International Marketi ng 14 th Edition P h

International Marketi ng 14 th Edition P h i l i p R. C a t e o r a M a r y C. G i l l y John L. Graham The Political Environment: A Critical Concern Chapter 6 Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

What Should You Learn? • What the sovereignty of nations means and how it can affect the stability of government policies • How different governmental type, 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 2

Global Perspective • A crucial reality of international business – Both host and home governments are integral partners • A government controls and restricts a company’s activities – By encouraging and offering support – By discouraging and banning or restricting its activities • International law recognizes the sovereign right of a nation – To grant or withhold permission to do business within its political boundaries – To control where its citizens conduct business 3

The Sovereignty of Nations • A sovereign state – Independent – Free from all external control • Sovereignty – Powers exercised by a state in relation to other countries – Supreme powers exercised over its own members 4

The Sovereignty of Nations • Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other nations – NAFTA – North America Free Trade Agreement – NATO – North Atlantic Treaty Organization – WTO – World Trade Organization • The United States involvement in international political affiliations is surprisingly low • The WTO is considered by some as the biggest threat so far to national sovereignty 5

Stability of Government Policies • Issues that can affect the stability of a government – Radical shifts in government philosophy when an opposing political party ascends to power – Pressure from nationalist and self-interest groups – Weakened economic conditions – Bias against foreign investment – Conflicts between governments • Five main political causes of international market instability – 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 themselves 6

Forms of Government • Circa 500 B. C – Ancient Greeks criticized three fundamental forms of government – Rule by one (monarchy) – Rule by few (aristocracy) – Rule by many (democracy) • Circa 1990 – Collapse of communism – Free-enterprise democracy considered the best solution • 200+ sovereign states on the planet – Almost all have at least nominally representative governments with universal suffrage for those 18 years and older – In about 10% of the states voting is required, in the rest it is voluntary 7

A Sampling of Government Types Exhibit 6. 1 8

Political Parties • In countries where two strong political parties typically succeed one another, it is important to know the direction each party is likely to take – Great Britain ► The Labour Party vs. the Conservative Party • Unpredictable and drastic shifts in government policies deter investments, whatever the cause of the shift • A current assessment of a country’s political philosophy and attitudes is important in gauging their stability and attractiveness in terms of market potential 9

Nationalism • An intense feeling of national pride and unity – An awakening of a nation’s people to pride in their country • National interest and security are more important than international relations • Countries use nationalism to protect themselves against intrusions – Threats from outside forces – Declines in the domestic economy • Nationalism comes and goes – As conditions and attitudes change – Foreign companies welcomed today may be harassed tomorrow and vice versa 10

Targeted Fear and/or Animosity • Marketers should not confuse nationalism with a widespread fear or animosity directed at a particular country – Toyota in the U. S. (1980 s) – Animosity toward the United States in France – The unhappiness of citizens and politicians in many other countries concerning the war in Iraq • No nation-state, however secure, will tolerate penetration by a foreign company into its market and economy – If it perceives a social, cultural, economic, or political threat to its wellbeing • Trade disputes 11

Political Risks of Global Business • Confiscation – the seizing of a company’s assets without payment • Expropriation – where the government seizes an investment but makes some reimbursement for the assets • Domestication – when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees – Mandating local ownership – Greater national involvement in a company’s management 12

How Complicated Things Can Get Exhibit 6. 2 13

Economic Risks • Exchange controls – Stem from shortages of foreign exchange held by a country • Local-content laws – Countries often require a portion of any product sold within the country to have local content • Import restrictions – Selective restrictions on the import of raw materials to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry 14

Economic Risks • Tax controls – A political risk when used as a means of controlling foreign investments • Price controls – Essential products that command considerable public interest ► ► ► Pharmaceuticals Food Gasoline • Labor problems – Labor unions have strong government support that they use effectively in obtaining special concessions from business 15

