Topic 4 - The Global Political Environment

When we look at the global market as one big market, investors and entrepreneurs have to look carefully at the political and legal environment of any country before they decide to enter a that country to invest and carry out business.

F. Cherunilam (2009) The political environment of a country would include such factors as the policies of the political parties, the nature of the Constitution and the government systems encompassing the economic and business policies and regulations.

The factors mentioned may vary from country to country however, are very important to marketers when it comes to market selections and business strategy formulation. When studying any major economic policy of a country, students will find that behind these policies are political decisions therefore political environment and the economic environment tends to intertwined.

Economic Policies

Let us look at a few important economic policies that students may be familiar with and can be found in any country;

• Industrial policies
• Fiscal policies
• Export/Import policies.

Political decisions tend to impact economic and business decisions. For example; Increase in tariffs on certain products can have an impact on prices as well profitability or if a product is prohibited from being imported into a country than businesses have to consider other strategies.

Thus when investors or businesses are contemplating to enter a foreign market, they should be aware of the economic policies of the political party that is in power. By understanding the economic policies of the government, businesses would be able to operate within the framework of the given policies.

Economic Roles of Government

When studying the different roles a government plays in any economy, students will note the three important roles the Government normally plays. These roles are; Participator, Facilitator and Regulator.

Participator – In almost all countries there are commercial activities undertaken by the government especially in areas related to transport, education, infrastructure development etc. You will find government participating in the public transport or in any infrastructural development.

Facilitator – Government can operate as facilitators to oversee business and investment growth by providing tax concession, tax holidays etc.

Regulator – Government regulates activities which are tied with the government planning framework and fiscal policies. In Papua New Guinea, the government planning framework is carried out by the Department of National Planning while the fiscal policies is facilitated by the Department of Treasury, Together with the Department of Finance, these three departments are the central agencies for the government.

Political Instability

Political Instability is another risk factor that marketers may encounter in a foreign market. For example, in some countries there are political instability with change of government occurring frequently that there are uncertainty by investors whether to invest or not. There are other risks whether or not to enter a market and if so what form of entry should investors or marketers take to minimize risk.

D. Crowther and S. Seifi (2010) stated in their book Corporate Governance and Risk Management that Corporate Governance is now an important concept the world over and these has come about due to economic liberalization and deregulation of industries and business. There is demand for more corporate responsibilities in terms of corporate ethics and stricter compliance with the law of the land.

Home governments can apply pressure not to deal with disapproved parties. These measures may take the refusal to grant an export licence, or withdrawal of export guarantee cover.

The host government may take measures like taxation, ownership controls, operating restrictions or expropriation. 

Forms of Government and Political Structures

Knowledge of the various forms of government and political structures is useful in making an appraisal of the political environment for a firm. Forms of Government are:

1. Democracy
2. Monarchy and Dictatorship as distinct from capitalism
3. Communism and socialism which are economic systems characterized by varying degree of market orientation

One can classify government as open (e.g. parliamentary) or closed (e.g. with absolute government control).

Parliamentary Governments – This form of government consults its citizens at periodic intervals to ascertain their wishes and preferences.

Absolute Governments – Dictates government policies without considering citizens needs or opinions.

Other Governments – Governments falling between two extreme.

Government involvement in the economy presents commercial opportunities to firms to operate where government becomes the purchaser of goods and services.

POLITICAL ENVIRONMENT

Politics has a very important impact on every business operation;

• No matter what its size, its area of operation
• Whether the company is domestic, national, international, large or small
• Political factors of the country it is located in will have an impact on it.
• Most crucial & unavoidable realities of international business are that both host and home governments are integral partners.
• Reflected in its policies and attitudes toward business are a governments idea of how best to promote the national interest, considering its own resources and political philosophy.

Political environment within the global market impact on businesses:

1. Size of business
2. Area of operation
3. Domestic, national, international, large or small
4. Political factors
5. Host and Home government are integral partners
6. Government ideas to promote national interest
7. Own resources
8. Political philosophy

A government can control and restricts a company's activities by:

• Encouraging and offering support or
• By discouraging and banning
• By restricting its activities depending on the government.

INTERNATIONAL LAWS

International law recognizes - the right of nations to grant or withhold permission to do business within its political boundaries and control its citizens when it comes to conducting business.

