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- 1. The Political Environment: A Critical Concern Chapter 6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 2. Learning Objectives LO1 What the sovereignty of nations means and how it can affect the stability of government policies LO2 How different governmental types, political parties, nationalism, targeted fear/animosity, and trade disputes can affect the environment for marketing in foreign countries LO3 The political risks of global business and the factors that affect stability LO4 The importance of the political system to international marketing and its effect on foreign investments LO5 The impact of political and social activists, violence, and terrorism on international business LO6 How to assess and reduce the effect of political vulnerability LO7 How and why governments encourage foreign investment 2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 3. World Trade Goes Bananas (1 of 2) The European Union imposed a quota and tariffs that favored imports from former colonies in the Caribbean and Africa, distributed by European firms, over Latin American bananas distributed by U.S. firms. France gave preferential treatment for bananas coming from its former colonies in the Caribbean and Africa. Chiquita Brands International and Dole Food Company, contending that the EU’s “illegal trade barriers” were costing $520 million annually in lost sales to Europe, asked the U.S. government for help. 3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 4. World Trade Goes Bananas (2 of 2) Chiquita Brands’ annual political campaign contributions increased from barely over $40,000 in 1991 to $1.3 million in 1998. The U.S. government agreed that unfair trade barriers were damaging their business, and 100 percent tariffs on selected European imports were levied. The rest is history and politics. 4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 5. The Sovereignty of 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 sovereign state: is independent and free from all external control governs its own territory selects its own political, economic, and social systems has the power to enter into agreements with other nations enjoys full legal equality with other states 5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 6. Stability of Government Policies At the top of the list of political issues concerning foreign businesses is the stability or instability of prevailing government policies. Other issues include: • Opposing political party ascends to power • Pressure from nationalist and self-interest groups • Weakened economic conditions • Bias against foreign investment • Conflict among governments 6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 7. Chaos in Port-au-Prince CHAOTIC CONDITIONS: On the first Sunday after the quake, at 9:00 a.m., the streets of downtown Port-au-Prince were filled with people scavenging. Onlookers add to the crowd. ©OlivierLaban-Mattei/AFP/GettyImages 7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 8. Instability in the International Market Five main political issues • governments that are inherently unstable • changes in political parties during elections • nationalism • animosity targeted toward specific countries • trade disputes themselves 8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 9. Case in Point: Africa Africa is trapped in a vicious cycle. For its nations to prosper, they need foreign investment. But investment is leery of unstable nations. Some African countries are unstable, with seemingly unending civil wars, boundary disputes, and oppressive military regimes. Kenya fell victim to political violence in 2008 that greatly disrupted growth in commerce in the entire region. Sierra Leone has had three changes in government in five years. UN peacekeeping forces have had to maintain the peace in Central Africa, where ethnic wars have embroiled seven nations. 9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 10. Forms of Government Monarchy (Dictatorship) - rule by one Aristocracy (Oligarchy) - rule by few Democracy - rule by many The purpose of the government is to serve the people, not vice versa. – Cyrus the Great, Monarch of Persia Cyrus’s notion is embedded in the constitutions of most modern nations. The world seemed to have agreed that free enterprise democracy was the best solution to all the criticisms of government. Exhibit 6.1 lists a sampling of the countries that are currently taking a different approach to the conventional wisdom of representational democracy. 10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 11. Exhibit 6.1 A Sampling of Government Types Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11 Source: http://www.cia.gov/cia/ publications/factbook/, 2012. back
- 12. Political Parties 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. An astute international marketer must • know the philosophies of all major political parties within a country, because any one of them might become dominant and alter prevailing attitudes and the overall business climate • know the direction each party is likely to take, in case there are two, or more, strong political parties since they typically succeed one another in control of the government • understand all aspects of the political landscape to be properly informed about the political environment 12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 13. Eyes on the polls Portraits of Ayatollah Ali Khamenei (the Supreme Leader) and the late Ayatollah Ruhollah Khomeini loom over Iranian women lined up to vote at a mosque south of Tehran. As mandated by law, women and men waited in separate