CH 6 with doc notes

Risks in International business

Cross
cultural

Commercial Risks in Political /

/ trade
barriers
international country
business

Currency &
economic
 Political Risks of Global Business: “Host country
environment”
• Risks can range from confiscation, the harshest, to many lesser but still significant government rules and regulations, such as
exchange controls, import restrictions, and price controls that directly affect the performance of business activities
• Of all the political risks, the most costly are those actions that result in a transfer of equity from the company to the
government, with or without adequate compensation.

 Only included in the doc notes:

1. General instability: revolution, invasion and terrorism.
2. Ownership risk: risk of property & expats lives (employees cultural) ‫خايفيني بعتو ا لعما بل تعهوم ا السبابامنيه‬
3. Operating risks: interference in the ongoing operations. “like the closure of the Suez canal.
4. Transfer risk: prevent firms from moving capital between countries & back home.
Confiscation, Expropriation, and Domestication:
 Confiscation: is he most severe political risk, it is the seizing of a company’s assets without payment.
 Expropriation: is less drastic, but still severe, is where the government seizes an investment but makes some
reimbursement for the assets.
 Domestication = Nationalization is the third type of risk which occurs when host countries gradually cause the transfer of
foreign investments to national control and ownership through a series of government decrees that mandate local
ownership and greater national involvement in a company’s management
• The ultimate goal of domestication is to force foreign investors to share more of the ownership, management, and profits
with nationals.
• Expropriation and nationalization have often led to nationalized businesses that were inefficient, technologically weak, and
noncompetitive in world markets.
• Risks of confiscation and expropriation appear to have lessened over the last two decades.
• Today, countries often require prospective investors to agree to share ownership, use local content, enter into labor and
management agreements, and share participation in export sales as a condition of entry; in effect, the company has to
become domesticated as a condition for investment.
• Countries now view foreign investment as a means of economic growth.
• The world has become more economically interdependent.
• It has become obvious that much of the economic success of countries such as South Korea, Singapore, and Taiwan is tied to foreign
investments.
• Nations throughout the world that only a few years ago restricted or forbade foreign investments are now courting foreign
investors as a much needed source of capital and technology.
• Privatization to encourage FDI:
• Countries have begun to privatize telecommunications, broadcasting, airlines, banks, railroads, and other nationally
owned companies as a means of enhancing competition and attracting foreign capital.
• The benefits of privatizing are many.
• EX: In Mexico privatization of the national telephone company resulted in almost immediate benefits when the
government received hundreds of millions of dollars of much needed capital from the sale and immediate investment in
new telecommunications systems.
• Ironically, many of the businesses that were expropriated and nationalized in earlier periods are now being privatized.

 Forecasting Political Risk:

• Risk assessment: assessing the amount of risk a company can take.
• Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political
events and their potential influence on current and future international business decisions.
• Number of firms are employing systematic methods of measuring political risk.
• the greatest risk to international marketers is the threat of the government actually failing, causing chaos in the streets
and markets.
• Foreign Policy magazine uses 12 criteria to rank countries on its “Failed States Index.” The list of criteria includes
demographic pressures, human flight, uneven development, and the like.
• For a marketer doing business in a foreign country, a necessary part of any market analysis is an assessment of the
probable political consequences of a marketing plan, since some marketing activities are more susceptible to political
considerations than others.
 Lessening Political Vulnerability:
• Although a company cannot directly control or alter the political environment of the country within which it operates, a
specific business venture can take measures to lessen its degree of susceptibility to politically induced risks.
• Foreign investors frequently are accused of exploiting a country’s wealth at the expense of the national population and for
the sole benefit of the foreign investor.
• Companies must manage external affairs in foreign markets to ensure that the host government and the public are aware
of their contributions to the economic, social, and human development of the country.
• Relations between governments and MNCs are generally positive if the investment:
(1) improves the balance of payments by increasing exports or reducing imports through import substitution.
(2) uses locally produced resources
(3) transfers capital, technology, and/or skills
(4) creates jobs
(5) makes tax contributions.
(6) CSR: many MNCs strive to benefit countries through social programs “helping schools, universities, water supply, etc..”
(7) Joint ventures.
(8) Expanding the investment base: including banks and several investors from the host company in the financing operations.
(9)Licensing: eliminates almost all risks, effective especially when technology is unique & the risk is high.

