International Marketing

Everything on the class test, and where it is answered

Chapter 6, The Political Environment, in three parts. Open a part to see what sits under it; every line is a link to the section that covers it.

Cateora, Chapter 6 · part 1 of 3

The political environment

No company, domestic or international, large or small, can do business without weighing the political environment it will work in. Foreign and home governments are both integral partners. A government reacts to its circumstances by making the policies it thinks it needs, and it can encourage and support a company or discourage, ban and restrict it. International law recognises the sovereign right of a nation to grant or withhold permission to do business inside its borders, and to control where its own citizens do business. That is why the political environment of a country is a critical concern for the international marketer.

Sovereignty of nations

In international law a sovereign state is independent and free from all external control. It enjoys full legal equality with other states, governs its own territory, chooses its own political, economic and social systems, and can make agreements with other nations. SovereigntyA nation's supreme power over its own territory and its own people.It also means the right to grant or refuse permission to do business inside the country. means both the powers a state uses toward other countries and the supreme powers it holds over its own members. A state sets the rules for citizenship, defines its borders, and controls trade and the movement of people and goods, and sometimes data, across them. A citizen stays subject to the state's laws even while abroad, and it is this extension of national law beyond the border that causes much of the conflict in international business.

Nations do give up parts of their sovereignty in order to get along. The European Union, the United States-Mexico-Canada Agreement, NATO and the World Trade Organization are all cases of nations voluntarily yielding some sovereign rights for a common, mutually beneficial goal. In 2009 the G20 leaders ceded some sovereignty when they agreed to reject protectionism, at a moment when world trade had fallen more than 12 percent. Countries that give up sovereignty often fear they gave away too much: many Greeks resented the austerity forced on them, and some, including former President Trump, have called the WTO the biggest threat so far to national sovereignty. Foreign investment can look like a threat as well. A Chinese national oil company's proposed purchase of Unocal was opposed on those grounds, and U.S. politicians disliked the sovereign wealth fundsA large pool of money controlled by a foreign government and invested abroad.Opposed in the United States as a threat to national sovereignty. that put money into American banks in 2008. Mexico blocked a Belgian company's power plant, reading it as an assault on Mexican sovereignty. The point for the marketer is plain: national sovereignty is a critical issue in assessing the environment in which a firm operates.

Five causes of instability

The ideal political climate for a multinational firm is a stable, friendly government. Unfortunately, governments are not always stable and friendly, and even stable, friendly governments do not always stay that way. A radical shift in philosophy when an opposing party comes to power, pressure from nationalist and self-interest groups, weakened economic conditions, bias against foreign investment, and conflicts among governments can all shake a government's stability.

At the top of the list of concerns for a foreign business is the continuity of the rules and the rule of law, whichever government is in power. A change of government does not always mean a change in the level of political riskThe chance that government action will harm a foreign investment.It runs from confiscation, the harshest, down to routine controls.. Italy has formed more than 50 governments since the Second World War, yet business goes on as usual. India has had as many governments since 1945, but much policy is still hostile to foreign investment, partly because senior civil servants stay in place and carry on with former policies. In Mexico the PRI held power from 1929 to 2000, and across that period the risk to foreign investors ran from expropriationThe government seizes an investment but makes some reimbursement.Often followed by nationalization of the asset. to NAFTA and an open door.

Some African countries are unstable, with civil wars, boundary disputes and oppressive military regimes. Kenya fell victim to political violence in 2008 that disrupted the whole region, and Sierra Leone has had three changes of government in five years. The result is a vicious cycle: for its nations to prosper, Africa needs foreign investment, but investment is wary of unstable nations. A World Bank study found the 47 nations of sub-Saharan Africa were drawing less than $2 billion a year in direct foreign investment, about a tenth of what Mexico attracts. Even so, a multinational can function under any type of government if there is long-run predictability: PepsiCo ran a profitable countertrade business with the Soviet Union, swapping Pepsi syrup for Russian vodka.

Forms of government

Around 500 BC the ancient Greeks named three fundamental forms of government: rule by one, rule by few and rule by many. We call them monarchy (or dictatorship), aristocracy (or oligarchy) and democracy. About the same time Cyrus the Great of Persia declared that government exists to serve the people, an idea now written into most constitutions. After colonialism and communism collapsed, the world largely agreed that free-enterprise democracy was best. Of the more than 200 sovereign states, almost all now have at least nominally representative government with suffrage at 18 or over. About 10 percent require voting; the rest leave it voluntary. A few countries have unusual rules: Bolivia lets you vote at 18 if married and 21 if single, Peru bars police and military personnel, Croatia lets employed people vote at 16, and Saudi Arabia let women vote only from 2015. More troubling is the apparent backsliding toward autocracy in countries such as Nigeria, Kenya, Bangladesh, Venezuela, Georgia and Kyrgyzstan, and Haiti's democracy has still not recovered from the 2010 earthquake.