Thus, political environment of countries is a critical concern for the international marketer and he should examine the salient features of political features of global markets they plan to enter.

From the international laws point of view a sovereign state:

• Is independent and free from external control;
• Enjoys full legal equality;
• Governs its own territory;
• Selects its own political system
• Social system
• Economic systems;
• And has the power to enter into agreements with other nations.
• It is extension of national laws beyond a country's borders that much of the conflict in international business arises.
• Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other countries.

Example:

Like the European Union (EU), North American Free Trade Agreement (NAFTA) are examples of nations voluntarily agreeing to give up some of their sovereign rights in order to participate with member nations for common, mutually beneficial goals.

The ideal political climate for a multinational firm is stable, friendly environment. Unfortunately, that is never really the case; it's not always friendly and stable. Since foreign businesses are judged by standards as variable as there are nations, the friendliness and stability of the government in each country must be assessed as an ongoing business practice.

STABILITY OF GOVERNMENT POLICIES:

The most important of the political conditions that concern an international business is the stability or instability of the prevailing government policies.

1. Political parties may change or get re-elected but the main concern for MNCs is the continuity of the set rules or code of behavior regardless of the party in power.
2. A change in the government does not always mean change in the level of political risks.
3. In Italy the political parties have changed 50 times since the end of World War II but the business continues to go on as usual in spite of the political turmoil.
4. In comparison is India, where the government has changed 51 times since 1945 but however much of the government policies remain hostile to foreign investments.
5. Some of the African countries are among the unstable with seemingly unending civil wars, boundary disputes and oppressive military regimes. 
6. Conversely, radical changes in policies toward foreign business can occur in the most stable of the governments.

If there is potential for profit and if given permission to operate within a country, MNCs can function under any type of government as long as there is some long-term predictability and stability.

Political Sovereignty

1. This involves a nation’s desire to exert control over foreign-owned enterprises operating within its boundary.
2. A common form of protection is an increase in taxes payable by foreign corporation.
3. Mostly encountered in developing nations

Political Conflict

1. Categorized as turmoil, civil war/unrest, conspiracy
2. Turmoil – upheaval on a major scale against a government
3. Civil war/internal war – organized violence on large scale against government

Political intervention 

• This occurs when decisions by governments in the host country force the foreign firm to change its strategies, policies or operations.

NATURE OF POLITICAL RISK

Political risk varies from country to country. Countries with political stability are perceived to be lower in political risk than those with instability.

1. General instability risk – internal risks such as civil unrest, revolution or external threats to the government through invasion
2. Ownership risk – pertaining to properties and life of expatriate employees
3. Operating risk – interference in the ongoing operation of the company overseas
4. Transfer risk – Occurs when the firm is prevented from moving funds between countries

Political risk assessment is important and necessary to identify country’s environment.

POLITICAL PARTIES

• Particularly important to the marketer is the knowledge of all philosophies of all major political parties within a country, since anyone might become dominant and alter prevailing attitudes.
• In those countries where there are two strong political parties where usually one succeeds the other, it is important to know the direction each of the parties is likely to take.
• Changes in direction a country may take toward trade and related issues are caused not only by political parties but also by politically strong interest groups and factions within different political parties, which cooperate to affect trade policies.

 NATIONALISM

• Economic nationalism that exists to some degree in all countries is another factor that affects international environment.
• Nationalism is intense feelings of national pride and unity, an awakening of nation's people to take pride in their own country.
• This pride can take an anti-foreign business bias. One of the central aims of economic nationalism is the preservation of national economic anatomy, where national interest and security are more important than international considerations.

Example: In 1974 in Indonesia a series of riots broke out against Japan and Prime Minister Tanaka. These riots were caused by popular reaction against Japanese businesses and agencies being burned to the ground and Japanese product being destroyed. Those caught driving Japanese cars at the time were invited to step out of their vehicles so they could witness their cars being torched.

Riots against the Chinese businesses in PNG in 2009 and in the Solomon Islands a few years ago.

