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Chapter 06 - The Political Environment: A Critical Concern
6-1
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. Here you might have your students list the purposes, pros and cons of the Trump administrations
tariff actions against international friend and foe.
Chapter 06 - The Political Environment: A Critical Concern
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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
Chapter 06 - The Political Environment: A Critical Concern
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Discussion Questions
1.
Define:
Sovereignty
Confiscation
Nationalism
Domestication
Expropriation
Political and Social Activists (PSAs)
Non-governmental Organizations (NGOs)
2. Why would a country rather domesticate than expropriate?
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
4. What are the main factors to consider in assessing the dominant political climate within a country?
5. Why is working knowledge of party philosophy so important in a political assessment of a market?
Discuss.
6. How can a change in the political party in power affect an investor? Discuss and give examples.
Chapter 06 - The Political Environment: A Critical Concern
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Even in Mexico, where a dominant party (PRI) maintained absolute control for seven decades,
7. What are the most common causes of instability in governments? Discuss.
8. Discuss how governmental instability can affect marketing.
Government instability affects marketing because of the risks which are inherent in foreign
9. What are the most frequently encountered political risks in foreign business? Discuss.
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:
Chapter 06 - The Political Environment: A Critical Concern
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© 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
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.
12. How do foreign governments encourage investment? Discuss.
13. How does the U.S. government encourage foreign investment? Spell out the implications in foreign
marketing.
14. What are the motives behind U.S. government encouragement for foreign investment? Explain.
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:
Chapter 06 - The Political Environment: A Critical Concern
6-6
© 2020 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
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.
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
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?
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
www.crg.com. 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.
Chapter 06 - The Political Environment: A Critical Concern
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20. Visit the homepage of Agora http://www.politicalresources.net . 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.
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.
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.
