Political Environment and Political Risk
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Political System
Political Risk
Risk of changes that may adversely impact marketers
Internal politics
System for interest aggregation and expression
External politics
Expression of national interests and will
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Political System
Internal politics – a changing state…
System for interest aggregation and expression
How are individual vs. collective interests perceived?
A philosophical question
Democracy vs. autocracy, capitalism vs. communism
How is society organized politically?
How are individual interests aggregated into political voices
How is policy formed and implemented?
Centralized vs. decentralized, Parties and voting blocs,
How does change occur?
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Political System
External politics – Political Risks
Change vs. nationalization vs. expropriation
Host country national interest and controls
Generally governments strive to benefit those who elect (put them in power) them.
Tools of national interest;
Entry restrictions
Price controls
Tariffs and quotas
Exchange control
Expropriation and nationalization
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
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The most severe political risk is confiscation, that is, the seizing of a company’s assets without payment. The two most notable recent confiscations of U.S. property occurred when Fidel Castro became the leader in Cuba and later when the Shah of Iran was overthrown. Confiscation was most prevalent in the 1950s and 1960s when many underdeveloped countries saw confiscation, albeit ineffective, as a means of economic growth.
Less drastic, but still severe, is expropriation, where the government seizes an investment but some reimbursement for the assets is made. Often the expropriated investment is nationalized, that is, it becomes a government-run entity.
A third type of risk is domestication. This occurs 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.
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
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Even though expropriation and confiscation are waning as risks of doing business abroad, international companies are still confronted with a variety of economic risks that can occur with little warning. Restraints on business activity may be imposed under the banner of national security to protect an infant industry, to conserve scarce foreign exchange, to raise revenue, or to retaliate against unfair trade practices, among a score of other real or imagined reasons. These economic risks are an important and recurring part of the political environment that few international companies can avoid.
Exchange controls – These stem from shortages of foreign exchange held by a country.
Local-content laws – In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts.
Import restrictions – These are selective restrictions on the import of raw materials, machines, and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry.
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
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Tax Controls – Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements.
Price Controls – Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests. A side effect on the local economy can be to slow or even stop capital investment.
Labor Problems – In many countries, labor unions have strong government support that they use effectively in obtaining special concessions from business. Layoffs may be forbidden, profits may have to be shared, and an extraordinary number of services may have to be provided.
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Political System
What determines risk?
External Factors
Firm’s home country (country of origin)
Product or industry
Size and location of operations
Visibility
Host country politics
Company Factors
Company behavior- good citizen or not
Contributions of the firm -JOBS, technology migration
Localization of operations
Subsidiary dependence
A word about ethics….
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Corruption Defined
Types of Corruption
Interest Rates
Profits (Marxism)
Individualism (Japan)
Rampant consumerism (India)
Missionaries (China)
Intellectual property laws (Sub-Sahara Africa)
All RELATIVE TO CULTURE
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The moral question of what is right or appropriate poses many dilemmas for domestic marketers. Even within a country, ethical standards are frequently not defined or always clear. The problem of business ethics is infinitely more complex in the international marketplace because value judgments differ widely among culturally diverse groups
Indeed, the meaning of the word corruption varies considerably around the world. In formerly communist countries where Marxism was an important part of the educational system for many, profits can be seen as a kind of corruption. What American managers view as essential others view as a sign of exploitation. Individualism so important to Americans can also be seen as a kind of corruption. The Japanese have an expression, “The nail that sticks up gets hammered down.” In India, many attribute the decline in the society to the rampant consumerism, such as that promoted on MTV. Of course, such rampant consumerism is what kept the American economy afloat right after the turn of the century. In China missionaries and religious movements are viewed by the government as being potentially dangerous and disruptive. Many in sub-Sahara Africa view Western intellectual property laws as a kind of exploitation that prevents treatment of AIDS for millions. During the 19971998 financial crisis many government leaders in Southeast Asia decried currency speculation as the worst kind of corruption.
Finally, remember the 2003 homogenization of Barbie, described at the beginning of this chapter. First, sales of Barbie declined worldwide after the global standardization. Second, parents and governments did react, and third, Mattel’s strategy boosted sales of its competitors. Multi-ethnic dolls were both designed with other cultures in mind.
Bribery – Variations on a Theme
Bribery and Extortion
Voluntary offered payment by someone seeking unlawful advantage is bribery
If payments are extracted under duress by someone in authority from a person seeking only what he are she is lawfully entitled to that is extortion
Subornation and Lubrication
Lubrication involves a relatively small sum of cash, a gift, or a service given to a low-ranking official in a country where such offerings are not prohibited by law
Subornation involves payments designed to entice an official to commit an illegal act on behalf of the one offering the bribe
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While voluntarily offered payment by someone seeking unlawful advantage is bribery, on the other hand, it is extortion if payments are extracted under duress by someone in authority from a person seeking only what he or she is lawfully entitled to.
Another variation of bribery is the difference between lubrication and subornation. Lubrication involves a relatively small sum of cash, a gift, or a service given to a low-ranking official in a country where such offerings are not prohibited by law.
Subornation, on the other hand, generally involves giving large sums of money, frequently not properly accounted for, designed to entice an official to commit an illegal act on behalf of the one offering the bribe. Lubrication payments accompany requests for a person to do a job more rapidly or more efficiently; subornation is a request for officials to turn their heads, to not do their jobs, or to break the law.
Legal Environment
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Legal System
Basis of Legal Systems
Marketing Concerns
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Legal System
Basis of Legal Systems
Common Law
Anglo/American system
Interpretation
Code Law or Civil Law
Napoleonic Code ( Roman code, Hammurabi’s code)
Islamic Law
Shar’ia
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Legal System
Business Implications (some but not all)
Contracts
Trademark, patent and copyright protections
Taxation
Liability
Adjudication of disputes
Warranty and guarantees
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Legal System
International Law Enforcement
Domestic courts
Trans-border disputes
International disputes
Bottom line: expensive, therefore hard to win
International Agreements and organizations
Regional Trade Associations
WTO