Political Sanctions • One or a group of nations may boycott another nation – Stopping all trade between the countries – Issuing sanctions against trade of specific products ► U. S. boycotts of trade with Cuba/Iran • History indicates that sanctions are often unsuccessful in reaching desired goals – Particularly when ignored by other major nations’ traders 16

Political and Social Activists • Not usually government sanctioned • Can interrupt the normal flow of trade • Range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change – Worldwide boycott of Nestle products • The Internet has become an effective tool of PSAs to spread the word – Protest rallies against the U. S. – Iraq War 17

Nongovernmental Organizations • Nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments – Protests – Lobbying – Collaborations with governmental organizations • Many also are involved in mitigating much of the human misery plaguing parts of the planet – – – – Red Cross Red Crescent Amnesty International Oxfam UNICEF Care Habitat for Humanity 18

U. S. State Department Travel Warnings Exhibit 6. 3 19

Violence and Terrorism • The State Department reported 3, 200 terrorist incidents worldwide in 2004 • Goals of terrorism against multinationals – – To embarrass a government and its relationship with firms To generate funds by kidnapping executives To use as pawns in political or social disputes To inflict terror within a country as did September 11 • In the past 30 years, 80% of terrorist attacks against the U. S. have been aimed at American businesses 20

Armed Conflicts Around the World Exhibit 6. 4 21

Cyberterrorism and Cybercrime • The internet is a vehicle for terrorist and criminal attacks to inflict damage on a company with little chance of being caught – By foreign and domestic antagonists • It is hard to determine if a cyber attack has been launched – By a rogue state – A terrorist – A hacker as a prank 22

Cyberterrorism and Cybercrime • Each wave of viruses – Gets more damaging – Spreads so rapidly that considerable harm is done before it can be stopped • Tools for cyberterrorism – Can be developed to do considerable damage ► ► ► To a company, An entire industry A country’s infrastructure • Mounting concern over the rash of attacks – Business leaders and government officials addressed a Group of Eight conference 23

Politically Sensitive Products and Issues • Politically sensitive products – Perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people – Are publicly visible or subject to public debate • Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political concern • The European Union has banned hormonetreated beef for more than a decade 24

Forecasting Political Risk • Political risk assessment – An attempt to forecast political instability – To help management identify and evaluate political events – To predict their potential influence on current and future international business decisions • Government failure is greatest risk to international marketers – Causing chaos in the streets and markets • Risk assessment of investments – Used to estimate the level of a risk a company is assuming – Helps determine the amount of risk a firm is prepared to accept 25

Top 20 States in Danger of Failing (Ranked) Exhibit 6. 5 26

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 – Makes tax contributions • Political parties often focus public opinion on the negative aspects of MNCs whether true or false – As scapegoats for their own failure – To serve their own interests 27

Lessening Political Vulnerability • Strategies that MNCs use to minimize political vulnerability and risk – – – Joint ventures Expanding the investment base Licensing Planned domestication Political bargaining Political payoffs 28

Government Encouragement • Most important reason to encourage foreign investment – To accelerate the development of an economy • U. S. government motivated for economic as well as political reasons – Encourages American firms to seek business opportunities in countries worldwide including those that are politically risky ► ► Department of Commerce International Trade Administration • Agencies that provide assistance to U. S. companies – – Export-Import Bank (Ex-Im Bank) Foreign Credit Insurance Association (FCIA) The Agency for International Development (AID) The Overseas Private Investment Corporation (OPIC) 29

Summary • The foreign firm – Must strive to make its activities politically acceptable or it may be subjected to a variety of politically condoned harassment • The foreign marketer frequently faces the problem of uncertainty of continuity in government policy • Marketing firms accepted under one administration might find its activities undesirable under another – As governments change political philosophies • Unfamiliar or hostile political environment does not necessarily preclude success foreign marketers – If the company becomes a local economic asset and responds creatively to the issues raised by political and social activities – If a company is considered vital to achieving national economic goals, the host country often provides an umbrella of protection 30