4 Political and Regulatory Climate Learning Objectives • List and explain the political motivations behind government actions that promote or restrict international marketing. Identify pressure groups that affect international marketing. • Discuss specific government actions salient to international marketing, such as boycotts and takeovers. • List and compare the four basic legal traditions that marketers encounter worldwide. • Cite examples illustrating how national laws can vary and change. • Differentiate between the steps involved in managing political risk and those involved in planning for regulatory change. Host Country Defined A host country is any country that contains an operational unit (marketing, sales, manufacturing, R&D) of an international company. Home Country • A home country is the country where a multinational enterprise is headquartered. • A home country expects multinational enterprises based within its borders to demonstrate social responsibility Political Motivations of Host Countries • • • • • • Self-preservation Security Prosperity Prestige Ideology Cultural identity Self-Preservation • Sovereignty concerns • Restricted markets – Media – Airspace and landing rights National Security • Defense industry • Telecommunications Royalty Free World Host Government Goals and Policy Actions Fostering National Prosperity • Employment • Exports Promoting Ideology • Self-reliance – “Juche” • Non-alignment • Communism in China - Threatened by market liberalization? Protecting Cultural Identity • Resisting foreign brand names • Protecting cultural content in movies and TV programming Host Country Pressure Groups • • • • Labor unions Political parties Environmental groups Local business community Host Country Actions • Government subsidies • Ownership restrictions • Operating conditions – Work permits – Local content requirements The new restrictions come from legislation passed in 2019 that says foreigners can own no more than 49 percent of any company. When the law was first enacted, Iraqi policymakers indicated that exemptions would be given. https://www.iraqoilreport.com/news/foreign-investors-recoil-as-iraq-restrictscompany-ownership-44073 NPR Segment: Chinese Oil Company Pulls Unocal Bid • The Chinese oil company CNOOC says it has abandoned its controversial attempt to buy Unocal, a California-based oil producer. CNOOC says a hostile political environment doomed its bid. – Listen to it at http://www.npr.org/templates/story/story.php?storyId= 4782101 Operating Conditions • Operating conditions can also be affected by what governments fail to do – Kidnappings! Boycotts of Firms • Government boycotts – Arab Boycott • Ad-hoc consumer boycotts – The new Arab Boycott Takeovers • Takeovers = Host-government actions that result in a firm’s loss of ownership or direct control • An expropriation is a formal seizure of an operation • A confiscation is an expropriation without compensation Examples of Expropriations In January 2010, Hugo Chavez expropriated 6 hypermarkets and 35 supermarkets owned by French Casino, because they raised prices after the Venezuelan currency devaluated. Later Chavez said he would consider a partnership with Casino. The Venezuelan government forced Banco Santander to sell their its stake in Banco de Venezuela for $1.05 billion in mid 2009. Home Country Actions • Guided by the same six interests as host countries – U.S. embargo of Cuba – U.S. anti-Arab boycott legislation • Often home countries seek multilateral actions to increase their bargaining power Home Country Pressure Groups • Firms come under pressure at home for their – Choice of markets – Methods of doing business • Massachusetts passes law to deny state contracts with firms operating in Myanmar International Legal Tradition • • • • • Common law Civil (or code) law Islamic law Socialist law Mix Legal System Royalty Free World Legal Evolution • Product liability • Bankruptcy • Regulating cyberspace Regulatory Environments Vary Among Countries ESTABLISH A BUSINESS 153 days in Mozambique versus 3 days in Canada STEPS TO REGISTER COMMERCIAL PROPERTY 21 steps in Nigeria versus 3 steps in Finland New Zealand, USA, Singapore = Least regulated countries Heavy Regulation in Japan • Steps to Qualify as an Official University – – – – Own your own building Have your own sports field and gym Operate on <25% debt-equity ratio Get government approval for new programs Attitudes Toward Rules • Attitudes toward rules are affected by two criteria: 1. Level of power distance 2. Type of human nature orientation Human Nature Orientation (HNO) • Positive HNO – assume people can be trusted to obey the rules • Negative HNO – assume people cannot be trusted to obey the rules Power Distance LOW HNO + HIGH _ Laws challenged to a certain degree Pragmatic rules; most people respect and obey Italy, France USA Formal, unrealistic rules. Often discrepancy between law and what people actually do or what is enforced by authorities Society does not trust people to obey laws. Compliance is insured with explicit sanctions Many developing countries Germany, Switzerland Another Perspective on Attitudes Toward Rules • Tight cultures – many rules, norms and standards for correct behavior. – Criticize and punish rule breakers severely. – More isolated and less influenced by other cultures • Loose cultures – few rules, norms and standards for correct behavior Power distance refers to the way in which power is distributed and the extent to which the less powerful accept that power is distributed unequally. Put simply, people in some cultures accept a higher degree of unequally distributed power than do people in other cultures. Predicting Regulatory Change • Analyze economic basis of changes • Listen for signals Managing Regulatory Change • Alter Bargain to get government to change regulations • Avoid Move to bypass the impact of the regulation • Accede Comply • Ally Avoid some risks by seeking strategic alliances Strategic Approaches to Regulatory Change Political Risk Political risk is the possibility that an unexpected and drastic change due to political forces will result in adverse circumstance for business operations Regulatory Change Versus Political Risk • Regulatory Change – More moderate and predictable changes in the business environment • Political risk – More unexpected and drastic changes Politically Risky Countries Not Risky USA United Kingdom Switzerland Canada Germany France Sweden Japan Singapore Source: Euromoney Moderate Poland Hungary China Tunisia Mexico Egypt Thailand India Turkey Risky Afghanistan Iraq Congo Sudan Georgia Cuba Armenia Russia A Typology of Political Risk Government Risks Instability Risks Sabotage Firm-Specifi Discriminatory c Risks regulations Kidnappings “Creeping” expropriation Firm-specific boycotts Breach of contract Country-Le Mass nationalizations vel Risks Regulatory changes Currency inconvertibility Source: Wagner, Daniel. 