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Discussion Questions for Chapter 6
The Political Environment: A Critical Issue
Discussion Questions
1. Define: Sovereignty Nationalism Expropriation PSAs Confiscation Domestication

2. Why would a country rather domesticate than expropriate? Expropriation creates problems with other governments and can cause potential investors to shy away from investments in their country. Further, if a country domesticates, they are able to achieve almost all, if not all, the advantages of expropriation without the negative aspects associated with such a drastic move. 3. “A crucial fact when doing business in a foreign country is that permission to conduct business is controlled by the government of the host country.” Comment.
It is extremely critical for a company to examine, evaluate, and comprehend the present and future policies of the government in a foreign country. To do this, the type of government and the types of political parties and their basic philosophies toward foreign business must be studied in depth. The level of economic development and the accompanying political policies are directly correlated with the attitude of the government toward foreign business. This attitude may or may not change with changes in government, political parties, economic conditions, etc. Also, the importance of products to the country is a deciding factor in restricting or encouraging foreign business.

4. What are the main factors to consider in assessing the dominant political climate within a country?
a. Current form of government. b. Current political party systems. c. Stability and permanency of government policy. d. Risks or encouragements of foreign business resulting from political activity.

5. Why is working knowledge of party philosophy so important in a political assessment of a market? Discuss.
A working knowledge of party philosophies is necessary if there is a possibility that a change in government policy toward foreign business could result from a change in government or political parties.

6. How can a change in the political party in Power affect an investor? Discuss and give examples. Particularly important to the marketer is knowledge of the philosophies of all major political parties within a country, since any one of them might become dominant and alter prevailing attitudes. In those countries where there are two strong political parties that 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.

Even in Mexico, where a dominant party (PRI) maintained absolute control for seven decades, knowledge of the philosophies of all political parties is important. Over the years, the doctrines of opposing parties have had an influence on the direction of Mexican policy. With the recent election of the PAN party nominee for president, it is even more essential to know the philosophy and direction of both the PRI and PAN, the two major political parties in Mexico.1 The election of Vladimir Putin as president of Russia has been favorably received. By all accounts Russia’s economy has been stagnant for over 20 years. Corruption, half-baked market policies, expansion of the ranks of petty civil servants, and a chaotic legal system have produced an economy that in many ways is as dysfunctional as the old Soviet system.2 Mr. Putin’s apparent commitment to economic reform and his statement that “the only dictatorship Russia will obey is the dictatorship of the rule of law”3 are seen as encouraging notes that there will be reform in Russia. However, most agree that it will take time to unseat an entrenched bureaucracy and a court system infested with low-paid communist-era judges who are susceptible both to bribery and political pressure. An astute international marketer must understand all aspects of the political landscape to be properly informed about the political environment. 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. 7. What are the most common causes of instability in governments? Discuss.
The most common causes of instability in governments are: a. a change in the form of government – this is the most drastic cause because a “reform” government is often replacing a government which encouraged foreign business, b. a shift in political parties – the policy of various parties quite often differs concerning restrictions or encouragements of foreign business, c. a rise in feelings of nationalism – the people may pressure the government or party in control to negatively influence the extent of trade with foreign countries (i.e., “Buy American”).

8. Discuss how governmental instability can affect marketing.
Government instability affects marketing because of the risks which are inherent in foreign marketing. Much can be lost if a company invests money in a plant or operation within a foreign country and is later subjected to restrictions, controls, or expropriation by the present or new government.

9. What are the most frequently encountered political risks in foreign business? Discuss.
1 2 3

“Mexican Parties at a Glance,” AP Online, July 2, 2000. “Putin, Gref Discuss Administrative Reform, Interfax, February 21, 2003. “Putin Reaffirms Need to Protect Foreigners’ Rights,” Interfax, January 22, 2003.

a. Expropriation – the acquisition of a company’s property by the host country. The companies may or may not be compensated. b. Exchange Controls – used to conserve the supply of foreign exchange. Controls may be levied against foreign companies or types of products. c. Import Restrictions – restrictions on the imports of raw material, parts, etc., are employed to induce the foreign industry to purchase its supplies locally. d. Taxes – they are sometimes increased despite prior agreements calling for a specific tax rate. e. Price Controls – generally applied during inflationary periods to essential products. f. Labor Problems – unions may have strong government support which allows special labor concessions from the foreign business. Companies may be forced to abide by rules set up by labor unions through the government.

