The Political Environment

1. The Political Environment

2. The Political Environment “Marketing decisions in the international context are deeply affected by the political perspectives of both the home and host countries.” I. Sources of Political Problems 1) Political Sovereignty a) Conflicting laws b) Freedom of contact issues 2) Political Conflict

3. The Political Environment II. Political Intervention III. Political Risk - Factors indicating high risk include: unstable, inconsistent history; public unrest, government crises; politically motivated assassinations; guerilla warfare; irregular changes. Methods of Assessment 1) Grand Tour 2) Old Hand 3) Delphi 4) Quantitative Methods

4. 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

5. International Terrorist IncidentsBy Region 1992-1997 SOURCE: http://www.state.gov/www/global/tourism/1997report

6. 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 company’s intelligence network in order to advise and forewarn corporate decision makers about political and economic situations 6-8 Irwin/McGraw-Hill

7. Strategies to Lessen Political Risk • Joint Ventures • Investment Base Expansion • Marketing and Distribution • Licensing • Planned Demonstration • Other

8. 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

9. 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

10. 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

11. 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 Note:*Lower scores represent higher risk (Highest Risk=1…100=Lowest 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.