Political parties

For most countries the marketer must know the philosophy of every major political party, because any one of them might become dominant and change attitudes and the overall business climate. Where two strong parties take turns in control, it matters which direction each will take. In the United States a Democratic Congress was reluctant to ratify trade pacts negotiated by a Republican administration, though President Obama pushed through agreements with South Korea, Colombia and Panama in 2011. President Trump's nationalist stand against free trade was a reversal of his own party's preferences. Unpredictable, drastic shifts in policy deter investment whatever the cause, so political philosophy has to be assessed continuously.

Nationalism

Economic and cultural nationalism exists to some degree in every country, and it matters when judging the business climate. Nationalism is an intense feeling of national pride and unity, an awakening of a people to pride in their country, and it can take an anti-foreign-business bias that tolerates controls on foreign investment. Economic nationalismPreserving national economic autonomy.Residents identify their interests with the sovereignty of their own state. aims to preserve national economic autonomy: residents identify their interests with the sovereignty of their state, so national interest and security come before international relations.

Nationalism shows itself in many ways: a call to buy the country's own products only, restrictions on imports, restrictive tariffs, and controls over foreign investment, which is viewed with suspicion. The more a country feels threatened by an outside force, or the more its economy declines, the more nationalistic it turns. After the Second World War militant nationalism was rampant, and expropriation, restrictive investment policies and nationalisation of industries were common. India imposed such restrictive practices that Coca-Cola, IBM and many others left rather than face a hostile climate. By the late 1980s militant nationalism had subsided and the foreign investor, once feared as a tyrant, was courted as a source of capital. But nationalism comes and goes: when the United States pressed Japan to import more rice, deep feelings of self-sufficiency and concern for Japanese farmers kept restrictions in place for years.

Targeted animosity

Do not confuse nationalism, whose animosity is aimed at all foreign countries in general, with a targeted fearAnimosity aimed at one particular country rather than at all foreign firms.Toyota mistook American fear of Japan for general nationalism. or animosity aimed at one particular country. Toyota made that mistake in the United States in the late 1980s and early 1990s. Sales of Japanese cars were falling, and the company assumed the problem was American nationalism, but sales of German cars were not declining. The real problem was Americans' fear of Japan, at a time when many saw the economic threat from Japan as greater than the military threat from the Soviet Union. Toyota's campaign, showing Camrys built by Americans in Kentucky, may even have fed the fear that Japan was colonising the United States. Chinese consumers' long animosity toward Japanese brands, rooted in the military aggression of the 1930s and 1940s, is another example of history shaping marketing. French best-sellers attacking American influence sit oddly beside France's appetite for American films and fast food. The United States is not immune either: after the rift over Iraq, Americans turned on French wine, French cheese and even products they thought were French, and French's Mustard had to say it is an American company. No nation will tolerate penetration by a foreign firm it sees as a social, cultural, economic or political threat.

Trade disputes

Finally, narrow trade disputes can unsettle wider international markets. Around 2018 the hot issues included washing machines, Internet trade, steel, sanctionsOne nation or group boycotting another to change its behaviour.History shows they rarely reach their goal. against Russia, farm subsidies in developed countries, and the long Airbus-Boeing battle over subsidies. Any of these might boil over, though so far cooler heads and the WTO's dispute resolution processes have prevailed.

Cateora, Chapter 6 · part 2 of 3

Issues of sovereignty, differing political philosophies and nationalism show up in a host of government actions that raise the risks of global business. Of all the political risks, the most costly are those that transfer equity from the company to the government, with or without adequate compensation.

Confiscation to domestication

The most severe political risk is confiscationSeizing a company's assets with no payment.The most severe political risk., the seizing of a company's assets without payment. Two notable confiscations of U.S. property came when Fidel Castro took power in Cuba and later when the Shah of Iran was overthrown. Confiscation was most prevalent in the 1950s and 1960s, when many underdeveloped countries saw it, wrongly, as a means of economic growth.

Less drastic but still severe is expropriation, where the government seizes an investment but makes some reimbursement for the assets. In 2008 the Chavez regime in Venezuela expropriated Mexico's CEMEX operations, paying a negotiated price. Often the expropriated investment is nationalized, that is, it becomes a government-run entity. A third type is domesticationHost-country decrees that gradually transfer a foreign investment to national control.The goal is to share ownership, management and profits with nationals.: the host country gradually causes the transfer of foreign investment to national control and ownership through a series of decrees that mandate local ownership and greater national involvement in management. The goal is to force foreign investors to share more of the ownership, management and profits with nationals than before.

