Chapter 6
The Political Environment: A Critical Concern
PowerPoint presentation prepared by: Professor Rajiv Mehta Associate Professor of Marketing New Jersey Institute of Technology Newark, N.J.
Nationalism
• Nationalism refers to feelings of national pride and unity
Feelings of nationalism are manifested by: 1. Call to “buy our country’s products only,” e.g., “Buy American” 2. Restrictions on imports, restrictive tariffs, and other barriers to trade
Reducing 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 resources transfers capital, technology, and/or skills
• • 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
6. How and why governments encourage foreign investment
Introduction
• The political environment of countries is a critical concern for the international marketer • International law recognizes the sovereign right of a nation to allow or deny foreign firms to conduct • 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 sovereign state is independent and free from all external control; enjoys full legal equality with other states; and governs its own territory
creates jobs, and/or
makes tax contributions
Reducing Political Vulnerability
MNC’s can use the following strategies to minimize ­political vulnerability and risk:
Other Political Risks of Global Business 1. Political Sanctions 2. Political and Social Activists
3. Violence and Terrorism
4. Cyberterrorism
Forecasting Political Risk
Joint Ventures Expanding the Investment Base
Licensing
Planned Domestication Political Payoffs
•
Domestication occurs when the government mandates local ownership and greater national involvement in a foreign company’s management
Economic Risks
• International firms face a variety of economic risks
2. The political risks of global business and the factors that affect stability
3. The importance of the political system to international marketing and its effect on foreign investments
McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Learning Objectives
1. What does the sovereignty of nations mean and how can it affect the stability of government policies, political parties and nationalism.
Economic Risks
• These economic risks are an important and recurring part of the political environment that few international companies can avoid
1)Exchange controls 2)local content laws 3) Import restrictions 4) Tax controls 5) Price controls 6)Labor problems
Political Risks of Global Business
• Risks of global business include:
1. Confiscation, Expropriation, and Domestication 2. Economic Risks, 3. Other political risks
Chapter Learning Objectives
4. The impact of political and social activists, violence and terrorism on international business
5. Assessing and reducing the effect of political vulnerability
Confiscation, Expropriation, and Domestication
•
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
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3. Weakened economic conditions. 4. Bias against foreign investment or conflicts between governments
Stability of Government Policies
• • The stability or instability of prevailing government policies is a major concern of foreign businesses A change in government, whether by election or coup, does not always mean a change in the level of political risk • Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well