The Political Environment:

A Critical Concern
Chapter 6
Learning Objectives
LO1What the sovereignty of nations means and how it can
affect the stability of government policies
LO2 How different governmental types, political parties,
nationalism, targeted fear/animosity, and trade
disputes can affect the environment for marketing in
foreign countries
LO3 The political risks of global business and the factors
that affect stability
LO4 The importance of the political system to
international marketing and its effect on foreign
investments
6-2
World Trade Goes Bananas!
 The Banana wars and conflict between the U.S. and
Europe started out as a simple tariff dispute between
France and U.S. companies exporting bananas from
Latin American countries to France
 France gave preferential treatment for bananas
coming from its former colonies in the Caribbean and
Africa
 The rest is history and politics, see more here:
“Banana Wars”
http://www.europarltv.europa.eu/en/player?pid=f40ed
de4-2882-4036-ba47-9e9300b0092b
6-3
What is the definition of Political Environment?

6-4
What is the definition of Political Environment?

How can companies navigate political risk? | FT Business

https://www.youtube.com/watch?v=xeSFxXlLnZg
What to watch in 2022: How geopolitical risks could hit the global economy
https://www.youtube.com/watch?v=nUHIGIXHh3M

When political risk costs money | FT World

https://www.youtube.com/watch?v=IrPdG386-tk

Political Risk Explained: How to Reduce Political Risk

https://www.youtube.com/watch?v=QXMZ3wWRiyo
What is political risk?
https://www.youtube.com/watch?v=7XWekWmF4QQ

6-5
Political Environment!

 It consists of a set of political

factors and government activities
in a foreign market that can either
facilitate or hinder a company‘s
ability to conduct business
activities in the foreign market.

 There is often a high degree of

uncertainty when conducting
business in a foreign country, and
this risk is often referred to as
political risk or sovereign risk.
Why is it important for a marketer to assess the political environment?

POLITICAL ENVIRONMENT!
Political
• No company conducts business without
considering the influence of the political
environment within which it will operate.

Environment! • A government controls and restricts a

company’s activities by encouraging and
offering support or by discouraging and banning
or restricting its activities—depending on the
pleasure of the government.
Political Environment!

 To gauge how government

actions will affect their
company.
Sovereignty of Nations
What is a sovereign state?
 •A sovereign state is independent and free from all external
control
• enjoys full legal equality with other states
Sovereignty • governs its own territory
• selects its own political, economic, and social systems and
of Nations • has the power to enter into agreements with other nations.
•Sovereignty refers to both the powers exercised by a state in
relation to other countries and the supreme powers exercised
over its own members
SOVEREIGNTY
OF NATIONS
In which cases states renounce
part of their sovereign rights?
Sovereignty of Nations
Nations can renounce specific aspects of their sovereign
rights to coexist with other nations.

Examples of nations agreeing to give up some of their

sovereignty:

The European Union, North American Free Trade

Agreement (CUSMA), North Atlantic Treaty organization
(NATO), and World Trade Organization (WTO).

G20 nations ceded some sovereignty to “reject

protectionism” , when world trade had declined more
than 12 percent by 2009. (The Great Depression).

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Sovereignty: issue for companies
working abroad
• e.g.:
•-Adherence to the WTO means the loss of some degree of national sovereignty.
The member nations have pledged to abide by international covenants and
arbitration procedures that override/nullify national laws.
•(Cases: Brexit, Syriza, Podemos).

•-The Mexican government agreed with a Belgian company on the construction of

a power plant to sell electricty directly to large Mexican manufacturers bypassing
the state monopoly on electricity.

•-The constitution limits private ownership of public utilities. Assault on Mexican

sovereignty.

•Sovereignty is an issue for companies operating abroad.

What is the ideal political climate for a business?
Why is the ideal political climate?

 The ideal political climate for a

multinational firm is a stable, friendly
government. (Quebec Referendum,
secessionist process, Colombia thought
a failed state, Brexit)
 Companies refrain from investing
 Radical shifts in government
philosophy can occur when:
• An opposing political party
ascends to power
• Pressure from nationalist and self-
interest groups
• Weakened economic conditions
disturb the political environment.
(Social discontent)
• Bias against foreign investment or
conflicts between governments
 Fragile States Index 2015 2016
Fragile States Index 2005

https://fragilestatesindex.or
g/data/
6-17
 Stability of Government Policies
•• AA change
change in
in 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.
•• E.g.
E.g. Venezuela
Venezuela

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CHAOTIC CONDITIONS: On the first Sunday after the quake, at 9:00 a.m., the streets of
downtown Port-au-Prince were filled with people scavenging. Haiti Earthquakes in
2010.

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 A confrontational past
Who´s to blame?

The opposite of
poverty….
6-20
 Instability of Governments and Policies:
Political Reasons
• Africa:
-Some African countries are unstable, with
seemingly unending civil/ethnic wars, boundary
disputes, and oppressive military regimes.

- Africa is trapped in a vicious cycle:

To prosper, they need foreign investment. But
investment is leery of unstable nations.

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Forms of Government
• Democracy (Republic, Parliamentary monarchy)
• Communist governments
• Theocratic Republic
– Islamic Law countries where political parties can
exist but have little power
– The religious leader controls government and all
governmental decisions
 Some forms of government seem to be inherently
unstable

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6-23
Your challenge as an international marketer

 Be knowledgeable about the philosophies of all

major political parties and their attitudes towards
trade

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 Global awareness
“An astute international marketer must understand all
aspects of the political landscape to be properly
informed about the political environment.

