Chapter

6
The Political
Environment:
A Critical
Concern

Introduction
International

law recognizes
the sovereign right of a nation
to grant or withhold permission
to do business within its
political boundaries and to
control where its citizens
conduct business.

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,
& social systems
has the power to enter into
agreements with other nations.

Sovereignty of 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
A state:
Sets requirements for citizenship
defines geographical boundaries
controls trade and the movement of
people and goods across its borders.

Sovereignty of Nations
Nations

can and do abridge

specific aspects of their
sovereign rights to coexist with
other nations.
The

European Union & North American

Free Trade Agreement (NAFTA)
represent examples of nations
voluntarily agreeing to give up some
of their sovereign rights to participate
with member nations for a common,
mutually beneficial goal.

Stability of Government Policies

The ideal political climate for a

multinational firm is a stable,
friendly government.
Unfortunately, governments
are not always stable and
friendly, nor do stable, friendly
governments always remain
so.

Stability of Government Policies

Radical shifts in government

philosophy can occur when:

An opposing political party ascends

to power
Pressure from nationalist and selfinterest groups
Weakened economic conditions
Bias against foreign investment or
conflicts between governments

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

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

Political Parties
Be

knowledgeable about the

philosophies of all major political
parties & their attitudes towards
trade

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 countrys products only

Restrictions on imports, restrictive
tariffs, and other barriers to trade

Targeted Fear
and/or Animosity

Trade Disputes: Examples

Undervalued

Chinese currency
Ban on beef imports into Japan
Chinese subsidies in apparent
violation of WTO rules
Farm subsidies in developed
countries
AIRBUSBoeing battle over subsidies

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

Economic Risks
Exchange

Controls - when a nation faces

shortages of foreign exchange and/or a
substantial amount of capital is leaving
the country, controls may be levied over
all movements of capital to conserve the
supply of foreign exchange for the most
essential uses.
Local Content Laws - countries often
require a portion of any product sold
within the country to have local content,
that is, to contain locally made parts.

Economic Risks
Import

Restrictions - selective
restrictions on the import of products
are fairly common strategies to force
foreign industry to purchase more
supplies within the host country and
thereby create markets for local
industry.
Tax Controls can be used as a means
of controlling foreign investments

Economic Risks
Price

Controls - essential products that

command considerable public interest,
such as pharmaceuticals, food,
gasoline, and cars, are often subjected
to price controls.
Labor Problems - in many countries,
labor unions have strong government
support that they use effectively in
obtaining special concessions from
business.

Political Sanctions:
Examples from the U.S.
Cuban

crisis of the 1960s

The Iranian revolution in the
1980s
The Persian Gulf War in the
1990s

The consequences of the U.S. embargo of

Cuba: A relatively new Chinese Chery Q, and
one of the newest American cars you can find
on the island, a 1957 Chevy.

Political and Social

Activists
The

impact of political and social

activists (PSAs) can also interrupt
the normal flow of trade.
PSAs can range from those who
seek to bring about peaceful
change to those who resort to
violence and terrorism to effect
change.

Political and Social

Activists
French farmers
tossed tomatoes
and such at
McDonalds;
theyve also
lobbed lamb
chops at their
own trade
ministers.

Violence, Terrorism &

War
Violence

and terrorism may be

closely related to politics
In

the past 30 years, 80 percent of

terrorist attacks against the United
States have been aimed at American
businesses.

War-torn

regions are areas of

concern for foreign businesses to
operate in

Cyberterrorism &
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

Assessing Political
Vulnerability
No

specific guidelines to determine a

products political vulnerability
Countries

seeking investments in highpriority industries may well excuse

companies from taxes, customs duties,
quotas, exchange controls, and other
impediments to investment.
Firms either marketing products not
considered high priority or that fall from
favor for some other reason often face
unpredictable government restrictions.

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

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
companys intelligence network in order
to advise and forewarn corporate
decision makers about political and
economic situations

Top 20 States in
Danger of Failing (2011)

Lessening
Political
Vulnerability

Lessening Political
Vulnerability

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