Chapter 5 - Political Environment PDF

International Marketing Midterm Notes Chapter 5 : Political Environment Political and legal factors play a critical role in global marketing The best global marketing strategies may fail as a result of unexpected developments in the political and legal environments Political & Legal...

International Marketing Midterm Notes Chapter 5 : Political Environment Political and legal factors play a critical role in global marketing The best global marketing strategies may fail as a result of unexpected developments in the political and legal environments Political & Legal Political & Legal factors are often intertwined as laws result from political decision, need to consider 1. Home country environment 2. Host country environment The state of international relations between the home county, host country environment and the rest of the world Home Country Home Country legislation may not be designed specifically to influence global marketing but can have an impact on domestic firms operations aboard, need to examine 1. Embargos & Sanctions 2. Export Controls 3. Import Controls 4. Boycotts 5. Regulation of Firms International Behavior Embargos & Sanctions Embargos & Sanctions refers to governmental actions that distort the free flow of trade in goods, services or ideas for decidedly adversarial and political rather than strictly economic purposes  Sanctions applied by the UN Security Council under Chapter 7 of its charter may be comprehensive or more limited in scope ○ Limited or targeted sanctions include for example banning importation of “blood” diamonds from sierra leone ○ Comprehensive sanctions would restrict all but humanitarian imports Enforcing Sanctions - idea is that embargoes and sanctions can force a country to act peacefully and co exist with its neighbors Scanations are sometimes imposed unilaterally by a country in order to force change in another. This often has limited effect, works best when imposed multilaterally Getting all counties to agree on sanction is difficult - may have long standing economic, political, geographic, or historical ties with target country Scanations take time to have desired effect Impact of Scanations Sanctions imposed by home country may mean a loss of business export revenue for local firms, contracts may be canceled without warning or compensation Firms must try and forecast these events as they assess a countries political risk Of course sanctions also hurt people in the target country who may be deprived of basic needs Export Controls Export Controls many nationals have export control systems, which are designed to deny or at least delay the acquisition of stagtelly important goods by adversaries Example : The European Union US and Canada have implemented export controls against Iran for its failure to cooperate with the International Atomic Energy Agency and suspend its uranium enrichment activities Import Controls Import Controls many national exert substantial restaurants on global marketers through import controls For the global marketer such restrictions may mean that the most efficient sources of supply are not available because government regulations restrict importation from those sources Boycotts Boycott's firms refuse to do business with another company often for political reasons. Consumers reusemt to but prodiys really as a form of political protest Example - Disney for the remake of Mulan International Business Behaviour International Business Behaviour home counties may implore special laws and regulations to ensure that the international business behavior of their firms is conducted within the legal, moral and ethical boundaries considered appropriate Bribery & Corruption Bribery is the payment or favors in return for government services or benefit Corruption the abuse of public office for private gain Example - walmart in mexico Bribery and Corruption Arguments According to OECD convention on bribery and corruption the value of the bribe or advantage doesn't matter it is still a bribe No matter whether the host country is tolerant of corrupt business practices it is still an offense NOTE - the OECD exempts small facilitation payments even though they may be used to induce services from foreign government officials Problems with Bribery and Corruption Ethics vs practical need - canadian firms do need to compete Briabiey may lead to other mortality problem Can reduce FDI flows to those countries viewed as corrupt Corruption may have an impact on whether companies use local partners in corrupt countries or whether they go in alone Quantivity Corruption Levels Transparency International (IT) published 1. Corruption Perception Index (CPI) 2. Bribe Payers Index (BPI) Corruption Perception Index (CPI) Corruption Perception Index (CPI) bases on 16 surveys from independent institutions which collected information from business people and country analyst Score range from 0 (highly corrupt) to 100 (clean not corrupt at all) Limitations of Corruption Perception Index (CPI) Based on the perceptions of business people and analysis which may not reflect the actual situation in the country Corruption is difficult to measure CPI scores are widely reported in the media which may influence the people asked in survey, thus a low score one year could lead to an even lower score next year Methods and sources of info used to survey changes making comparisons problematic The CPI does not tell you anything about the type of corruption that exists Bribe Payers Index (BPI) Bribe Payers Index (BPI) shows the likelihood that firms headquartered in various countries will bribe when operating in a foreign country Ranges from 0-10 the higher the score the less likely business will engage in bribery Measures the supply side of