GMS522 - CH.4

Sanctions

• A company's home government may, for example impose ___ on a foreign country in retaliation for its military aggression or perceived terrorist threats

• a threatened penalty for disobeying a law or rule

  • Basically a penalty, punishment 

  • A ban for its military aggression. 

• In such situations, the multinational firm will be prohibited from doing business with that foreign country. 

Embargo

• An official ban on trade or other commercial activity within a particular country 

• The term refer to actions taken by national governments which disrupt the free flow of goods, services and money in order to force a target country to coexist

Dictatorship

• a government or a social situation where one person makes all the rules and decisions without input from anyone else

• Power is concentrated in the hands of a single individual (textbook definition)

Oligarchy

a small group of people having control of a country, organization, or institution.

Democratic

• All eligible members of the society have an equal say in how they are governed

• Citizens have the right to vote and the right to serve as electives government representatives

The home-country environment

can have a significant impact on the operations of the multinational firm.

Political positions and legislative measures adopted by the firm;s home country are generally not designed to inhibit global market activity but may have just that effect.

• Governments are for the most part supportive of the global activities of their multinational companies and do what is required to promote their ambitions. The activities of these firms do create jobs at home and generate foreign exchange and tax revenues that may be used to fund social programs. The successful foreign market expansion of multinational firms also generates national pride in their home countries, and governments are, therefore, supportive of their effort

Export controls

• Several national governments impose ___ in order to restrict access by adversarial countries to strategically sensitive products such as uranium. 

• Many governments use ___ to limit the access of hostile nations to critical items like uranium.

• These ___ in effect become instruments of foreign policy designed to keep dual-use materials out of the hands of rogue states or terrorist groups 

  • Example: US and Canada banned exports on uranium against Iran, because Iran is unfriendly when it comes to their atomic stuff.

Import controls

Such regulations limit the quantity of a product that can be imported into the multinational firm’s home market and are implemented to protect a domestic industry or to correct trade imbalances

Boycotts

when people or groups refuse to use, buy, or support something (like a product, service, or company) as a way to protest or show disapproval for a specific reason.

Slideshow definition: firms refuse to do business with another company often for political reasons. Consumers refuse to buy products as a form of political protest

International Business Behaviour

• Home countries may implement special laws and regulations to ensure that the ___________ of their firms is conducted within the legal, moral, and ethical boundaries considered appropriate. 

Corruption

Generally viewed as the abuse of public office for private gain.

The payment of government officials for their services is expected and considered just another cost of doing business

• Bribery

Bribery

the act of offering someone money or something valuable in order to persuade them to do something for you.

Bribery Payers Index (BPI)

Shows the likelihood that firms headquartered in various countries will bribe when operating in foreign country.

The higher the scorer the less likely it is that firms from that country will engage in bribery

BPI measures the supply side of corruption

Extortion

The practice of obtaining something, especially money, through force or threats.

Non-tariff barriers

any measure, other than a customs tariff, that acts as a barrier to international trade. These include: regulations: Any rules which dictate how a product can be manufactured, handled, or advertised. rules of origin: Rules which require proof of which country goods were produced in.

Corruption Perception Index (CPI)

• Index to measure the country's corruption. 

• 0 for countries which are perceived as being highly corrupt to 10 for those viewed as being not at all corrupt.

Political Risk

Defined as the risk of loss when investing in a foreign country due to changes in that country’s political structure, policies, regulations or laws.

Three types of Political Risk

• Ownership risk

• Transfer Risk

• Operating Risk

Ownership risk

• refers to the risk associated with the government seizing control of the firm’s assets in the host country and jeopardizing property, as well as the lives and well-being of its employees

  • Seize your assets and pay you a little bit or nothing. 

Transfer risk

• refers to government actions which make it difficult or impossible for the firm to transfer financial capital into or out of the host country

  • Cant send ur money back home

Operating risk

• involves government interference with the day-to-day business decisions made by the firm

  • Taking control of day to day business 

Coups d’etat

• Can result in drastic changes in government after the firm has invested in the country

Expropriation

the seizure of the company’s assets (for public use) with the payment of compensation

• when the government seizes a company's assets for public use, the company should receive fair monetary compensation for the value of the seized assets and any associated losses. This compensation is crucial to ensure fairness and prevent legal disputes.

