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Chapter 6 – The Political Environment: A Critical Concern
Teaching Objectives
All the cultural elements are important in international marketing but the political element is by far the
most pervasive and must always be examined from both domestic and foreign country perspectives.
Regardless of where a company does business, the political element is always a partner and further, often
an unpredictable one. Governments both encourage and control business and the goal of an MNC is to
take steps to lower its political vulnerability.
While confiscation and expropriation have rarely been imposed in the last decade, they are the most
severe political risk and can always be imposed. Today, most governments encourage foreign investment
but this does not mean that there are no political risks. The teaching objectives of this chapter are to:
1) Stress that government polices and their stability are influenced by political parties and
nationalism.
2) Make the point that the U.S. government is just as important in creating political risks for U.S.
business as are foreign governments.
3) Examine the various types of political risks from the most severe, confiscation, to the less severe.
4) Discuss the various ways governments encourage foreign investment.
5) Explore the means companies have to reduce political vulnerability and protect their foreign
investment.
Comments and Suggestions
1. Even though expropriation and forced domestication that existed in the 1960s and 1970s no longer
loom as major political risks, we still like to discuss these issues in some depth. Our purpose is
threefold; first, it is important for students to be aware of the power that a government can have over
a foreign business and a foreign company’s relative inability to change government decrees once they
are made; second, while, not perfect, there are ways companies can operate to lessen vulnerability;
and, third, many of the investment decisions and the manner in which business operate routinely
today stem from their experiences during the period when expropriation was more prevalent. Most
foreign investments include local partners rather than trying “to go it alone,” and efforts to operate in
such a way that they add to the country’s economic and social development beyond their individual
investments albeit much is mandated by the host government.
2. One of the types of risks that seem to be on the increase are terrorists acts. Sometimes these acts of
violence are directed against an specific MNC for some alleged “crime,” in other cases the MNC is
the victim but the violent act is designed to embarrass the government. Airlines have often been the
victim when it is the government the terrorist is targeting.
3. Lecture Outline
The Political Environment: A Critical Concern
I. The Sovereignty of Nations
II. Stability of Government Policies
A. Forms of Government
B. Political Parties
C. Nationalism
D. Targeted Fear and/or Antimosity
E. Trade Disputes
III. Political Risks of Global Business
A. Confiscation, Expropriation, and Domestication
B. Economic Risks
1. Exchange Controls
2. Local-Content Laws
3. Import Restrictions
4. Tax Controls
5. Price Controls
6. Political Sanctions
C. Political and Social Activists
1. Violence and Terrorism
2. Cyber Terrorism
IV. Assessing Political Vulnerability
A. Politically Sensitive Products and Issues
B. Forecasting Political Risk
V. Reducing Political Vulnerability
A. Joint Ventures
B. Expanding the Investment Base
C. Marketing and Distribution
D. Licensing
E. Planned Domestication
F. Political Payoffs
G. Political Bargaining
VI. Government Encourage of Global Business
A. Foreign Government Encouragement
B. U.S. Government Encouragement
VII. Summary
