Chapter 6

Chapter 6: The Political Environment: A Critical Concern

Overview

  • Understanding the political environment is crucial for businesses engaging in global markets.

Topics Covered

  • Political risks:

    • Confiscation

    • Expropriation

    • Domestication

  • Economic risks:

    • Currency exchange controls

    • Local content laws

    • Tax controls

    • Price controls

    • Labor issues

  • Other risks:

    • Nationalism

    • Political sanctions

  • Strategies for risk reduction

Political Risks of Global Business

Confiscation

  • Definition: Seizing a company’s assets without any compensation.

  • Example: U.S. properties taken by Fidel Castro in 1959.

  • Example: Seizures during the overthrow of the Pahlavi dynasty in Iran (1979).

Expropriation

  • Definition: Government seizes an investment but offers some payment, often inadequate or delayed.

  • Example: Venezuela's expropriation of Mexico’s CEMEX operations in 2008.

Domestication

  • Definition: Gradual transfer of foreign investments to national control through government mandates.

  • Involves local ownership and management increases, compelling foreign companies to share profits and operations with local nationals.

Economic Risks of Global Business

Currency Exchange Rate Controls

  • Governments may manipulate exchange rates or selectively apply them due to foreign exchange shortages.

  • Intent: Lower product prices internationally by reducing currency value against others.

Local Content Laws

  • Requirement for a certain percentage of products to be sourced locally.

  • Example: In Thailand, at least 50% of milk products must be locally sourced.

Import Restrictions

  • Selective limitations on importing certain products and materials, affecting market access.

Tax Controls

  • Governments may impose specific taxes on products, such as sin taxes on carbonated drinks, differing from country to country.

Price Controls

  • Regulated prices for critical goods, including pharmaceuticals and food, to prevent exploitation.

Labor Issues

  • Challenges may arise from layoffs, union activities, and strikes (e.g., France).

Nationalism and Political Sanctions

Nationalism

  • Strong national pride can lead to restrictive trade practices:

    • "Buy American only" campaigns can impose tariffs and barriers on imports.

Political Sanctions

  • Trade restrictions against certain countries (e.g., Cuba, Iran, North Korea).

Strategies to Reduce Political & Economic Risks

Good Corporate Citizenship

  • Engaging in corporate philanthropy helps improve company image (e.g., supporting local schools, hospitals).

Joint Ventures

  • Partnering with local firms limits financial exposure and reduces potential anti-foreign sentiment.

Franchising

  • Lower investment risk while utilizing local companies for market access.

Licensing

  • Granting technology licenses allows for business operations without direct entry into foreign markets.

Expanding Investment Bases

  • Including local investors and banks may better protect investments from political instability.

Planned Domestication

  • Gradually increasing local participation in operations to minimize the risk of expropriation.

Recap of Important Points

  • Political risks include confiscation, expropriation, and domestication; each has different implications for businesses.

  • Economic risks encompass currency exchange controls, local content laws, import restrictions, tax and price controls, and labor issues.

  • Various strategies can be employed to mitigate risks associated with political and economic environments.