The Political Environment

One of the most undeniable and crucial realities of international business is that both host and home governments are integral partners. The 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 power exercises by a state in relation to other countries and the supreme powers exercised over its own members.

Its sets requirements for citizenship, defines geographical boundaries, and controls trade and the movements of people and goods across its borders. A citizen is subject to the state’s laws even when beyond national borders. EU, NAFTA and NATO are examples of nations voluntarily agreeing to give up some of their sovereign rights in order to participate with member nations for a common, mutually beneficial goal. Pajama game – an MNC must also be concerned with the relationships between its home country (Wal mart – US), the host countries (Canada), and countries of product origin (Cuba).

International firm is subject to the laws of multiple countries and the political, legal and foreign policy issues revolving around host and home countries are of paramount important in assessing the environment in which the firm must operate. Changes are brought about by any number of events: A radical shift in the government when a political party with a philosophy different from the one it replaces ascends to power, government response to pressure form nationalist and self interest groups, weakened economic conditions that cause a government to recant trade commitments, or increasing bias against foreign investment.

Stability of Government Policies At the top of the list of political conditions that concern foreign businesses is the stability or instability of prevailing government policies. The concern of the multinational corporation is the continuity of the set of rules or code of behavior – regardless of which government is in power. In Italy, there have been more than 50 different governments formed since the end of WWII and India 51 since 1945 but in Italy business goes on as usual and India much of the government was still hostile to foreign investments.

Sierra Leone has three changes in government in five years, and the most recent (1997) coup d’etat ended the country’s brief experiment with democracy. 1997 Hong Kong given back to China and it was promised that nothing will change. Pepsi Cola in Russia was making profits by exchanging their products with Vodka. Forms of Government Circa 500 b. c. the ancient Greeks conceived of and criticized three fundamental forms of government: rule by one, rule by the few, and rule by the many. The common terms for these in use today are monarchy (or dictatorship), aristocracy (or oligarchy), and democracy.

About the same time in history Cyrus the Great, monarch of Persia, declared that the purpose of government was to serve the people, not vice versa. Cyrus’s notion is embedded in the constitutions of most modern nations. Following the collapse of communism circa 1990 the w orld seemed to have agreed that free-enterprise democracy was the best solution to all the criticisms of government since the time of Aristotle. Cyrus, and the others. Thus of the more than 200 sovereign states on the planet almost all have at least nominally representative governments with universal suffrage for those 18 years and over.

In about 10 percent of the states voting is required: in the rest it is voluntary. A few states have some unusual rules for suffrage: In Bolivia you can vote at 1 8 if you are married and at 21 if single: in Peru police and military personnel cannot vote: in Croatia you can vote at 16 if employed: in Lebanon only women with at least an elementary education can vote (although all men can vote): and Saudi Arabia precludes women from voting. The last appears to be the only state still completely in the dark ages with regards to suffrage.

The CIA claims to have taken a look beyond the façade of constitutions in their descriptors. Eg Iran (modern Persia) is defined as a “theocratic republic recognizing that the constitution codifies Islamic principles of government as interpreted from the Koran. Although political parties are allowed to function, they hold little political power. Instead, the Supreme Leader controls all-important decisions of the government, including who is allowed to run for president in Iran. A Sampling of Government Types Country |Government Type | |Afghanistan |Islamic republic | |Belarus |Republic in name, although in fact a dictatorship | |Bosnia and Herzegovina |Emerging federal democratic republic | |Burma (Myanmar) |Military junta

| |Canada |Confederation with parliamentary democracy | |China |Communist state | |Congo, Democratic |Dictatorship, presumably undergoing a | |Republic of the |transition to representative government | |Cuba |Communist state | |Iran |Theocratic republic | |Libya |Jamahiriya (a state of the masses) in theory, governed by the populace through | | |local ouncils; in fact a military dictatorship | |North Korea |Communist state, one-man dictatorship | |Saudi Arabia |Monarchy | |Somalia |No permanent national government; transitional, | | |parliamentary federal government | |Sudan |Authoritarian regime—ruling military junta | |United Kingdom |Constitutional monarchy | |United States |Constitutional federal republic | |Uzbekistan |Republic; authoritarian presidential rule, with little | | |power outside the executive branch | |Vietnam |Communist state |