10. Expropriation is considered a major risk of foreign business. Discuss ways in which this particular type of risk has been minimized somewhat as a result of company activities. Explain how these risks have been minimized by the activities of the U.S. government. The risk of expropriation has been minimized by:
a. a change in attitude of foreign governments toward expropriating an industry or company. b. application of strict economic pressures by the country of the expropriated firm. c. encouraging the people of the host country to invest in the business venture and work in the enterprise. d. The U.S. government also offers support in minimizing political risks by establishing agencies (such as export-import Bank) to underwrite the investment activities of American companies. The U.S. government also supplies pressure to countries which expropriate U.S. firms by cutting off foreign aid via the Hickenlooper amendment.

11. How do exchange controls impede foreign business? Discuss.
Exchange controls are established by a country in order to maintain a specific level of foreign exchange. They are used especially during periods when the country faces shortages of foreign currency. This control keeps the company from exchanging its earnings into the currency of its own country. Also, demand for imported goods may exist, but exchange controls may limit currency and thus render the demand ineffective.

12. How do foreign governments encourage investment? Discuss.
Foreign governments encourage foreign investment by offering tax exemptions, protection against competing imports, and unimpeded movement of capital and profits.

13. How does the U.S. government encourage foreign investment? Spell out the implications in foreign marketing.
The U.S. government encourages foreign investment by attempting to create favorable climates in foreign countries for investment and by assisting in current operations of the foreign-located firm. The United States does this by minimizing investment risks. These

encouragements by the United States set the stage for foreign investment. However, it is basically up to the company to combine its self-interest with that of the host country. By doing so, the U.S. government will probably not be called upon to apply political or economic pressures.

14. What are the motives behind U.S. government encouragement for foreign investment? Explain. Governments, both foreign and U.S. encourage foreign investment as well as discourage it. In fact, within the same country some foreign businesses may fall prey to politically induced harassment while others may be placed under a government umbrella of protection and preferential treatment. The difference lies in the evaluation of a company’s contribution to the nation’s interest.

The most important reason to encourage foreign investment is to accelerate the development of an economy. An increasing number of countries are encouraging foreign investment with specific guidelines aimed toward economic goals 4 . Multinational corporations may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of local industry, conserve foreign exchange, or meet a combination of these expectations as a requirement for market concessions5. Recent investments in China, India, and the former republics of the USSR include provisions stipulating specific contributions to economic goals of the country that must be made by foreign investors. 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: 15. Discuss measures a company might take to lessen its political vulnerability.
Companies investing in foreign countries can minimize the political and economic risks by: a. establishing a management of Americans and nationals, b. employing nationals, c. selling stock in the company to nationals, d. sharing the profits and earnings in a fair manner, e. understanding the traditions of the people in the host country, f. having the national work with you, not for you.

16. Select a country and analyze it politically from a marketing viewpoint.
A library project.

17. The text suggests that violence is a politically motivated risk of international business. Comment.
Although violence is not generally government initiated, it is a risk that multinational companies must consider in assessing the political vulnerability of their activities. Violence against government, as well as against multinational firms, has been on a steady increase during the 1970s. Violence against multinational companies may have governmental-political overtones since it is frequently directed toward a multinational in order to embarrass a
4 5

“Tax Incentives Key to Turning Korea Into NE Asian Hub,” the Korea Times, July 8, 2002. Matthew Mok, “Pooling Best Practices to Woo MNCs,” New Straits Times-Management Times, September 5, 2002

government. Much of the violence is designed to disrupt the relationship between a government and a multinational firm forcing the government to expropriate or force a multinational to leave the country. A recent example would be the experience of Owens-Illinois Company in Venezuela. The government admitted that their decision to expropriate Owens-Illinois was directly related to the violence that leftist groups caused against that company.

18. There is evidence that expropriation and confiscation are less frequently encountered today than just a few years ago. Why? What other types of political risks have replaced expropriation and confiscation importance?
Risks of confiscation and expropriation have lessened over the last decade because experience has shown that few of the desired benefits materialized after government takeover. Rather than a quick answer to economic development, expropriation and nationalization often lead to nationalized businesses that were inefficient, technologically weak, and noncompetitive in world markets. As the world became more economically interdependent and it became obvious that much of the economic success of countries like South Korea, Singapore, and Taiwan could be tied to foreign investments, countries began to view foreign investment as a means of economic growth. Even in Mexico, MNCs that were heavily restricted until only a few years ago, are now courted for direct investment as well as a source of much needed capital and technology. Additionally, Mexico has begun to privatize many nationally owned companies. A national airline was sold to private investors and the nationalized telephone company was sold to a consortium of investors from Mexico, U.S. and France. The benefits realized by Mexico of privatizing the national telephone company were almost immediate because the government received hundreds of millions of dollars of much needed capital from the sale. In addition, Mexico’s antiquated telephone system will be replaced by the latest technology, something the financially strapped government could not do. A similar scenario is being played out in Brazil, Argentina, India, and many Eastern European countries. Although expropriation and confiscation are waning in importance as a risk of doing business abroad, more frequently international companies are confronted with a variety of economic restraints that are often imposed with little warning. These economic risks may be imposed under the banner of national security, protection of infant industry, protection of scarce foreign exchange, or as taxes to raise revenue. They include such things as exchange controls, local content laws, import restrictions, tax controls, price controls, and labor problems.

