International Business Politics

International Business Politics
Introduction:
International business comprises all commercial transactions (private and governmental, sales,
investments, logistics, and transportation) that take place between two or more regions, countries
and nations beyond their political boundaries. Usually, private companies undertake such
transactions for profit; governments undertake them for profit and for political reasons. It refers
to all those business activities which involve cross border transactions of goods, services,
resources between two or more nations. Transaction of Business resources include capital, skills,
people etc. for international production of physical goods and services such as finance, banking,
insurance, construction etc.
Politics and Business are closely linked and often affect each other. A good example is the
Business changes that are sweeping Eastern Europe and Asia today. As these countries embrace
open markets, their centrally-planned economies are giving way to market-driven Business
However, this latter development would have been impossible had it not been preceded by the
requisite political change as reflected by more democratic governments. The purposes of this
chapter are to examine the linkage between political forces and Business change and then to
review some of the major forms of Business integration that are being used to create regional
trade areas and common markets.
International Business Politics:
Over the past two decades, many countries have seen a dramatic change in their political
systems. In the Americas, both Chile and Nicaragua have returned to democracy. The former
communist countries of Eastern Europe are building, in varying degrees, free market systems. In
China, meanwhile, the central government is still communist, but the nation is no longer tightly
managed by Beijing. Market driven companies have blossomed in a growing number of
geographic areas lending credence to the contentions of those who hold that China will be a
market-driven economy within a few decades. Whether or not this proves true, one thing is
certain political and economic changes are taking place everywhere, opening up new
opportunities for MNEs.
In particular, the movement toward market-driven economies of countries that were once
controlled by the USSR has affected international business. For example, Poland, Hungary, the
Czech Republic, Latvia, Lithuania, and Estonia, to name but six, have all created market-driven
economies. Years ago the USSR would not have permit-ted these satellite nations to abandon the
command economy advocated by communist ideology and replace it with a free-market system.
Under Mikhail Gorbachev, however, the USSR revised its political and economic thinking and
things have never been the same since.
Md. Hasanuzzaman ID:2011000400007 Page 1

These reforms of china have come a long way. In 2005 the private economy accounted for nearly
40 per cent of the gross product of Shanghai, China’s largest urban center. These governmental
decrees certainly represent a big change in the way things have been done in China for the last 50
years. The same is true worldwide. International politics and economic integration are altering
the way international business is being conducted, and those nations that cannot keep up with
these developments are going to find them falling farther and farther behind.
Political ideologies and Business:
An ideology is a set of integrated beliefs, theories, and doctrines that help direct the actions of a
society. Political ideology is almost always intertwined with economic philosophy. For example,
the political ideology of the United States is grounded in the Constitution, which guarantees the
rights of private property and the freedom of choice. This has helped lay the foundation for US
capitalism. A change in this fundamental ideology would alter the economic environment of the
United States. The same is true, for example, for China and the former USSR republics. Simply
put, the political and economic ideologies of nations help to explain their national economic
policies. Political systems in the extreme, there are two types of political systems: democracy
and totalitarianism.
Democracy is a system of government in which the people, either directly or through their
elected officials, decide what is to be done. Good examples of democratic government’s include
the United States, Canada, England, and Australia. Common features of democratic governments
include (1) the right to express opinions freely, (2) election of representatives for limited terms of
office, (3) an independent court system that protects individual property and rights, and (4) a
relatively non-political bureaucracy and defense infrastructure that ensure the continued
operation of the system. Totalitarianism is a system of government in which one individual or
political party maintains complete control and either refuses to recognize other parties or
suppresses them. A number of types of totalitarianism currently exist. Communismis an
economic system in which the government owns all property and makes all decisions regarding
the production and distribution of goods and services. To date, all attempts at national
communism have led to totalitarianism. The best example of communism is Cuba. Another form
of totalitarianism is theocratic
Totalitarianism, in which a religious group exercises total power and represses or persecutes non-orthodox
factions. Iran and some of the sheikdoms of the Middle East are good examples. A
third form is secular totalitarianism, in which the military controls the government and makes
decisions that it deems to be in the best interests of the country. Examples of this are communist
North Korea and Chile under Pinochet. Political systems typically create the infrastructure within
which the economic system functions; in order to change the economic system, there often needs
to be a change in the way the country is governed.

