The political Environment

Sovereignty of Nations

Stability of
Government Policies
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

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
An example of domestication is given on the next slide

Domestication - Example
A good example of domestication can be seen in the
nationalization of Air-India (formerly called as Tata
Airlines). Tata owned and operated Air-India and
Indian Airlines until they were nationalized by the
Indian Government, much to Tata’s chagrin. Very
recently, the Indian government has asked Mr. Ratan
Tata, chairman of the Tata group, to head an
advisory panel to revive Air India. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag_NJBLk6TVo

Economic Risks (1 of 2)
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

Economic Risks (2 of 2)
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, and Gasoline
Labor problems
Labor unions have strong government support that they use effectively in obtaining special concessions from business

Political and Social Activists (PSAs)
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

Nongovernmental Organizations (NGOs)
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 and the Red Crescent
Amnesty International
Oxfam
UNICEF
Care and Habitat for Humanity

Violence and Terrorism
International warfare is fast becoming obsolete as the number of wars have declined steadily since the end of the Cold War
The greatest threat to peace and commerce for the twenty-first century remain civil strife and terrorism
Tourism and International education are two industries that have been affected by terrorism.
The latest fresh wave of terrorism is seen in the attacks by Sudanese terrorists on ships that sail in what has become known as the “horn of Africa.”

Cyberterrorism and Cybercrime (1 of 2)
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

Cyberterrorism and Cybercrime (2 of 2)
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

Politically Sensitive
Products and Issues
Politically sensitive products
Are 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 hormone-treated beef for more than a decade

Lessening Political Vulnerability (1 of 2)
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

Lessening Political Vulnerability (2 of 2)
Strategies that MNCs use to minimize political vulnerability and risk
Joint ventures
Expanding the investment base
Licensing
Planned domestication
Political bargaining
Political payoffs