The Political Environment

1
Chapter 6
The Political Environment
2
The Political Environment

• I. Sovereignty
• - Nationalism
• II. Embargoes and Trade Sanctions
• III. Export Controls
• IV. Political Risk
• - Types
• - Assessment

3
Export Controls

• U.S. export control systems
• Export Administration Act (Commerce Department)
• Munitions Control Act (State Department)
• Determinants for export controls
• National security, foreign policy, short supply,
  nuclear nonproliferation
• Critical commodities list
• Sensitive to national security
• Controlled for other purposes
• No License Required (NLR)
• Export license

4
U.S. Export Control System
Decision Steps in the Export Licensing Process
Should a Given Product be Exported?
To a Given Country?
To a Given End User?
For A Particular End Use?
5
Typical Forms of Host Country Controls

• Expropriation
• Taking of private property with compensation
• Confiscation
• Taking of private property without compensation
• More subtle forms of control
• Domestication
• Local-content
• Exchange controls
• Over investment
• Tax policies
• Price controls

6
Political Risks of Global Business

• Confiscation
• Expropriation
• Domestication
• Economic Risks
• Exchange Controls
• Local-Content Laws
• Import Restrictions
• Tax Controls
• Price Controls
• Labor Problems

7
International Terrorist IncidentsBy Region
1992-1997
SOURCE http//www.state.gov/www/global/tourism/19
97report
8
International Casualtiesby Terrorist Incidents,
1992-1997
6-6
SOURCE http//www.state.gov/www/global/terrorism/
1997report
Irwin/McGraw-Hill
9
Forecasting Political Risk

• Decide if risk insurance is necessary
• Devise an intelligence network and an early
  warning system
• Develop contingency plans for unfavorable
  future political events
• Build a database of past political events for
  use in predicting future problems
• Interpret the data gathered by a companys
  intelligence network in order to advise and
  forewarn corporate decision makers about
  political and economic situations

6-8
Irwin/McGraw-Hill
10
Strategies to Lessen Political Risk

• Joint Ventures
• Investment Base Expansion
• Marketing and Distribution
• Licensing
• Planned Demonstration
• Other

11
Country Risk Assessment Criteria

• Index Area Criteria
• Stability of the political system
• Political and economic Degree of control of
  economic system
• environment Constitutional guarantees
• Effectiveness of public administration
• Labor relations and social peace

12
Country Risk Assessment Criteria

• Index Area Criteria
• Population size
• Per capita income
• Domestic economic Economic growth during
  previous 5 years
• conditions Inflation during previous 2 years
• Accessibility of domestic capital market to
• foreigners
• Availability of high-quality local labor
• Possibility of giving employment
• Traffic system and communication channels

13
Country Risk Assessment Criteria

• Index Area Criteria
• Restrictions imposed on imports
• Restrictions imposed on exports
• Restrictions imposed on foreign investments
  in the country
• External economic Legal protection for brands
  and products
• relations Restrictions imposed on
  monetary transfers
• Revaluations of currency during previous 5
  years
• Drain on foreign funds through oil or other
  energy imports
• Restrictions on the exchange on local money
  into foreign currencies

14
Examples of Country Risk Ratings

• Country Political Risk Financial Risk Economic
  Risk Composite Risk
• 1. Switzerland 92 50 43 94
• 2. Germany 83 49 41 87
• 3. Japan 85 49 42 88
• 4. U.S. 83 49 38 85
• 5. Canada 83 46 39 84
• 6. U.K. 81 48 36 82
• 7. France 80 44 38 81
• 8. Italy 74 44 37 77
• 9. Mexico 68 32 28 64
• 10. Hong Kong 67 41 39 74
• 11. China 67 39 33 69
• 12. India 49 30 31 55
• 13. Argentina 62 23 21 53
• 14. Romania 55 29 15 49.5
• 15. Liberia 10 8 12 15
• NoteLower scores represent higher risk (Highest
  Risk1100Lowest Risk).
• Data from 1991.

Source Extracted from International Country Risk
Guide, 1996, reprinted in Claude B. Erb, Campbell
R. Harvey, and Trades E.Viskanta, Expected
Returns and Volatility in 135 Countries, Journal
of Portfolio Maanagement, 22(Spring 1996), p.46.