corruption Example - Ikea two company executives were fired for partaking in bribes Host Country Host Country the host country legal and political environment has a major impact on global marking these include the impact of 1. Political Risks 2. Legal Systems Political Risks Political Risks risk of loss when investing in a given country caused by changes in political structure or policies such as tax laws, tariffs, expiration of assets or restrictions on repatriation of profits Types of Political Risk Ownership Risk - exposes property and life Operating Risk - interference with the ongoing operations of a firm Transfer Risk - encountered when attempts are made to shift funds between counties Coups d’etat - can result in drastic changes in government after firm has invested in the country Expropriation - the seizure of foreign asset by a government with payment of compensation to the owners Confiscation - same as expropriation but without the compensation Domestication/Nationalization - government demands particle transfer of ownership and management reusability and imposes regulations to ensure that a large share of the products is locally produced and larger share of profit is retained in the country (government takes over) Price Controls ceiling on what the foreign company can charge Local Content Requirement utilize local labor and part and not rely 100% on imported inputs Terrorisum the premeditated systemic threat or use of violence by subnational groups to attain political religious or ideological objectives through intimation of large audience Not usually carried out as part of government's agenda but can disrupt business, dampen consumer demand and reduced investment NOTE firms face political risks as result of government action but also because of actions/events that are outside the control of the host country government Measurement of Political Risk The Profit Opportunity Recommendation Index (POR) developed by Business Environment Risk Intelligence SA (BERI) Components : ○ The Political Risk Index (PRI) which docs on socio political considerations in the country. PRI measures 6 internal causes of political risk such as  fractionalization of the political spectrum and fractionalization by language, ethic or religious grouping ○ The Operations Risk Index (ORI) which assesses the operations climate for foreign business. 15 variables are included in this index which attempt to capture the degree to which national firms are given preference and the overall quality of business climate in the country ○ The R Factor which is focused on remittance and repatriation. 6 criteria are used in this measure to assess the counties willingness and capability for foreign firms to convert profits and capital to foreign exchange and transfer the proceeds International Marketing Chapter 6 : Entry Modes Foreign Market Entry Requires Consideration of a Number of Issues: 1. Assessing the market potential of prospective countries 2. Evaluating and selecting a mode of entry 3. Assessment of the firm's capability to operate in the selected environment Country Selection Assessing markets using a logical step by step approach is critical to successful market entry. Empirical evidence suggests, however that forms do not follow a systematic marketer selection process Systematic Market Selection involves formal strategic planning, market research consideration of many country options and entry mode options, developing contingency plans and setting long term objectives Country Selection Driven by a Number of Considerations 1. Cultural Distance or Psychic Distance - defined as anything which disrupts the flow of information and knowledge between host and home countries ○ The lower the degree of cultural distance the more relevant the forms previous experience is likely to be 2. Geographic Distance - the physical separation between one location and another If the company is successful with its business model in one country it is likely to also be successful if the model is simply transplanted to similar country Country Selection Process Steps 1. Marco Segmentation  2. Preliminary (fine grained) Screening - markets/countries assessed based on external screening criteria 3. Secondary Screening - firms relative competitive advantage in each market is taken into consideration 4. Final Country Selection Marco Segmentation involves the development of segmentation criteria that can be applied to group countries for marketing purposes Grouping performed using cluster analysis Typically decide to focus on a particular trade region (EU or USMCA) Marco Segmentation Criteria Must be actionable and measurable to be useful Create segments that are homogeneous within and heterogeneous between Firms may wish to tackle Latin America but with over 20 counties in that region may decide to focus only on countries with democratic governments (ie exclude countries such as Cuba and Venezuela) Preliminary (fine grained) Screening used to rate and reduce the number of candidate countries/markets using criteria such as GDP growth rates Population Income per capita Firms may decide to focus on LA countries with high growth rates (eg Dominican Republic, Panama, Panama, Peru or Honduras) and not low growth countries e.g. Suriname or Brazil. If population size is more important than Brazil and Mexico would be screened in and countries such as Costa Rica and Uruguay screened out. Idea is to end up with 2-3 countries for further consideration  Secondary Screening forces the firm to consider not only country attractiveness but its own resources, capabilities and sources of competitive advantage Secondary Screening Criteria Marketing ability Product quality & fit with the market Financial resources Brand image Market support Technological