Political Risk in International Business

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Questions and Answers

What is the primary difference between expropriation and confiscation?

Expropriation is limited to foreign assets; confiscation applies to all assets.

Expropriation requires prior negotiation; confiscation is immediate.

Expropriation involves government seizure with compensation; confiscation does not. (correct)

Expropriation occurs only during political upheaval; confiscation can happen anytime.

Which type of political risk specifically involves difficulties in transferring funds across borders?

Transfer Risk (correct)

Domestication Risk

Ownership Risk

Operating Risk

What do price controls typically impose on foreign companies operating in a country?

Bans on profit repatriation

Minimum profit margins

Restrictions on the types of products sold

Maximum prices that can be charged (correct)

What is the primary aim of nationalization as a form of political risk?

To increase government ownership of key assets and production Signup and view all the answers

What role does the Profit Opportunity Recommendation Index (POR) play in assessing political risk?

It evaluates socio-political considerations and provides a political risk index. Signup and view all the answers

What is one major challenge when trying to impose sanctions multilaterally?

Many countries have existing ties with the target country. Signup and view all the answers

What is a consequence for local firms when sanctions are imposed by their home country?

Cancellations of contracts without compensation. Signup and view all the answers

What is the main purpose of export controls implemented by nations?

To delay access to crucial goods by adversaries. Signup and view all the answers

How can import controls affect global marketers?

They can limit access to efficient sources of supply. Signup and view all the answers

What characterizes a boycott in the context of international business?

A refusal to do business for political reasons. Signup and view all the answers

What is a key characteristic of the segments created through Marco Segmentation?

Homogeneous within and heterogeneous between Signup and view all the answers

Which of the following criteria is NOT used in preliminary screening of countries?

Cultural similarities Signup and view all the answers

What is the primary focus of secondary screening?

Country attractiveness and firm's resources Signup and view all the answers

What might a firm decide when focusing on Latin America for market entry?

To consider countries with democratic governments only Signup and view all the answers

What is the purpose of a site visit in the final country selection process?

To gather first-hand information before making a decision Signup and view all the answers

What is bribery defined as?

Payments or favors in return for government services or benefits Signup and view all the answers

Which of the following statements about corruption is true?

The value of a bribe is irrelevant to its classification as a bribe. Signup and view all the answers

What is one argument against bribery and corruption in international business?

It reduces foreign direct investment in corrupt countries. Signup and view all the answers

What can be a consequence of bribery for Canadian firms competing internationally?

It presents ethical dilemmas and occasions for moral issues. Signup and view all the answers

What is not true about the OECD's stance on corruption?

Corruption perception is disregarded in business decisions. Signup and view all the answers

What is one primary reason a company might acquire a foreign firm already established in the market?

To gain rapid access to larger markets Signup and view all the answers

Which of the following is a cost-related reason for a company to invest in a foreign market?

Lower transportation costs Signup and view all the answers

What does PRI measure in assessing political risk?

Fractionalization of the political spectrum Signup and view all the answers

Which index assesses the operations climate for foreign businesses?

Operations Risk Index (ORI) Signup and view all the answers

Why might a company choose to follow its clients to overseas markets?

To prevent customers from finding new suppliers Signup and view all the answers

What defines 'Cultural Distance' in the context of country selection?

Barriers that disrupt information flow between countries Signup and view all the answers

What is a significant risk for a company considering full ownership in a foreign market?

Potential government restrictions on repatriation of profits Signup and view all the answers

What is NOT a step in the country selection process?

Financial Ratio Analysis Signup and view all the answers

What might be a reason for implementing trade-related strategies in foreign investment?

Circumventing trade barriers in foreign markets Signup and view all the answers

Which factor tends to lower the relevance of a firm’s previous experience in a foreign market?

Increased cultural distance Signup and view all the answers

What is the purpose of secondary screening in the country selection process?

To evaluate competitive advantage in each market Signup and view all the answers

Which of the following is a criterion considered in the R Factor?

Remittance and repatriation processes Signup and view all the answers

What approach is suggested for successful market entry?

Systematic market selection process Signup and view all the answers

Study Notes

Political and Legal Environment

Political and legal factors are crucial in global marketing
Unexpected political developments can significantly impact even the best strategies
Political and legal factors are interconnected, with laws often resulting from political decisions
Crucial considerations: home country environment, host country environment, and global relations

Home Country Environment

Domestic regulations can impact firms operating abroad.
Specific issues to consider: Embargos & Sanctions, Export Controls, Import Controls, Boycotts, and Regulations of Firms' International Behavior.

