2. 6-2
Learning Objectives
LO1 What 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
LO5 The impact of political and social activists, violence, and
terrorism on international business
LO6 How to assess and reduce the effect of political vulnerability
LO7 How and why governments encourage foreign investment
3. 6-3
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”
4. 6-4
Sovereignty of Nations
A sovereign state is independent and free from all
external control
• enjoys full legal equality with other states
• governs its own territory
• selects its own political, economic, and social systems and
• 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
5. 6-5
Stability of Government Policies
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
• Bias against foreign investment or conflicts between
governments
6. 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. Onlookers add to the
crowd.
6-6
7. 6-7
Instability of Governments and Policies:
Political Reasons
Some forms of government seem to be inherently
unstable
Changes in political parties during elections can have
major effects on trade conditions
Nationalism
Animosity targeted toward specific countries
Trade disputes
8. 6-8
Forms of Government
Democracy or market directed government ideology
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
10. 6-10
Political Parties
Be knowledgeable about the philosophies of all
major political parties and their attitudes towards
trade
11. 6-11
Nationalism
Nationalism refers to feelings of national pride and
unity
• Feelings of nationalism are manifested by:
• Disaster (e.g. 9/11)
• War
• Recession
• Call to “buy our country’s products only,” e.g., “Buy
American”
• Restrictions on imports, restrictive tariffs, and other
barriers to trade
12. Targeted Fear and/or Animosity
Nationalism
• Targets all foreign
countries
Animosity
• Targets specific nations
6-12
13. 6-13
Trade Disputes: Examples
Undervalued Chinese currency (ongoing problem)
Ban on beef imports into Japan
Chinese subsidies in apparent violation of WTO rules
Farm subsidies in developed countries
AIRBUS–Boeing battle over subsidies
14. Political Risks of Global Business
Confiscation
Expropriation
Domestication
6-14
15. 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
6-15
16. 6-16
Economic Risks
International firms face a variety of economic risks
Governments can impose restraints on business
activity to:
• Protect national security
• Protect an infant industry
• To conserve scarce foreign exchange
• Raise revenue
• Retaliate against unfair trade practices
18. 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.
6-18
20. 6-20
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.
21. 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.
6-21
23. 6-23
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
24. 6-24
Cyberterrorism and Cybercrime
Cyber terrorism is in its infancy
The internet provides a vehicle for terrorist and
criminal attacks
Internet Virus attacks can disrupt businesses
• “I Love You”
• Melissa
• Slammer
• Goner Worm
25. 6-25
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.
26. 6-26
Politically Sensitive Products and Issues
Politically sensitive products include those that have
an effect on:
• the environment,
• exchange rates
• national and economic security
• public health, e.g., genetically modified (GM) foods
27. 6-27
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
29. 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
6-29
30. Lessening 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 Bargaining
• Political Payoffs
6-30
31. 6-31
Government Encouragement
Governments can both encourage and discourage
foreign investment
The key reason to encourage foreign investment is to
accelerate the country’s economic growth
During the recent economic downturn, the U.S.
government has been particularly creative in helping
promote American exports
Editor's Notes
What started as a trade dispute ended up being so intertwined with politics. Small businesses that did not have lobbying power in Washington DC ended up being the victims of the tariff retaliation permitted by the WTO on products imported from Europe into the U.S. If one was a large feta cheese or olive oil importer, they had industry groups and lobbyists working on their behalf to prevent these products from Europe from being slapped with a large tariff increase. The whole deal caused many small businesses in the U.S. to go out of business.
A citizen is subject to the state’s laws even outside the country’s borders. Nations can and do abridge specific aspects of their sovereign rights to coexist with other nations. The European Union and NAFTA are examples of agreements between nations to give up their sovereignty for free trade and other common benefits. Some countries view the WTO as a threat to sovereignty, the fear of relinquishing their nation’s rights for a common goal that might not benefit them or be detrimental to their goals. Foreign investment is also viewed as a threat to sovereignty, for example it took many years after the NAFTA was passed for the Mexican government to allow foreign companies to invest in the energy and banking sectors which were government controlled monopolies until then.
For foreign firms, the ideal situation is a stable government in the country they are operating in. Unfortunately, this is not always the case. 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 (Coke in India is an example). The political changes in Mexico in 2000, a change after many years of the PRI party to the PAN party helped open up the Mexican market to foreign investment and a more liberal government trade policy. The newly elected President of Mexico in 2012, Enrique Peña Nieto is planning a major upgrade of the 1994 U.S.-Canada-Mexico free trade deal, that is, he wants NAFTA to expand just beyond the current three country deal if this region is to compete effectively with China and its neighboring countries. He is also proposing greater collaboration with the United States.
Streets full of people in the capital city after the Haiti Earthquakes in 2010.
Instability can be caused for various reasons, some governments are inherently unstable. An example would be where there are too many political parties that a coalition government has to be formed and is weak and therefore can be ousted by opposition parties. India and Italy are prime examples of coalition governments that have been unstable. When Lucent Technologies sold cellular phones for the first time in India many years ago, they had a huge sale of cell phones that resulted in millions of dollars. However, within six months of this, the Indian government changed and the new political party in power imposed a special tax on all cell phone owners, and this resulted in many giving up their cell phones. The current government in India has a liberal policy on cell phones and therefore there is once again a large penetration of cell phones in the country at all economic and social class levels. Being very nationalistic can be a reason for instability as well as having historical feelings of dislike towards certain countries can lead to specific policies. And, as described at the beginning of the chapter, trade disputes such as the banana wars can lead to specific policies as well.