lines at polling places with more than one ballot box. The current government also specifies the public dress of the women pictured. ©BehrouzMehri/AFP/GettyImages 13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 14. Nationalism Intense feeling of national pride and unity • National interest and security are more important than international relations • Manifestations: • Call to “buy our country’s products only,” (e.g., “Buy American”) • Restrictions on imports, restrictive tariffs, other barriers to trade 14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 15. Targeted Fear and/or Animosity 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 Nationalism: targets all foreign countries Animosity: targets specific nations 15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 16. Trade Disputes Trade disputes can boil over and affect other aspects of international trade. Hot issues circa 2015 • solar panels • Internet trade • steel • trade sanctions against Russia • farm subsidies in developed countries • AIRBUS–Boeing battle over subsidies 16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 17. Political Risks of Global Business Confiscation • The most severe political risk, seizing of a company’s assets without payment Expropriation • Government seizes an investment, but some reimbursement for the assets is made; often the expropriated investment is nationalized to become a government-run entity Domestication • Host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees that mandate local ownership and greater national involvement in a company’s management 17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 18. Economic Risks (1 of 2) Exchange Controls When a nation faces shortages of foreign exchange and/or a substantial amount of capital is leaving the country, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange for the most essential uses. 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 Selective restrictions on the import of consumer products, 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. 18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 19. Economic Risks (2 of 2) Tax Controls Taxes must be classified as a political risk when used as a means of controlling foreign investments. 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 may also be used to force foreign companies to sell equity to local interests. Labor Problems Labor unions with strong government support may use it effectively to obtain special concessions from businesses. Layoffs may be forbidden, profits may have to be shared, and an extraordinary number of services may have to be provided. 19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 20. The consequences of U.S. embargo of Cuba A relatively new Chinese Chery Q (red provisional plate), and one of the newest American cars you can find on the island, a 1957 Chevy (yellow citizen’s plate), certainly with a refurbished engine. A variety of other European and Asian brands ply the streets of Havana, almost all recent models. No new American models are in sight. ©JohnGraham ©JohnGraham 20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 21. 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. • United States’ long-term boycott of trade with Cuba and Iran • Trade sanctions against Russia for its continued aggression toward Ukraine • Russians retaliating against McDonald’s, closing stores in Moscow Political Sanctions 21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 22. Political and Social Activists (PSAs) and Nongovernmental Organizations Those who seek to bring about peaceful change Those who resort to violence and terrorism to effect change Some of the most effective and best-known PSAs • Worldwide boycott of Nestlé • Free Burma Campaign (FBC) • College campuses boycott of Pepsi drinks and PepsiCo-owned Pizza Hut and Taco Bell stores Images in the following pages show protestors using creativity to make a point 22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 23. The French food throw The most entertaining protest technique was pioneered by French farmers. ©ClaudeParis/APImages 23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 24. Pitching perch in Taiwan Apparently they pay attention in Taiwan. Most recently, fishermen pitched perch in Taipei to protest the Japanese fishing fleet’s presence in their waters. ©APImages 24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 25. Protesting milk prices A farmer sprayed milk on police forces during a protest against falling milk prices outside the European Commission headquarters in Brussels. European dairy farmers are seeking more aid to cope with a sharp drop in milk prices. An udderly fantastic shot! ©GeorgesGobet/AFP/GettyImages 25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 26. Baring their dismay Members of the Pirate Party parade through Berlin’s Tegel Airport in their underwear to protest government plans to test full-body scans as an invasion of citizens’ privacy. ©Klaus-DietmarGabbert/epa/Corbis 26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 27. Masked faces Activists of the Bharatiya Janata Party wearing “evil” masks shout antigovernment slogans near the Union Carbide plant in the central Indian city of Bhopal on the eve of World Environment Day. ©Reuters/Corbis 27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 28. Staging a drama They were “pirates” to some, “hostages” to others. But two anti-whaling activists (an Australian and a Briton from the Sea Shepherd Conservation Society) who drew global attention by forcibly boarding a Japanese harpoon ship in Antarctic waters have demonstrated how the emotional clash over Japan’s annual whale hunt can disrupt even the best international friendships. CourtesyofSeaShepherdConservationSociety 28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 29. Violence Terrorism and War Terrorist attacks victimized thousands of people around the world. • These attacks affect business • Multinationals are targeted to • embarrass government and its relationship with firms • generate funds by kidnapping executives • inflict terror within a country Based on the threats of terrorism and other violence, the U.S. State Department posts travel `warnings on its website, as shown in Exhibit 6.2. The world-wide battle deaths from 1940s to 2000s is shown in Exhibit 6.3. 29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. ,