Political Parties Particular important to the marketer is knowledge of the philosophies of all major political parties within a country, since any one of them might become dominant and alter prevailing attitudes. The point is that an astute international marketer must understand all aspects of the political landscape to be properly informed about the political environment. Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift. Nationalism

It is an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. This pride can take an anti-foreign business bias, and minor harassment and controls of foreign investment are supported, if not applauded. National interest and security are more important than international consideration. Buy local products only. Eat local fruits. During the period after WWII, when many new countries were founded and many others were seeking economic independence, manifestations of militant nationalism were rampant.

Expropriation of foreign companies, restrictive investment policies, and nationalization of industries were common practices in some part of the world. India imposed such restrictive practices on foreign investments that companies like Coca-Cola, IBM, and many others choose to leave rather than face the uncertainty of hostile economic climate. Strong nationalistic feelings prevail among many Asian countries, especially those that were colonies of Western countries e. g.

Dr Mahathir said “It is time that Asia too is accorded the regard and the respect it is due. ” Japanese investors purchased Rockefeller Center, Pebble Beach golf course, Columbia Records and other high-profile propertied in the US politicians, labor unions, the press, and others raised questions about the need to restrict the Japanese from “buying America” Japanese notions of self-sufficiency, self-respect, and the welfare of Japanese farmers resisted any change for several years. Targeted Fear and/or Animosity

It is important for marketers not to confuse nationalism, whose animosity is directed generally toward all foreign countries, with a widespread fear or animosity directed at a particular country. This was a mistake made by Toyota in the United States in the late 1980s and early 1990s. Sales of Japanese cars were declining in the States and an advertising campaign was designed and delivered that assumed the problem was American nationalism. However, nationalism was clearly not the problem, because sales of German cars were not experiencing the same kinds of declines.

The properly defined problem was “Americans’ fear of Japan. ” Indeed, at the time Americans considered the economic threat from Japan greater than the military threat from the Soviet Union. So when Toyota spent millions on an advertising campaign showing Toyotas being made by Americans in a plant in Kentucky, it may well have exacerbated the fear that the Japanese were “colonizing” the United States. In a similar manner, currently China is vilifying Japan over recent changes in Japanese history books that downplay atrocities committed by the latter during World War II.

Of course, other issues have strained this crucial relationship over the years, including the growing economic and political clout of each. Similarly, Americans’ criticism of China’s “unfair” trade practices, currency manipulations and growing militarism now are beginning to sound much like U. S. sentiments expressed about Japan in the late 1980s. American moms are even “banning” Chinese products from Christmas lists. The World Is Not Merchandise, Who Is Killing France?

The American Strategy, and No Thanks Uncle Sam have been best-selling titles in France that epitomize animosity toward the United Stales in France. Although such attitudes may seem odd in a country that devours U. S. movies, eats U. S. fast foods, views U. S. soap operas, and shops at U. S. Wal-Mart stores, national animosity—whatever the cause—is a critical part of the political environment. The United States is not immune to the same kinds of directed negativism either. The rift between France and the United States over the Iraq-U. S. ar led to hard feelings on both sides and an American backlash against French wine. French cheese, and even products Americans thought were French.

French’s mustard felt compelled to issue a press release stating that it is an “American company founded by an American named “French”. And. of course, circa 2005 the French are not alone in directing ire at the United States and the products of its companies. Citizens and politicians in many other countries are also unhappy about the war in Iraq. Numerous public opinion polls have shown a recent worldwide decline in sentiment toward America. ‘ It is important to appreciate that no nation-state, however secure, will tolerate penetration by a foreign company into its market and economy if it perceives a social, cultural, economic, or political threat to its well-being. Trade Disputes Finally, narrow trade disputes themselves can roil broader international markets. Three hot issues circa 2005 were the relaxation of quotas on textiles mandated by WTO, farm subsidies in developed countries, and the long-simmering AIRBUS – Boeing battle over subsidies. Any of the three might boil over and affect other aspects of international trade.

