International Marketing
13 t h E d i t i o n
P h i l i p R. C a t e o r a
M a r y C. G i l l y
John L. Graham
The Political
Environment:
a Critical Concern
Chapter 6
Global Perspective
• A crucial reality of international business
– Both host and home governments are integral partners
• A government controls and restricts a company’s
activities
– By encouraging and offering support
– 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
– To control where its citizens conduct business
6-2
The Sovereignty of Nations
• A sovereign state
– Independent
– Free from all external control
• Sovereignty
– Powers exercised by a state in relation to other countries
– Supreme powers exercised over its own members
6-3
The Sovereignty of Nations
• 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
6-4
Stability of Government Policies
• 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 international market
instability
– 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
– Trade disputes themselves
6-5
Forms of Government
• Circa 500 B.C – Ancient Greeks criticized three
fundamental forms of government
– Rule by one (monarchy)
– Rule by few (aristocracy)
– Rule by many (democracy)
• Circa 1990 – Collapse of communism
– Free-enterprise democracy considered the best solution
• 200+ sovereign states on the planet
– Almost all have at least nominally representative governments with
universal suffrage for those 18 years and older
– In about 10% of the states voting is required, in the rest it is voluntary
6-6
A Sampling of Government Types
Exhibit 6.1
6-7
Political Parties
• In countries where two strong political parties
typically succeed one another, it is important to
know the direction each party is likely to take
– Great Britain
► The Labour Party vs. the Conservative Party
• Unpredictable and drastic shifts in government
policies deter investments, whatever the cause
of the shift
• A current assessment of a country’s political
philosophy and attitudes is important in gauging
their stability and attractiveness in terms of market
potential
6-8
Nationalism
• 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
• Countries use nationalism to protect themselves
against intrusions
– Threats from outside forces
– Declines in the domestic economy
• Nationalism comes and goes
– As conditions and attitudes change
– Foreign companies welcomed today may be harassed tomorrow
and vice versa
6-9
Targeted Fear and/or Animosity
• Marketers should not confuse nationalism with
a widespread fear or animosity directed at a
particular country
– Toyota in the U.S. (1980s)
– Animosity toward the United States in France
– The unhappiness of citizens and politicians in many other countries
concerning the war in Iraq
• 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
6-10
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
– Mandating local ownership
– Greater national involvement in a company’s management
6-11
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
6-12
Economic Risks
• 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
6-13
Political Sanctions
• One or a group of nations may boycott
another nation
– Stopping all trade between the countries
– Issuing sanctions against 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 ignored by other major nations’
traders
6-14
Political and Social Activists
• Not usually government sanctioned
• Can interrupt the normal flow of trade
• 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
– Protest rallies against the U.S. – Iraq War
6-15
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
6-16
U.S. State Department
Travel Warnings
Exhibit 6.3
6-17
Violence and Terrorism
• The State Department reported 3,200 terrorist
incidents worldwide in 2004
• Goals of terrorism against multinationals
– To embarrass a government and its relationship with firms
– To generate funds by kidnapping executives
– To use as pawns in political or social disputes
– To inflict terror within a country as did September 11
• In the past 30 years, 80% of terrorist attacks
against the U.S. have been aimed at American
businesses
6-18
Armed Conflicts Around the World
Exhibit 6.4
6-19
Cyberterrorism and Cybercrime
• The internet is a vehicle for terrorist and criminal
attacks to inflict damage on a company with little
chance of being caught
– By foreign and domestic antagonists
• It is hard to determine if a cyber attack has been
launched
– By a rogue state
– A terrorist
– A hacker as a prank
6-20
Cyberterrorism and Cybercrime
• Each wave of viruses
– Gets more damaging
– 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
► A country’s infrastructure
• Mounting concern over the rash of attacks
– Business leaders and government officials addressed a Group
of Eight conference
6-21
Politically Sensitive
Products and Issues
• Politically sensitive products
– Perceived to have an effect on the environment, exchange rates,
national and economic security, and the welfare of people
– Are publicly visible or subject to public debate
• 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
6-22
Forecasting Political Risk
• Political risk assessment
– An attempt to forecast political instability
– To help management identify and evaluate political events
– To predict their potential influence on current and future
international business decisions
• Government failure is greatest risk to
international marketers
– Causing chaos in the streets and markets
• Risk assessment of investments
– Used to estimate the level of a risk a company is assuming
– Helps determine the amount of risk a firm is prepared to accept
6-23
Top 20 States in Danger of Failing
(Ranked)
Exhibit 6.5
6-24
Lessening Political Vulnerability
• 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
– Creates jobs
– Makes tax contributions
• Political parties often focus public opinion on the
negative aspects of MNCs whether true or false
– As scapegoats for their own failure
– To serve their own interests
6-25
Lessening Political Vulnerability
• Strategies that MNCs use to minimize
political vulnerability and risk
– Joint ventures
– Expanding the investment base
– Licensing
– Planned domestication
– Political bargaining
– Political payoffs
6-26
Government Encouragement
• Most important reason to encourage foreign
investment
– To accelerate the development of an economy
• U.S. government motivated for economic as well
as political reasons
– Encourages American firms to seek business opportunities in countries
worldwide including those that are politically risky
► Department of Commerce
► International Trade Administration
• Agencies that provide assistance to U.S. companies
– Export-Import Bank (Ex-Im Bank)
– Foreign Credit Insurance Association (FCIA)
– The Agency for International Development (AID)
– The Overseas Private Investment Corporation (OPIC)
6-27
