Political Risk in International Business

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).

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.