The Political Environment:

A Critical Concern
Chapter 6

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
LO1 What the sovereignty of nations means and how it can affect
the stability of government policies
LO2 How different governmental types, political parties,
nationalism, targeted fear/animosity, and trade disputes can
affect the environment for marketing in foreign countries
LO3 The political risks of global business and the factors that affect
stability
LO4 The importance of the political system to international
marketing and its effect on foreign investments
LO5 The impact of political and social activists, violence, and
terrorism on international business
LO6 How to assess and reduce the effect of political vulnerability
LO7 How and why governments encourage foreign investment

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Political Environment
▪ Both host and home countries are partners
• Initiating pursuing policies
• Promoting national interest (considering its national
interest and political philosophy).
• Controls or restricts company’s activities by encouraging or
discouraging and banning activities (depending on the
pleasure of the government).

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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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Sovereignty of Nations
▪ A state sets requirements for citizenship, defines
geographical borders, etc.
▪ A citizen is subject to the state’s laws even outside
the country’s borders.
▪ Nations can and do abridge specific aspects of their
sovereign rights to coexist with other nations(Eg. EU,
NAFTA, and WTO).
▪ However, some countries view the WTO and foreign
investments as a threat to sovereignty, (the fear of
relinquishing their nation’s rights for a common goal that might not
benefit them)

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Stability of Government Policies
▪ For foreign firms, the ideal situation is a stable
government in the country they are operating in.
▪ Radical shifts in government philosophy can occur
when:
• An opposing political party ascends to power
• Pressure from nationalist and self-interest groups
• Weakened economic conditions
• Bias against foreign investment or conflicts between
governments
▪ Government stability must be assessed as an ongoing
business practice (change can happen in stable
countries).

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Stability of Government Policies
▪ For foreign businesses, the stability of government
policies is the main concern.

▪ In Italy, more than 50 new governments since World

War II without major changes in business policies.

▪ Recently, Indian governments are favoring foreign

investments and free markets.

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Instability of Countries
▪ Due to the instability of some African countries
(unending civil wars, boundary disputes, oppressive
regimes, etc), a recent World Bank study showed
that 47 nations of sub-Saharan Africa were attracting
less than $2 Billion annually in FDI. (1/10 of what
developing countries such as Mexico attracts).

▪ These countries enter a vicious cycle: they need investments

to prosper and investments need stability.

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CHAOTIC CONDITIONS: On the first Sunday after the quake, at 9:00 a.m., the streets of
downtown Port-au-Prince were filled with people scavenging. Onlookers add to the
crowd.

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 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

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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

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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 country’s products only,” e.g., “Buy
American”
• Restrictions on imports, restrictive tariffs, and other
barriers to trade

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Targeted Fear and/or Animosity

Nationalism
• Targets all foreign Animosity
countries • Targets specific
nations

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Political Risks of Global Business

Confiscation
Expropriation
Domestication
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Confiscation
• the most severe political risk, is the seizing of a company’s
assets without payment

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

Domestication
• occurs when the government mandates local ownership and
greater national involvement in a foreign company’s
management

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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

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Economic Risks
▪ Exchange Controls
• This happens when there is a shortage of foreign exchange in the country and
the government restricts the spending in foreign currency. This may result in
the imposition of differential exchange rates for different products entering
the country
▪ Local Content Laws
• All countries and regions may have local content laws, for example NAFTA has
a 62.5% local content requirement for cars originating from the NAFTA region,
the EU has a 45% local content requirement so that it forces companies to use
local components.
▪ Import Restrictions
• Countries may impose import restrictions to protect local farmers or
industries, but this may be detrimental to the local economy if it interrupts
production in certain industries

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Economic Risks
▪ Tax Controls
• Taxes that are imposed on foreign companies but not on domestic
companies and caused their products to be more expensive in the
country because it is passed on to the consumer.
▪ Price Controls
• Countries can impose price controls on foreign companies selling
essential products such as food or gasoline, especially during
inflationary periods.
▪ Labor Problems
• Unionism and labor laws are different in different countries and there
are especially strict rules for laying off employees by foreign
companies.

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The consequences of the U.S. embargo of Cuba: A relatively new Chinese Chery Q (red
provisional plate), and one of the newest American cars you can find on the island, a 1957
Chevy (yellow citizen’s plate), certainly with a refurbished engine. A variety of other
European and Asian brands ply the streets of Havana, almost all recent models. No new
American models are in sight.

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Political Sanctions
▪ When one or a group of nations boycott another
nation, thereby stopping all trade between the
countries (or sanctions against the trade of specific
products).
• Example: Egypt, Saudia Arabia, UAE and Bahrain cut ties
with Qatar

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Political and Social Activists
The most entertaining protest technique
was pioneered by French farmers. French
farmers like to throw their food. Here they
tossed tomatoes and such at McDonald’s;
they’ve also lobbed lamb chops at their
own trade ministers.

PSAs (Political and Social Activists) can also

protest against companies importing from
other countries that violate human rights.

The internet has helped these movements

go viral.

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Political Activism Apparently they pay attention in Taiwan. Most recently,
fishermen pitched perch in Taipei to protest the Japanese fishing fleet’s
presence in their waters.

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NGOs
▪ Often associated with political activism,
nongovernmental organizations (NGOs) are
increasingly affecting policy decisions made by
governments. Many are involved in peaceful
protests, lobbying, and even collaborations with
governmental organizations.

▪ Examples of NGOs are the Red Cross and Red

Crescent, Amnesty International, Oxfam, UNICEF,
Care, and Habitat for Humanity.

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Violence, Terrorism and War
▪ Violence and terrorism may be closely related to
politics
▪ Multinationals are targeted to:
• Embarrass a government
• Kidnap executives
• Resolve political and social disputes
• Inflict terror within a country
▪ War-torn regions are areas of concern for foreign
businesses to operate in

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Cyberterrorism and 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” - $25 Billion damage
• Melissa – CNN, Yahoo! and Amazon.com
• Slammer
• Goner Worm

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Assessing Political Vulnerability
▪ Some companies are more politically vulnerable than
others
▪ No absolute guidelines
▪ No specific guidelines to determine a product’s
political vulnerability
▪ Countries seeking investments in high-priority
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
• Children
• Publicly visible
• Subject to public debate
• Associated to their country of origin

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Forecasting Political Risk
▪ Risk assessment is used to estimate the level of risk a
company is assuming when making an investment
and to help determine the amount of risk it is
prepared to accept.

▪ For example, doing business with India may not bring

immediate returns for businesses, but in the long run
it may be a profitable decision.

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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 company’s intelligence
network in order to advise and forewarn corporate
decision makers about political and economic situations

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Criteria includes demographic pressures, uneven development, etc.

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Lessening Political Vulnerability
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 Political Vulnerability
MNC’s can use the following strategies to
minimize political vulnerability and risk:
• Joint Ventures
• Expanding the Investment Base (banks)
• Licensing
• Planned Domestication
• Political Bargaining
• Political Payoffs (bribes)

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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 country’s economic growth
▪ During the recent economic downturn, the U.S.
government has been particularly creative in helping
promote American exports

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