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The Political Environment:
A Critical Concern
Chapter 6
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
Learning Objectives
LO1
LO2
LO3
LO4
LO5
LO6
LO7
What the sovereignty of nations means and how it can affect
the stability of government policies
How different governmental types, political parties,
nationalism, targeted fear/animosity, and trade disputes can
affect the environment for marketing in foreign countries
The political risks of global business and the factors that affect
stability
The importance of the political system to international
marketing and its effect on foreign investments
The impact of political and social activists, violence, and
terrorism on international business
How to assess and reduce the effect of political vulnerability
How and why governments encourage foreign investment
6-2
World Trade Goes Bananas!
 The Banana wars and conflict between the U.S. and
Europe started out as a simple tariff dispute between
France and U.S. companies exporting bananas from
Latin American countries to France
 France gave preferential treatment for bananas
coming from its former colonies in the Caribbean and
Africa
 The rest is history and politics, see more here:
“Banana Wars”
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Sovereignty of Nations
 A sovereign state is independent and free from all
external control
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enjoys full legal equality with other states
governs its own territory
selects its own political, economic, and social systems and
has the power to enter into agreements with other
nations.
 Sovereignty refers to both the powers exercised by a
state in relation to other countries and the supreme
powers exercised over its own members
6-4
Stability of Government Policies

Radical shifts in government philosophy can occur
when:
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An opposing political party ascends to power
Pressure from nationalist and self-interest groups
Weakened economic conditions
Bias against foreign investment or conflicts between
governments
6-5
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.
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Instability of Governments and Policies:
Political Reasons
 Some forms of government seem to be inherently
unstable
 Changes in political parties during elections can have
major effects on trade conditions
 Nationalism
 Animosity targeted toward specific countries
 Trade disputes
6-7
Forms of Government
 Democracy or market directed government ideology
 Communist governments
 Theocratic Republic
• Islamic Law countries where political parties can exist but
have little power
• The religious leader controls government and all
governmental decisions
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Political Parties
 Be knowledgeable about the philosophies of all
major political parties and their attitudes towards
trade
6-10
Nationalism
 Nationalism refers to feelings of national pride and
unity
• Feelings of nationalism are manifested by:
• Disaster (e.g. 9/11)
• War
• Recession
• Call to “buy our country’s products only,” e.g., “Buy
American”
• Restrictions on imports, restrictive tariffs, and other
barriers to trade
6-11
Targeted Fear and/or Animosity
Nationalism
• Targets all foreign
countries
Animosity
• Targets specific nations
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Trade Disputes: Examples
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Undervalued Chinese currency (ongoing problem)
Ban on beef imports into Japan
Chinese subsidies in apparent violation of WTO rules
Farm subsidies in developed countries
AIRBUS–Boeing battle over subsidies
6-13
Political Risks of Global Business
Confiscation
Expropriation
Domestication
6-14
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
Domestication
• occurs when the government mandates local ownership and
greater national involvement in a foreign company’s
management
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Economic Risks
 International firms face a variety of economic risks
 Governments can impose restraints on business
activity to:
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Protect national security
Protect an infant industry
To conserve scarce foreign exchange
Raise revenue
Retaliate against unfair trade practices
6-16
Economic Risks
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Exchange Controls
Local Content Laws
Import Restrictions
Tax Controls
Price Controls
Labor Problems
6-17
The consequences of the U.S. embargo of Cuba: 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 Sanctions:
Examples from the U.S.
 Cuban crisis of the 1960s
 The Iranian revolution in the 1980s
 The Persian Gulf War in the 1990s
6-19
Political and Social Activists
The most entertaining protest technique
was pioneered by French farmers. French
farmers like to throw their food. Here they
tossed tomatoes and such at McDonald’s;
they’ve also lobbed lamb chops at their
own trade ministers.
6-20
Political Activism Apparently they pay attention in Taiwan. Most recently,
fishermen pitched perch in Taipei to protest the Japanese fishing fleet’s
presence in their waters.
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6-22
Violence, Terrorism and War
 Violence and terrorism may be closely related to
politics
 War-torn regions are areas of concern for foreign
businesses to operate in
6-23
Cyberterrorism and Cybercrime
 Cyber terrorism is in its infancy
 The internet provides a vehicle for terrorist and
criminal attacks
 Internet Virus attacks can disrupt businesses
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“I Love You”
Melissa
Slammer
Goner Worm
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Assessing Political Vulnerability
 No absolute guidelines
 No specific guidelines to determine a product’s
political vulnerability
 Countries seeking investments in high-priority
industries may well excuse companies from taxes,
customs duties, quotas, exchange controls, and other
impediments to investment.
6-25
Politically Sensitive Products and Issues
 Politically sensitive products include those that have
an effect on:
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the environment,
exchange rates
national and economic security
public health, e.g., genetically modified (GM) foods
6-26
Forecasting Political Risk
 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
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6-28
Lessening 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
creates jobs, and/or
makes tax contributions
6-29
Lessening Political Vulnerability
MNC’s can use the following strategies to
minimize political vulnerability and risk:
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Joint Ventures
Expanding the Investment Base
Licensing
Planned Domestication
Political Bargaining
Political Payoffs
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Government Encouragement
 Governments can both encourage and discourage
foreign investment
 The key reason to encourage foreign investment is to
accelerate the country’s economic growth
 During the recent economic downturn, the U.S.
government has been particularly creative in helping
promote American exports
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