International Marketing

14th 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
McGraw-Hill/Irwin
International Marketing

Copyright 2009 by The McGraw-Hill Companies, Inc. All

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
6-2

Global Perspective

A crucial reality of international business

Both host and home governments are integral partners

A government controls and restricts a companys

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
6-3

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

6-4

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
6-5

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

6-6

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

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A Sampling of Government Types

Exhibit 6.1

6-8

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 countrys political
philosophy and attitudes is important in gauging their
stability and attractiveness in terms of market
potential
6-9

Nationalism
An intense feeling of national pride and unity
An awakening of a nations 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
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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. (1980s)
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
6-11

Political Risks of Global Business

Confiscation the seizing of a companys 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 companys management
6-12

How Complicated Things Can Get

Exhibit 6.2

6-13

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

6-14

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
6-15

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
6-16

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
6-17

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

6-18

U.S. State Department

Travel Warnings
Exhibit 6.3

6-19

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
6-20

Armed Conflicts Around the World

Exhibit 6.4

6-21

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

6-22

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 countrys infrastructure

Mounting concern over the rash of attacks

Business leaders and government officials addressed a Group
of Eight conference
6-23

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

6-24

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
6-25

Top 20 States in Danger of Failing

(Ranked)

Exhibit 6.5

6-26

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

6-27

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

6-28

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)

6-29

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 for 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

6-30