Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16The Political Environment: A Critical ConcernChapter 6McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved.PowerPoint presentation prepared by:Professor Rajiv MehtaAssociate Professor of MarketingNew Jersey Institute of TechnologyNewark, N.J.Chapter Learning Objectives1. What does the sovereignty of nations mean and how can it affect the stability of government policies, political parties and nationalism.1. What does the sovereignty of nations mean and how can it affect the stability of government policies, political parties and nationalism.2. The political risks of global business and the factors that affect stability2. The political risks of global business and the factors that affect stability3. The importance of the political system to international marketing and its effect on foreign investments3. The importance of the political system to international marketing and its effect on foreign investmentsChapter Learning Objectives4. The impact of political and social activists, violence and terrorism on international business4. The impact of political and social activists, violence and terrorism on international business5. Assessing and reducing the effect of political vulnerability5. Assessing and reducing the effect of political vulnerability6. How and why governments encourage foreign investment 6. How and why governments encourage foreign investmentIntroduction•The political environment of countries is a critical concern for the international marketer•International law recognizes the sovereign right of a nation to allow or deny foreign firms to conduct•Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members•A sovereign state is independent and free from all external control; enjoys full legal equality with other states; and governs its own territoryStability of Government PoliciesQ: Radical shifts in government philosophy can occur when:Q: Radical shifts in government philosophy can occur when:1. An opposing political party ascends to power2. Pressure from nationalist and self-interest groups1. An opposing political party ascends to power2. Pressure from nationalist and self-interest groups3. Weakened economic conditions.4. Bias against foreign investment or conflicts between governments3. Weakened economic conditions.4. Bias against foreign investment or conflicts between governmentsStability of Government Policies•The stability or instability of prevailing government policies is a major concern of foreign businesses •A change in government, whether by election or coup, does not always mean a change in the level of political risk •The stability or instability of prevailing government policies is a major concern of foreign businesses •A change in government, whether by election or coup, does not always mean a change in the level of political risk •The ideal political climate for a multinational firm to conduct business is a stable, friendly government •Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade •The ideal political climate for a multinational firm to conduct business is a stable, friendly government •Be knowledgeable about the philosophies of all major political parties and their attitudes towards trade •Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well •Conversely, radical changes in policies toward foreign business can occur in the most stable governments as wellNationalism•Nationalism refers to feelings of national pride and unity •Nationalism refers to feelings of national pride and unity Feelings of nationalism are manifested by: 1. Call to “buy our country’s products only,” e.g., “Buy American” 2. Restrictions on imports, restrictive tariffs, and other barriers to tradeFeelings of nationalism are manifested by: 1. Call to “buy our country’s products only,” e.g., “Buy American” 2. Restrictions on imports, restrictive tariffs, and other barriers to tradePolitical Risks of Global Business•Risks of global business include: •Risks of global business include: 1. Confiscation, Expropriation, and Domestication2. Economic Risks, and3. Price Controls1. Confiscation, Expropriation, and Domestication2. Economic Risks, and3. Price ControlsConfiscation, Expropriation, and Domestication•Confiscation, the most severe political risk, is the seizing of a company’s assets without payment•Confiscation, the most severe political risk, is the seizing of a company’s assets without payment•Expropriation is where the government seizes an investment, but some reimbursement for the assets is made; often the expropriated investment is nationalized to become a government run entity•Expropriation is where the government seizes an investment, but some reimbursement for the assets is made; often the expropriated investment is nationalized to become a government run entity•Domestication occurs when the government mandates local ownership and greater national involvement in a foreign company’s management•Domestication occurs when the government mandates local ownership and greater national involvement in a foreign company’s managementEconomic Risks•International firms face a variety of economic risks•International firms face a variety of economic risksGovernments can impose restraints on business activity to:a) Protect national security b) Protect an infant industry c) To conserve scarce foreign exchanged) Raise revenue e) Retaliate against unfair trade practicesGovernments can impose restraints on business activity to:a) Protect national security b) Protect an infant industry c) To conserve scarce foreign exchanged) Raise revenue e) Retaliate against unfair trade practicesForecasting Political Risk•Decide if risk insurance is necessary•Devise an intelligence network and an early warning system•Decide if risk insurance is necessary•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