Chapter 6

The Political Environment:

A Critical Concern

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 Learning Objectives 1 of 2
6-1 What the sovereignty of nations means and how it
can affect the stability of government policies
6-2 How different governmental types, political parties,
nationalism, targeted fear/animosity, and trade
disputes can affect the environment for marketing
in foreign countries
6-3 The political risks of global business and the factors
that affect stability

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 Learning Objectives 2 of 2
6-4 The importance of the political system to
international marketing and its effect on foreign
investments
6-5 The impact of political and social activists, violence,
and terrorism on international business
6-6 How to assess and reduce the effect of political
vulnerability
6-7 How and why governments encourage foreign
investment

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 The Sovereignty of Nations
Sovereignty
• Powers exercised by state in relation to other countries
• Supreme powers exercised over country’s own members
• Characteristics of a sovereign state
• Enjoys full legal equality with other states
• Independent and free from all external control
• Governs its own territory
• Selects own political, economic, and social systems
• Has power to enter into agreements with other nations

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 Stability of Government Politics 1 of 5
Political Climate
• The ideal climate for multinational firm is stable and
friendly government
• Causes of instability
1. Inherent instability
2. Political shifts during elections impact trade conditions
3. Nationalism
4. Animosity toward specific countries
5. Trade disputes

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 Chaotic Conditions

© Olivier Laban-Mattei/AFP/Getty Images

On the first Sunday after the quake, at 9:00 a.m., the streets of downtown
Port-au-Prince were filled with people scavenging. Onlookers add to the
crowd. Eight years after the 2010 earthquake, the misery in Haiti continues.

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 Stability of Government Politics 2 of 5
Forms of Government
• Monarchy/dictatorship – rule by one
• Aristocracy/oligarchy – rule by few
• Democracy – rule by many

Sovereign States
• Most have nominally representative governments with
universal suffrage
• Some countries backsliding from democracy toward autocracy

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 Exhibit 6.1 A Sampling of Government Types

Country Government Type

Afghanistan Presidential Islamic Republic
Bosnia and Herzegovina Emerging federal democratic republic
Canada Confederation with parliamentary democracy
Cuba Communist state
Iran Theocratic republic
Libya Transitional government
Saudi Arabia Absolute monarchy
Sudan Presidential republic
United States Constitutional federal republic

©McGraw-Hill Education Source: http://www.cia.gov/cia/publications/factbook/, 2012.

 Stability of Government Politics 3 of 5
Political Parties
• Important for international marketer to:
• Know philosophies of all major political parties within a country
• Dominant party will alter attitudes and overall business climate

• Know direction each party is likely to take after shift in power

• Understand all aspects of the political landscape
• Be able to respond to drastic policy shifts

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 Iran Parliamentary Election

©Abedin
Taherkenareh/EPA/REX/Shutterstock
An Iranian woman passes in front of an election billboard displaying Iranian Supreme
Leader Ayatollah Ali Khamenei casting his own vote in the city of Karaj in the Alborz
Province in central Iran. Voting is often done in mosques or schools. As mandated by
law, women and men wait in separate lines to cast their ballots. The current
government also specifies the public dress of the woman pictured.
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 Stability of Government Politics 4 of 5
Nationalism
• Intense feeling of national pride and unity
• National interest and security more important than international
relations
• Minor harassment and controls of foreign investment are
supported
• Restrictions on imports, tariffs, other barriers to trade
• Encouragement of citizens to buy domestic products only

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 Stability of Government Politics 5 of 5
Targeted Fear and/or Animosity
• Important distinction
• Nationalism: directed generally to all foreign countries
• Targeted animosity: directed toward a particular country

• National well-being most important

Trade Disputes
• WTO dispute resolution process

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 Political Risks of Global Business 1 of 6
Confiscation
• Seizing of a company’s assets without payment

Expropriation
• Government seizes investment but makes some
reimbursement for the assets
• Investment sometimes becomes government-run entity

Domestication
• Host country gradually gains control of investment
• Series of government decrees that mandate local ownership and
national involvement in company’s management

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 Political Risks of Global Business 2 of 6
Economic Risks
• Exchange controls
• Local-content laws
• Import restrictions
• Tax controls
• Price controls
• Labor problems

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 Political Risks of Global Business 3 of 6
Political Sanctions
• Nations can boycott others, stopping all trade
• Possible to boycott or issue sanctions against trade of
specific products
• Sanctions are almost always unsuccessful at reaching goals

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 The Consequences of the U.S. Embargo of Cuba
© John
Graham

© John Graham
A relatively new Chinese Chery Q (red provisional plate), and one of the newest
American cars you can find on the island, a 1957 Chevy (yellow citizen’s plate),
certainly with a refurbished engine. A variety of other European and Asian
brands ply the streets of Havana, almost all recent models. No new American
models are in sight.