• Companies that establish deep local roots and show by example, rather than meaningless talk, that their strategies are
aligned with the long-term goals of the host country stand the best chance of overcoming a less than positive image.
• In addition to corporate activities focused on the social and economic goals of the host country and good corporate
citizenship, MNCs can use other strategies to minimize political vulnerability and risk.
Joint Ventures:
• joint ventures can be with locals or other third-country multinational companies; in both cases, a company’s
financial exposure is limited.
• A joint venture with locals helps minimize anti-MNC feelings, and a joint venture with another MNC adds
the additional bargaining power of a third country.

Expanding the Investment Base:

• Including several investors and banks in financing an investment in the host.
• This approach has the advantage of engaging the power of the banks whenever any kind of government
takeover or harassment is threatened.
• This strategy becomes especially powerful if the banks have made loans to the host country; if the
government threatens expropriation or other types of takeover, the financing bank has substantial power
with the government.

 Licensing:
• A strategy that some fi rms find eliminates almost all risks is to license technology for a fee.
• Licensing can be effective in situations in which the technology is unique and the risk is high.
• Of course, there is some risk assumed, because the licensee can refuse to pay the required fees while
continuing to use the technology.
Planned Domestication:
• In those cases in which a host country is demanding local participation, the most effective long-range solution is planned
domestication.
• Planned domestication is a gradual process of participating with nationals in all phases of company operations.
• This method is not the preferred business practice, but the alternative of government-initiated domestication can be as
disastrous as confiscation.
• Planned domestication can be profitable and operationally expedient or convenient for the foreign investor.

 Political Bargaining:
• Multinational companies clearly engage in lobbying and other sorts of political bargaining to avoid potential political risks.

 Political Payoffs:
• An attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company (MNCs).
• Political payoffs, or bribery, have been used to lessen the negative effects of a variety of problems.
• Paying heads of state to avoid confiscatory taxes or expulsion, paying fees to agents to ensure the acceptance of sales
contracts, and providing monetary encouragement to an assortment of people whose actions can affect the effectiveness of
a company’s programs are decisions that frequently confront or challenge multinational managers and raise ethical
questions.
CH 7 with doc notes

Note: el part bta3 International

Conventions (slide 12 & 13) kbeer awy
wa lsa msh mot2kda 3lana eh feh fa
hs2al el doc wa a2olko
 Protection of Intellectual Property Rights:
• intellectual or industrial properties are among the more valuable assets a company may possess.
• Normally, property rights can be legally protected to prevent other companies from infringing on such assets.

Counterfeiting and Piracy:

• Counterfeit and pirated goods come from a wide range of industries—apparel, automotive parts, agricultural chemicals,
pharmaceuticals, books records, films, computer software, mobile & etc..
• counterfeit CDs, toys, and similar products cost companies billions of dollars in lost revenue and have the potential of
damaging the product’s brand image, the counterfeiting of pharmaceuticals can do serious physical harm.
• Ex: “just for reading”
• In Colombia, investigators found an illegal operation making more than 20,000 counterfeit tablets a day of the flu drug Dristan, a generic
aspirin known as Dolex, and Ponstan 500, a popular painkiller made by Pfizer. The counterfeited pills contained boric acid, cement, floor
wax, talcum powder, and yellow paint with high lead levels, all used to replicate the genuine medications’ appearance.
• Another problem is collusion between the contract manufacturer and illegitimate sellers.
• Counterfeiting and piracy of intellectual property constitute outright theft
• There is a possibility of legally losing the rights to intellectual property because of inadequate protection of property rights and/or a
country’s legal structure.
• Some critics argue that MNCs have pushed the current intellectual property regime too far in favor of the firms.
• The critics suggest that the so-called tight rein the firms hold on the production of intellectual property has actually served to limit
creativity and the associated benefits to the people that the intellectual property (IP) laws are intended to serve.
Inadequate Protection:
• The failure to protect intellectual property rights adequately in the world marketplace can lead to the legal loss of
rights in potentially profitable markets.
• Patents, processes, trademarks, and copyrights are valuable in all countries.
• There have been many cases in which companies have legally lost the rights to trademarks and have had to buy back
these rights or pay royalties for their use.
• Many businesses fail to take proper steps to legally protect their intellectual property.
• They fail to understand that some countries do not follow the common-law principle that ownership is established by
prior use or to realize that registration and legal ownership in one country does not necessarily mean ownership in
another.

