Download Political Risks of Global Business

Chapter 6
The Political Environment: A Critical Concern
McGraw-Hill/Irwin
© 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 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
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
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: Radical shifts in government philosophy can occur when:
1. An opposing political party ascends to
power
2. Pressure from nationalist and self-interest
groups
3. Weakened economic conditions.
4. Bias against foreign investment or
conflicts between governments
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
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
Political Risks of Global Business
•
Risks of global business include:
1. Confiscation, Expropriation,
and Domestication
2. Economic Risks, and
3. Price Controls
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
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
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
Other Political Risks of Global Business
1. Political Sanctions
2. Political and Social
Activists
3. Violence and
Terrorism
4. Cyberterrorism
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
•
1.
2.
3.
4.
Politically sensitive products include
those that:
effect on the environment,
exchange rates
national and economic security
affect public health, e.g., genetically
modified (GM) foods
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
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