Expropriation and nationalizationTurning a seized investment into a government-run entity.It often left firms inefficient, technologically weak and uncompetitive. rarely delivered quick development; the nationalised businesses tended to be inefficient, technologically weak and noncompetitive in world markets. The risks of confiscation and expropriation have lessened over the last two decades, with exceptions in Latin America and Venezuela in particular, because experience showed that few of the hoped-for benefits materialise. Today countries often require investors to share ownership, use local content, accept labour and management agreements and share export sales as a condition of entry, so the company domesticates itself in order to invest.

Countries now view foreign investment as a means of economic growth. Much of the success of South Korea, Singapore and Taiwan is tied to it, and nations that once restricted or forbade foreign investment now court investors as a source of capital and technology. They have begun to privatize telecommunications, broadcasting, airlines, banks and railroads to attract capital and sharpen competitiveness. In Mexico the privatisationSelling a state-owned business back to private owners.Countries now privatize firms they once nationalized, to attract foreign capital. of the national telephone company brought the government hundreds of millions of dollars and immediate investment in new systems, and similar stories played out in Brazil, Argentina, India and eastern Europe. Ironically, many of the businesses expropriated and nationalized in earlier periods are now being privatized.

Economic risks

Even though expropriation and confiscation are waning, international companies still meet a variety of economic risks that can arrive with little warning. Restraints may be imposed under the banner of national security, to protect an infant industry, to conserve scarce foreign exchange, to raise revenue or to retaliate against unfair trade practices. These risks are an important and recurring part of the political environment that few international companies can avoid.

Political sanctions

One nation, or a group of nations, may boycottA refusal to buy from or trade with a target, often by activists.The Nestlé boycott changed the company's marketing. another and stop all trade between them, or issue sanctions against the trade of specific products. The United States has long had boycotts of trade with Cuba and Iran, and sanctions against Russia were approved in 2017 over interference in the 2016 election, the annexation of Crimea and military operations in eastern Europe, though implementation lagged. In 2022 the world applied an unfamiliar high level of sanctions after Russia's attack on Ukraine.

History shows that sanctions are almost always unsuccessful in reaching their goals, particularly when other major nations ignore them. China signed an agreement to bring $70 billion of natural gas from Iran and kept importing Iranian crude oil through the boycott. In Cuba, North Korea and Iran the behaviour the sanctions were meant to change continues, and the ones who seem to be hurt are the people and the companies caught in the middle.

Activists and NGOs

Political and social activists (PSAsPolitical and social activists, who press companies and governments for change.Well organised, they can interrupt the normal flow of trade.) are not usually officially sanctioned by a government, but their actions can interrupt the normal flow of trade. They range from those who seek peaceful change to those who turn to violence and terrorismPolitical violence aimed at a government or the firms linked to it.Most attacks on American targets have hit businesses, not governments., and when well organised they can succeed. One of the best-known campaigns was the worldwide boycott of Nestlé over the sale of baby formula in Third World markets, which brought substantial changes to the company's marketing. Activists of the Free Burma Campaign pressed enough to make several U.S. garment companies stop importing textiles from Myanmar, and campus boycotts of Pepsi drinks, Pizza Hut and Taco Bell led PepsiCo to sell its stake in its Myanmar joint ventureSharing an investment with local or third-country partners.It limits exposure and softens anti-foreign feeling. and withdraw, because potential losses in the United States outweighed potential profits in Myanmar. Heineken and Carlsberg left Myanmar for similar reasons. Broader concern about globalisation drove the Seattle protests during the 1999 WTO meeting and the Washington demonstrations against the World Bank and the International Monetary Fund. Whether misguided or not, PSAs are a potent force that companies such as Nike, McDonald's and Nestlé have learned not to dismiss.

Protests need two things: large numbers of people, and memorable pictures. The Internet and cell phones have become effective tools. During the rallies against the Iraq war, organisers coordinated demonstrations in 600 cities worldwide. Nongovernmental organizations (NGOsNongovernmental organizations, which lobby and campaign on public issues.Some, like the Red Cross and Oxfam, carry real brand power.) are increasingly affecting the policy decisions of governments, through peaceful protest, lobbying and collaboration. Many also work to reduce human suffering, and some, including the Red Cross and Red Crescent, Amnesty International, Oxfam, UNICEF, Care and Habitat for Humanity, have earned global recognition and real brand power.

