The Political Environment: A Critical Concern

Chapter: 6

Global Perspective

No company, domestic or international, large or small, can conduct business without considering
the influence of the political environment within which it will operate. 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 depending on the pleasure of the
government.

International law recognizes the sovereign right of a nation to grant or withhold permission to do
business at the pleasure of the government. In addition, 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.

The Sovereignty of Nations

In the context of international law, a sovereign state is independent and free from all external
control; enjoys full legal equality with other states; governs its own territory; selects its own
political, economic, and social systems; and has the power to enter into agreements with other
nations.

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 state sets requirements for citizenship,
defines geographical boundaries, and controls trade and the movement of people and goods
across its borders.

Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other
nations. The European Union, North American Free Trade Agreement (NAFTA), North Atlantic
Treaty Organization (NATO), and World Trade Organization (WTO) represent examples of nations
voluntarily agreeing to give up some of their sovereign rights in order to participate with member
nations for a common, mutually beneficial goal.

However, the United States’ involvement in international political affiliations is surprisingly low.

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For example, the WTO is considered by some as the biggest threat so far to national sovereignty.
Adherence to the WTO inevitably means loss of some degree of national sovereignty because the
member nations have pledged to abide by international covenants and arbitration procedures
that can override national laws and have far-reaching ramifications for citizens. Sovereignty was
one of the issues at the heart of the spat between the United States and the European Union
over Europe’s refusal to lower tariffs and quotas on bananas. And critics of the free trade
agreements with both South Korea and Peru claim America’s sacrifice of sovereignty is too great.

Stability of Government Policies

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, or conflicts between governments are all issues that can affect the stability
of a government.

Socioeconomic and political environments invariably change, as they have in the Soviet Union
and Mexico. There are 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 targeted toward specific countries; and
- trade disputes themselves.

Forms of Government

Circa 500 B.C., the ancient Greeks conceived of and criticized three fundamental forms of
government: rule by one, rule by the few, and rule by the many. The common terms for these in
use today are monarchy (or dictatorship), aristocracy (or oligarchy), and democracy.

Following the collapse of colonialism beginning with World War II and communism circa 1990,
the world seemed to have agreed that free-enterprise democracy was the best solution to all the
criticisms of government since the time of Aristotle, Cyrus, and the others.

Thus of the more than 200 sovereign states on the planet, almost all have at least nominally
representative governments with universal suffrage for those 18 years and over. In about 10
percent of the states voting is required; in the rest it is voluntary.

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Political Parties

For most countries around the world, it is particularly important for the marketer to know the
philosophies of all major political parties within a country, since any one of them might become
dominant and alter prevailing attitudes and the overall business climate. 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.

In Great Britain, for example, the Labour Party traditionally has tended to be more restrictive
regarding foreign trade than the Conservative Party. The Labour Party, when in control, has
limited imports, whereas the Conservative Party has tended to liberalize foreign trade when it is
in power.

A foreign firm in Britain can expect to seesaw between the liberal trade policies of the
Conservatives and the restrictive ones of the Liberals. Of course, in the United States in recent
years, the Democratic Congress has been reluctant to ratify free trade pacts negotiated by the
Republican administration in White House.

Unpredictable and drastic shifts in government policies deter investments, whatever the cause
of the shift. In short, 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

Economic and cultural nationalism, which exists to some degree within all countries, is another
factor important in assessing the business climate. Nationalism can best be described as an
intense feeling of national pride and unity, an awakening of a nation’s people to pride in their
country.

Economic nationalism has as one of its central aims the preservation of national economic
autonomy in that residents identify their interests with the preservation of the sovereignty of the
state in which they reside. In other words, national interest and security are more important than
international relations.

Generally speaking, 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.

By the late 1980s, militant nationalism had subsided; today, the foreign investor, once feared as
a dominant tyrant that threatened economic development, is often sought after as a source of

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needed capital investment. Nationalism comes and goes as conditions and attitudes change, and
foreign companies welcomed today may be harassed tomorrow and vice versa.

