Chapter 6

The Political
Environment: A
Critical Concern

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Learning Objectives

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
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
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
A Great Moment for Free Trade

President Barack Obama, Italian Prime Minister Silvio Berlusconi,

and Russian President Dmitry Medvedev mugged for the camera
during a group photo after a G20 summit in London aimed at
fixing the crises-wracked global economy.

©Olivier Hoslet/EPA/REX/Shutterstock
A Different Approach

President Trump’s combative approach to international

relations stands in contrast to past presidents. To accompany
his abrogation of the Paris Climate Accord and the major trade
agreements with Asia and Europe, President Trump announces
steep tariff barriers on imports of solar panels and washing
machines, targeting Chinese and South Korean companies.

©ASSOCIATED PRESS
Stability of Government Politics 1 of
5

Political Climate
• 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
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
Chaotic Conditions

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.
© Olivier Laban-Mattei/AFP/Getty Images
Figure 6.1 A Sampling of Government
Types

Country Government Type

Afghanistan Presidential Islamic Republic
Bosnia and Emerging federal democratic
Herzegovina 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
United Kingdom Constitutional monarchy
Source: https://www.cia.gov/library/publications/resources/the-world-factbook/, 2018.
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

Iran Parliamentary Election

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.
©Abedin Taherkenareh/EPA/REX/Shutterstock
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
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
Political Risks of Global Business 1 of
7

Confiscation Seizing of a company’s assets without

payment
Expropriatio Government seizes investment but
n makes some reimbursement for the
assets
•Investment sometimes becomes
government-run entity
Domesticatio Host country gradually gains control of
n investment
•Series of government decrees that
mandate local ownership and national
involvement in company’s
management
Political Risks of Global Business 2 of
7

Economic Risks
Exchange When there is a shortage of foreign
controls exchange in the country and the
government restricts the spending in
foreign currency.
Local-content When countries often require a portion
laws of any product sold within the country to
have local content—that is, to contain
locally made parts.
Import Selective restrictions on the import of
restrictions consumer products, raw materials,
machines, and spare parts to force
foreign industry to purchase more
supplies within the host country and
thereby create markets for local
Political Risks of Global Business 3 of
7

Economic Risks continued

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,
often are subjected to price controls.
Labor In many countries, labor unions have
problems strong government support that they use
effectively in obtaining special concessions
from business.
Political Risks of Global Business 4
of 7

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
 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.
Political Risks of Global Business 5
of 7

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
Political Risks of Global Business 6
of 7

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
Political Disaster Strikes Kenya

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.
©EPA/REX/Shutterstock
Exhibit 6.2 U.S. State Department
Promulgates a New Country Advisory System

Country Advisory Level Date Updated

Level 1: Exercise
Albania June 18, 2018
Normal Precautions
Level 2: Exercise January 10,
France
Increased Caution 2018
Level 3: Reconsider January 10,
Honduras
Travel 2018
Afghanista Level 4: Do Not
July 9, 2018
n Travel

Source: https://travel.state.gov/content/travel/en/traveladvisories/traveladvisories.html/
Exhibit 6.3 Annual Worldwide Deaths
from State Battles

Source: Roser, M. War and peace, OurWorldInData.org, 2018.

The Berlin Wall

©Dave Moyer
The separation of East and West Germany famously came to an end
when the iconic Berlin Wall was torn down. Some pieces of the wall
still stand, serving as symbols of the country’s once divided history.
Political Risks of Global Business 7
of 7

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
Assessing Political Vulnerability 1 of
4

Some companies are 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
Assessing Political Vulnerability 2 of
4

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
Assessing Political Vulnerability 3 of
4

Politically Sensitive Products and

Issues
• 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
Assessing Political Vulnerability 4 of
4

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”
Figure 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 17. Burundi
Congo
18. Pakistan
8. Chad
19. Eritrea
9. Afghanistan
20. Niger
10. Iraq

Source: Foreign Policy, “Fragile States Index,” 2016, online.

Lessening Political Vulnerability 1 of
3

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
Lessening Political Vulnerability 2 of
3

Strategies to reduce political

vulnerability and risk
• Joint ventures
• Expanding the investment base
• Licensing/franchising
Lessening Political Vulnerability 3 of
3

Strategies to reduce political

vulnerability and risk
• Planned domestication
• Political bargaining
• Political payoffs (bribery)
 Political and Economic Aid in Action,
Where Everybody Wins

The Japanese government has paid for the construction of a new

highway that connects key safari tourism areas in Tanzania.
© John Graham
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
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
 Exhibit 6.5 Examples of Government
Incentives for Renewable Energy Projects

Australia: Investment funds for R&D and production projects,

subsidies, tax incentives, and feed-in tariffs.
Brazil: Tax incentives (particularly related to biofuels),
operating subsidies, and feed-in tariffs for wind, biomass, and
hydro technology projects.
Japan: Feed-in tariffs for all renewable energy projects, green
investment tax incentives.
Mexico: Tax incentives for renewable energy projects,
government investments in renewable energy projects, also
funding for new technologies related to hydrocarbon pollution
reduction and remediation.
South Africa: Tax incentives for emission reductions, capital
and R&D allowances, grants and subsidies.
United Kingdom: Feed-in tariffs, renewable resource
mandates, tax exemptions, carbon tax floor, EU emissions
trading exemptions.
Source: KPMG International Cooperative, www.kpmg.com, accessed