Economic systems:
The three basic economic systems are capitalism, socialism, and mixed. However, for the
purposes of our analysis it is more helpful to classify these systems in terms of resource
allocation (market-driven versus centrally determined) and property ownership (private versus
public). In a market-driven economy, goods and services are allocated on the basis of demand
and supply. If consumers express a preference for cellular telephones, more of these products
will be offered for sale. If consumers refuse to buy dot-matrix printers, these goods will cease to
be offered. The US and EU nations have market-driven economies. In a centrally determined
economy, goods and services are allocated based on a plan formulated by a committee that
decides what is to be offered. In these economies people are able to purchase only what the
government determines should be sold. Cuba is the best example.
Market-driven economies are characterized by private ownership. Most of the assets of
production are in the hands of privately-owned companies that compete for market share by
offering the best-quality goods and services at competitive prices. Centrally-determined
economies are characterized by public ownership. Most of the assets of production are in the
hands of the state, and production quotas are set for each organization. In examining economic
systems, it is important to remember that, in a strict sense, most nations of the world have mixed
economies, characterized by a combination of market-driven forces and centrally determined
planning. Mixed economies include privately-owned commercial entities as well as government
owned commercial entities. Governments in mixed economies typically own the utilities and
infrastructural industries railroads, airlines, shipping lines, and industries considered to be of
economic and strategic importance for instance, petroleum and copper. For example, the United
States, a leading proponent of market-driven economic policies, provides health care and other
social services to many of its citizens through government-regulated agencies, which gives it
some aspects of central planning. Other democratic countries with mixed economies include
Great Britain, Sweden, and Germany, all of which have even stronger social welfare systems
than the United States.
At the same time, however, many market-driven economies are increasingly adopting centrally-determined
ideas, such as using business–government cooperation to fend off external
competitors, or the use of political force to limit the ability of overseas firms to do business in
their country. In the United States, for example, the government is frequently being urged to play
a more active role in monitoring foreign business practices.
Government control of assets:
Over the last decade or so, an increasing number of countries have begun moving to-ward
privatization, the process of selling government assets to private buyers. To under-stand the
reasons for, and the economic impact of, this process, it is helpful to examine both the potential
benefits of government ownership and the advantages of moving to privatization. There are six

common, and sometimes interdependent, reasons for countries to control business assets, a
process known as nationalization. These include (1) promoting economic development, such as
by coordinating the assets of many businesses into one overall master plan (2) earning profits for
the national treasury (3) preventing companies from going bankrupt and closing their doors (4)
enhancing programs that are in the national interest (5) increasing the political or economic
control of those in power and (6) ensuring goods and services to all citizens regardless of their
economic status.
The opposite situation, privatization, can take two forms. The most common form is divestiture,
in which the government sells its assets. The other is contract management, in which the
government transfers operating responsibility of an industry without transfer-ring the legal title
and ownership. The major trend today is toward divestiture. Some of the primary reasons for
privatization are: (1) it is more efficient to have the goods and services provided by private
business than by government-run companies; (2) a change in the political culture brings about a
desire to sell these assets; (3) the company has been making money, and the government feels
there is more to be gained by selling now than by holding on; (4) the purchase price can be used
to reduce the national debt; (5) the company is losing money, and the government has to assume
the losses out of the national treasury; (6) the company needs research and development funds in
order to maintain competitive stance, and it is unwilling to make this investment; and (7)
international funding agencies are making assistance to the country conditional on a reduction in
the size of the government.
Privatization in action:
Many nations have privatization programs. These include countries with moderate per capita
gross domestic products, such as Argentina, Brazil, Chile, Mexico, and China, as well as
economically advanced nations such as the United States, Japan, Germany, and the UK. All feel
that their economies can be strengthened through privatization programs. In the case of
Argentina, for example, the government has now ended the nation’s phone monopoly and
opened up the $10 billion market to outside investors. Previously the two telephone companies
that monopolized all long distance and local phone services had their territories firmly
established, and neither could compete with the other. Now they can. Moreover, other telephone
companies also have licenses to operate throughout the country. The Argentinean government
believes that, as a result of privatization in this industry, competition will increase, phone rates
will drop, and service will increase sharply. In the case of the UK, privatization and deregulation
have proven to be a national boon. A few years ago British Telecommunications began
downsizing its operations so as to increase its competitiveness and profitability. The firm slashed
100,000 jobs, and critics said that privatization and deregulation were hurting the economy.
However, just the opposite occurred. Many of the workers who were laid off began finding jobs
with small telecommunications firms that were springing up throughout the country. At the same
time, there was an influx of large foreign competitors such as AT&T, the giant American