The form of government greatly dictates the extent of government interference in business activities. Most governments in the world are democracies that allow participation of the country’s citizens in electing their leaders. There a few communist governments in existence, China and Vietnam being prime examples where the rules and regulations for foreign companies can be determined/changed by the government at will in order to benefit that country and its industries. Russia on the other hand moved to a democracy after the break-up of the former USSR, but continues to struggle with the change, corruption is pervasive particularly for foreign investors, and the Russian government is aware of the problem. The other form of government would be countries where religious leaders and religion dictates government, Shariah Law prevails in Islamic countries. Even though political parties are allowed to exist, they have very little power.
The CIA has classified countries based on government type as illustrated in Exhibit 6.1.
In Great Britain, for example, the Labour Party traditionally has been more restrictive regarding foreign trade than the Conservative Party. The Labour Party, when in control, has limited imports, whereas the Conservative Party has tended to liberalize foreign trade when it is in power. Portraits of Ayatollah Ali Khamenei (the Supreme Leader) and the late Ayatollah Ruhollah Khomeini loom over Iranian women lined up to vote at a mosque south of Tehran. As mandated by law, women and men waited in separate lines at polling places with more than one ballot box. The current government also specifies the public dress of the women pictured.
Nationalism is an awakening of a nation’s people to pride in their country. This pride can take lead to anti foreign business sentiment in the nation. Feelings of nationalism can be manifested in a variety of ways such as the reaction of the American people and busineses towards Muslim nations following 9/11. War or recession can create feelings of nationalism as well. Other ways that nationalism can manifest itself is in trade policies such as restrictions on imports from certain countries (imposition of tariffs on shrimp imports from Vietnam, Thailand and India in 2005 to project the U.S. shrimp farmers in the Gulf region), restrictive tariffs (such as the once France imposed on South American Bananas), and other barriers such as specific product standards or health standards that only the country’s industries are able to comply with.
When the French tried to thwart America’s plans to oust Iraqi leader Saddam Hussein in 2003 during the Bush era, the United States called for a boycott of French products, especially wine. This was a targeted animosity specifically towards one country. The historical relationship and dispute over the region of Kashmir between India and Pakistan from the time of the British rule still creates feelings of animosity that has an impact on trade between the two countries.
Economic risks can be encountered for reasons of national security, to protect an infant industry, to conserve scarce foreign exchange, to raise revenue, or to retaliate against unfair trade practices.
Exchange Controls This happens when there is a shortage of foreign exchange in the country and the government restricts the spending in foreign currency. This may result in the imposition of differential exchange rates for different products entering the countryLocal Content Laws All countries and regions may have local content laws, for example NAFTA has a 62.5% local content requirement for cars originating from the NAFTA region, the EU has a 45% local content requirement so that it forces companies to use local components.Import Restrictions Countries may impose import restrictions to protect local farmers or industries, but this may be detrimental to the local economy if it interrupts production in certain industries.Tax Controls Taxes that are imposed on foreign companies but not on domestic companies and caused their products to be more expensive in the country because it is passed on to the consumer.Price Controls Countries can impose price controls on foreign companies selling essential products such as food or gasoline, especially during inflationary periods.Labor Problems Unionism and labor laws are different in different countries and there are especially strict rules for laying off employees by foreign companies. China’s new labor laws have been revamped and require foreign companies to provide a lot more benefits as well as lifelong employment after a certain number of years of service.
Often associated with political activism, nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments. Many are involved in peaceful protests, lobbying, and even collaborations with governmental organizations. Examples of NGOs are the Red Cross and Red Crescent, Amnesty International, Oxfam, UNICEF, Care, and Habitat for Humanity.
The U.S. Department of State updates warnings for travel to certain countries due to violence, political unrest, calamities, disease or political unrest.
September 11, 2001 and the attack on the twin towers had numerous consequences, including increasing security measures, the creation of Homeland Security that increased the cost of doing business both domestically and internationally. When there is violence and war as witnessed post September 11th, the target of the violence is usually U.S. businesses as evidenced by companies like McDonald’s and Pizza Hut.
Firms either marketing products not considered high priority or that fall from favor for some other reason oft en face unpredictable government restrictions. India’s example with Lucent Technologies and cellular phone sales followed by a tax imposition by the Indian government on cell phone users leading to cell phone users giving up their cell phones is a prime example. What Lucent thought was a sale did not turn out to be very profitable because of all the lost customers due to the new tax.
Ban on hormone treated beef in Europe. Closing of a KFC restaurant in India because of the spotting of “two flies.” (This was mainly because KFC did not enter the country by building a good relationship with the Indian government and their commercials unknowingly mocked the poverty in the country).
Risk assessment is used to estimate the level of risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept. For example, doing business with India may not bring immediate returns for businesses, but in the long run it may be a profitable decision.
Foreign Policy magazine uses 12 criteria to rank countries on its “Failed States Index.”