Political Risks of Global Business Issues of sovereignty, differing political philosophies, and nationalism are manifest in a host of governmental actions that enhance the risks of global business. Risks can range from confiscation or may lesser but still significant government rules and regulations such as exchange controls, import restrictions, and price controls that directly impact the performance of business activities. A. Confiscation, Expropriation, and Domestication Confiscation is the seizing of a company’s assets without payment. E. g. Fidel Castro and Shah of Iran.

Expropriation – requires some reimbursement for the government-seized investment. Domestication which occurs when host countries take steps to transfer foreign investments to national control and ownership through a series of government decrees. Governments seek to domesticate foreign-held assets by mandating: A transfer of ownership in part or totally to nationals The promotion of a large number of nationals to higher levels of management Greater decision-making powers resting with national. A greater number of component products locally produced.

Specific export regulations designed to dictate participation in world markets. Today, countries which are concerned that foreign investments may not be in harmony with social and economic goals often require prospective investors to agree to share ownership, local content, labor and management agreements and participation in export sales as a condition of entry. S Korea, Singapore, and Taiwan is tied to foreign investments, countries are viewing foreign investment as a means of economic growth i. e. much needed source of capital and technology.

Mexico – privatized its national telephone company resulted in almost immediate benefits when the government received hundreds of millions of dollars of much-needed capital from the sale. B. Economic Risks Restraints on business activity may be imposed under the banner of national security to protect and infant industry, to conserve scarce foreign exchange, t raise revenue, or to retaliate against unfair grade practices and self-sufficiency. These economic risks are an important and recurring part of the political environment that few international companies can avoid. Exchange controls

Exchange controls stem from shortages of foreign exchange held by a country. When a nation faces shortages of foreign exchange, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange for the most essential uses. A recurrent problem for the foreign investor is getting profits and investments into the currency of the home country. 2. Local-content Laws Countries often require a portion of any product sold within the country to have local content i. e. to contain locally made parts.

EU – 45% for “screwdriver operation”- a name given for foreign-owned assemblers NAFTA – 62% local content for all cars coming from member countries. 3. Import restrictions Selective restrictions on the import of raw materials, machines and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry. Sometimes disrupt the operations of established industries. 4. Tax controls Taxes must be classified as a political risk when used as a means of controlling foreign investments.

They are raised without warning and in violation of formal agreements. A squeeze on profit results from taxes being raised significantly as a business becomes established. 5. Price controls Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, an cars, are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests.

A side effect to the economy can be to slow or even stop capital investment. 6. Labor problems In many countries, labor unions have strong government support that they use effectively in obtaining special concession from business. Layoffs may be forbidden, profits may have to be shared, and an extraordinary umber of services may have to be provided. C. Political sanctions One or a group of nations may boycott another nation, thereby stopping all trade between the countries, or issue sanctions against the trade of specific products.

The US has long-term boycotts of trade with Cuba, Iran, and Libya. Some imposed sanctions against the trade in specific products. Companies caught in the crossfire of such political disputes between countries or between political factions within a country can become unwitting victims of political reprisals. E. g. An auto dealer made a deal to sell GMs car in Cameroon but when the company was about to send the car, the state government imposed sanction against trade in these ‘special cars’ used by abusive policemen.

D. Political an social activists Although not usually officially sanctioned by the government, the impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can ranged from those who seek to bring about peaceful change to those who resort to violence and terrorism to affect change. Free Burma Campaign (FBC) have applied enough pressure to cause several US companies to stop importing from Burma or invest in Burma.

Pepsi-Cola sold its joint venture in Burma, Heineken and Carlsberg withdrew form Burma and several garments factories refuses to buy from Burma. Violence and Terrorism Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities. The State Department reported 3,200 terrorist incidents worldwide in 2004, up dramatically from previous years given a new approach to counting. Terrorism has many different goals.