telecommunications company, and AB L. M. Ericsson, the Swedish telecom-equipment maker,
which hired thousands of people. As a result, between 1990 and 1999 the number of jobs in the
UK’s telecommunications industry increased, while prices decreased and service improved
sharply.
Privatization is not always a popular idea, and it is often part of election debates. Yet
governments continue to assess the benefits of privatization against those of state owner-ship.
Mexico and Japan provide two recent examples. Recently the Mexican government announced
that it will privatize its two national airlines, Aeroméxico and Mexicana, on the hopes that it can
provide cheaper service and compete with low-cost service from the United States. Despite
opposition from civil servants and some political parties, Japan Post is set for a slow
privatization process that is to culminate in 2017
Government business cooperation
The fact that governments are privatizing assets does not mean they are distancing themselves
from business firms. Both Japan and the EU have seen a large amount of business government
cooperation that has been extremely beneficial to the business sector in these countries.
Business Integration:
Business integration is the establishment of transnational rules and regulations that enhance
economic trade and cooperation among countries. At one extreme, economic integration would
result in one worldwide free trade market in which all nations had a common currency and could
export anything they wanted to any other nation. At the other extreme would be a total lack of
economic integration, in which nations were self-sufficient and did not trade with anyone. The
concept of economic integration is attractive, but there are many implementation problems. In
particular, it requires that the participants agree to surrender some of their national sovereignty,
such as the authority to set tariffs and quotas. For example, if the United States and the EU agree
to allow free trade of agricultural products, neither country can restrict the other’s right to export
these commodities. So although free trade may lead to lower prices, those who are unwilling to
give up the right to control goods being imported into their country may well be opposed to it. A
number of regional economic efforts have been undertaken over the last 30 years to promote
varying degrees of economic integration. The most successful has been the EU, although less
developed countries (LDCs) have also made integration efforts.
Trade creation and trade diversion:
Trade creation occurs when members of an economic integration group begin focusing their
efforts on those goods and services for which they have a comparative advantage and start
trading more extensively with each other. For example, the United States and Mexico have an
agreement that allows cars to be assembled in Mexico and shipped into the United States. As a

result, Mexico, a low-cost producer, supplies a large number of vehicles sold in America, and
both countries prosper as a result.
Trade diversion occurs when members of an economic integration group decrease their trade
with non-member countries in favor of trade with each other. One common reason is that the
removal of trade barriers among member countries makes it less expensive to buy from
companies within the group, and the continuation of trade barriers with non- member countries
makes it more difficult for the latter to compete. Thus, trade diversion can lead to the loss of
production and exports from more efficient non-member countries to less efficient member
countries that are being protected by tariffs or other barriers. Quite obviously, the creation of
economic integration groups is beneficial only if trade creation exceeds trade diversion.
Otherwise, the economic union impedes international trade.
Levels of economic integration:
Free trade area
A free trade area is an economic integration arrangement in which barriers to trade (such as
tariffs) among member countries are removed. Under this arrangement, each participant will seek
to gain by specializing in the production of those goods and services for which it has a
comparative advantage and importing those goods and services for which it has a comparative
disadvantage.
Customs union
A customs union is a form of economic integration in which all tariffs between member
countries are eliminated and a common trade policy toward non-member countries is established.
This policy often results in a uniform external tariff structure. Under this arrangement, a country
outside the union will face the same tariff on exports to any member country receiving the goods.
Common market
A common market is a form of economic integration characterized by (a) no barriers to trade
among member nations, (b) a common external trade policy, and (c) mobility of factors of
production among member countries. A common market allows reallocation of production
resources, such as capital, labor, and technology, based on the theory of comparative advantage.
Although this may be economically disadvantageous to industries or specific businesses in some
member countries, in theory it should lead to the efficient delivery of goods and services to all
member countries. The best example of a successful common market is the EU, although this
group has now progressed beyond a common market and is now focusing on political and
financial integration.

