The Political Environment: A Critical Concern

1. The Political Environment: A Critical Concern

2. Stability of Government Policies • Issues that can affect the stability of a government: • Radical shifts in government philosophy when an opposing political party ascends to power. • Pressure from nationalist and self-interest groups. • Weakened economic conditions • Bias against foreign investment • Conflicts between governments • Five main political causes of instability in international markets: • 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 themselves

3. Forms of Government • Ancient Greeks Circa 500 B.C. criticized three fundamental forms of government: • Rule by one (monarchy) • Rule by few (aristocracy) • Rule by many (democracy) • Following the collapse of communism circa 1990 the world seemed to have agreed that free-enterprise democracy was the best solution. • 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 older. • In about 10% of the states voting is required, in the rest it is voluntary.

4. A Sampling of Government Types • Insert Exhibit 6.1

5. A Sampling of Government Types • Insert Exhibit 6.1 Women Wait to Vote in Iran

6. Economic Risks • Exchange controls • Stem from shortages of foreign exchange held by a country. • Local-content laws • Countries often require a portion of any product sold within the country to have local content. • Import restrictions • Selective restrictions on the import of raw materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry

7. Economic Risks (continued) • Tax controls • A political risk when used as a means of controlling foreign investments. • Price controls • Essential products that command considerable public interest • Pharmaceuticals • Food • Gasoline • Labor problems • Labor unions have strong government support that they use effectively in obtaining special concessions from business.

8. Political Risks of Global Business • Confiscation – the seizing of a company’s assets without payment. • Expropriation – where the government seizes an investment but some reimbursement for the assets is made. • Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s management.

9. Political and Social Activists Korean Students Protest Daewoo Sale to GM

10. Political and Social Activists Bharatiya Party Protesting in Bhopal

11. Nongovernmental Organizations • Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments. • Protests • Lobbying • Collaborations with governmental organizations • Many also are involved in mitigating much of the human misery plaguing parts of the planet. • Red Cross • Red Crescent • Amnesty International • Oxfam • UNICEF • Care • Habitat for Humanity

12. U.S. State Department Travel Warnings • Insert Exhibit 6.3

13. Violence and Terrorism • The State Department reported 3,200 terrorist incidents worldwide in 2004. • Goals of terrorism • 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 • To inflict terror within a country as did September 11 • In the past 30 years, 80% of terrorist attacks against the U.S. have been aimed at American businesses.

14. Cyberterrorism and Cybercrime • 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. • 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. • Each wave of viruses gets more damaging and spreads so rapidly that considerable harm is done before it can be stopped. • 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.

15. Forecasting 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. • The greater the risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets. • Risk assessment is used to estimate the level of a risk a company is assuming when making an investment and to help determine the amount of risk it is prepared to accept.

16. Top 20 States in Danger of Failing (Ranked) • Insert Exhibit 6.4

17. 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 • Create jobs • Make tax contributions • Political parties seeking publicity or scapegoats for their failure often serve their own interests by focusing public opinion on the negative aspects of MNCs whether true or false.

18. Lessening Political Vulnerability French Farmers toss Tomatoes at McDonalds to Protest the Company’s Fast Food.

19. Lessening Political Vulnerability Taiwanese Fishermen Protest Japanese Fishing

20. Lessening Political Vulnerability (continued) • Strategies that MNCs use to minimize political vulnerability and risk: • Joint ventures • Expanding the investment base • Licensing • Planned domestication • Political bargaining • Political payoffs

21. Government Encouragement • The most important reason to encourage foreign investment is to accelerate the development of an economy. • The U.S. government is motivated for economic as well as political reasons to encourage American firms to seek business opportunities in countries worldwide, including those that are politically risky. • Agencies that provide assistance to U.S. companies include: • Export-Import Bank (Ex-Im Bank) • Foreign Credit Insurance Association (FCIA) • The Agency for International Development (AID) • The Overseas Private Investment Corporation (OPIC)