 

POLITICAL RISKS OF GLOBAL BUSINESS

Three main types of political risks are :-( Confiscation, Expropriation and Domestication)

• Confiscation: The most severe political risk is confiscation, which is seizing of company's assets without payment.
• Expropriation: Less severe is however, expropriation, which requires reimbursement, for the government seized investment.
• Domestication: A third type of risk is domestication, which occurs when host country takes steps to transfer foreign investments to national control and ownership through series of government decrees.

 

ECONOMIC RISKS

International companies are often faced with many economic risks most of which arise without any prior warning. Economic risks are an important and a recurring part of political environment that a few companies can avoid.

Exchange controls - stems from shortage of foreign exchange held by the country. When this happens, controls may be placed upon all movements of capital or selectively against most politically vulnerable companies. Exchange controls are extended to cover products by applying a system of multiple exchange rates to regulate trade.

Local-content laws - companies often require a portion of any product sold in a country to have a local content. Import restrictions- selective restrictions on import of certain raw materials, machines and spare parts are common strategies used to force foreign companies to purchase more materials within host country creating markets for local products.

Tax controls - taxes are a classified risk when used as a means of controlling' foreign investments. They are often raised without warning and in violation of formal agreements. · Price controls- essential products that command considerable public interest are often subject to price controls.

 

 

 

ASSESSING POLITICAL VULNERABILITY

• Some products are more politically vulnerable than others, in that they receive more government attention.
• This special attention may result in positive or negative actions towards the company.
• Unfortunately there are no absolute guidelines for marketer's to follow whether the product will receive government attention or not.

FORECASTING POLITICAL RISKS

A number of firms are employing systematic methods of measuring political risk. Political risk assessment can:

• Help managers decide if risk insurance is needed
• Devise intelligence network and an early warning system
• Help managers develop a contingency plan
• Build a database of past political events for use by corporate management
• Interpret the data gathered and getting forewarnings about political and economic situations

POLITICALLY SENSITIVE PRODUCTS

There are some generalizations that help to identify the tendency for products to be politically sensitive.

• Products that have an effect upon the environment exchange rates, national and economic security, and the welfare of the people are more apt to be politically sensitive.
• For products judged non-essential the risk would be greater, but for those thought to be making an important contribution, encouragement and special considerations could be available.

REDUCING POLITICAL VULNERABILTY

Even though the company cannot directly control or alter the political environment, there are measures with which it can lessen the susceptibility of a specific business venture.

GOOD CORPORATE CITIZENSHIP

A company can reduce its political vulnerability by being a corporate citizen and remembering:

1. It is a guest in the country and should act accordingly
2. The profits are not it's solely, the local employees and the economy of the nation should also benefit.
3. It is not wise to try and win over new customers by totally Americanizing them.
4. A fluency in the local language helps making sales and cementing good public relationships.
5. It should train its executives to act appropriately in the foreign environment.

STRATEGIES TO LESSEN POLITICAL RISKS:

MNCs can use other strategies to minimize political risks and vulnerability. They are:

1. Joint ventures
2. Expanding the investment base
3. Marketing and distribution
4. Licensing
5. Planned domestication
6. Political payoffs 

GOVERNMENT ENCOURAGEMENT OF GLOBAL BUSINESS

Governments also encourage foreign investment.

1. The most important reason to encourage investment is to accelerate the development of an economy.
2. An increasing number of countries are encouraging investments with specific guidelines toward economic goals.
3. MNCs may be expected to create local employment, transfer technology, generate export sales, and stimulate growth and development of the local industry.  

ECONOMIC REGIONALISM

Regionalism has much greater significance for the global economy.

1. The movement at the beginning of the twenty-first century is nearly universal; the major economies, with a few exceptions that include China, Japan, and Russia, are members of a formal regional arrangement. 
2. Regionalism at the turn of the twenty-first century entails increased regionalization of foreign investment, production, and other economic activities.
3. Although there is no single explanation for this development, every regional arrangement represents cooperative efforts of individual states to promote both their national and their collective economic and political objectives.
4. Economic regionalism is an important response by nation-states to shared political problems and to a highly interdependent, competitive global economy.
5. As the international economy has become more closely integrated, regional groupings of states have increased their cooperation in order to strengthen their autonomy, improve their bargaining positions, and promote other political/economic objectives.
6. The ways in which the world economy functions are determined by both markets and the policies of nation-states, especially those of powerful states; markets and economic forces alone cannot account for the structure and functioning of the global economy.
7. The interactions of the political ambitions and rivalries of states, including their cooperative efforts, create the framework of political relations within which markets and economic forces operate.
8. States, particularly large states, establish the rules that individual entrepreneurs and multinational firms must follow, and these rules generally reflect the political and economic interests of dominant states and their citizens.
9. However, economic and technological forces also shape the policies and interests of individual states and the political relations among states, and the market is indeed a potent force in the determination of economic and political affairs.
10. The relationship of economics and politics is interactive. 