Economic union
An economic union is a deep form of economic integration and is characterized by free
movement of goods, services, and factors of production among member countries and full
integration of economic policies. An economic union (1) unifies monetary and fiscal policy
among the member nations, including the same tax rates, and (2) has a common currency (or a
permanently fixed exchange rate among currencies). Additionally, most of the national economic
policies of the individual countries are ceded to the group at large. There are no true economic
unions in the world, but the creation of a single currency, the euro, certainly moves the EU in
this direction.
Political union
A political union goes beyond full economic integration to encompass a single government. This
occurs only when countries give up their individual national powers to be united and led by one
government. One successful example is the United States, which combined independent states
into a political union. The EU is now also on its way to becoming a political union. The
European Parliament, for example, is directly elected by citizens of the EU countries, and its
Council of Ministers, which is the decision-making body of the EU, is made up of government
ministers from each EU country.
Political Risk:
There are a number of political risks with which marketers must contend. Hazards based on a
host government’s actions include confiscation, expropriation, nationalization, domestication,
and creeping expropriation. Such actions are more likely to be levied against foreign
investments, though local firms’ properties are not totally immune. Charles de Gaulle
nationalized France’s three largest banks in 1945, and more nationalization occurred in 1982
under the French socialists. Coca Cola Co. managed to re-enter India in 1993, after being thrown
out of the country fifteen years earlier by India’s socialist government.
Confiscations the process of a government’s taking ownership of a property without
compensation. An example of confiscation is the Chinese government’s seizure of American
property after the Chinese communists took power in 1949. A more recent example involves
Occidental Petroleum whose assets were confiscated without compensation by Venezuela.
Expropriation differs somewhat from confiscation in that there is some compensation, though
not necessarily just compensation. More often than not, a company whose property is being
expropriated agrees to sell its operations not by choice but rather due to some explicit or implied
coercion. After property has been confiscated or expropriated, it can be either nationalized or
domesticated.

Nationalization involves government ownership, and it is the government that operates the
business being taken over. Burma’s foreign trade, for example, is completely nationalized.
Generally, this action affects a whole industry rather than only a single company. When Mexico
attempted to control its debt problem, then-President Jose Lopez Portillo nationalized the
country’s banking system. In another case of nationalization, Libya’s Colonel Gadhafi’s vision
of Islamic socialism led him to nationalize all private business in 1981. Unlike communists in
Hungary and Poland, Czech communists nationalized 100 percent of their economy. Chile
nationalized its large copper mines in 1971. By 1980, it had readmitted foreign investment and
even provided incentives for foreign investment in the mining sector
General instability risk is related to the uncertainty about the future viability of a host country’s
political system. The Iranian revolution that overthrew the Shah is an example of this kind of
risk. In contrast, ownership/control risk is related to the possibility that a host government might
take action (eg. expropriation) to restrict an investor’s ownership and control of a subsidiary in
that host country.
Operation risk proceeds from the uncertainty that a host government might constraint investor’s
business operations in all areas, including production, marketing, and finance. Finally, transfer
risk applies to any future acts by a host government that might constrain the ability of a
subsidiary to transfer payments, capital, or profit out of the host country back to the parent firm.
Indicators of Political Instability:
To assess a potential marketing environment, a company should identify and evaluate the
relevant indicators of political difficulty. Potential sources of political complication include
social unrest, the attitudes of nationals, and the policies of the host government. The breakup of
the Soviet Union should not come as a surprise. Human nature involves monastery (the urge to
stand alone) as well as systasy (the urge to stand together), and the two concepts provide
alternative ways of using resources to meet a society’s needs. Competition, but systasy
emphasizes cooperation. As explained by Alderson, “a cooperative society tends to be a closed
society. Closure is essential if the group is in some sense to act as one.” Not surpriseingly, China,
although wanting to modernize its economy, does not fully embrace an open economy, which is
likely to encourage dissension among the various groups. For the sake of its own survival, a
cooperative society may have to obstruct the dissemination of new ideas and neutralize an
external group that poses a threat. China has apparently learned a lesson from the Soviet Union’s
experience.
Policies of the host government
Unlike citizens’ inherent hostility, a government’s attitude toward foreigners is often relatively
short lived. The mood can alter either over time or with a change in leadership, and it can alter
for either better or worse. The impact of a change in mood can be quite dramatic, especially in

