Lecture International marketing (14/e) - Chapter 6

Chapter 6 - The political environment: A critical concern. What you should learn from chapter 6: 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;...

I n t e r n a t i o n a l M a r k e t i

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The Political Environment:

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

Global Perspective

– Both host and home governments are integral partners

company’s activities

– By encouraging and offering support

– By discouraging and banning or restricting its activities

of a nation

– To grant or withhold permission to do business within its

political boundaries

The Sovereignty of Nations

– Independent

– Free from all external control

– Powers exercised by a state in relation to other countries

– Supreme powers exercised over its own members

• 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

political affiliations is surprisingly low

threat so far to national sovereignty

The Sovereignty of Nations

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

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

A Sampling of Government Types

Exhibit 6.1

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

• 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

– As conditions and attitudes change

– Foreign companies welcomed today may be harassed tomorrow

and vice versa

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

well-being

• Trade disputes

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

How Complicated Things Can Get

Exhibit 6.2

Economic Risks

– Stem from shortages of foreign exchange held by a country

– Countries often require a portion of any product sold within the

country to have local content

– Labor unions have strong government support that they use

effectively in obtaining special concessions from business

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

Political and Social Activists

peaceful change to those who resort to violence and terrorism to effect change

– Worldwide boycott of Nestle products

PSAs to spread the word

– Protest rallies against the U.S – Iraq War

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

U.S State Department

Travel Warnings

Exhibit 6.3

Violence and Terrorism

incidents worldwide in 2004

– 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

against the U.S have been aimed at American businesses

Armed Conflicts Around the World

Exhibit 6.4

Cyberterrorism and Cybercrime

attacks to inflict damage on a company with little chance of being caught

– By foreign and domestic antagonists

launched

– By a rogue state

– A terrorist

– A hacker as a prank

Cyberterrorism and Cybercrime

– Gets more damaging

– Spreads so rapidly that considerable harm is done before it can

be stopped

– Can be developed to do considerable damage

► To a company,

► An entire industry

► A country’s infrastructure

– Business leaders and government officials addressed a Group

of Eight conference

Politically Sensitive Products and Issues

– 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

products that affect or are affected by health

issues can be sensitive to political concern

hormone-treated beef for more than a decade

Forecasting Political Risk

– 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

international marketers

– Causing chaos in the streets and markets

– Used to estimate the level of a risk a company is assuming

– Helps determine the amount of risk a firm is prepared to accept

Top 20 States in Danger of Failing

(Ranked)

Exhibit 6.5

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

Lessening Political Vulnerability

• Strategies that MNCs use to minimize

political vulnerability and risk

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 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,