and unity
unity

Feelings
Feelings ofof nationalism
nationalism are are
manifested
manifested by: by:
1.
1. Call
Call to
to “buy
“buy ourour country’s
country’s
products
products only,”
only,” e.g.,
e.g., “Buy
“Buy
American”
American”
2.
2. Restrictions
Restrictions on on imports,
imports,
restrictive
restrictive tariffs,
tariffs, and
and other
other
barriers
barriers toto trade
trade
 Political Risks of Global Business

•• Risks
Risks of
of global
global business
business include:
include:

1.
1. Confiscation,
Confiscation, Expropriation,
Expropriation,
and
and Domestication
Domestication
2.
2. Economic
Economic Risks,
Risks, and
and
3.
3. Price
Price Controls
Controls
 Confiscation, Expropriation, and Domestication

•• Confiscation,
Confiscation, the
the most
most severe
severe political
political risk,
risk, is
is the
the seizing
seizing of
of aa
company’s
company’s assets
assets without
without payment
payment

•• Expropriation
Expropriation is is where
where the
the government
government
seizes
seizes an
an investment,
investment, but
but some
some
reimbursement
reimbursement for for the
the assets
assets is
is made;
made;
often
often the
the expropriated
expropriated investment
investment isis
nationalized
nationalized toto become
become aa government
government runrun
entity
entity

•• Domestication
Domestication occurs
occurs when
when the
the government
government mandates
mandates local
local
ownership
ownership and
and greater
greater national
national involvement
involvement in
in aa foreign
foreign
company’s
company’s management
management
 Economic Risks

•• International
International firms
firms face
face aa variety
variety of
of economic
economic risks
risks

Governments
Governments cancan impose
impose restraints
restraints
on
on business
business activity
activity to:
to:
a)
a) Protect
Protect national
national security
security
b)
b) Protect
Protect an
an infant
infant industry
industry
c)
c) To
To conserve
conserve scarce
scarce foreign
foreign
exchange
exchange
d)
d) Raise
Raise revenue
revenue
e)
e) Retaliate
Retaliate against
against unfair
unfair trade
trade
practices
practices
 Forecasting Political Risk

•• Decide
Decide ifif risk
risk insurance
insurance isis necessary
necessary
•• Devise
Devise an
an intelligence
intelligence network
network and and an
an early
early warning
warning system
system

•• Develop
Develop contingency
contingency plans
plans for
for
unfavorable
unfavorable future
future political
political events
events
•• Build
Build aa database
database of
of past
past political
political events
events
for
for use
use in
in predicting
predicting future
future problems
problems
•• Interpret
Interpret the
the data
data gathered
gathered by
by aa
company’s
company’s intelligence
intelligence network
network in
in order
order
to
to advise
advise and
and forewarn
forewarn corporate
corporate decision
decision
makers
makers about
about political
political and
and economic
economic
situations
situations
 Other Political Risks of Global Business

1.
1. Political
Political Sanctions
Sanctions 2.
2. Political
Political and
and Social
Social
Activists
Activists

3.
3. Violence
Violence and
and 4.
Terrorism
Terrorism 4. Cyberterrorism
Cyberterrorism
 Assessing Political Vulnerability

•• No
No absolute
absolute guidelines
guidelines toto assess
assess ifif aa firm
firm faces
faces political
political risks
risks
•• No
No specific
specific guidelines
guidelines toto determine
determine aa product’s
product’s political
political
vulnerability,
vulnerability, but
but there
there are
are some
some generalizations
generalizations

•• Politically
Politically sensitive
sensitive products
products include
include
those
those that:
that:
1.
1. effect
effect on
on the
the environment,
environment,
2.
2. exchange
exchange rates
rates
3.
3. national
national and
and economic
economic security
security
4.
4. affect
affect public
public health,
health, e.g.,
e.g., genetically
genetically
modified
modified (GM)
(GM) foods
foods
 Reducing Political Vulnerability
Relations
Relations between
between governments
governments and
and MNCs
MNCs are
are generally
generally
positive
positive ifif the
the investment:
investment:

improves
improves the
the balance
balance of
of payments
payments by
by increasing
increasing
exports
exports or
or reducing
reducing imports
imports through
through import
import
substitution
substitution

uses
uses locally
locally produced
produced resources
resources

transfers
transfers capital,
capital, technology,
technology, and/or
and/or skills
skills

creates
creates jobs,
jobs, and/or
and/or

makes
makes tax
tax contributions
contributions
 Reducing Political Vulnerability
MNC’s
MNC’s can
can use
use the
the following
following strategies
strategies to
to minimize
minimize ­p­political
olitical
vulnerability
vulnerability and
and risk:
risk:

Joint
Joint Ventures
Ventures

Expanding
Expanding the
the Investment
Investment Base
Base

Licensing
Licensing

Planned
Planned Domestication
Domestication

Political
Political Payoffs
Payoffs