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CHAPTER 4
Political and Regulatory Climate
CHAPTER OUTLINE
XXIV. Host Country Political Climate
A. Political Motivations
C. Operating Conditions
D. Boycotts of Firms
E. Takeovers
XXVI. Home Country Political Forces
A. Home Country Actions
B. Home Country Pressure Groups
XXVII. Legal Environment
A. Common Law
CHAPTER OBJECTIVES
At the end of this chapter, students should be able to do the following:
List and explain the political motivations behind government actions that promote or
restrict global marketing.
Cite examples illustrating how national laws can vary and change.
Differentiate between the steps involved in managing political risk and those involved
in planning for regulatory change.
QUESTIONS FOR DISCUSSION
1. The construction industry in Japan has traditionally been dominated by the domestic
suppliers. Few foreign construction companies have won projects in Japan. What
aspects of Japan’s political forces may have influenced this local control over the
Japanese construction market? What political or regulatory forces may lead to the
opening of this market for foreign firms?
One likely answer to this is that domestic construction companies successfully lobbied their
2. Do ownership restrictions such as local-partner requirements always ensure that
multinational firms will contribute more to the local economy than they would
otherwise?
Arguments that local-partner requirements are bad for the local economy may include:
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3. What are the different methods a company can use to obtain and/or develop political
risk assessment information? What do you think are the strengths and weaknesses of
each?
Students should identify the following methods:
Foreign travel
Pros: See events first-hand; talk with home-country nationals who are working in
4. John Deere has decided to enter the tractor market in Central America. What strategies
could be used to reduce the possible effects of political risk? Students should identify the
following:
The firm could look for sources of local borrowing.
5. Choose a cause promoted by Public Citizen’s World Trade Watch. Do you agree with
the cause? Why or why not? What firms are or could be involved in the controversy?
This Internet exercise is likely to generate much controversy and discussion, and it is a good
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6. How is terrorism similar to and different from prior political risk faced by global
marketers?
Like political risk, terrorism involves politics (power and authority relationships) and is
unpredictable in nature. As businesses can be soft targets of terrorism, there is potential direct
CASE 4.1: CUBA: RE-ENTERING THE WORLD
This short case encompasses a surprising number of issues discussed in the chapter. It is
particularly useful for developing a discussion concerning embargoes. The case also presents
students with an opportunity to buy shares of confiscated properties in Cuba in hopes of cashing
in on an eventual settlementbut at what price?
DISCUSSION QUESTIONS
1. List the various issues covered in Chapter 4 that are illustrated by this case.
Besides just listing the issues, a little prompting should allow the students to review the
nature of the following concepts:
Ideology as political motivation. The problems between Cuba and the United States
begin with a communist revolution. A good follow-up question could be: Why do you
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It might be useful to tell the students that all anti-American revolutions dont bring
on an immediate embargo. The United States was among the first countries to
recognize the Islamic Republic of Iran in 1979. So why do you think the United
States reacted with such an immediate, stringent, and long (60-year) embargo of
Cuba?
It was a communist revolution during the Cold War. The United States
Why arent the European countries supporting the United States in this embargo?
What do you think the United States was trying to accomplish by the embargo?
The most likely answer is that they were trying to oust the Castro regime.
Put the above points together and ask the question: What does this suggest
about realistic expectations for embargoes?
Embargoes are far more likely to be effective if you ask for smaller,
Who lost and who gained from the embargo?
Lost:
Cubaan estimated $60 billion
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2. Should claim holders be compensated? If so, who should pay? Why?
Pay claim holders:
Property rights must be upheld.
Dont pay claim holders:
This was 60 years agotoo much water under the bridge.
3. If you were considering investing in the proposed claims fund, what discount rate would
you apply? In other words, how many cents on the dollar do you think these claims are
worth? Why?
Some students might just say that they would not be interestedzero cents on the dollar! But
building on the discussion under Question 2, the key hope for compensation would appear to
CASE 4.2: COKE UNDER FIRE
Coke is an esteemed brand throughout the world, but that doesnt always help to keep the company
out of trouble. This case follows Coca-Cola as it runs afoul of laws and regulations around the
world. Since the problems specifically relate to different understandingsculturally and legally
of proper competitive behavior, this case could also be used with Chapter 6 where issues of
antitrust legislation are addressed.
DISCUSSION QUESTIONS
1. Why do you think some countries disallowed the Cadbury-Schweppes acquisition
whereas others did not?
Pepsi appears to be a major instigator in keeping this deal from going through. Perhaps
Pepsi is more (or less) powerful in different markets.