Embargos & Sanctions

Governmental actions designed to disrupt trade in goods, services, or ideas, often for political rather than economic reasons.

Enforcing Sanctions

Sanctions can be used to compel peaceful behavior by a country.
Sanctions can be imposed unilaterally or multilaterally
Sanctions are often not effective when imposed unilaterally.
Sanctions can have delayed effects and are affected by existing international relations.

Impact of Sanctions

Sanctions imposed by a home country can lead to losses in revenues for local exporting companies.
Contracts may be disrupted due to sanctions
Sanctions can have negative effects on the people within the targeted country.

Export Controls

Regulations that limit or delay the sale of strategically important goods to other countries.

Import Controls

Restrictions on importing goods into a country, many countries have import controls to protect domestic businesses.
Import controls can restrict the availability of materials from efficient suppliers.
Regulations exist to influence domestic operations through the impact on global marketing.

Boycotts

Businesses may refuse to do business with another firm for political reasons, while consumers may refuse to buy goods from a specific firm in protest.

International Business Behavior

Companies must follow applicable rules and regulations governing ethical and legal operations outside their home country.

Bribery & Corruption

Bribery involves payments or favors exchanged for government services or benefits.
Corruption is the unethical abuse of public office for personal gain.

Political Risk

Risk of loss due to changes in political structure or policies like tax laws, tariffs, or restrictions.

Types of Political Risk

Ownership Risk: Exposure to property and business loss.
Operating Risk: Interference with ongoing business operations.
Transfer Risk: Difficulties in transferring funds.
Coups d'état: Sudden changes in government.

Expropriation/Confiscation

Expropriation: Seizure of assets with compensation.
Confiscation: Seizure of assets without compensation.

Domestication/Nationalization

Government control of businesses and transfers profits to the country.
Ownership and management may be adjusted through regulations.

Price Controls

Government-set limits on prices charged for goods.

Local Content Requirements

Rules that require a certain percentage of goods use local labor or inputs.

Terrorism

Acts of violence by groups to achieve political or ideological goals disrupt business and can dampen consumer spending, leading to reduced investment.

Measurement of Political Risk

The Profit Opportunity Recommendation Index (POR) measures the political risk index (PRI) for various countries based on political and social factors.

Foreign Market Entry: Country Selection and Entry Modes

Step-by-step approach to assessing market potential.
Systematic market selection method is important, involves formal planning, market research.
Country selection considerations include cultural distance, geographic distance, and a firm's experience in similar markets.
Country selection process includes market segmentation, preliminary screening, secondary screening, and final selection.

Secondary Screening

Considering a firm's own resources, abilities, and competitive advantages.
Factors to consider include: marketing ability, product quality, financial resources, brand image, market support, and technological capabilities.

Final Country Selection

Decisions should only be made following on-site visits.

Entry Modes

Categorized into Export Modes, Intermediate Modes, and Hierarchical Modes.
Detailed categories are given for each mode(Export Modes: Low Risk, Low Return, Little Control; Intermediate Modes: Risk and Reward Shared, Some Control; Hierarchical Modes: Full Control, 100% of reward but all risk).

Internationalization Stages

Indirect Exporting
Direct Exporting
Foreign Sales Subsidiary
Local Assembly
Foreign Production

Why Firms Internationalize

Proactive Motivations (Need for profit, Control over unique product or technology, Aggressive management, Tax benefits, Economics of scale)
Reactive Motivations (Competitive pressures, Overproduction, Saturated Domestic Market, Declining sales)

Foreign Direct Investment (FDI)

Includes full ownership (100%) and partial ownership (e.g. International Joint Ventures).
FDI advantages (e.g., overcoming market access restrictions), disadvantages (e.g., conflicts over control).
Foreign market expansion strategies include Waterfall (entering one market at a time) and Sprinkler (entering multiple markets simultaneously).

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Description

Test your knowledge on various forms of political risk in international business, including expropriation, confiscation, and the effects of nationalization and sanctions. This quiz explores concepts like the Profit Opportunity Recommendation Index (POR) and the implications of price and export controls. Enhance your understanding of how these factors influence global marketing strategies.