the short run. Government policy formulation can affect business operations either internally or
externally. The effect is internal when the policy regulates the firm’s operations within the home
country. The effect is external when the policy regulates the firm’s activities in another country.
Although an external government policy is irrelevant to firms doing business in only one
country, such a policy can create complex problems for firms doing business in countries that are
in conflict with each other. Disputes among countries often spill over into business activities. A
company in one country may be prohibited from doing business with other countries that are
viewed as hostile. A company should pay particular attention to election time. Elections post a
special problem because of many candidates’ instinctive tendency to use demagoguery to acquire
votes. Candidate activities and tactics can very easily create a un wellcome atmosphere for
foreign firms. When French politicians cited the fact that one French worker became
unemployed for every five to ten Japanese cars imported, the government held up imported cars
when the election was a few weeks away. The industry minister used every conceivable excuse
to avoid signing the required certificates.
Management Political Risk:
To manage political risk, an MNC can pursue a strategy of either avoidance or insurance.
Avoidance means screening out politically uncertain countries. In this, measurement and analysis
of political risk can be useful. Insurance, in contrast, is a strategy to shift the risk to other parties.
This strategy will be covered in detail below. There are other strategies that MNCs can use to
safeguard their foreign investments. They may want to come to an understanding with a foreign
government as to their rights and responsibilities. They can increase and maintain their
bargaining power when their technical, operational, and m an agerial complexity requirement are
not within reach of a host country’s abilities.
Conclusion:
The international marketer’s political environment is complex and difficult due to the interaction
among domestic, foreign, and international politics. If a product is imported or produced
overseas, political groups and labor organizations accuse the marketer of taking jobs from people
in the home country. On the other hand, foreign governments are not always receptive to
overseas capital and investment because of suspicions about the marketer’s motives and
commitment. When both the host country and the home country have different political and
national interests, their conflicting policies can complicate the problem further. This chapter has
covered the political dimension of international trade. Due to the diversity of political and
economic systems, governments develop varying philosophies. In some circumstances, their
political motives overshadow their economic logic. The result is often that political risks such as
expropriation, nationalization, and restrictions are created against exports and/or imports and are
probably inevitable. Marketing decisions are thus affected by political considerations. When
investing in a foreign country, companies must be sensitive to that country’s political concerns.

Because of the dynamic nature of politics in general, companies should prepare a contingency
plan to cope with changes that occur in the political environment. To minimize political risk,
companies should attempt to accommodate the host country’s national interests by stimulating
the economy, employing nationals, sharing business ownership with local firms, and being civic
oriented. On the other hand, to protect their own economic interests, companies should maintain
political neutrality, lobby quietly for their goals.
References:
1) International Business, 4th Edition.
2) International Marketing - Strategy and Theory (4th Edition)
3) http://en.wikipedia.org/wiki/International_business
Etc.

International Business Politics

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International Business Politics