Chapter 6

The Political Environment:

A Critical Concern
1. The Sovereignty of Nations and how it can affect the
Stability of Government Policies

• One of the most undeniable and crucial realities of

international business is that both host and home
governments are integral partners.
• A government controls and restricts a company’s
activities by encouraging and offering support or 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 and to control where its
citizens conduct business.

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• A sovereign state is independent and free from all external
control.
• Sovereignty refers to both the powers exercised by a state in
relation to other countries and the 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
• 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.

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2. Different Governmental type, Political parties, Nationalism,
Targeted fear/Animosity, and Trade Disputes can affect the
environment for marketing in foreign countries
• Out of three fundamental forms of government
- Rule by one (monarchy)
- Rule by few (aristocracy)
- Rule by many (democracy)
the world seemed to have agreed that free-enterprise democracy was the best solution.

• 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 instability in international markets:
- Some forms of government seem to be inherently unstable
- Changes in political parties during elections can have major effects on trade conditions
- Nationalism
- Animosity (Ill Feeling) targeted toward specific countries
- Trade disputes themselves
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 Prevailing Government Types across the Globe
China; North Korea; Vietnam; Cuba and Laos - Communist Govt.

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Political Parties:
• In countries where two strong political parties typically succeed one another in
control of the government, it is important to know the direction each party is
likely to take.
- Great Britain
• The Labour Party Vs. The Conservative Party
- Bangladesh
• The Awami League Vs. BNP (The Banglades Jatiotabadi Chatrodol)
• Unpredictable and drastic shifts in government policies deter investments, whatever the
cause of the shift.
• A current assessment of political philosophy and attitudes within a country is important in
gauging the stability and attractiveness of a government in terms of market potential.
Nationalism:
• Nationalism is 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.
• The more a country feels threatened by some outside force or as the domestic economy
declines, the more nationalistic it becomes in protecting itself against intrusions.
• Nationalism comes and goes as conditions and attitudes change, and foreign
companies welcomed today may be harassed tomorrow and vice versa.
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Targeted Fear and/or Animosity:
• It is important for marketers not to confuse nationalism with a
widespread fear or animosity directed at a particular country.
- The unhappiness of citizens and politicians in many other countries
concerning the war in Iraq.
• It is important to appreciate that 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

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3. The Need to Assess/ Forecast Political Risk and the Importance/Impact of
these risks to international marketing/business
• Political risk assessment is an attempt to forecast political instability to help management identify
and evaluate political events and their potential influence on current and future international
business decisions.
• Risk assessment is used to estimate the level of a risk a company is assuming when making an
investment and to help determine the amount of risk it is prepared to accept.
Political Risks of Global Business:
• Confiscation – the seizing of a company’s assets without payment.
• Expropriation – where the government seizes an investment but some reimbursement for the assets is made.
• Domestication – when host countries gradually cause the transfer of foreign investments to national control and
ownership through a series of government decrees by mandating local ownership and greater national involvement in
a company’s management.
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
• 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.

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Political Sanctions:
• One or a group of nations may boycott another nation, thereby stopping all trade between the
countries, or may issue sanctions against the 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 other major nations’ traders ignore them.
Political and Social Activists:
• Not usually officially sanctioned by the government
• Can interrupt the normal flow of trade
• Can 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 on whatever cause
they sponsor.
- 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.
- Red Cross; Red Crescent; Amnesty International; Oxfam; UNICEF; Care; Habitat for
Humanity 6-9
Violence and Terrorism:
• Goals of terrorism:
- Multinationals are targeted to embarrass a government and its relationship with
firms
- To generate funds by kidnapping executives to finance terrorist goals
- To inflict/impose terror within a country as did September 2011 in U.S
- To inflict terror within a country as happened in Bangladesh July 2016
regarding ‘Holey Artisan Bakery Attack’.
Table: U.S. State Department Travel Warnings

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Cyberterrorism and Cybercrime:

• The internet is a vehicle for terrorist and criminal attacks by foreign and domestic
antagonists wishing to inflict damage on a company with little chance of being
caught.
• It is hard to determine if a cyber attack has been launched by a rogue state, a
terrorist, or by a hacker as a prank.
• Each wave of viruses gets more damaging and 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, or a country’s infrastructure

Politically Sensitive Products and Issues:

• Products that have or are perceived to have an effect on the environment, exchange
rates, national and economic security, and the welfare of people and that are
publicly visible or subject to public debate, are more likely to be politically
sensitive.
• 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.
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4. Strategies to reduce the Effect of Political Vulnerability to encourage
foreign investment
The most important reason to encourage foreign investment is to accelerate the
development of an economy.
• 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
- Create jobs
- Make tax contributions
• Political parties seeking publicity or scapegoats for their failure often serve their own
interests by focusing public opinion on the negative aspects of MNCs whether true or
false.
• Strategies that MNCs use to minimize political vulnerability and risk:
- Joint ventures
- Expanding the investment base
- Licensing
- Planned domestication
- Political bargaining
- Political payoffs

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