Violence and terrorism

The 2022 Russian attack on Ukraine is both a humanitarian tragedy and an economic tsunami. Even in far-away America the economic consequences were unexpectedly harsh, the old fear of nuclear war was reignited, and the toughest trade sanctions in history were applied. Violence is not usually initiated by governments, but it is another risk for multinationals to weigh, and peaceful protests often turn violent.

Terrorism has many goals: to embarrass a government and its relationship with firms, to raise funds by kidnapping executives, to use firms as pawns in disputes not aimed at them, and to inflict terror. In the past 30 years, 80 percent of terrorist attacks against the United States have been aimed at American businesses, and since 9/11 McDonald's, KFC and Pizza Hut together have been bombed in more than 10 countries. The U.S. State Department posts travel advisories at four levels of risk. When firms weigh political conflict, two decision criteria matter: the proximity of the violence, and the advice and influence of local and foreign stakeholders.

In 1996 the political scientist Samuel Huntington predicted a clash of civilizations, dividing the world into nine cultural groupings, and others expected three trade spheres led by Japan, the European Union and the United States. The book finds both too simple: they overlook the WTO and the fast-multiplying bilateral trade agreements, and the facts suggest the greater threats to peace and commerce are civil strife and terrorism, not civilization against civilization. Civil conflicts can be settled by negotiation, as in the peaceful dissolution of the Soviet Union, the split of the Czech and Slovak Republics, German reunification, the Hong Kong handover and the occasional trade overtures between China and Taiwan.

Cyberterrorism

CyberterrorismAttacks by computer on a company, an industry or a country's infrastructure.It is hard to tell a rogue state from a hacker prank. and cybercrime are always on the horizon. The Internet gives foreign and domestic antagonists a way to damage a company with little chance of being caught, and it is hard to tell whether an attack came from a rogue state, a terrorist or a prankster. The I Love You worm caused an estimated $25 billion of damage and was probably an out-of-control prank, while the Melissa virus and the denial-of-service attacks that crippled the websites of CNN, ZDNet, Yahoo! and Amazon were purposeful. China has been criticised for blocking text messaging and disrupting Google, and large American organisations, Chase Bank among them, have been hacked for reasons that range from espionage to robbery, political punishment and national-security attacks.

Each wave of viruses becomes more damaging and spreads faster than the last. Slammer doubled its numbers every 8.5 seconds in its first minute and infected more than 75,000 hosts within 10 minutes. The Goner worm crossed from Europe and North America to Australia overnight, bringing down government agencies, financial and manufacturing sites and at least 25 multinationals. A Group of 8 conference met on cybercrime, and the 2016 disruption of the U.S. election through social media showed how serious an attack on the processes of democracy can be.

Cateora, Chapter 6 · part 3 of 3

Assessing vulnerability

There are at least as many reasons for a company's political vulnerabilityHow likely a company or product is to draw government attention.Visible, sensitive or foreign-linked products are the most exposed. as there are political philosophies, economic variations and cultural differences. Some companies are more politically vulnerable than others because they receive special government attention, and that attention can be positive or negative. There are no absolute guidelines to tell whether a company and its products will draw political attention. Countries seeking investment in high-priority industries may excuse firms from taxes, customs duties, quotas and exchange controls: India announced a new trade policy that eases restraints and offers tax breaks for firms developing infrastructure. A firm whose products are not high priority, or that falls from favour for some other reason, faces unpredictable restrictions. Continental Can Company's joint venture to make cans for the Chinese market met a barrage of restrictions when the Chinese economy weakened: canned beverages were declared wasteful and banned from state functions and banquets, tariffs on aluminium were doubled, and a new tax was placed on canned drinks, turning a potentially profitable investment into a loss.

Politically sensitive products

There is no formula, but some tendencies help. Products that have, or are perceived to have, an effect on the environment, exchange rates, national and economic security, or the welfare of people (and especially children) are more likely to be politically sensitive. So are products that are publicly visible, subject to public debate, or associated with their country of origin. Examples include the U.S. government's suspicion of China's Huawei entering the American telecommunications market, and the interest of Ant Financial, part of Alibaba, in merging with MoneyGram. Fast-food restaurants, meant to be visible, are lightning rods: authorities closed a KFC in India for health reasons after months of protest, before a court ordered it reopened. Health is often the subject of debate. The European Union has banned hormone-treated beef for more than a decade, and the WTO found in 1989 that the ban had no scientific basis, yet it remains. Fears of genetically modified food, or Frankenfood, have effectively banned GM foods in Europe: Unilever stopped using GM ingredients in Britain, and 11 restaurant chains, including McDonald's, Pizza Hut, Wimpy and Burger King, went GM-free. McDonald's stopped using genetically modified potatoes for its U.S. french fries to forestall a similar reaction at home.