Targeted Fear and/or Animosity

It is important for marketers not to confuse nationalism, whose animosity is directed generally
toward all foreign countries, with a widespread fear or animosity directed at a particular country.
This was a mistake made by Toyota in the United States in the late 1980s and early 1990s. At the
time Americans considered the economic threat from Japan greater than the military threat from
the Soviet Union. So when Toyota spent millions on an advertising campaign showing Toyotas
being made by Americans in a plant in Kentucky, it may well have exacerbated the fear that the
Japanese were “colonizing” the United States.

The World Is Not Merchandise, Who Is Killing France? The American Strategy, and No Thanks
Uncle Sam have been best-selling titles in France that epitomize animosity toward the United
States in France. Although such attitudes may seem odd in a country that devours U.S. movies,
eats U.S. fast foods, views U.S. soap operas, and shops at U.S. Wal-Mart stores, national animosity
– whatever the cause – is a critical part of the political environment.

The United States is not immune to the same kinds of directed negativism either. The rift
between France and the United States over the Iraq U.S. war led to hard feelings on both sides
and an American backlash against French wine, French cheese, and even products Americans
thought were French. French’s mustard felt compelled to issue a press release stating that it is
an American company founded by an American named French. Thus, it is quite clear 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.
Finally, narrow trade disputes themselves can roil broader international markets.

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

Economic Risks

Even though expropriation and confiscation are waning as risks of doing business abroad,
international companies are still confronted with a variety of economic risks that can occur with
little warning. Restraints on business activity may be imposed under the banner of national

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security to protect an infant industry, to conserve scarce foreign exchange, to raise revenue, or
to retaliate against unfair trade practices, among a score of other real or imagined reasons. These
economic risks are an important and recurring part of the political environment that few
international companies can avoid.
 Exchange controls – These stem from shortages of foreign exchange held by a country.
 Local-content laws – In addition to restricting imports of essential supplies to force local
purchase, countries often require a portion of any product sold within the country to have
local content, that is, to contain locally made parts.
 Import restrictions – These are selective restrictions on the import of raw materials,
machines, and spare parts are fairly common strategies to force foreign industry to
purchase more supplies within the host country and thereby create markets for local
industry.
 Tax Controls – Taxes must be classified as a political risk when used as a means of
controlling foreign investments. In such cases, they are raised without warning and in
violation of formal agreements.
 Price Controls – Essential products that command considerable public interest, such as
pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such
controls applied during inflationary periods can be used to control the cost of living. They
also may be used to force foreign companies to sell equity to local interests. A side effect
on the local economy can be to slow or even stop capital investment.
 Labor Problems – In many countries, labor unions have strong government support that
they use effectively in obtaining special concessions from business. Layoffs may be
forbidden, profits may have to be shared, and an extraordinary number of services may
have to be provided.

Political Sanctions

In addition to economic risks, one or a group of nations may boycott another nation, with political
sanctions – thereby stopping all trade between the countries, or may issue sanctions against the
trade of specific products. The United States has come under some criticism for its demand for
continued sanctions against Cuba and its threats of future sanctions against countries that violate
human rights issues. History indicates that sanctions are almost always unsuccessful in reaching
desired goals, particularly when other major nations’ traders ignore them.

Political and Social Activists

Although not usually officially sanctioned by the government, the impact of political and social
activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek
to bring about peaceful change to those who resort to violence and terrorism to effect change.
When well organized, the actions of PSAs can succeed. One of the most effective and best-known
PSA actions was against Nestle and the sale of baby formula in Third World markets. The

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worldwide boycott of Nestle’s products resulted in substantial changes in the company’s
marketing.

The Internet has become an effective tool of PSAs to spread the word on whatever cause they
sponsor. During protest rallies against the U.S.- Iraq war, organizers were able to coordinate
protest demonstrations in 600 cities worldwide and to disseminate information easily. A Google
search for “peace protest” during that time (2003) resulted in 788,000 entries (about 660,000 in
2008), including news briefs, Web sites for peace organizations, online petitions for peace, where
to show up with your placard, where to send your dollars, and how to write your member of
Congress.