- 30. Exhibit 6.2 U.S. State Department Travel Warnings (in order of date of posting, most recent list) Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 30 Source: http://travel.state.gov/travel/, 2015. back
- 31. Political disaster strikes Kenya In the Nairobi slum of Kibera, supporters of opposition leader Raila Odinga tear up a key railway that ran from the coast to Uganda. ©EPA/Newscom 31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 32. Source: Human Security report project, the Uppsala Conflict, and the Peace Research Institute of Oslo Exhibit 6.3 The Waning of War 32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. back
- 33. Current State of Peace Steven Pinker, in his book The Better Angels of Our Nature, makes the most detailed argument about the current state of peace on the planet. He reasons that the four causes of the decline in violence are • the rule of law • the rule of reason • the rule of women • commerce 33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 34. Cyberterrorism and Cybercrime 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.” One of the problems of tracking cyberterrorism and criminals is that it is hard to determine if the cyber attack has been launched by • a rogue state • a terrorist • a hacker as a prank 34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 35. Assessing Political Vulnerability A marketer has • no absolute guidelines to determine whether a company and its products will be subject to political attention. Countries seeking investments in high-priority industries may well excuse companies from • taxes • customs duties • quotas • exchange controls • other impediments to investment 35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 36. Politically Sensitive Products and Issues Products that have or are perceived to have an effect on the • environment • exchange rates • national and economic security • welfare of people • particularly children health 36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 37. Forecasting Political Risk Political risk assessment • 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 • 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 Foreign Policy magazine uses 12 criteria to rank countries on its “Failed States Index.” • Demographic pressures • Human flight • Uneven development Exhibit 6.4 lists the 20 most fragile states. 37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 38. Exhibit 6.4 Fragile States Index South Sudan Yemen Syria Somalia Haiti Guinea Bissau Central African Republic Pakistan Nigeria Democratic Republic of Congo Zimbabwe Kenya Sudan Guinea Ethiopia Chad Ivory Coast Niger Afghanistan Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 38 Source: From Foreign Policy, “Fragile States Index,” August 2014, pp. 72–77. back
- 39. Lessening Political Vulnerability Joint ventures Expanding the investment base Licensing/franchising Planned domestication Political bargaining Political playoffs 39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 40. Where everybody wins! Political and economic aid in action, where everybody wins: The Japanese government has paid for the construction of a new highway that connects key safari tourism areas in Tanzania. Foreign tourism becomes more efficient, comfortable, and profitable for the Tanzanian company (and others) pictured—Kibo is one of the best in the country. The Japanese designers, consultants, and contractors involved make money on the work. And the road ultimately pays for itself in the form of lower warranty expenses on the armada of Toyota Land Cruisers that regularly ply the path between the Makuyuni and Ngorongoro animal preserves. ©JohnGraham 40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 41. Government Encouragement Reasons to encourage foreign investment • accelerate development • create local employment • transfer technology • generate export sales • stimulate growth and development of local industry • conserve foreign exchange 41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 42. 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. The foreign firm must strive to make its activities politically acceptable, or it may be subjected to a variety of politically condoned harassment. 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. 42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Notas do Editor
- What started as a trade dispute ended up being so intertwined with politics. Small businesses that did not have lobbying power in Washington D.C. ended up being the victims of the tariff retaliation permitted by the WTO on products imported from Europe into the U.S. If one was a large feta cheese or olive oil importer, they had industry groups and lobbyists working on their behalf to prevent these products from Europe from being slapped with a large tariff increase. The whole deal caused many small businesses in the U.S. to go out of business.