19. You are an executive in a large domestic company with only minor interests in international markets; however, corporate plans call for major global expansion. Visit the homepage of Control Risks Group After thoroughly familiarizing yourself with the services offered by CRG, write a brief report to management describing how its services could possibly help with your global expansion. Although CRG is a “for profit company” and will charge for complete reports, they do provide summaries of the reports which contain a synopsis of the report. Visiting this site will illustrate the types of information available to MNCs seeking information on political

conditions in countries and regions. At the time this was written (2001) the following report was available; RiskMap 2001 provides a critical assessment of global and regional political, security and business practice issues that will challenge and energize business leaders in 2001 and beyond. RiskMap 2001 global essays cover issues as diverse as: the growing threat to business from AIDS; the powerful politics of hydro-electric construction projects; and the short- and medium-term effects arising from price changes and technological developments in the oil sector. The regional sections include articles on key countries as well as political and security risk ratings for all countries. A new feature is a map illustrating these risks, suitable for wall display.

Key predictions for 2001
Sub-Saharan Africa Despite containing most of the world’s Extreme-rated areas, the prospects for subSaharan Africa as a whole provide some reason for optimism. Gradual political and economic reform is likely, albeit accompanied by phases of political instability and renewed conflict. Countries such as Tanzania, Mozambique and Zambia will achieve new successes, while old favorites such as Ghana and Ethiopia could again hit the spotlight. Areas of concern include Liberia, the Central African Republic, Chad, Kenya, Zimbabwe, Guinea-Conakry and Equatorial Guinea. Americas The situation in the Americas is increasingly stable, with star-performing countries like Argentina, Brazil and Mexico maintaining their commitment to fiscal austerity and attracting the bulk of inward investment into Latin America. On the negative side, however, Brazil and Mexico will experience serious crime problems and some of the smaller economies, especially in the Andean region, could experience continued political volatility and this could undermine investor confidence in the region. Asia and the Pacific Both perennial hazards and new areas of uncertainty confront foreign investors in Asia and the Pacific in 2001. The main areas of concern will remain Pakistan, Indonesia and the Philippines, with potential for more unrest in the South Pacific countries of Fiji and the Solomon Islands. Basic political stability in the continent’s giants, India and China, will not be in question. Europe and the FSU In Europe and the Former Soviet Union, new risks, from cybercrime to physical direct action campaigns, will come to the fore. Although overt gangsterism is declining in most of Eastern Europe, criminal groups are becoming more sophisticated, engaging in

complex economic fraud, cybertheft and money-laundering. Western Europe, in particular, will witness further episodes of direct action, while terrorism will remain a specter in countries such as Spain and Greece. Middle East and North Africa The Middle East and North Africa will see continued political stability combined with moderate growth. Israel’s fragmented parliament will result in weak governing coalitions and further clashes are likely in the West Bank and Gaza. The power struggle between reformists and conservatives in Iran will continue to open to foreign investment. An increasingly nationalist political atmosphere in Turkey may heighten political risk to foreign business. The successor to Control Risks’ Outlook series. RiskMap 2001 is an important annual milestone in the political and security risk assessment process that is now a required part of good corporate governance. 20. Visit the homepage of Agora . Select the Political Site of the Week and write a brief political analysis highlighting potential problem areas for a company interested in investing in that country. Individual research. Instructor may want to visit the Web site and assign countries for students to study. 21. Search the Web for information on activities of PSAs outside the United States and write a briefing paper for international management on potential problems. Individual research. Most of the large periodical search sources will result in numerous articles about PSA activities. 22. Discuss ways the companies discussed in the Global Perspective could have minimized their losses in the Banana Wars. Opinion. Questions 22 and 23 can be used for a debate or discussion in class 23. Discuss any ethical and socially responsible issues that may be implied in the Global Perspective. Opinion. Questions 22 and 23 can be used for a debate or discussion in class.



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