Multinationals are targeted to embarrass a government and its relationship with firms, to generate funds by kidnapping executives to finance terrorist goals, to use as pawns in political or social disputes not specifically directed at them and to inflict terror within a country as did September 11. September 11 has raised the cost of doing business domestically and internationally. The dominance of the United States in world affairs exposes U. S. businesses to a multitude of uncertainties, from the growing danger of political violence to investment risks in emerging markets.

In the past 30 years, 80 percent of terrorist attacks against the United States have been aimed at American businesses. Since September 11 McDonald’s, Kentucky Fried Chicken, and Pizza Hut combined have been bombed in more than 10 countries, including Turkey, Saudi Arabia, Russia. Lebanon, and China; most attacks have been linked with militant Islamic groups. There are reasons to expect that businesses w ill become increasingly attractive to terrorists, both because they are less well defended than government targets and because of what they symbolize.

Cyberterrorism and Cybercrime New on the horizon is the growing potential for cyberterrorism and cybercrime. Although in its infancy, the Internet is a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. One problem in tracing cyberterrorists and criminals is that it is hard to determine if a cyber attack has been launched by a rogue state, a terrorist, or by a hacker as a prank.

Whether perpetrated by pranksters or hackers out to do harm, these incidents show that tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a country’s infrastructure. Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of Eight conference convened to discuss cybercrime expressing an urgent need for cooperation among governments, industry, and users to combat the growing menace of cybercrime.

As the Internet grows, “it’s only a matter of time before every terrorist, anarchist, thief, and prankster with a PC and a phone line will be waging a virtual war and inflicting real harm. ” The Internet is a potent tool for cybercrime, and, unless systems are designed to safeguard it against these intrusions, the costs to governments and industry will be enormous and may prevent the Internet from reaching its full potential. Assessing Political vulnerability

Some products appear to be more politically vulnerable than others, in that they receive special government attention, Depending n the desirability of the product, this special attention may result in positive actions toward the company or in negative attention. It is not unusual for countries, seeking investments in high-priority industries to excuse companies from taxes, customs duties, quotas, exchange controls, and other impediments t investment. Conversely, firms marketing products not considered high priority or that fall from favor often face unpredictable government restrictions.

Politically sensitive products There are some generalizations that help to identify the tendency for products to be politically sensitive. Products that have an effect upon or are perceived to heave an effect upon the environment, exchange, rates, national and economic security, and the welfare of people, and are publicly visible or subject o public debate, are more apt to be politically sensitive. * First KFC outlet was closed because there were two flies and the second one was closed because MSG was too high even though it was below international and India acceptable standards. Enron Corporation which had a $2. 8 billion contract to build a power plant canceled. * EU banned US’s beef which were hormone treated. Forecasting Political risk In addition to qualitative measures of political vulnerability, a number of firms are employing systematic methods of measuring political risk. Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions.

Political risk assessment can; * Help managers decide if risk insurance is necessary. * Devise an intelligence network and an early warning system. * Help managers develop contingency plans for unfavorable future political events * Build a database of past political events for use by corporate management * Interpret the data gathered by its intelligence network to advise and forewarn corporate decision makers about political and economic situations

Risk assessment is used not only to determine whether or not to make an investment in a county but also to determine the amount of risk a company is prepared to accept in the Commonwealth of independent /States (CIS) and China the risk may be too high for some companies, but stronger and better financed companies can make long-term investments in those countries that will be profitable in the future. Reducing Political Vulnerability

Even though a company cannot directly control or alter the political environment of the country within which it operates, a there are measures that can lessen the degree of susceptibility of a specific business venture to politically induces risks. Good corporate citizenship To minimize the fear of foreign multinationals interest is only to exploit their labor, markets, or raw material and to leave nothing behind except the wealthy that become wealthier, a company is advised to remember: 1.

It is a guest in the country and should act accordingly. 2. The profits of an enterprise are not solely any company’s; the local national employees and the economy of the country should also benefit. 3. It is not wise to try to win over new customers by completely Americanizing them. 4. Although English is an accepted language overseas, a fluency in the local language goes far in making sales and cementing good public relations. 5. The company should try to contribute to the country’s economy and culture with worthwhile public projects. 6.