capabilities Final Country Selection no decision until a site visit is conducted Entry Mode institutional arrangements used by firms to penetrate international markets Entry Mode Classified as 1. Export Modes 2. Intermediate Modes 3. Hierarchical Modes Export Modes Intermediate Modes Hierarchical Modes ➔ Low risk ➔ Risk and reward shared ➔ Full control ➔ Low return ➔ Some control ➔ 100% of the reward but all the ➔ Little control risk ➔ Direct exporting Licensings Wholly Owned Foreign ➔ Indirect exporting IJVs Subsidiary Strategic Alliances Cross Border Acquisition Entry Modes Selection of the appropriate entry mode is critical to the long run success of the global firm Each mode has its own risk vs reward profile Each mode offers the firm a different degree of control over foreign operations Each mode requires a different level of managerial expertise Internalization refers to the process by which firms gradually become more engaged in international markets Firms may migrate from being exporters to the establishment of production operations overseas Internationalization Stages 1. Indirect Exporting Licensing 2. Direct Exporting 3. Foreign Sales Subsidiary 4. Local Assembly 5. Foreign Production Why do Firms Internationalize? Proactive Motivations stimuli that drive the firm to take action Need for profit Control over unique product or technology Aggressive management Tax benefits Economies of scale EXAMPLE : SAB Miller acquired Fosters for roughly $13 billion. Miller is a major player in the global beer industry but had a weak position in Australia’s premium segment of the Market. Fosters controlled more than 50% of the Australian beer market by volume and was a major player in the high end segment of the market. Reactive Motivations external factors that force the frim to adjust Competitive pressures Overproduction Saturated domestic market Declining sales EXAMPLE : Russian vodka manufacturers are facing a mature market at home. Intense competition from international players such as Diageo and Nemiroff has resulted in declining sales. Those markets now closed - ontario banning russian products from LCBO shelves over Ukraine invasion - Biden to ban US imports of Russian vodka, diamonds and seafood Exporting Exporting products manufactured in the firm's home country are shipped to and marketed in one or more foreign countries Direct Exporting the frim transcats directly with a market intermediary located in a foreign country Indirect Exporting the firm transcats with an intermediary based in its own home country. Intermediary in turn takes responsibility for exporting the product to one or more foreign countries Licensing Licensing one firm, the licensor permits another to use its intellectual property in exchange for compensation designated as a royalty The recipient firm is the licensee The property might include, patens, trademarks, copyrights, technology, technical know how or specific marketing skills  Licensor Advantages Licensee Advantages No capital requirements Reduced risk of R&D failure (proven No market knowledge required ( a concept) good thing?) Ongoing cooperation and support No need to worry about government from licensor actions against foreign firms Franchising Franchising form of licensing in which the parent company (the franchisor) grants another independent entity (the franchisee) the right to do business with a specified manner. Franchisor earns a management fee (royalty) from the franchisee Common in fast food industry as well as in other areas such as hotel accommodations and car rentals Direct Franchising the firm transacts with several franchises in the foreign market Indirect Franchising the firm transacts only with a master franchisee which builds out the network in the foreign country EXAMPLE : Tim Hortons was acquired by Restaurant Brands International in 2014. RBI (which is itself owned by 3G Capital) also owns Burger King and many thought the acquisition would speed up Tim Hortons’ US expansion Foreign Direct Investment Foreign Direct Investment (FDI) refers to capital flows from abroad used to create or expand a long term interest in an enterprise FDI transactions are long term and generally difficult and expensive to unwind. Firms need to thoroughly research the opportunity and be confident in the country Reasons for FDI 1. Market Related gain rapid access to larger markets ○ Acquire a foreign firm already established in the market ○ Maintain market share ○ Maintain contact with customers in major markets 2. Trade Related ○ Circumvent trade barriers ○ Local political knowledge to deal with market regulations ○ Country of origin effects (if country is well known) 3. Cost Related ○ Lower labor costs ○ Access to natural resources ○ Lower transportation costs 4. Need to Follow Customers ○ Clients may find suitable new suppliers in overseas markets and discontinue contracts, better to move with them 5. Government Incentives EXAMPLE CIRCULATIVE TRADE BARRIERS : Wenzhou Kazakhstan Sequoia Shoes Company entered the African market as an exporter. In 2004 the Nigerian government imposed a ban on shoe imports to protect its domestic industry. Wenzhou’s inventory worth millions of dollars was seized by the Nigerian government. Impounded shoes were eventually returned but the company decided to set up a manufacturing plant in Nigeria to prevent a recurrence of the problem. The “local” company now employs 600 workers, operates four assembly lines and has an annual output of two million shoes. Foreign Direct Investment - Types of Ownership 1. Full Ownership (100%) ○ Need to consider the importance of control to success ○ Need to consider the reaction the host government to full ownership (issues of transfer pricing, repatriation of profit and taxations) 2. Partial Ownership (