2. Given Coca-Cola’s position that the company is committed to playing by the rules, why
is the firm in trouble in so many countries?
There may be several explanations for this:
The firm appears to have an ethnocentric view of proper competitive behavior. What is
socially accepted and legally allowed in the United States might not be accepted and
3. What are the government motivations behind Coca-Cola’s problems concerning the
soda tax in Mexico and the company’s use of GPS?
It could be argued that the Mexican government is attempting to foster national prosperity by
concerns.
4. What advice would you give Coca-Cola concerning its handling of government
relations?
The cynics in your class might suggest that Coke clean up its act and stop breaking the law.
However, when it comes to the Cadbury-Schweppes acquisition, there is no evidence of law
breaking, even if some countries eventually disallowed the purchase.
First, managers at Coca-Cola might be more proactive in understanding the (changing?)
order not to use up goodwill by fighting losing battles with the government.
In summing up it would be good to note: At the end of the day, the acquisition will go
through in some countries but not in others. What are the possible implications of Coca-
Cola’s owning the Canada Dry Ginger Ale brand in the United States but not in Canada or
Mexico? In Italy but not Belgium? In Argentina but not Chile? The immediate implication
is that Coke will own the brand in some countries and compete against that same brand in
others. But so what? This is a somewhat tough question to pose to the students at this point in
the coursealthough it is arguably a great final exam essay. In essence, we are asking
CASE 4.3: EVALUATING NATIONAL REGULATORY ENVIRONMENTS
This case allows students to think about national regulatory environmentsnot only at a macro
level but at the more important micro, or firm, level. The website Doing Business is sponsored by
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the World Bank Group. Students use it to assess the national environments of Argentina, Saudi
Arabia, South Africa and Vietnam for three companies, each with a unique business model.
Since the numbers from this site will change with each year, the instructor is cautioned to do the
exercise first in order to have the latest numbers available. Below is an analysis based on the 2014
numbers:
Case questions:
1. First note how difficult it is to do business overall in each of these countries. Order the
countries from easiest to work in to hardest to work in.
3. For each of the three companies below, identify which categories are most relevant to the
companys business model. Which factors are irrelevant or of lesser importance? Why?
Based on your analysis for question 3, order the four countries from easiest to work in to
hardest to work in from the point of view of each of the three businesses above.
SUGGESTED ANSWERS:
OVERALL COUNTRY SCORES:
Mexico= 53
Saudi Arabia = 22
Russia = 92
Vietnam = 99
And for useful comparison: USA = 4
HAPPY-MART
For this scenario all the categories of regulations are arguably applicablewith
KNUCKLE-TECH
For this scenario, two key issues are trading across borders and enforcing contracts
(with distributors).
oOn these two categories, Vietnam looks better compared to its overall score,
scoring 65 on trading across borders and 46 on enforcing contracts.
oBut Saudi Arabia looks much worse, scoring 69 on trading across borders and
As the name implies and the methodology confirms, trading across borders is an
amalgam of importing and exporting, whereas importing is much more key to this
company. If you click on this category, you get more specifics. Vietnam still looks
good for importing.
Some students might argue that starting a business might be a surrogate for dealing
TARRYTOWN TOYS
For this scenario, the firm doesn’t want to start from scratch but to buy into an
on-going operation. One category important to them is trading across borders. The
sub-data show that Argentina pretty much matches the other three on regulatory
hurdles and days to export. Russia is long and very expensive to export fromdont
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taxes might apply here. On both of these criteria Saudi Arabia looks very, very good
while the other three countries look awful. But note that the protecting investors
measure deals with protecting minority investors—is this what Tarrytown toys has in
mind?
FOLLOW-UP QUESTIONS
How might these rankings differ from political risk rankings?
These numbers assess a status quo. Political risk assessments try to guess at the possibility
If a look at political risk rankings suggests that Russia was very much more politically risky than
Vietnam, which of the three firms is the most and the least affected by this new information?
Arguably, the most affected would be Happy Mart with the greatest investment in assets on
Are there any issues besides the regulatory environment and political risk that could make these
companies reassess their ranking of these markets?
Students might suggest that the other three markets have larger populations than Saudi
Arabia and that would make them more interesting to Happy Mart in particular.
POSSIBLE STUDENT TAKEAWAYS
The macro view has some value. It applies pretty well to some business models
(Happy Mart).
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But macro can be for chumpsby considering your business model, the
attractiveness of countries may vary greatly from the macro number.
These issues can become nuanced, and firms must weigh the importance of
difference categories.