2. Chapter 6 The Political Environment

3. I. Sovereignty - Nationalism II. Embargoes and Trade Sanctions III. Export Controls IV. Political Risk - Types - Assessment

4. Export Controls §U.S. export control systems l Export Administration Act (Commerce Department) l Munitions Control Act (State Department) l Determinants for export controls National security, foreign policy, short supply, nuclear nonproliferation §Critical commodities list l Sensitive to national security l Controlled for other purposes §No License Required (NLR) §Export license

5. Should a Given Product be Exported? To a Given Country? To a Given End User? Decision Steps in the Export Licensing Process U.S. Export Control System For A Particular End Use?

6. Typical Forms of Host Country Controls §Expropriation l Taking of private property with compensation §Confiscation l Taking of private property without compensation §More subtle forms of control l Domestication l Local-content l Exchange controls l “Over investment” l Tax policies l Price controls

7. Political Risks of Global Business § Confiscation § Expropriation § Domestication § Economic Risks §Exchange Controls §Local-Content Laws §Import Restrictions §Tax Controls §Price Controls §Labor Problems

8. International Terrorist Incidents By Region 1992-1997 SOURCE: http://www.state.gov/www/global/tourism/1997report

9. International Casualties by Terrorist Incidents, 1992-1997 SOURCE: http://www.state.gov/www/global/terrorism/1997report Irwin/McGraw-Hill 6-6

10. Irwin/McGraw-Hill Forecasting Political Risk 6-8 ● 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

11. Strategies to Lessen Political Risk § Joint Ventures § Investment Base Expansion § Marketing and Distribution § Licensing § Planned Demonstration § Other

12. Country Risk Assessment Criteria Index AreaCriteria Stability of the political system Political and economic Degree of control of economic system environmentConstitutional guarantees Effectiveness of public administration Labor relations and social peace

13. Country Risk Assessment Criteria Index AreaCriteria Population size Per capita income Domestic economic Economic growth during previous 5 years conditions Inflation during previous 2 years Accessibility of domestic capital market to foreigners Availability of high-quality local labor Possibility of giving employment Traffic system and communication channels

14. Country Risk Assessment Criteria Index AreaCriteria Restrictions imposed on imports Restrictions imposed on exports Restrictions imposed on foreign investments in the country External economicLegal protection for brands and products relationsRestrictions imposed on monetary transfers Revaluations of currency during previous 5 years Drain on foreign funds through oil or other energy imports Restrictions on the exchange on local money into foreign currencies

15. Examples of Country Risk Ratings Country*Political RiskFinancial Risk Economic RiskComposite Risk 1.Switzerland92504394 2.Germany83494187 3.Japan85494288 4.U.S.83493885 5.Canada83463984 6.U.K.81483682 7.France80443881 8.Italy74443777 9.Mexico68322864 10.Hong Kong67413974 11.China67393369 12.India49303155 13.Argentina62232153 14.Romania**55291549.5 15.Liberia**10 81215 Note:*Lower scores represent higher risk (Highest Risk=1…100=Lowest Risk). **Data from 1991. Source: Extracted from International Country Risk Guide, 1996, reprinted in Claude B. Erb, Campbell R. Harvey, and Trades E.Viskanta, “Expected Returns and Volatility in 135 Countries,” Journal of Portfolio Maanagement, 22(Spring 1996), p.46.