It should train its executives and their families to act appropriately in the foreign environment. 7. It is best to conduct business from the US but to staff foreign offices with competent nationals and supervise the operation from the US. By changing the way they operate, companies can minimize their political vulnerability and often survive the most hostile environments. * Merrill Lynch is helping India devise regulatory policy for stock markets. * Chine – Procter ; Gamble is helping local schools and universities to train and educate leaders. Malaysia – Motorola and Intel have instituted training programs to enhance the skills for local workers. Managing External Affairs Companies manage external affairs in foreign markets to ensure that the host government and the public are aware of their contributions to the economic, social or human development of the country. Government – MNC relation are generally positive if the investment 1. improves the BOP 2. uses locally produced resources 3. transfer s capital, technology or skills 4. creates jobs 5. makes tax contributions E. g.

Coca-Cola received Africa Award for good corporate citizenship for “continued help to drive long-term sustainable economic growth across the African continent” Strategies to Lessen Political Risk Other strategies to minimize political vulnerability and risk. 1. Joint Venture – JV can be with either locals or other third-country multinational companies. Helps minimize anti-MNC feelings and adds the additional bargaining power of a third country. 2. Expanding the Investment base – Including investors and banks in financing an investment in the host country.

If the government threatens expropriation or other types of takeover the financing bank has substantial power with the government. 3. Marketing and distribution – Controlling distribution in markets outside the country can be used effectively if an investment should be expropriated: the expropriated country would lose access to world markets. Marcona Mining Company (Peru) was expropriated, the country lost access to markets around the world. 4. Licensing – Eliminates almost all risks is to license technology for a fee.

It can be effective in situations where the technology is unique and the risk is high. 5. Planned domestication – The strategies just discussed can be effective in forestalling or minimizing the effect of a total takeover. However, in those cases where an investment is being domesticated by the host country, the most effective long-range solution is planned phasing out i. e. planned domestication. Planned domestication is, in essence, a gradual process of participating with nationals in all phases of company operations.

Better to plan to blend into a foreign market on your own terms than have the host country force domestication or worse, employ expropriation. Political Payoffs An attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company. Political payoffs, or bribery, have been used to lessen the negative effects of a variety of problems. Bribery poses problems for the marketer at home an abroad since it is illegal. There may be short-run benefits to political payoffs, but in the long run the risks are high and bribery should be avoided.

Government Encouragement of Global Business Government, both foreign and US also encourage foreign investment. In fact, within the same country some foreign businesses fall prey to politically induced harassment while others may be placed under a government umbrella of protection and preferential treatment. The difference lies in the evaluation of a company’s contribution to the nation’s interest. Foreign Government Encouragement The most important reason to encourage foreign investment is to accelerate the development of an economy.

Multinational corporations may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of local industry, and /or conserve foreign exchange as a requirement for market concessions. Many countries open to foreign investment impose requirements similar to those discussed in planned domestication as a precondition for entry or continued expansion. China – Japan’s NEC encourage to build a semiconductor manufacturing and assembly plant even though they don’t need it.

Chrysler Corporation refused to give up patent rights to technology used in making vans and lost the deal to Mercedes. India- dropping preconditions for entry and liberalizing requirements in order to encourage further investment. Pepsi was restricted to a minority position (40%) in a joint venture. Pepsi was required to develop an agricultural research center to produce high-yielding seed varieties, construct and operate a snack food processing plant and a vegetable processing plant and guarantee that export revenues would be five times greater than money spent on imports.

US Government Encouragement US government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries world wide, including those that are politically risky. It seeks to create a favorable climate for overseas business by providing the assistance that help minimize some of the more troublesome politically motivated financial risks of doing business abroad. DOC – Department of Commerce is the principal department that supports US business.

ITA – The International Trade Administration, a bureau in the DOC is dedicated to helping US business compete in the global market place. Eximbank – Export/Import Bank underwrites international trade and investment activities of American firms. (foreign Credit Insurance Association (FCIA) AID – International Development has provisions for limited protection in support of essential projects in approved countries. OPIC – The Overseas Private Investment Corporation provides political-risk insurance for companies investing in less-developed countries.