ThePoliticalEnvironment:ACriticalConcernChapter6ChapterLearningObjectives1.Whatdoesthesovereigntyofnationsmeanandhowcanitaffectthestabilityofgovernmentpolicies,politicalpartiesandnationalism.2.Thepoliticalrisksofglobalbusinessandthefactorsthataffectstability3.Theimportanceofthepoliticalsystemtointernationalmarketinganditseffectonforeigninvestments4.AssessingandreducingtheeffectofpoliticalvulnerabilityIntroductionThepoliticalenvironmentofcountriesisacriticalconcernfortheinternationalmarketerInternationallawrecognizesthesovereignrightofanationtoallowordenyforeignfirmstoconductSovereigntyreferstoboththepowersexercisedbyastateinrelationtoothercountriesandthesupremepowersexercisedoveritsownmembersAsovereignstateisindependentandfreefromallexternalcontrol;enjoysfulllegalequalitywithotherstates;andgovernsitsownterritoryStabilityofGovernmentPoliciesQ:Radicalshiftsingovernmentphilosophycanoccurwhen:AnopposingpoliticalpartyascendstopowerPressurefromnationalistandself-interestgroupsWeakenedeconomicconditions.BiasagainstforeigninvestmentorconflictsbetweengovernmentsStabilityofGovernmentPoliciesThestabilityorinstabilityofprevailinggovernmentpoliciesisamajorconcernofforeignbusinessesAchangeingovernment,whetherbyelectionorcoup,doesnotalwaysmeanachangeinthelevelofpoliticalriskTheidealpoliticalclimateforamultinationalfirmtoconductbusinessisastable,friendlygovernmentBeknowledgeableaboutthephilosophiesofallmajorpoliticalpartiesandtheirattitudestowardstradeConversely,radicalchangesinpoliciestowardforeignbusinesscanoccurinthemoststablegovernmentsaswellNationalismNationalismreferstofeelingsofnationalprideandunityFeelingsofnationalismaremanifestedby:Callto“buyourcountry’sproductsonly,”e.g.,“BuyAmerican”Restrictionsonimports,restrictivetariffs,andotherbarrierstotradePoliticalRisksofGlobalBusinessRisksofglobalbusinessinclude:Confiscation,Expropriation,andDomesticationEconomicRisks,andPriceControlsConfiscation,Expropriation,andDomesticationConfiscation,themostseverepoliticalrisk,istheseizingofacompany’sassetswithoutpaymentExpropriationiswherethegovernmentseizesaninvestment,butsomereimbursementfortheassetsismade;oftentheexpropriatedinvestmentisnationalizedtobecomeagovernmentrunentityDomesticationoccurswhenthegovernmentmandateslocalownershipandgreaternationalinvolvementinaforeigncompany’smanagementEconomicRisksInternationalfirmsfaceavarietyofeconomicrisksGovernmentscanimposerestraintsonbusinessactivityto:ProtectnationalsecurityProtectaninfantindustryToconservescarceforeignexchangeRaiserevenueRetaliateagainstunfairtradepracticesForecastingPoliticalRiskDecideifriskinsuranceisnecessaryDeviseanintelligencenetworkandanearlywarningsystemDevelopcontingencyplansforunfavorablefuturepoliticaleventsBuildadatabaseofpastpoliticaleventsforuseinpredictingfutureproblemsInterpretthedatagatheredbyacompany’sintelligencenetworkinordertoadviseandforewarncorporatedecisionmakersaboutpoliticalandeconomicsituationsOtherPoliticalRisksofGlobalBusinessPoliticalandSocialActivistsViolenceandTerrorismCyberterrorismPoliticalSanctionsAssessingPoliticalVulnerabilityNoabsoluteguidelinestoassessifafirmfacespoliticalrisksNospecificguidelinestodetermineaproduct’spoliticalvulnerability,buttherearesomegeneralizationsPoliticallysensitiveproductsincludethosethat:effectontheenvironment,exchangeratesnationalandeconomicsecurityaffectpublichealth,e.g.,geneticallymodified(GM)foodsReducing

PoliticalVulnerabilityRelationsbetweengovernmentsandMNCsaregenerallypositiveiftheinvestment:improvesthebalanceofpaymentsbyincreasingexportsorreducingimportsthroughimportsubstitutionuseslocallyproducedresourcestransferscapital,technology,and/orskillscreatesjobs,and/ormakestaxcontrib