Unpredictable and drastic shifts in government policies

deter investments, whatever the cause of the shift. (

In short, a current assessment of political philosophy

and attitudes within a country is important in gauging
the stability and attractiveness of a government in
terms of market potential.” 6-25
Nationalism
 Nationalism refers to feelings of
national pride and unity
• Feelings of nationalism are
manifested by:
• Disaster (e.g. 9/11)
• War
• Recession (Drivers of nationalism)
COLOMBIA IS P
• Call to “buy our country’s products ASSION
only,” e.g., “Buy Colombian”
• Restrictions on imports, restrictive
tariffs, and other barriers to trade
(fueled by nationalism).

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Nationalism

“Generally speaking, the more a country feels

threatened by some outside force or the domestic
economy declines, the more nationalistic it becomes
in protecting itself against intrusions”.

The Falklands War

Venzuela and Colombia (smuggling, Trafficking, closing
the borders. Venezuelan nationalism)

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Nationalism: Companies suffer
• The rift between France and the United States over the Iraq–U.S.
war
• American backlash against French wine, French cheese, and even
products Americans thought were French.
• French’s mustard had to issue a press release stating that it is an
“American company founded by an American named ‘French.’”

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Nationalism: Companies suffer

“No Nation will tolerate penetration by a foreign

company into its market and economy if it
perceives a social, cultural, economic, or political
threat to its well-being”

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Political Risks of Global Business
Of all the political risks, the most costly are
actions that result in a transfer of equity from a
company to the government, with or without
adequate compensation.

Confiscation
Expropriation
Domestication
Venezuela:
https://www.youtube.com/watch?v=-EJ8TZYvadE 6-30
 Confiscation
The most severe political risk, is the seizing of a
company’s assets without payment.
e.g.:
Confiscations of U.S. property occurred when Fidel
Castro became the leader in Cuba and later when the
Shah of Iran was overthrown.

• Underdeveloped countries see confiscation,

as a means of economic growth.

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 Expropriation
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.
e.g.
In 2008 the Chavez regime in Venezuela expropriated
Mexico’s CEMEX operations, paying a negotiated price.

6-32
Domestication
occurs when the government mandates local
ownership and greater national involvement in a
foreign company’s management.

It is to force foreign investors to share more of

the ownership, management, and profits with
nationals.

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Economic Risks
 Even though the risks of expropriation and
confiscation have lessened, international companies
are still confronted with a variety of economic risks.
Restrictions are imposed in order to:
• Protect an infant industry
• To conserve scarce foreign exchange
• Retaliate against unfair trade practices

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Economic Risks
 Exchange Controls: foreign investors get profits in and out of
the host country. Put in place to control capital leaving a
country.
 Local Content Laws: require a portion of any product sold
within the country to have local content.
 Import Restrictions: to force foreign industry to purchase
more supplies within the host country.
 Tax Controls
 Price Controls: public interest goods (medicines)
 Labor Problems: unions with government support

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Political Sanctions:
Examples from the U.S.
 Cuban embargo
 The Iranian revolution in the 1980s

 Have the sanctions been successful in reaching the

desired goals?

Read page 171.

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The consequences of the U.S. embargo of Cuba: A relatively new Chinese Chery Q (red
provisional plate), and one of the newest American cars you can find on the island, a 1957
Chevy (yellow citizen’s plate), certainly with a refurbished engine. A variety of other
European and Asian brands ply the streets of Havana, almost all recent models. No new
American models are in sight.

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Political and Social Activists
The most entertaining protest technique
was pioneered by French farmers. French
farmers like to throw their food. Here they
tossed tomatoes and such at McDonald’s;
they’ve also lobbed lamb chops at their
own trade ministers.

Political and social activists (PSAs)

can also interrupt the normal flow
of trade or can affect a company´s
operations.

6-38
Political and Social Activists
It was prompted by concern about
Nestlé's "aggressive marketing" of
breast milk substitutes, particularly
in less developed nations.

Organizers of the boycott

encourage the practice of
newborn nutrition via natural
breast milk and claim that use of
the substitutes represent a health
risk for infants.

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Political Activism Apparently they pay attention in Taiwan. Most recently, fishermen
pitched perch in Taipei to protest the Japanese fishing fleet’s presence in their waters.

6-40
 Travel warning
https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories.html/

6-41
Violence, Terrorism and War
 Violence and terrorism may be closely related to politics
 War-torn regions are areas of concern for foreign
businesses to operate in.
 Multinationals are targeted to generate funds by
kidnapping executives to finance terrorist goals.
As an example, since September 11, McDonald’s, KFC, and
Pizza Hut combined have been bombed in more than 10
countries, including Turkey, Saudi Arabia, Russia, Lebanon,
and China; most attacks have been linked with militant
Islamic groups.

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Assessing Political Vulnerability
 No absolute guidelines
 No specific guidelines to determine a product’s
political vulnerability
 Countries seeking investments in high-priority
industries may well excuse companies from taxes,
customs duties, quotas, exchange controls, and other
impediments to investment.

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Lessening 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

6-44