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Chapter 6

Chapter 6. The Political Environment. The Political Environment. I. Sovereignty - Nationalism II. Embargoes and Trade Sanctions III. Export Controls IV. Political Risk - Types - Assessment. Export Controls. U.S. export control systems

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Chapter 6

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  1. Chapter 6 The Political Environment

  2. The Political Environment I. Sovereignty - Nationalism II. Embargoes and Trade Sanctions III. Export Controls IV. Political Risk - Types - Assessment

  3. Export Controls • U.S. export control systems • Export Administration Act (Commerce Department) • Munitions Control Act (State Department) • Determinants for export controls • National security, foreign policy, short supply, nuclear nonproliferation • Critical commodities list • Sensitive to national security • Controlled for other purposes • No License Required (NLR) • Export license

  4. U.S. Export Control System Decision Steps in the Export Licensing Process Should a Given Product be Exported? To a Given Country? To a Given End User? For A Particular End Use?

  5. 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

  6. Political Risks of Global Business • Confiscation • Expropriation • Domestication • Economic Risks • Exchange Controls • Local-Content Laws • Import Restrictions • Tax Controls • Price Controls • Labor Problems

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

  8. International Casualtiesby Terrorist Incidents, 1992-1997 6-6 Irwin/McGraw-Hill SOURCE: http://www.state.gov/www/global/terrorism/1997report

  9. 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

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

  11. 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

  12. 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

  13. 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

  14. 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.

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