Forecasting political risk

Besides qualitative judgement, many firms use systematic methods to measure political risk. Political risk assessment is an attempt to forecast political instability so that management can identify and evaluate political events and their potential influence on current and future decisions. Perhaps the greatest risk is the threat of a government actually failing, causing chaos in the streets and markets. Foreign Policy magazine uses 12 criteria, including demographic pressures, human flight and uneven development, to rank countries on its Fragile States IndexA ranking of the countries closest to failure, on twelve criteria.It helps firms forecast the risk of government collapse..

Risk assessment estimates the level of risk a company is taking on and how much it is prepared to accept. In the former Soviet Union and China the risk may be too high for some firms, while stronger, better-financed firms make longer-term investments that will pay off as the economy grows and risk subsides. One study found that French managers' market-entry decisions are more influenced by concerns about political risk than those of American and Japanese managers. An executive's line captures the trade-off: if U.S. companies wait until all the problems are solved, somebody else will get the business.

Lessening vulnerability

A company cannot directly control the political environment, but a specific venture can take measures to reduce its susceptibility to politically induced risks. Foreign investors are often accused of exploiting a country's wealth for the investor's sole benefit, an attitude summed up by a recent president of Peru: we have had massive foreign investment for decades but Peru has not achieved development, so foreign capital will now have to meet government and social goals. As long as such impressions persist, the political climate for foreign investors stays hostile. Relations between governments and multinationals are generally positive if the investment improves the balance of paymentsThe record of a country's money coming in and going out.An investment that improves it is welcomed. by increasing exports or replacing imports, uses locally produced resources, transfers capital, technology or skills, creates jobs, and/or makes tax contributions.

Corporate philanthropy helps too. Microsoft pledged more than $100 million in technology and training in a deal to put government services online in Mexico. Cisco Systems runs 10,000 networking academies in 150 countries through non-profits. Procter & Gamble helps train leaders in China, Motorola and Intel run training in Malaysia, and Merck developed and donated a once-a-year pill against river blindness in Africa and Latin America. Companies that put down deep local roots and align their strategy with the host country's long-term goals stand the best chance of overcoming a poor image. Beyond good citizenship, the chapter lists six strategies.

Government encouragement

Governments both encourage and discourage foreign investment. Within the same country one firm may be harassed while another enjoys an umbrella of protection and preferential treatment, and the difference is the evaluation of a company's contribution to the national interest. The most important reason to encourage foreign investment is to accelerate the development of an economy, and more countries now set guidelines aimed at economic goals: firms may be expected to create local employment, transfer technology, generate export sales, stimulate local industry and conserve foreign exchange as the price of market concessions. Recent investments in China, India and the former Soviet republics carry such provisions.

After the 2009 downturn the U.S. government was creative in promoting exports: visa rules were changed to spur tourism and home sales, and diplomats help push sales of jetliners abroad. Governments are motivated for economic and political reasons to encourage firms to seek opportunities worldwide, even in risky countries, and to reduce the politically motivated financial risks of doing business abroad. The Department of Commerce is the principal agency supporting U.S. business abroad, and the International Trade Administration, a bureau of the DOC, helps U.S. business compete in the global marketplace. The International Development Finance Corporation provides debt financing, equity investments, feasibility studies, investment funds, political risk insurance and technical assistance, and the Export-Import Bank underwrites trade and investment for U.S. firms.

Many governments also offer incentives for clean energy. Local circumstances shape each country's choices: Brazil favours biofuels, and Mexico favours hydrocarbon remediation. Feed-in tariffsA long-term contract to buy renewable energy at a set price.It gives producers stable income in a volatile energy market. are long-term price contracts often tied to costs of production, which give producers a stable platform of income in an otherwise volatile energy price environment. Government support for renewable energy is also affected by oil and gas prices: if oil stays below $85 a barrel, countries adjust their clean-energy policies.

Summary

Vital to every marketer's assessment of a foreign market is an appreciation of the political environment of the country they plan to operate in. Government involvement in business abroad, especially foreign-controlled business, is generally much greater than a firm is used to in the United States. The foreign firm must strive to make its activities politically acceptable, or it may be subjected to a variety of politically condoned harassment. Beyond harassment, it must also live with uncertainty over the continuity of policy: a firm accepted under one administration may find its activities undesirable under the next. An unfamiliar or hostile environment does not rule out success, as long as the company becomes a local economic asset and responds creatively to the issues that political and social activists raise. The U.S. government may aid an American business in its foreign operations, and a host country often gives an umbrella of protection to a firm it considers vital to its national economic goals.

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