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 Political Risks of Global Business 4 of 6
Political and Social Activists (PSAs) and
Nongovernmental Organizations (NGOs)
• PSAs participate in peaceful or violent acts to effect change
• Seek to change behavior of governments and corporations
• Many focus on broad issue of globalization
• Demonstrations against the World Bank and the IMF in Seattle

• The Internet and cell phones have become tools of PSAs

• NGOs are involved in protests, lobbying, and collaborations

with governments

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 Political Risks of Global Business 5 of 6
Violence, Terrorism, and War
• Peaceful protests often turn violent
• Thousands of terrorist attacks each year around world
• Multinationals are often targeted
• Embarrasses government and its relationship with firms
• Generates funds by kidnapping executives
• Inflicts terror within country

• Most U.S. attacks have been against businesses

• Need to consider proximity of the violence and advice of local and
foreign stakeholders

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 Political Disaster Strikes Kenya

Shutterstock
©EPA/REX/
In the Nairobi slum of Kibera, supporters of opposition leader Raila Odinga
tear up a key railway that ran from the coast to Uganda. As many as 12 people
were killed in the associated clashes. Of course, this destruction will do great
damage to commerce and progress to all the countries in Eastern Africa.

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 Political Risks of Global Business 6 of 6
Cyberterrorism and Cybercrime
• Growing potential with rise of the Internet
• Can inflict real harm
• Viruses can spread and do damage quickly before being stopped

• Hard to determine the source of attack

• Reasons may be espionage, robbery, political punishment,
and potential national security attacks

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 Assessing Political Vulnerability 1 of 3
Some companies more vulnerable than others
• Vulnerable companies
• Subject to political attention
• May face unpredictable government restrictions

• Less vulnerable companies

• Often are in high-priority industry for host country
• Excused from taxes, duties, quotas, controls

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 Assessing Political Vulnerability 2 of 3
Politically Sensitive Products and Issues
• Generally perceived to have an effect on host country
• Environment
• Exchange rates
• National and economic security
• Welfare of people—particularly children
• Publicly visible
• Subject to public debate
• Associated with their country of origin

• Public health is often subject of public debate

• EU ban of hormone-treated beef for health safety continues
• The WTO claims no scientific basis for ban
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 Assessing Political Vulnerability 3 of 3
Forecasting Political Risk
• Firms attempt to predict political instability in foreign
country
• Evaluate influence of politics on international business decisions
• Estimate level of risk company is assuming in making investment

• Government failure greatest source of risk

• Causes chaos in streets and markets
• Foreign Policy magazine’s “Failed States Index”

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 Exhibit 6.5 20 Most Fragile States
(ranked in order of closest to failure)
1. South Sudan 11. Haiti
2. Somalia 12. Guinea
3. Central African Republic 13. Nigeria
4. Yemen 14. Zimbabwe
5. Sudan 15. Ethiopia
6. Syria 16. Guinea-Bissau
7. Democratic Republic of Congo 17. Burundi
8. Chad 18. Pakistan
9. Afghanistan 19. Eritrea
10. Iraq 20. Niger

©McGraw-Hill Education Source: Foreign Policy, “Fragile States Index,” 2016, online.
 Lessening Political Vulnerability 1 of 2
Many believe foreign investors are self-serving
• Exploit country’s wealth at expense of population
• Relations between governments and MNCs are generally
positive if the investment:
• Improves country’s balance of payments
• Uses locally produced resources
• Transfers capital, technology, and skills
• Creates jobs
• Makes tax contributions

• Corporate philanthropy

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 Lessening Political Vulnerability 2 of 2
Strategies to reduce political vulnerability and risk
• Joint ventures
• Expanding the investment base
• Licensing and franchising
• Planned domestication
• Political bargaining
• Political payoffs (bribery)

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 Political and Economic Aid in Action, Where
Everybody Wins

© John Graham
The Japanese government has paid for the construction of a new highway that
connects key safari tourism areas in Tanzania. Foreign tourism becomes more efficient,
comfortable, and profitable for the Tanzanian company (and others) pictured—Kibo is
one of the best in the country. The Japanese designers, consultants, and contractors
involved make money on the work. And the road ultimately pays for itself in the form
of lower warranty expenses on the armada of Toyota Land Cruisers that regularly ply
the path between the Makuyuni and Ngorongoro animal preserves.

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 Government Encouragement 1 of 2
Reasons a government encourages foreign investment:
• Accelerate development of economy
• Create local employment
• Transfer technology
• Generate export sales
• Stimulate growth and development of local industry
• Conserve foreign exchange

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 Government Encouragement 2 of 2
U.S. government and other agencies help companies
seek opportunities worldwide
• Department of Commerce
• International Trade Administration
• Export-Import Bank
• Foreign Credit Insurance Association
• Agency for International Development
• Overseas Private Investment Corporation

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