Confiscation

the seizure of the firm’s assets without the payment of compensation

Domestication (or nationalization)

partial ownership of the foreign firm is transferred to the government along with day-to-day management responsibilities

• Company is allowed to continue operating in the country but the government may place a number of its own nationals on the board of directors, changing the balance of power and giving the state de facto decision-making authority

Price controls

Put a ceiling on what the foreign company can charge for its products on the local market, which has implications for overall profitability

Local content requirements

Necessitate that the foreign country utilize local parts and labour in its assembly operations and not rely 100 percent on foreign inputs

For example, let's say you are Canadian and you do manufacturing in Africa for cars. You have to use the local parts and labor from africa and not from canada or other foreign inputs

It doesn't have to be 100%, as long as it meets the percentage threshold

Terrorism

defined as ‘the premeditated, systematic threat or use of violence by sub-national groups to attain a political, religious, or ideological objective through intimidation of a large audience

Why analysis of political risk is extremely important

Government in power when a power is being evaluated for investment may be overthrown in a coup d’etat after the investment has been made

The measurement of political risk

The Profit Opportunity recommendation Index (POR) developed by Business Environment Risk Intelligence SA (BERI) is one of the more widely used measures of political risk

Three Sub-indicies of Profit Opportunity Recommendation Index (POR)

Political Risk Index (PRI)
Operations Risk Index (ORI)

R Factor

The Political Risk Index (PRI)

focused on political risk that stems from sociopolitical conditions in the country under analysis. The PRI considers six internal causes of political risk:

• fractionalization of the political spectrum and the power of these fractions

• fractionalization along language, ethnic or religious lines and the strength of these fractions

• restrictive measures used to retain power in the society 

• the mentality of the people (tendencies toward xenophobia, nepotism, corruption, etc.)

• social conditions, e.g. wealth distribution

• strength of forces for a radical government.

Operations Risk Index (ORI)

 assesses the operations climate for foreign businesses. A total of 15 variables are considered which attempt to capture the degree to which nationals are given preferential treatment over foreigners and the overall quality of the business climate. Specific variables used in this sub-index include: policy continuity; attitude towards foreign investors and profits; degree of privatization; bureaucratic delays; and the enforceability of contracts.

 R Factor

concerned with remittances and repatriation. Several criteria are used in this measure to assess the country’s willingness and capacity to allow foreign firms to convert their profits in the local currency into foreign exchange and transfer the funds back to their home country. It also assesses the willingness of the country to provide foreign firms with access to convertible currency in order to import equipment and raw materials. The R factor takes into consideration factors such as the country’s legal framework, its ability to generate foreign exchange, accumulated international reserves and foreign debt.

Strategies for mitigating political risk

• Global marketer also has option of purchasing political risk insurance

• Industrialized countries such as USA, UK etc. offer insurance coverage to their domestic firms when operating abroad

• multinational firm should strive to build good working relationships with the host-country government

•  have the option of licensing its technology to a local firm, thereby eliminating the need to operate in the foreign country. The multinational will receive a royalty payment for its technology, so is able to build market share in the foreign country without direct exposure to the political risks involved. 

General Global Environment

• Global political tensions can undermine business and consumer confidence and make international sales more challenging for the multinational firm

• On the other hand, a thawing of political animosity can lead to a entirely new market opportunities for globally oriented firms

The Legal Environment

There is no uniform law that governs how business is conducted in all countries

Major differences in the legislative environment do exist and will have significantly different impacts on the firm’s operations

USA is generally regarded as being extremely litigious and has the highest number of lawyers per capita

Major differences in legal systems around the world

Business in muslim countries is conducted under sharia law which is opposed to the payment of interest

Antidumping legislation

may prohibit the sale of products at prices below their cost of production, and health and safety legislation may place restrictions on the labelling of products that are allowed into the foreign market

For ex. Mergers and acquisitions may give a firm an unfair advantage in a particular market or industry are generally subjected for approval by local authorities

Dealing with cross-border legal disputes

• Litigation

• Alternative dispute resolution (ADR)

• Mediation

• Arbitration

Litigation

 take (a claim or a dispute) to a court of law. (GO TO COURT)

Alternative dispute resolution (ADR)

different ways people can resolve disputes without a trial.

Mediation (conciliation)

voluntary, non-binding process in which the disputants retain the services of a neutral third party to help them work through their differences and arrive at an acceptable compromise

Arbitration

The process involves the selection of a neutral but informed third party who will review the merits of the case presented by both sides and render a judgment which is binding on the parties