chapter nine

Political Forces

McGraw-Hill/Irwin
International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives

 Identify the ideological forces that affect business

 Discuss the fact that although most governments own

businesses, they are privatizing them in growing numbers

 Explain the changing sources and reasons for terrorism

 Explain steps that traveling international business executives

should take to protect themselves from terrorists

 Evaluate the importance to business of government stability

and policy continuity

 Explain country risk assessment by international businesses

9-3
 Ideological Forces

 Communism
 The belief that the government should own all
the major factors of production
 Production in these countries is at state-
owned factories and farms (some exceptions)
 Labor unions are government-controlled

9-4
 Communism

• Conceived by Karl Marx as “classless

society”
– Developed by his successors into control of society
by the Communist Party and an attempted
worldwide spread of communism
• Expropriation and Confiscation
– Government seizure of property within its
borders owned by foreigners, followed by
prompt, adequate, and effective compensation
to the former owners
– Generally expropriated becomes confiscation (no
compensation)
9-5
 Ideological Forces

• Capitalism
– An economic system in which the means of production
and distribution are for the most part privately owned
and operated for private profit
• Ideal capitalism
• Government restricted to functions that the private
sector cannot perform
– National defense
– Police, fire, and other public services
– Government-to-government international
relations

9-6
 Ideological Forces
• Socialism
 Public, collective ownership of the basic
means of production and distribution,
operating for use rather than profit
Socialist governments frequently perform
in ways not consistent with the doctrine
Many European countries have practiced
socialism: Great Britain, France, Spain,
Greece, Germany

9-7
 Socialism

• Socialism in Developing Countries

 Government typically owns and controls
most of the factors of production
 Shortages of capital, technology, and skilled
management and labor are characteristic
 Many of the educated citizens connected
with government

9-8
 Conservative or Liberal

Conservative
 A person, group, or party that wishes to
minimize government activities and
maximize private ownership and business
Right wing is a more extreme
conservative position

9-9
 Conservative or Liberal

 Liberal
 In the contemporary U.S., a person, group,
or party that urges greater government
involvement in business and other aspects
of human activities
Left wing is a more extreme liberal
Careful! Terms may have entirely
different meanings outside the U.S.

9-10
 Government Ownership
of Business
 Why Firms are Nationalized
– To extract more money from the firms

– To increase the firm’s profitability

– For ideological reasons

– To preserve jobs

– To follow previous government support (control follows

money)

– happenstance
9-11
 Unfair Competition?

 Private-owned companies complain that

government owned companies
– Can cut prices unfairly
– Get cheaper financing
– Get government contracts
– Get export assistance
– Can hold down wages with government
assistance

9-12
 Privatization

• The transfer of public sector assets to the

private sector, the transfer of management of
state activities through contracts and leases,
and the contraction out of activities previously
conducted by the state
• Britain’s Margaret Thatcher, leader of
privatization movement
• Airports, garbage, postal services frequent
examples

9-13
 Privatization in on the Move

• Trend all over the world

• China is allowing state-run enterprises to

diversify ownership

• Usually the buyers have financial

success

9-14
 Privatization Anywhere
Any Way

 Not always 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

9-15
Privatizations by Region

9-16
 Government Protection

 Terrorism
 Unlawful acts of violence committed for a wide
variety of reasons, including for ransom, to
overthrow a government, to gain release of
imprisoned colleagues, to exact revenge for real or
imagined wrongs, and to punish nonbelievers of the
terrorists' religion
 Since the 1970s, the world has been plagued by
terrorism

9-17
 Government Protection

 World Wide Terrorist Groups

 Al Qaeda, IRA, Hamas, other Islamic
fundamentalist groups, ETA, Japanese Red Army,
German Red Army Faction
 Government-Sponsored Terrorism: Act of War
• Countries finance, sponsor, and train terrorists
and/or provide sanctuaries for them
– Iran, Iraq, Libya, Syria, Afghanistan, Cuba,
Lebanon, North Korea, and Sudan

9-18
 Government Protection

 Kidnapping for Ransom

 Victims held for large ransoms
 Columbia and Peru 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

9-19
 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
• Checklists for executives

9-20
 Terrorism Developments

• Ethnoterrorism • Chemical and

– Tribe against tribe, Biological Terrorism
race against race, – Recipes from self-
religion against
taught terrorists that
religion
can be downloaded
• Nuclear Terrorism from the Internet
– Failing security
standards at former
Soviet installations
permit uranium to be
stolen, then sold to
terrorists

9-21
 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

9-22
 Traditional Hostilities

 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 Lank

9-23
 ICs and Political Forces

• International Companies (ICs)

– Make decisions about where to invest,
where to conduct research and
development, and where to manufacture
products
– The financial size of many ICs provides
them with a strong negotiating position

9-24
 Country Risk Assessment
(CRA)

• An evaluation that assesses the

country’s economic situation and policies
and its politics to determine how much
risk exists of losing an asset or not being
paid

9-25
 Country Risk Assessment
(CRA)
• Types of Country Risks
– Political
• Wars, revolutions, coups
– Economic
– Financial
• BOP deficits
– Labor
• Low productivity, militant unions
– Legal
• Laws may be changed
– Terrorism

9-26
 Information Content for CRA

• Nature of Business
– The needs of the company
• Needs of a hotel company compared with
those of heavy-equipment manufacturers
• Length of Time Required
– Utility of risk analyses of social, political,
and economic factors decreases
precipitously over longer time spans

9-27
Country Risk

9-28