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The Political Environment: A Critical Concern
Chapter 6 by Professor Riaz Khan
.
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Chapter Learning Objectives
1. What does the sovereignty of nations mean and how can it affectthe stability of government policies, political parties and
nationalism.
2. The political risks of global business andthe factors that affect stability
3. The importance of the political system to international marketingand its effect on foreign investments
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Chapter Learning Objectives
4. The impact of political and social activists, violence and
terrorism on international business
5. Assessing and reducing the effect of politicalvulnerability
6. How and why governments encourage foreign investment
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Introduction
The political environment of countries is a critical
concern for the international marketer
International law recognizes the sovereign right ofa nation to allow or deny foreign firms to conduct
Sovereignty refers to both the powers exercisedby a state in relation to other countries and thesupreme powers exercised over its own members
A sovereign state is independent and free from allexternal control; enjoys full legal equality withother states; and governs its own territory
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Stability of Government Policies
Q: Radical shifts in government philosophy can occur when:
1. An opposing political party ascends topower
2. Pressure from nationalist and self-interestgroups
3. Weakened economic conditions.4. Bias against foreign investment or
conflicts between governments
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Stability of Government Policies
The stability or instability of prevailing government policies isa major concern of foreign businesses
A change in government, whether by election or coup, does notalways mean a change in the level of political risk
The ideal political climate for a multinational firm to conductbusiness is a stable, friendly government
Be knowledgeable about the philosophies of all major politicalparties and their attitudes towards trade
Conversely, radical changes in
policies toward foreign businesscan occur in the most stablegovernments as well
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Nationalism
Nationalism refers to feelings of national pride and unity
Feelings of nationalism are
manifested by:1. Call to buy our countrys
products only, e.g., BuyAmerican
2. Restrictions on imports,
restrictive tariffs, and otherbarriers to trade
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Political Risks of Global Business
Risks of global business include:
1. Confiscation, Expropriation,and Domestication
2. Economic Risks, and
3. Price Controls
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Confiscation, Expropriation, and Domestication
Confiscation, the most severe political risk, is the seizing of a
companys assets without payment
Expropriation is where the governmentseizes an investment, but some
reimbursement for the assets is made;often the expropriated investment isnationalized to become a government runentity
Domestication occurs when the government mandates localownership and greater national involvement in a foreigncompanys management
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Economic Risks
International firms face a variety of economic risks
Governments can impose restraints
on business activity to:a) Protect national security
b) Protect an infant industry
c) To conserve scarce foreignexchange
d) Raise revenue
e) Retaliate against unfair tradepractices
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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 eventsfor use in predicting future problems
Interpret the data gathered by a companysintelligence network in order to adviseand forewarn corporate decision makersabout political and economic situations
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Other Political Risks of Global Business
2. Political and Social
Activists
3. Violence andTerrorism
4. Cyberterrorism
1. Political Sanctions
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Assessing Political Vulnerability
No absolute guidelines to assess if a firm faces political risks
No specific guidelines to determine a products politicalvulnerability, but there are some generalizations
Politically sensitive products includethose that:
1. effect on the environment,
2. exchange rates
3. national and economic security
4. affect public health, e.g., geneticallymodified (GM) foods
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ReducingPolitical Vulnerability
Relations between governments and MNCs are generallypositive if the investment:
improves the balance of payments by increasingexports or reducing imports through importsubstitution
uses locally produced resources
transfers capital, technology, and/or skills
creates jobs, and/or
makes tax contributions
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Reducing Political Vulnerability
MNCs can use the following strategies to minimize politicalvulnerability and risk:
Joint Ventures
Expanding the Investment Base
Licensing
Planned Domestication
Political Payoffs
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