McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. The Political Environment: A Critical Concern Chapter 6

6-2 Learning Objectives LO1What 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

6-3 World Trade Goes Bananas!  The Banana wars and conflict between the U.S. and Europe started out as a simple tariff dispute between France and U.S. companies exporting bananas from Latin American countries to France  France gave preferential treatment for bananas coming from its former colonies in the Caribbean and Africa  The rest is history and politics, see more here: “Banana Wars”Banana Wars

6-4 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

6-5 Stability of Government Policies  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

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. 6-6

6-7 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  Trade disputes

6-8 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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6-10 Political Parties  Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade

6-11 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

Targeted Fear and/or Animosity Nationalism Targets all foreign countries Animosity Targets specific nations 6-12

6-13 Trade Disputes: Examples  Undervalued Chinese currency (ongoing problem)  Ban on beef imports into Japan  Chinese subsidies in apparent violation of WTO rules  Farm subsidies in developed countries  AIRBUS–Boeing battle over subsidies

Political Risks of Global Business Confiscation Expropriation Domestication 6-14

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 6-15

6-16 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

6-17 Economic Risks  Exchange Controls  Local Content Laws  Import Restrictions  Tax Controls  Price Controls  Labor Problems

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. 6-18

6-19 Political Sanctions: Examples from the U.S.  Cuban crisis of the 1960s  The Iranian revolution in the 1980s  The Persian Gulf War in the 1990s

6-20 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.

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. 6-21

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6-23 Violence, Terrorism and War  Violence and terrorism may be closely related to politics  War-torn regions are areas of concern for foreign businesses to operate in

6-24 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” Melissa Slammer Goner Worm

6-25 Assessing Political Vulnerability  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.

6-26 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

6-27 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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Indicators of state vulnerability 1 Social indicators – Demographic pressures – Massive movement of refugees and internally displaced persons – Legacy of vengeance-seeking group grievance – Chronic and sustained human flight 2 Economic indicators – Uneven economic development along group line – Sharp and/or severe economic decline

Indicators of state vulnerability 3 Political indicators – Criminalization and/or delegitimisation （非法） of the state – Progressive deterioration of public services – Widespread violation of human rights – Security apparatus as "state within a state" – Rise of factionalised elites( 派系精英 ) – Intervention of other states or external factors

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 resourcestransfers capital, technology, and/or skillscreates jobs, and/ormakes tax contributions 6-32

Lessening Political Vulnerability MNC’s can use the following strategies to minimize ­political vulnerability and risk: Joint Ventures Expanding the Investment Base Licensing Planned Domestication Political Bargaining Political Payoffs 6-33

6-34 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

6-35 Homework Assignments  How to evaluate the risks of FDI environments? How to reduce them?  Analysis on the Investment Environments in one of the countries along the New Silk Road.