Political Environment

1
Political Environment
2
Types of GovernmentPolitical Systems

• Parliamentary consults with citizens from time
  to time to learn about opinions and preferences
  (most industrialized and all democratic nations)
• Absolutist system the ruling regime dictates
  government policy without considering citizens
  opinions (monarchies and dictatorships)
• two party vs. multiparty vs. single-party vs.
  dominated on-party system

3
Types of Government Economic Systems

• Communism
• all recourses owned and shared by all people
  (i.e., no profit maximizing firms) centrally
  planned economies
• Capitalism
• a market oriented system in which individuals,
  motivated by private gain, produce and consume
  goods and services under competitive conditions
• Socialism
• government owns and operates major industries,
  but leaves small business to private ownership -
  a mix between communism and capitalism

4
Political Risks for Marketers

• Confiscation
• process of a government taking ownership of a
  property without compensation
• Expropriation
• differs by confiscation in that there is some
  payment typically a company whose property is
  expropriated agrees (by force) to sell its
  operations
• 575 expropriations took place from 1960-1992
  peaked at 83 in 1975
• After a property is confiscated or expropriated
  it is either
• Nationalized government ownership
• Domesticated private ownership by domestic
  firms

5
Political Risks for Marketers

• General Instability Risk
• related to uncertainty about the future viability
  of a host countrys political system (i.e.,
  revolution)
• Ownership/Control Risk
• related to possibility that a host government
  might take actions (e.g., expropriation) to
  restrict investors ownership and control of a
  subsidiary
• Operation Risk
• proceeds from uncertainty that host government
  might constrain investors business operations in
  all areas
• Transfer Risk
• applies to any future acts by a host government
  that might constrain the ability of a subsidiary
  to transfer payments, capital, or profit out of
  the host country back to parent firm

6
Indicators of Political Instability

• Social Unrest
• Attitudes of Nationals
• nationals attitude toward foreign enterprises
  and citizens
• Policies of Host Government
• Often become erratic around election time

7
Analysis of Political Risk

• Questionnaires sent to experts or local citizens
  to gauge political mood
• Econometric models
• Economic development
• (industrialized vs. developing) or (open vs.
  closed)
• Evaluation of country creditworthiness
• country credit rating based on survey of 100
  leading international banks concerning chance of
  default, etc.
• LIBOR interest rate charged for loans between
  banks

8
Management of Political Risk

• Avoidance
• screening out politically uncertain countries
• Insurance
• shift risk to other parties at a cost
• Politics
• firm can engage in political activities in host
  country
• Business activities
• market power, vertical integration, mergers,
  contracts, alliances, etc.
• Geographic diversity
• dont put all eggs in one basket

9
Measures to Minimize Political Risk

• Stimulation of Local Economy
• Employment of Nationals
• Sharing Ownership
• Being Civic Minded
• Political Neutrality
• Behind-the-Scenes Lobby
• Continuously Monitor Political Mood
• Keep a low profile
• Insurance