1. International Marketing 15 th edition Philip R. Cateora, Mary C. Gilly, and John L. Graham McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Introduction (1 of 2) No company, domestic or international, large or small, can conduct business without considering the influence of the political environment within which it will operate A government reacts to its environment by initiating and pursuing policies deemed necessary to solve the problems created by its particular circumstances A government controls and restricts a company’s activities – By encouraging and offering support – By discouraging and banning or restricting its activities Roy Philip6-2

3. Introduction (2 of 2) International law recognizes the sovereign right of a nation – to grant or withhold permission to do business within its political boundaries and – to control where its citizens conduct business Roy Philip6-3

4. Overview The Sovereignty of Nations Stability of Government Policies - Governmental types, political parties, nationalism, targeted fear/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 Economic risks Assessing and reducing the effect of political vulnerability How and why governments encourage foreign investment Roy Philip6-4

5. Global Perspective World Trade Goes Bananas Products from Europe were slapped with a 100% import tariff by the U.S. in retaliation to the EU banana-import rules that favored Caribbean bananas over Latin American bananas Global trade wars can affect small businesses such as Reha Enterprises, as well as big businesses such as Gillette and Mattel After long and hard fought political arm-twisting, the 16-year banana wars ended as the EU cut import tariffs on bananas grown in Latin America by U.S. firms Roy Philip6-5

6. The Sovereignty of Nations (1 of 2) A sovereign state is – Independent and, – Free from all external control Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members A state sets requirements for citizenship, defines geographical boundaries, and controls trade and the movement of people and goods across its borders Roy Philip6-6

7. Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other nations – NAFTA – North America Free Trade Agreement – NATO – North Atlantic Treaty Organization – WTO – World Trade Organization The United States involvement in international political affiliations is surprisingly low The WTO is considered by some as the biggest threat so far to national sovereignty The Sovereignty of Nations (2 of 2) Roy Philip6-7

8. Stability of Government Policies (1 of 2) 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 Roy Philip6-8

9. Stability of Government Policies (2 of 2) 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 Roy Philip6-9

10. Forms of Government Circa 500 B.C – Ancient Greeks criticized three fundamental forms of government – Rule by one (monarchy) – Congo, Sudan, Libya, Myanmar – Rule by few (aristocracy) – Rule by many (democracy) – USA, United Kingdom Circa 1990 – Collapse of communism – Free-enterprise democracy considered the best solution 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 Roy Philip6-10

11. A Sampling of Government Types Roy Philip Exhibit 6.1 6-11

12. Political Parties (1 of 2) 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 (restrictive trade policies) vs. the Conservative Party (liberal trade policies) Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift Roy Philip6-12

13. Political Parties (2 of 2) A current assessment of a country’s political philosophy and attitudes is important in gauging their stability and attractiveness in terms of market potential Three attitudes to look for in political parties – Nationalism – Targeted fear and/or animosity – Trade disputes Roy Philip6-13

14. 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 (Latin America) – Decline in the domestic economy (India) Nationalism comes and goes – As conditions and attitudes change – Foreign companies welcomed today may be harassed tomorrow and vice versa Roy Philip6-14

15. 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) – “fear of Japan” – 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 Roy Philip6-15

16. Trade Disputes The Banana war between the European Union (EU) and the U.S. is a great example of trade disputes Other notable trade disputes are: – Undervalued Chinese currency (making Chinese exports cheaper) – Ban on beef imports into Japan (raising the price of beef in Japan) – Chinese subsidies in apparent violation of WTO rules (making it hard to compete against Chinese firms who receive subsidies) – Farm subsidies in developed countries (protecting the farming industry in that country thus making it hard to compete against them) – AIRBUS subsidies (making it harder for Boeing to compete) Roy Philip6-16`

17. Political Risks of Global Business Confiscation – the seizing of a company’s assets without payment Expropriation – where the government seizes an investment but makes some reimbursement for the assets Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees – Mandating local ownership – Greater national involvement in a company’s management – An example of domestication is given on the next slide Roy Philip6-17

