MK006 - I n t e r n a t i o n a l M a r k e t i n g

MODULE 3
The Political Environment: A Critical Concern

Compiled by: Prof. PAUL MARIA A. PESITO

Source: International Marketing by Cateora, Gilly and Graham
The Political Environment:
A Critical Concern

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

2. The political risks of global business and

the factors that affect stability

3. The importance of the political system to international

marketing and its effect on foreign investments

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 Chapter Learning Objectives

4. The impact of political and social activists, violence and

terrorism on international business

5. Assessing and reducing the effect of political

vulnerability

6. How and why governments encourage foreign investment

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 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

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 Political causes of Instability
1. Some forms of government seem to be
inherently unstable
2. Changes in political parties during elections
can have major effects on trade conditions
3. Nationalism
4. Animosity• targeted toward specific
countries
5. Trade disputes themselves.

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 Forms of Government

Circa 500 BC, the ancient Greeks conceived

of and criticized three fundamental forms of
government:

rule by one •- monarchy (or dictatorship),

rule by few - aristocracy (or oligarchy)
rule by many - democracy.

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 Forms of Government

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 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

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 Nationalism

• Nationalism refers to feelings of national pride and unity

Feelings of nationalism are

manifested by:
1. Call to “buy our country’s
products only,” e.g., “Buy
American”
2. Restrictions on imports,
restrictive tariffs, and other
barriers to trade

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 Political Risks of Global Business

• Risks of global business include:

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

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 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

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 Economic Risks

• International firms face a variety of economic risks

Governments can impose restraints

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

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 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

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 Other Political Risks of Global Business

1. Political Sanctions 2. Political and Social

Activists

3. Violence and 4. Cyberterrorism

Terrorism

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 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:
1. effect on the environment,
2. exchange rates
3. national and economic security
4. affect public health, e.g., genetically
modified (GM) foods

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 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

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 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 and Political Bargaining

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QUESTIONS?

19
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 REFERENCES
• Cateora, P. R., Gilly, M.C., Graham, J.L. (2020)
International Marketing. USA :
McGraw-Hill/Irwin

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