- A citizen is subject to the state’s laws even outside the country’s borders. Nations can and do abridge specific aspects of their sovereign rights to coexist with other nations. The European Union and NAFTA are examples of agreements between nations to give up their sovereignty for free trade and other common benefits. Some countries view the WTO as a threat to sovereignty, the fear of relinquishing their nation’s rights for a common goal that might not benefit them or might be detrimental to their goals. Foreign investment is also viewed as a threat to sovereignty. For example, it took many years after NAFTA was passed for the Mexican government to allow foreign companies to invest in the energy and banking sectors, which were government-controlled monopolies until then.
- For foreign firms, the ideal situation is a stable government in the country they are operating in. Unfortunately, this is not always the case. A change in government, whether by election or coup, does not always mean a change in the level of political risk. Conversely, radical changes in policies toward foreign business can occur in the most stable governments as well (Coke in India is an example). The political changes in Mexico in 2000, a change after many years of the PRI party to the PAN party, helped open up the Mexican market to foreign investment and a more liberal government trade policy. The newly elected President of Mexico in 2012, Enrique Peña Nieto, is planning a major upgrade of the 1994 U.S.-Canada-Mexico free trade deal. That is, he wants NAFTA to expand just beyond the current three-country deal if this region is to compete effectively with China and its neighboring countries. He is also proposing greater collaboration with the United States.
- Streets full of people in the capital city after the Haiti Earthquakes in 2010.
- Instability can be caused for various reasons, and some governments are inherently unstable. An example would be where there are too many political parties that a coalition government has to be formed and is weak and therefore can be ousted by opposition parties. India and Italy are prime examples of coalition governments that have been unstable. When Lucent Technologies sold cellular phones for the first time in India many years ago, they had a huge sale of cell phones that resulted in millions of dollars. However, within six months of this, the Indian government changed and the new political party in power imposed a special tax on all cell phone owners, and this resulted in many giving up their cell phones. The current government in India has a liberal policy on cell phones and therefore there is once again a large penetration of cell phones in the country at all economic and social class levels. Being very nationalistic can be a reason for instability, and having historical feelings of dislike toward certain countries can lead to specific policies. And, as described at the beginning of the chapter, trade disputes such as the banana wars can lead to specific policies as well.
- The form of government greatly dictates the extent of government interference in business activities. Most governments in the world are democracies that allow participation of the country’s citizens in electing their leaders. There are a few communist governments in existence, China and Vietnam being prime examples, where the rules and regulations for foreign companies can be determined/changed by the government at will in order to benefit that country and its industries. Russia on the other hand moved to a democracy after the break-up of the former USSR, but continues to struggle with the change––corruption is pervasive particularly for foreign investors, and the Russian government is aware of the problem. The other form of government would be countries where religious leaders and religion dictates government, such as the Sharia law the prevails in Islamic countries. Even though political parties are allowed to exist, they have very little power.
- The CIA has classified countries based on government type as illustrated in Exhibit 6.1.
- In Great Britain, for example, the Labour Party traditionally has been 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. Portraits of Ayatollah Ali Khamenei (the Supreme Leader) and the late Ayatollah Ruhollah Khomeini loom over Iranian women lined up to vote at a mosque south of Tehran. As mandated by law, women and men waited in separate lines at polling places with more than one ballot box. The current government also specifies the public dress of the women pictured.
