Chapter 6
The Political Environment
The Political Environment
I.
Sovereignty
- Nationalism
II. Embargoes and Trade Sanctions
III. Export Controls
IV. Political Risk
- Types
- Assessment
Export Controls
 U.S. export control systems



Export Administration Act (Commerce Department)
Munitions Control Act (State Department)
Determinants for export controls
• National security, foreign policy, short supply, nuclear
nonproliferation
 Critical commodities list


Sensitive to national security
Controlled for other purposes
 No License Required (NLR)
 Export license
U.S. Export Control System
Decision Steps in the Export
Licensing Process
Should a Given Product
be Exported?
To a Given Country?
To a Given End User?
For A Particular End Use?
Typical Forms of Host Country Controls
 Expropriation

Taking of private property with compensation
 Confiscation

Taking of private property without compensation
 More subtle forms of control






Domestication
Local-content
Exchange controls
“Over investment”
Tax policies
Price controls
Political Risks of Global Business




Confiscation
Expropriation
Domestication
Economic Risks
Exchange Controls
Local-Content Laws
Import Restrictions
Tax Controls
Price Controls
Labor Problems
International Terrorist Incidents
By Region 1992-1997
Africa
73
Asia
122
Eurasia
93
602
Latin
American
Middle East
422
16
N. America
815
W. Europe
0
200
400
600
800
SOURCE: http://www.state.gov/www/global/tourism/1997report
1000
International Casualties
by Terrorist Incidents, 1992-1997
73
Africa
Asia
Eurasia
Latin American
Middle East
N. America
W. Europe
122
6-6
93
602
422
16
815
0
Irwin/McGraw-Hill
200
400
600
800
1000
SOURCE: http://www.state.gov/www/global/terrorism/1997report
Forecasting Political Risk
● Decide if risk insurance is necessary
6-8
● 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
Irwin/McGraw-Hill
Strategies to Lessen Political Risk
 Joint Ventures
 Investment Base Expansion
 Marketing and Distribution
 Licensing
 Planned Demonstration
 Other
Country Risk Assessment Criteria
Index Area
Criteria
Stability of the political system
Political and economic
environment
Degree of control of economic system
Constitutional guarantees
Effectiveness of public administration
Labor relations and social peace
Country Risk Assessment Criteria
Index Area
Criteria
Population size
Per capita income
Domestic economic
conditions
Economic growth during previous 5 years
Inflation during previous 2 years
Accessibility of domestic capital market to
foreigners
Availability of high-quality local labor
Possibility of giving employment
Traffic system and communication channels
Country Risk Assessment Criteria
Index Area
Criteria
Restrictions imposed on imports
Restrictions imposed on exports
Restrictions imposed on foreign investments in
the country
External economic
relations
Legal protection for brands and products
Restrictions imposed on monetary transfers
Revaluations of currency during previous 5
years
Drain on foreign funds through oil or other
energy imports
Restrictions on the exchange on local money
into foreign currencies
Examples of Country Risk Ratings
Country*
Political Risk
Financial Risk
Economic Risk
Composite Risk
1. Switzerland
92
50
43
94
2. Germany
83
49
41
87
3. Japan
85
49
42
88
4. U.S.
83
49
38
85
5. Canada
83
46
39
84
6. U.K.
81
48
36
82
7. France
80
44
38
81
8. Italy
74
44
37
77
9. Mexico
68
32
28
64
10. Hong Kong
67
41
39
74
11. China
67
39
33
69
12. India
49
30
31
55
13. Argentina
62
23
21
53
14. Romania**
55
29
15
49.5
15. Liberia**
10
8
12
15
Note:*Lower scores represent higher risk (Highest Risk=1…100=Lowest Risk).
**Data from 1991.
Source: Extracted from International Country Risk Guide, 1996, reprinted in Claude B. Erb, Campbell R.
Harvey, and Trades E.Viskanta, “Expected Returns and Volatility in 135 Countries,” Journal of Portfolio
Maanagement, 22(Spring 1996), p.46.