2000. “Defining ‘Political Risk’” http://www.irmi.com/Expert/Articles/2000/Wagner10.aspx Mass labor strikes Urban rioting Civil wars Managing Political Risk • Fighting the battle on two fronts: 1. Perfect intelligence systems to avoid being caught unaware when changes disrupt operations. 2. Develop risk-reducing strategies that help limit their exposure, or the losses they would sustain, should a sudden change occur Managing Political Risk (cont.) • Questions companies should ask: 1. How stable is the host country’s political system? 2. How strong is the host government’s commitment to specific rules of the game, given its ideology and power position? 3. How long is the government likely to remain in power? Managing Political Risk (cont.) • Questions companies should ask: 1. If the present government is succeeded by another, how will the specific rules of the game change? 2. What would be the effects on our business of any unexpected changes in the specific rules of the game? 3. In light of those effects, what decisions and actions should we take now? Political Risk Intelligence Systems • The Evolution of the Political Risk Industry – Grand Tours Approach – Old Hands Approach – Political Risk Firms Business Environment Risk Intelligence • • • • Political Risk Index Operations Risk Index Remittance and Repatriation Factor Composite Score • BERI S.A. is the private source for comprehensive ratings, analyses, and forecasts for over 140 countries. http://www.beri.com Business Environment Risk Intelligence (cont.) • Political Risk Index – Measures (Examples) • Internal Causes of Political Risk – Fractionalization of political spectrum and power of factions – Mentality, including xenophobia, nationalism, corruption, nepotism, willingness to compromise – Fractionalization of language, ethnic, or religious groups – Social conditions, e.g., population density and wealth distribution – Restrictive (coercive) measures required to retain power – Organization and strength of forces for a radical government • External Causes of Political Risk – Dependence on and/or importance to a major hostile power – Negative influence of regional political forces • Symptoms of Political Risk – Societal conflict involving demonstrations, strikes and street violence – Instability as perceived by non-constitutional changes, assassinations, and guerilla wars – Method • 100 experts rate 0-7; sum to 70 • Prohibitive risk (0-39 points), high risk (40-54 points), moderate risk (55-60 points), low risk (70-100 points) Business Environment Risk Intelligence (cont.) • Operations Risk Index – Measures (Examples) • • • • • • • • • • Policy continuity Currency convertibility Labor costs/production Short-term credit; Long-term loans and venture capital Enforcement of contracts Attitudes toward foreign investors and profits Degree of privatization Monetary inflation; Balance of payments Communication and transportation Bureaucratic delays – Method • 100 experts rate 0-7; sum to 70 • Prohibitive risk (0-39 points), high risk (40-54 points), moderate risk (55-60 points), low risk (70-100 points) Business Environment Risk Intelligence (cont.) • Remittance and Repatriation Factor – Measures (Examples) • • • • Legal framework (20%) Foreign exchange generation (30%) Accumulated international reserves (30%) Foreign debt assessment (20%) – Method • “Produced by a large computer program that manipulates over 14,000 cells of data and makes hundreds of calculations” Control Risks Group • • • • Planning Implementing Managing Solving Control Risks is an independent, specialist risk consultancy. They provide advice and services that enable clients to accelerate opportunities and manage strategic and operational risks. With 27 offices worldwide Control Risks offers consultancy, advice and assistance to a diverse range of corporate, governmental and non-governmental clients worldwide. http://www.crg.com Risk Reduction Strategies Risk Reduction Strategies • Sharing Risks – Joint ventures, alliances, licensing, franchising, management contracts, countertrade – Project finance • Minimizing Assets at Risk • Insuring Against Risks – Governments (e.g., OPIC) – Private firms OPIC • Formed by US government to facilitate the participation of private US firms in the development of less-developed countries • Offers project financing and political risk insurance in 100 developing countries • Covers losses caused by currency inconvertibility, expropriation, and bellicose activities, such as war and revolution www.opic.gov Selected OPIC Projects Terrorism Affects International Marketing • Starbucks pulled out of Israel because they feared a terrorist attack • GE criticized by a senator for taking “blood money” from a state that supports terrorism (Iran) • Global tourism and education are affected – Americans spend more on domestic and nearby tourism; less spent on overseas tourism. Fewer Middle Easterners are visiting America. – Tighter visa controls in America have created an opportunity for non-U.S. countries to increase their share of international students • Governments and companies spend lots of money to protect infrastructure, plant, equipment, and people