- Streets full of people in the capital city after the Haiti Earthquakes in 2010.
- Nationalism is an awakening of a nation’s people to pride in their country. This pride can lead to anti-foreign-business sentiment in the nation. Feelings of nationalism can be manifested in a variety of ways such as the reaction of the American people and businesses toward Muslim nations following 9/11. War or recession can create feelings of nationalism as well. Other ways that nationalism can manifest itself is in trade policies such as restrictions on imports from certain countries (imposition of tariffs on shrimp imports from Vietnam, Thailand, and India in 2005 to project U.S. shrimp farmers in the Gulf region), restrictive tariffs (such as the one France imposed on South American bananas), and other barriers such as specific product standards or health standards that only the country’s industries are able to comply with.
- Exchange Controls: This happens when there is a shortage of foreign exchange in the country and the government restricts the spending in foreign currency. This may result in the imposition of differential exchange rates for different products entering the country. Local-Content Laws: All countries and regions may have local-content laws. For example, NAFTA has a 62.5% local-content requirement for cars originating from the NAFTA region, and the EU has a 45% local-content requirement that forces companies to use local components. Import Restrictions: Countries may impose import restrictions to protect local farmers or industries, but this may be detrimental to the local economy if it interrupts production in certain industries. Tax Controls: Taxes that are imposed on foreign companies but not on domestic companies cause their products to be more expensive in the country because costs are passed on to the consumer. Price Controls: Countries can impose price controls on foreign companies selling essential products such as food or gasoline, especially during inflationary periods. Labor Problems: Unionism and labor laws are different in different countries and there are especially strict rules for laying off employees by foreign companies. China’s new labor laws have been revamped and require foreign companies to provide a lot more benefits as well as lifelong employment after a certain number of years of service.
- Exchange Controls: This happens when there is a shortage of foreign exchange in the country and the government restricts the spending in foreign currency. This may result in the imposition of differential exchange rates for different products entering the country. Local-Content Laws: All countries and regions may have local-content laws. For example, NAFTA has a 62.5% local-content requirement for cars originating from the NAFTA region, and the EU has a 45% local-content requirement that forces companies to use local components. Import Restrictions: Countries may impose import restrictions to protect local farmers or industries, but this may be detrimental to the local economy if it interrupts production in certain industries. Tax Controls: Taxes that are imposed on foreign companies but not on domestic companies cause their products to be more expensive in the country because costs are passed on to the consumer. Price Controls: Countries can impose price controls on foreign companies selling essential products such as food or gasoline, especially during inflationary periods. Labor Problems: Unionism and labor laws are different in different countries and there are especially strict rules for laying off employees by foreign companies. China’s new labor laws have been revamped and require foreign companies to provide a lot more benefits as well as lifelong employment after a certain number of years of service.
- 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.
- French farmers like to throw their food. Here they tossed tomatoes and such at McDonald’s; they’ve also lobbed lamb chops at their own trade ministers and herded their sheep into the Louvre Museum.
- The activists protested to draw the attention of the government to chemical waste and demanded the cleanup of hazardous waste in the area. The leak from the Union Carbide pesticide plant in 1984 was one of the world’s worst industrial accidents, killing 3,000 people and leaving thousands of others with lifetime illnesses.
- September 11, 2001 and the attack on the twin towers had numerous consequences, including increasing security measures and the creation of Homeland Security, that increased the cost of doing business both domestically and internationally. When there is violence and war, as witnessed post-September 11th, the target of the violence is usually U.S. businesses, as evidenced by companies like McDonald’s and Pizza Hut.
- As many as 12 people were killed in the associated clashes. Of course, this destruction will do great damage to commerce and progress to all the countries in Eastern Africa, including the World Economic Forum in Davos, Switzerland. Let’s hope the highway and international airport south of Nairobi stay intact, as they supply all of Europe with flowers from the burgeoning greenhouses in the area, and flower exports are a key source of revenue for the formerly thriving Kenyan economy.