IMPACT OF LAW ON INTERNATIONAL OPERATIONS:

Three areas of problems:

Environment - Countries have laws relating to environmental issues and are becoming more conscious of environmental problem cross national boundaries. Global conferences on environmental issues are now becoming annual events addressing ethical considerations

Human Resources – When operating abroad, employment of locals come into play. Local labor laws, employment visas for expatriate, wages and salary requirements have to be taken into considerations.

Intellectual Property – International protection of patents, copyright, trademarks, design, trade secret etc. In some cases, the cost of registrations outweighs the benefits, especially if preventive measures are designed to forestall future competition.  

CONTROLS ON INTERNATIONAL TRADE:

Tariffs – is a tax collected on goods shipped across national boundaries.  Tariffs can also be collected by the exporting country, countries through which goods pass and the importing country. Tariffs can also be levied, usually by less developed countries, to raise money for the government.

Import Tariffs – most common, can be levied to protect domestic companies by increasing the cost of foreign goods.

Example of Tariffs – Japan charges US tobacco producers a tariff on cigarettes imported into Japan as a way to keep their prices higher than the prices charged by domestic firms.

In Australia, tariffs still exist on motor vehicles manufactured overseas and on textiles and these are erected to protect local industries and manufacturers who are unable to compete with their international counterparts.

Quotas - Are the most common form of trade restrictions. A quota is a limit on the number or value of goods that can be traded. The quota amount is typically designed to ensure that domestic competitors will be able to maintain a certain market share.

Example: Honda is allowed to import 425,000 motor vehicles each year into the US. In order to make as many vehicle as they want Honda decided to open a manufacturing plant in the US whereby it is not importing but actually manufacturing in the US.

Export Restrain Agreement -  Are designed to convince other nations to voluntarily limit the volume of value of goods exported to a particular country. They are in fact export quotas.

Example: Japanese steel producers voluntarily limit the amount of steel they send to the US each year.

Buy National Legislation - Gives preference to domestic producers through the content or price restrictions. Several countries have this type of legislation.

Example: Brazil requires that Brazilian companies purchase only Brazilian made computers.

The United States requires that the Department of Defense purchase military uniforms manufactured only in the US.

Mexico requires that 50% of the parts sold in Mexico be manufactured in Mexico.

LAWS AFFECTING IMPORTS AND INVESTMENT

1. Quotas and other barriers
2. Tariffs and dumping
3. Import requirements, labeling, safety etc
4. Banking, currency, loans etc
5. Anti- trust
6. Corruption (facilitation, bribery etc)
7. Investments
8. Foreign ownership
9. Labor and Industrial laws
10. Localization of equity and management
11. Royalty, tax, expropriation risks

MULTILATERAL AGREEMENTS

• GATT
• UN (UNCTAD, UNICITRAL)
• UN (Intellectual property, sanctions, embargos)

Other convention

BILATERAL AGREEMENTS

Bilateral agreements between governments of different countries

REGIONAL TRADE AGREEMENTS

NAFTA, APEC, EU etc

INTERNATIONAL LAWS AFFECTING DISPUTE RESOLUTION

• Negotiation, mediation, arbitration, litigation
• Jurisdictions and enforcement, International conventions etc

OTHER LEGAL INFLUENCES ON INTERNATIONAL TRADE

• Courts of arbitration
• copyright
• trademarks
•  patents

LAWS AFFECTING EXPORTS

• Prohibited exports, pricing controls
• Statutory marketing authority
• Other government assistance etc

 SOURCE:

International Business 3^rd Edition P. Subba Rao

Marketing Management Textbook by Phillip Kotler

International Business Environment by Francis Cherunilam