 Prior Use versus Registration:

• In the United States, a common-law country, ownership of IP rights is established by prior use —whoever can
establish first use is typically considered the rightful owner.
• In many code-law countries, however, ownership is established by registration—the first to register a trademark or
other property right is considered the rightful owner. “like in EGYPT”
• For example, a trademark in Jordan belongs to whoever registers it first in Jordan. Thus you can find “McDonald’s”
restaurants, “Microsoft” software, and “Safeway” groceries all legally belonging to Jordanians.
 International Conventions:
• Many countries participate in international conventions designed for mutual recognition and protection of intellectual
property rights.
• There are three major international conventions:
1. The Paris Convention for the Protection of Industrial Property, commonly referred to as the Paris Convention, includes the
United States and 100 other countries.
2. The Inter-American Convention includes most of the Latin American nations and the United States.
3. The Madrid Arrangement, which established the Bureau for International Registration of Trademarks, includes 26
European countries.
• The World Intellectual Property Organization (WIPO) of the United Nations is responsible for the promotion of the
protection of intellectual property and for the administration of the various multilateral treaties through cooperation
among its member states.
• There are two multicountry patent arrangements have streamlined patent procedures in Europe.
• The first, the Patent Cooperation Treaty (PCT), facilitates the process for application for patents among its member
countries.
• It provides comprehensive coverage, in that a single application filed in the United States supplies the interested party with
an international search report on other patents to help evaluate whether or not to seek protection in each of the countries
cooperating under the PCT.
• The second, the European Patent Convention (EPC), established a regional patent system allowing any nationality to file a
single international application for a European patent.
• Companies have a choice between relying on national systems when they want to protect a trademark or patent in just a
few member countries and applying for protection in all 27 member states.
• Trademark protection is valid for 10 years and is renewable; however, if the mark is not used within 5 years, protection is
forfeited.
• Once the patent or trademark is approved, it has the same effect as a national patent or trademark in each individual
country designated on the application.
• The Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement, a major provision of the World Trade
Organization, is the most comprehensive multilateral agreement on intellectual property to date.
• TRIPs sets standards of protection for a full range of intellectual property rights that are embodied in current international
agreements.
• Once a trademark, patent, or other intellectual property right is registered, most countries require that these rights be
used and properly policed.
• The United States is one of the few countries in which an individual can hold a patent without the patented entity being
manufactured and sold throughout the duration of the patent period.
• Other countries feel that in exchange for the monopoly provided by a patent, the holder must share the product with the
citizens of the country.
• If patents are not produced within a specified period, usually from one to five years (the average is three years), the
patent reverts to public domain.
• This rule is also true for trademarks; products bearing the registered mark must be sold within the country, or the
company may forfeit its right to a particular trademark.
 Other Managerial Approaches to Protecting Intellectual Property:
(1) prevention, that is, engage local representation and diligently register IP with the appropriate agencies.
(2) Pursue negotiation and alternative dispute resolution.
(3) Complain to the Chinese authorities.
(4) Complain to the U.S. government and World Trade Organization (WTO).