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Foreign investment can threaten national sovereignty, as seen in opposition to Chinese purchases of Unocal and investments from sovereign wealth funds during the 2008 financial crisis. Maintaining national sovereignty is a critical issue for governments in assessing foreign business operations. The political stability and friendliness of governments can change due to shifts in party control, pressure groups, economic conditions, or conflicts between governments, affecting the environment in which businesses operate. Even stable governments like Mexico, where the PRI ruled for 71 years, saw major policy changes regarding foreign investment from expropriation to open markets under NAFTA.

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Esha Amir
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24 views

2

Foreign investment can threaten national sovereignty, as seen in opposition to Chinese purchases of Unocal and investments from sovereign wealth funds during the 2008 financial crisis. Maintaining national sovereignty is a critical issue for governments in assessing foreign business operations. The political stability and friendliness of governments can change due to shifts in party control, pressure groups, economic conditions, or conflicts between governments, affecting the environment in which businesses operate. Even stable governments like Mexico, where the PRI ruled for 71 years, saw major policy changes regarding foreign investment from expropriation to open markets under NAFTA.

Uploaded by

Esha Amir
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© © All Rights Reserved
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No company, domeForeign investment can also be perceived as a threat to sovereignty and thus

become a rallying cry by opposing factions. The Chinese national oil company’s proposed purchase of
Unocal was opposed on such grounds. As American banks struggled to maintain liquidity during the
2008 home mortgage debacle, huge investments from overseas were solicited and received from one
class of foreign investors that U.S. politicians particularly disfavored— the so-called “sovereign wealth
funds” that entail vast pools of money controlled by foreign governments from China and the Middle
East. 5 At the same time, members of the U.S. Congress have demanded that China raise the value of its
currency, but that would make it even easier for Chinese fi rms and their government to buy American
assets. 6 Of course, the Chinese resist the latter political pressure as a threat to their sovereignty.
Ironically, Ameri cans have criticized Mexico for hindering similar sorts of American investments. That
is, Mexico badly needs privately fi nanced electricity generating plants to meet electrical power
demands and to upgrade the country’s overloaded transmission network. The Mexican government
entered into an agreement with a Belgian company to build a power plant that would bypass the state
electricity monopoly and sell electricity directly to large Mexican manufacturers. But the Mexican
constitution limits private ownership of utilities, and any exception requires a two-thirds vote of the
legislature. The Institutional Revolutionary Party (PRI) saw the attempt to open Mexico’s protected
energy industry as an assault on Mexican sovereignty and blocked the agreement. What all this confl ict
highlights is that national sov ereignty is a critical issue in assessing the environment in which a fi rm
operates. 3 “Measuring Globalization,” Foreign Policy , November/December 2007, pp. 68–77. 4 John L.
Graham, “The Big Secret of World Peace,” Journal of Commerce , February 13, 1995, OPED page; John L.
Graham, “Trade Brings Peace,” in J. Runzo and N. Martin (eds.), War and Reconciliation (Cambridge:
Cambridge University Press, 2011); Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus, and
Giroux, 2005). 5 Peter S. Goodman and Louise Story, “Overseas Investors Buying U.S. Holdings at Record
Pace,” The New York Times , January 20, 2008, pp. 1, 14. 6 “Lost in Translations,” The Economist ,
January 19, 2008, pp. 73–75. cat2994X_ch06_158-183.indd 161 18/08/10 12:13 PM 162 Part 2 The
Cultural Environment of Global Markets friendly government. Unfortunately, governments are not
always stable and friendly, nor do stable, friendly governments always remain so. Radical shifts in
government philoso phy when an opposing political party ascends to power, 7 pressure from nationalist
and self-interest groups, weakened economic conditions, bias against foreign investment, or confl icts
among governments are all issues that can affect the stability of a government. Because foreign
businesses are judged by standards as variable as there are nations, the stability and friendliness of the
government in each country must be assessed as an ongo ing business practice. At the top of the list of
political issues concerning foreign businesses is the stability or instability of prevailing government
policies. Governments might change 8 or new political parties might be elected, but the concern of the
multinational corporation is the continuity of the set of rules or codes of behavior and the continuation
of the rule of law—regardless of which government is in power. A change in government, whether by
election or coup, does not always mean a change in the level of political risk. In Italy, for example, more
than 50 different governments have been formed since the end of World War II. While the politi cal
turmoil in Italy continues, business goes on as usual. In contrast, India has had as many different
governments since 1945 as Italy, with several in the past few years favorable to foreign investment and
open markets. However, much government policy remains hostile to foreign investment. Senior civil
servants who are not directly accountable to the elector ate but who remain in place despite the
change of the elected government continue with former policies. Even after elections of parties favoring
economic reform, the bureaucracy continues to be staffed by old-style central planners in India.
Conversely, radical changes in policies toward foreign business can occur in the most stable
governments. The same political party, the Institutional Revolutionary Party (PRI), controlled Mexico
from 1929 to 2000. During that period, the political risk for foreign investors ranged from expropriation
of foreign investments to Mexico’s membership in NAFTA and an open door for foreign investment and
trade. In recent years, the PRI created a stable political environment for foreign investment, in contrast
to earlier expropriations and harassment. Beginning with the elections in 2000, however, a new era in
Mexican politics emerged as a result of profound changes within the PRI brought about by
then president Ernesto Zedillo. Since 1929, the Mexican president had selected his successor, who,
without effective challenge, was always elected. President Zedillo changed the pro cess by refusing to
nominate a candidate; instead he let the nomination be decided by an open primary—the fi rst in seven
decades. From a fi eld of four candidates, the PRI selected Labastida Ochoa, and the opposing party PAN
9 selected Vicente Fox who, though consid ered a long shot, won the presidency. Although the PAN had
gained strength for several years in the congress and among state governments, its presidential
candidates never had a winning chance until the 2000 election

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