Nongovernmental Organizations

Often associated with political activism, nongovernmental organizations (NGOs) are increasingly
affecting policy decisions made by governments. Many are involved in peaceful protests,
lobbying, and even collaborations with governmental organizations. Many also are involved in
mitigating much of the human misery plaguing parts of the planet. Some NGOs have received
global recognition. The Red Cross and Red Crescent, Amnesty International, Oxfam, UNICEF, Care,
and Habitat for Humanity are examples for their good works, political influence, and even their
brand power.

Violence and Terrorism

The State Department reported 3,200 terrorist incidents worldwide in 2004, up dramatically from
previous years given a new approach to counting. Terrorism has many different goals.
Multinationals are targeted to embarrass a government and its relationship with firms, to
generate funds by kidnapping executives to finance terrorist goals, to use as pawns in political or
social disputes not specifically directed at them, and to inflict terror within a country as did
September 11.

September 11 has raised the cost of doing business domestically and internationally. The
dominance of the United States in world affairs exposes U.S. businesses to a multitude of
uncertainties, from the growing danger of political violence to investment risks in emerging
markets. In the past 30 years, 80 percent of terrorist attacks against the United States have been
aimed at American businesses.

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Cyberterrorism and Cybercrime

Always on the horizon is the growing potential for cyberterrorism and cybercrime. Although in
its infancy, 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.

One problem in tracing cyberterrorists and criminals is that 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.

As the Internet grows, it’s only a matter of time before every terrorist, anarchist, thief, and
prankster with a PC and a phone line will be waging a virtual war and inflicting real harm. Each
wave of viruses gets more damaging and spreads so rapidly that considerable harm is done
before it can be stopped.

Whether perpetrated by pranksters or hackers out to do harm, these incidents show that tools
for cyberterrorism can be developed to do considerable damage to a company, an entire
industry, or a country’s infrastructure.

Because of mounting concern over the rash of attacks, business leaders and government officials
addressed a Group of Eight conference convened to discuss cybercrime, expressing an urgent
need for cooperation among governments, industry, and users to combat the growing menace
of cybercrime.

The Internet is a potent tool for cybercrime, and, unless systems are designed to safeguard it
against these intrusions, the costs to governments and industry will be enormous and may
prevent the Internet from reaching its full potential.

Politically Sensitive Products and Issues

Unfortunately, a marketer has no absolute guidelines to follow to determine whether a company

and its products will be subject to political attention. Although there are no specific guidelines to
determine a product’s vulnerability at any point, there are some generalizations that help to
identify the tendency for products to be politically sensitive. 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 particularly children) 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. There is a
question about whether the ban is a valid health issue or just protection for the European beef
industry. Reluctance to respond to the WTO directive may be the result of the recent outcry

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against genetically modified (GM) foods that has, for all practical purposes, caused GM foods to
be banned in Europe. Public opinion against Frankenfood has been so strong that Unilever
announced that it would stop using GM ingredients in all its products in Britain.
The issue in the United States has not risen to the same level of concern as in Europe; to forestall
such adverse public opinion, many U.S. companies are slowing the introduction of GM foods.

Forecasting Political Risk

In addition to qualitative measures of political vulnerability, a number of firms are employing

systematic methods of measuring political risk. 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. Perhaps the greatest risk to
international marketers is the threat of the government actually failing, causing chaos in the
streets and markets.

Risk assessment is used to estimate the level of risk a company is assuming when making an
investment and to help determine the amount of risk it is prepared to accept. In the former Soviet
Union and in China, the risk may be too high for some companies, but stronger and better-
financed companies can make long-term investments in those countries that will be profitable in
the future. Early risk is accepted in exchange for being in the country when the economy begins
to grow and risk subsides.

Lessening Political Vulnerability

Even though a company cannot directly control or alter the political environment of the country
within which it operates, a specific business venture can take measures to lessen its degree of
susceptibility to politically induced risks.