18. Domestication - Example A good example of domestication can be seen in the nationalization of Air-India (formerly called as Tata Airlines). Tata owned and operated Air-India and Indian Airlines until they were nationalized by the Indian Government, much to Tata’s chagrin. Very recently, the Indian government has asked Mr. Ratan Tata, chairman of the Tata group, to head an advisory panel to revive Air India. http://www.bloomberg.com/apps/news?pid=newsarc hive&sid=ag_NJBLk6TVo http://www.bloomberg.com/apps/news?pid=newsarc hive&sid=ag_NJBLk6TVo Roy Philip6-18

19. Economic Risks (1 of 2) 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 Roy Philip6-19

20. Economic Risks (2 of 2) 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, and Gasoline Labor problems – Labor unions have strong government support that they use effectively in obtaining special concessions from business Roy Philip6-20

21. How Complicated Things Can Get Roy Philip Exhibit 6.2 6-21

22. 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 and Iran and sanctions against North Korea History indicates that sanctions are often unsuccessful in reaching desired goals – Particularly when ignored by other major nations’ traders Roy Philip6-22

23. Political and Social Activists (PSAs) Not usually government sanctioned 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 – Worldwide boycott of Nestle products The Internet has become an effective tool of PSAs to spread the word – Protest rallies against the U.S. – Iraq War Roy Philip6-23

24. Nongovernmental Organizations (NGOs) 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 and the Red Crescent – Amnesty International – Oxfam – UNICEF – Care and Habitat for Humanity Roy Philip6-24

25. Violence and Terrorism (1 of 2) 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 pawns 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 Roy Philip6-25

26. Violence and Terrorism (2 of 2) International warfare is fast becoming obsolete as the number of wars have declined steadily since the end of the Cold War The greatest threat to peace and commerce for the twenty-first century remain civil strife and terrorism Tourism and International education are two industries that have been affected by terrorism. The latest fresh wave of terrorism is seen in the attacks by Sudanese terrorists on ships that sail in what has become known as the “horn of Africa.” Roy Philip6-26

27. U.S. State Department Travel Warnings Roy Philip Exhibit 6.3 6-27

28. Armed Conflicts Around the World Roy Philip Exhibit 6.4 6-28

29. Cyberterrorism and Cybercrime (1 of 2) 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 – New Hacking Tools New Hacking Tools Roy Philip6-29

30. Cyberterrorism and Cybercrime (2 of 2) 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 Mounting concern over the rash of attacks – Business leaders and government officials addressed a Group of Eight conference Roy Philip6-30

31. Assessing Political Vulnerability A marketer has no absolute guidelines to follow to determine whether a company and its products will be subject to political attention In a bid to attract foreign investment, countries may well excuse companies from taxes, customs duties, quotas, and exchange controls as India did for companies developing and maintaining infrastructure In that same vein, marketing products of firms not considered high priority may often face unpredictable government restrictions as was the case with Continental Can Company’s canned beverages that were banned in China when the Chinese economy weakened Roy Philip6-31

32. Politically Sensitive Products and Issues Politically sensitive products – Are 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 Roy Philip6-32

33. 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 Roy Philip6-33

34. Top 20 States in Danger of Failing (Ranked) Roy Philip Exhibit 6.5 6-34

35. Lessening Political Vulnerability (1 of 2) 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 – Makes tax contributions Political parties often focus public opinion on the negative aspects of MNCs whether true or false – As scapegoats for their own failure – To serve their own interests Roy Philip6-35

36. Lessening Political Vulnerability (2 of 2) Strategies that MNCs use to minimize political vulnerability and risk – Joint ventures – Expanding the investment base – Licensing – Planned domestication – Political bargaining – Political payoffs Roy Philip6-36

37. 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) Roy Philip6-37

38. Summary The foreign firm must strive to make its activities politically acceptable or it may be subjected to a variety of politically condoned harassment The foreign marketer frequently faces the problem of uncertainty of continuity in government policy Marketing firms accepted under one administration might find its activities undesirable under another as governments change political philosophies Unfamiliar or hostile political environment does not necessarily preclude success for foreign marketers – If the company becomes a local economic asset and responds creatively to the issues raised by political and social activities – If a company is considered vital to achieving national economic goals, the host country often provides an umbrella of protection Roy Philip6-38