- Steven Pinker, in his book The Better Angels of Our Nature, made the most detailed argument about the current state of peace on the planet by providing strong evidence for the steady decline of violence among humankind over the millennia. The reasons for this wonderful decline are listed here.
- Because of mounting concern over the rash of attacks, business leaders and government officials addressed a Group of 8 conference convened to discuss cybercrime, expressing the urgent need for cooperation among governments, industry, and users to combat the growing menace of cybercrime.
- Firms either marketing products not considered high priority or that fall from favor for some other reason often face unpredictable government restrictions. India’s example with Lucent Technologies and cellular phone sales followed by a tax imposition by the Indian government on cell phone users, leading to cell phone users giving up their cell phones, is a prime example. What Lucent thought was a sale did not turn out to be very profitable because of all the lost customers due to the new tax.
- Ban on hormone-treated beef in Europe. Closing of a KFC restaurant in India because of the spotting of “two flies.” (This was mainly because KFC did not enter the country by building a good relationship with the Indian government and their commercials unknowingly mocked the poverty in the country.)
- JOINT VENTURES: 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: Including several investors and banks in financing an investment in the host country is another strategy. This approach has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened. This strategy becomes especially powerful if the banks have made loans to the host country; if the government threatens expropriation or other types of takeover, the financing bank has substantial power with the government. LICENSING/FRANCHISING: A strategy that some firms find eliminates almost all risks is to license technology for a fee. Licensing can be effective in situations in which 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: In those cases in which a host country is demanding local participation, the most effective long-range solution is planned phasing out, that is, planned domestication. This method is not the preferred business practice, but the alternative of government-initiated domestication can be as disastrous as confiscation. As a reasonable response to the potential of domestication, planned domestication can be profitable and operationally expedient for the foreign investor. Planned domestication is, in essence, a gradual process of participating with nationals in all phases of company operations. POLITICAL BARGAINING: Multinational companies clearly engage in lobbying and other sorts of political bargaining to avoid potential political risks. Mattel issued an extraordinary apology to China over the recall of Chinese-made toys, saying the items were defective because of Mattel’s design flaws rather than faulty manufacturing. In doing so, Mattel was (1) protecting the huge and all-important head of its value chain; (2) recognizing that it would be easier to fix its design and inspection routines than quickly affect manufacturing practices in China; and (3) uniquely for an American firm, publicly admitting its own very real culpability. On the other side of the Pacific, Toyota once considered raising prices of its cars in the American market to “help” its ailing American competitors. The Japanese government has set quotas on auto exports in the past as American car companies have struggled. And in the face of growing American and European criticism, China has agreed to put quotas on its exports of textiles and to float its currency. Now the question remains, when? Finally, a cynical way to look at the motivation behind corporate social responsibility in general is its use as a bargaining chip with foreign publics and governments. POLITICAL PAYOFFS: One approach to dealing with political vulnerability is the political payoff—an attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company. This choice 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. Paying heads of state to avoid confiscatory taxes or expulsion, paying fees to agents to ensure the acceptance of sales contracts, and providing monetary encouragement to an assortment of people whose actions can affect the effectiveness of a company’s programs are decisions that frequently confront multinational managers and raise ethical questions.
- POLITICAL AND ECONOMIC AID IN ACTION, WHERE EVERYBODY WINS: The Japanese government has paid for the construction of a new highway that connects key safari tourism areas in Tanzania. Foreign tourism becomes more efficient, comfortable, and profitable for the Tanzanian company (and others) pictured—Kibo is one of the best in the country. The Japanese designers, consultants, and contractors involved make money on the work. And the road ultimately pays for itself in the form of lower warranty expenses on the armada of Toyota Land Cruisers that regularly ply the path between the Makyuni and Ngorongoro animal preserves.
- Governments can both encourage and discourage foreign investment. 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.