As long as these impressions persist, the political climate for foreign investors will continue to be
hostile. Companies must manage external affairs in foreign markets to ensure that the host
government and the public are aware of their contributions to the economic, social, and human
development of the country. Relations between governments and MNCs are generally positive if
the investment (1) improves the balance of payments by increasing exports or reducing imports
through import substitution; (2) uses locally produced resources; (3) transfers capital,
technology, and/or skills; (4) creates jobs; and/or (5) makes tax contributions.

Even though companies strive to become good corporate citizens in their host countries, political
parties seeking publicity or scapegoats for their failures often serve their own interests by
focusing public opinion on the negative aspects of MNCs, whether true or false. Companies that
establish deep local roots and show by example, rather than meaningless talk, that their

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strategies are aligned with the long-term goals of the host country stand the best chance of
overcoming a less than positive image.

In addition to corporate activities focused on the social and economic goals of the host country
and good corporate citizenship, MNCs can use other strategies to minimize political vulnerability
and risk.

Typically less susceptible to political harassment, joint ventures can be with locals or other third-
country multinational companies; in both cases, a company’s financial exposure is limited. A joint
venture with locals helps minimize anti-MNC feelings, and a joint venture with another MNC adds
the additional bargaining power of a third country.

Expanding the investment base and including several investors and banks in financing an
investment in the host country is another strategy. This has the advantage of engaging the power
of the banks whenever any kind of government takeover or harassment is threatened.
Licensing is a strategy that can be effective in situations where the technology is unique and the
risk is high. Of course, there is some risk assumed because the licensee can refuse to pay the
required fees while continuing to use the technology

Planned domestication is the most effective long-range solution in cases in which the host
country is demanding local participation. While this is not the preferred business practice, the
alternative of government-initiated domestication can be as disastrous as confiscation.
Political bargaining by multinational companies through lobbying may be used to avoid potential
political risks.
Political payoffs are one approach to dealing with political vulnerability. This is not an approach
we recommend in any way. However, your competitors may use such a tactic, so beware. Political
payoffs, or bribery, have been used to lessen the negative effects of a variety of problems.

Government Encouragement

Governments, both foreign and U.S., encourage foreign investment as well as discourage it. The
most important reason to encourage foreign investment is to accelerate the development of an
economy.

The U.S. government is motivated for economic as well as political reasons to encourage
American firms to seek business opportunities in countries worldwide, including those that are
politically risky. It seeks to create a favorable climate for overseas business by providing the
assistance that helps minimize some of the more troublesome politically motivated financial risks
of doing business abroad. The Department of Commerce (DOC) is the principal agency that
supports U.S. business abroad. The International Trade Administration (ITA), a bureau in the DOC,
is dedicated to helping U.S. business compete in the global marketplace. Other agencies that
provide assistance to U.S. companies include:

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Export-Import Bank (Ex-Im Bank) that underwrites trade and investments for U.S. firms.
Foreign Credit Insurance Association (FCIA), an agency of the Ex-Im Bank that includes insurance
against confiscation, civil disturbances, and the cancellation or restriction of export or import
licenses.

The Agency for International Development (AID) provides aid to underdeveloped countries and
has limited protection in support of “essential” projects in approved countries and for approved
products. And the Overseas Private Investment Corporation (OPIC) provides risk insurance for
companies investing in less-developed countries.

Summary

Vital to every marketer’s assessment of a foreign market is an appreciation for the political
environment of the country within which he or she plans to operate. Government involvement
in business activities abroad, especially foreign-controlled business, is generally much greater
than business is accustomed to in the United States.

The foreign firm must strive to make its activities politically acceptable or it may be subjected to
a variety of politically condoned harassment. In addition to the harassment that can be imposed
by a government, the foreign marketer frequently faces the problem of uncertainty of continuity
in government policy.

As governments change political philosophies, a marketing firm accepted under one

administration might find its activities undesirable under another.

An unfamiliar or hostile political environment does not necessarily preclude success for a foreign
marketer if the company becomes a local economic asset and responds creatively to the issues
raised by political and social activists. The U.S. government may aid American business in its
foreign operations, and if a company is considered vital to achieving national economic goals, the
host country often provides an umbrella of protection not extended to others.

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