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The Political Environment:

A Critical Concern
Chapter 6

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
1What is the sovereignty( RULE,POWER) of nations means
and how it can affect the stability of government policies
2 How different governmental types, political parties,
nationalism, targeted fear/animosity, and trade disputes can
affect the environment for marketing in foreign countries
3 The political risks of global business and the factors that
affect stability
4 The importance of the political system to international
marketing and its effect on foreign investments
5 The impact of political and social activists, violence, and
terrorism on international business
6 How to assess and reduce the effect of political vulnerability
(weakness)
7 How and why governments encourage foreign investment
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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 (special) treatment
for bananas coming from its former colonies in
the Caribbean and Africa
The rest is history and politics, see more here:
Banana Wars
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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
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Stability of Government
Policies

Radical (Essential) shifts in government


philosophy can occur when:
An opposing political party ascends (Rise) to
power
Pressure from nationalist and self-interest
groups
Weakened economic conditions
Bias against foreign investment or conflicts
between governments

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Instability of Governments and Policies:


Political Reasons
Some forms of government seem to be
inherently (natural) unstable
Changes in political parties during
elections can have major effects on trade
conditions
Nationalism
Animosity (hostility) targeted toward
specific countries
Trade dispute (Clash)
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Forms of Government
1) Democracy or market
directed government
ideology
2) Communist
governments
3) Theocratic Republic
Islamic Law countries
where political parties
can exist but have
little power
The religious leader
controls government
and all governmental
decisions
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Political Parties
Be knowledgeable about the philosophies
of all major political parties and their
attitudes towards trade

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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, e.g., Buy American


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

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Trade Disputes (Clashes):


Examples
Undervalued (underpriced)Chinese
currency (ongoing problem)
Ban on beef imports into Japan
Chinese subsidies in apparent violation of
WTO rules
Farm subsidies in developed countries
AIRBUSBoeing battle over subsidies

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3 Political Risks of Global Business


Confiscation (Elimination, Taking away.)
The most severe political risk, is the seizing of a
companys assets without payment

Expropriation
Is where the government seizes an investment, but
some reimbursement (repayment ) for the assets is
made; often the expropriated investment is
nationalized to become a government run entity

Domestication
Occurs when the government authorized local
ownership and greater national involvement in a
foreign companys management
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Economic Risks
International firms face a variety of economic risks
Governments can obligate restraints on business activity
to:

Protect national security


Protect an infant industry
To protect insufficient foreign exchange
Raise revenue
Retaliate (get revenge) against unfair trade practices

Exchange Controls
Local Content Laws
Import Restrictions
Tax Controls
Price Controls
Labor Problems

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Political sanction ( Approval


Authorization ): Examples from the U.S.

Cuban crisis of the 1960s


The Iranian revolution in the
1980s
The Persian Gulf War in the
1990s
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Political and Social Activists


The
most
entertaining
protest
technique
was
pioneered (established) by
French
farmers.
French
farmers like to throw their
food. Here they tossed
tomatoes
and
such
at
McDonalds; theyve also
lobbed lamb chops at their
own trade ministers.

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Exhibit 6.2

U.S. State Department Travel Warnings


(in order of date of posting, most recent first)

Source: http://travel.state.gov/travel/cis_pa_tw/tw/tw_1764.html.
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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
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
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Assessing (evaluating) Political


Vulnerability (Political weakness)
No absolute guidelines
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.

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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

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Forecasting Political Risk


Decide if risk insurance is necessary
Devise (plan or develop) an intelligence
network and an early warning system
Develop contingency (unforeseen event or
emergency ) 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 (alert) corporate decision makers
about political and economic situations
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Exhibit 6.4 Top 20 States in Danger of


Failing (Ranked in order of State of
FAILURE or Becoming Failing state))

Source: From Foreign Policy, Failed States Index, May/June 2011, online.
Copyright 2011 by Foreign Policy. Reproduced with permission of Foreign Policy via Copyright Clearance
Center.

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Lessening (decreasing & reducing) Political


Vulnerability (weakness)
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


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Lessening (reducing) Political


Vulnerability (weakness)
MNCs can use the following strategies to
minimize political vulnerability and risk:

Joint Ventures
Expanding the Investment Base
Licensing
Planned Domestication ( Government
authorized local ownership )
Political Bargaining (Good buying)
Political Payoffs (Forfeit Payment)

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Government Encouragement
Governments can both encourage and
discourage foreign investment
The key reason to encourage foreign
investment is to accelerate the
countrys economic growth
During the recent economic downturn, the
U.S. government has been particularly
creative in helping promote American
exports

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