Chapter 6

1. Chapter 6 The Political Environment

2. Learning Objectives • Different governmental type, political parties, nationalism, animosity, and trade disputes can affect the environment for marketing in foreign countries • The political risks of global business and the factors that affect stability • The importance of the political system to international marketing and its effect on foreign investments • The impact of political and social activists, violence, and terrorism on international business

3. Global Perspective • A crucial reality of international business • Both host and home governments are integral partners • A government controls and restricts a company’s activities • By encouraging and offering support • By discouraging and banning or restricting its activities • International law recognizes the sovereign right of a nation • To grant or withhold permission to do business within its political boundaries • To control where its citizens conduct business

4. 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 international market instability • 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

5. Forms of Government • Circa 500 B.C – Ancient Greeks criticized three fundamental forms of government • Rule by one (monarchy) • Rule by few (aristocracy) • Rule by many (democracy) • Circa 1990 – Collapse of communism • Free-enterprise democracy considered the best solution • 200+ sovereign states on the planet • In about 10% of the states voting is required, in the rest it is voluntary

6. A Sampling of Government Types Exhibit 6.1

7. Political Parties • In countries where two strong political parties typically succeed one another, it is important to know the direction each party is likely to take • Great Britain • The Labour Party vs. the Conservative Party • Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift • A current assessment of a country’s political philosophy and attitudes is important in gauging their stability and attractiveness in terms of market potential

8. Nationalism • An intense feeling of national pride and unity • An awakening of a nation’s people to pride in their country • National interest and security are more important than international relations • Countries use nationalism to protect themselves against intrusions • Threats from outside forces • Declines in the domestic economy • Nationalism comes and goes • As conditions and attitudes change • Foreign companies welcomed today may be harassed tomorrow and vice versa

9. Targeted Fear and/or Animosity • Marketers should not confuse nationalism with a widespread fear or animosity directed at a particular country • Toyota in the U.S. (1980s) –threat to American • Animosity toward the United States in France • The unhappiness of citizens and politicians in many other countries concerning the war in Iraq • 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

10. Political Risks of Global Business Risks of doing business abroad: • Confiscation– the seizing of a company’s assets without payment • Expropriation – where the government seizes an investment but makes some reimbursement for the assets-becomes gov. entity • Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government ruling • Authorization local ownership • Greater national involvement in a company’s management

11. Economic Risks • 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 consideration from business

12. Political Sanctions • One or a group of nations may boycott another nation • Stopping all trade between the countries • Issuing sanctions against trade of specific products • U.S. boycotts of trade with Cuba • US and Iran • History indicates that sanctions are often unsuccessful in reaching desired goals • Particularly when ignored by other major nations’ traders

13. Political Sanction Reasons: • Iran’s support for international terrorism and active pursuit of weapons of mass destruction. Objective: • To put gov. of Iran under pressure. Impact: • Affect most transactions that would be done, many cannot invest in Iran.

14. Political and Social Activists (PSA) • Not usually government sanctioned • Example: Greenpeace and GM food (protest, lobbying) • Can interrupt the normal flow of trade • Range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change • Malaysia boycott of Dutch products after anti-Islam movie • The Internet has become an effective tool of PSAs to spread the word • Protest rallies against the U.S. – Iraq War

15. Non-governmental 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 • Oxfam • MERCY • Care

16. U.S. State Department Travel Warnings Exhibit 6.3

17. Violence and Terrorism • The State Department reported 3,200 terrorist incidents worldwide in 2004 • Goals of terrorism against multinationals • To embarrass a government and its relationship with firms • To generate funds by kidnapping executives • To use as collateral in political or social disputes • 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

18. Armed Conflicts Around the World Exhibit 6.4

19. Cyberterrorism and Cybercrime • The internet is a vehicle for terrorist and criminal attacks to inflict damage on a company with little chance of being caught • By foreign and domestic antagonists • It is hard to determine if a cyber attack has been launched • By a rogue state • A terrorist • A hacker as a prank

20. Cyberterrorism and Cybercrime • Each wave of viruses • Gets more damaging • 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 • A country’s infrastructure

21. Politically Sensitive Products and Issues • Politically sensitive products • Perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people • Are publicly visible or subject to public debate • Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern • The European Union has banned hormone-treated beef for more than a decade

22. Forecasting Political Risk • Political risk assessment • An attempt to forecast political instability • To help management identify and evaluate political events • To predict their potential influence on current and future international business decisions • Government failure is greatest risk to international marketers • Causing chaos in the streets and markets • Risk assessment of investments • Used to estimate the level of a risk a company is assuming • Helps determine the amount of risk a firm is prepared to accept

23. Top 20 States in Danger of Failing (Ranked) Exhibit 6.5

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

25. Summary • Different governmental type, political parties, nationalism, animosity, and trade disputes can affect the environment for marketing in foreign countries • The political risks of global business and the factors that affect stability • The importance of the political system to international marketing and its effect on foreign investments • The impact of political and social activists, violence, and terrorism on international business

26. In-class discussion questions • Why would a country domesticate that expropriate? • How can a change in the political party in “power” affect an investor? Discuss and give examples based on the Malaysian context. • What are the most common causes of instability in governments? Discuss.

27. Thank you