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POLITICAL ENVIRONMENT

Table 4.2 continued

Rank 2003 Trade Fiscal Govern- Mone- Foreign Banking Wage/ Property Regula- Black

Scores burden of ment tary invest- and prices rights tion market

govern- inter- policy ment ﬁnance

ment vention

80 Honduras 3.05 3 2.5 3 3 3 3 2 3 4 4

80 Ivory Coast 3.05 4 3.5 1 2 3 2 3 4 4 4

80 Senegal 3.05 4 2.5 3 1 3 3 3 3 4 4

80 Sri Lanka 3.05 3 3.5 3 3 3 3 3 3 3 3

85 Dominican Rep.,The 3.10 5 1.5 1 3 3 3 3 4 4 3.5

85 Guinea 3.10 5 3 1 3 3 2 2 4 4 4

85 Kenya 3.10 4 3.5 3 1 3 3 2 3 4 4.5

85 Mauritania 3.10 4 4 2 2 2 2 3 4 4 4

89 Cape Verde 3.15 4 4.5 4 1 3 3 3 3 2 4

89 Croatia 3.15 3 4 2 2 3 3 3 4 4 3.5

89 Gabon 3.15 5 4.5 2 1 3 3 3 3 4 3

92 Guyana 3.20 4 4 3 2 3 3 2 3 4 4

92 Moldova 3.20 2 3.5 3 4 3 3 3 3 4 3.5

94 Algeria 3.25 5 3.5 3 2 2 4 3 4 3 3

94 Burkina Faso 3.25 4 3.5 3 2 2 3 3 4 4 4

94 Lebanon 3.25 5 3.5 3 1 3 2 2 4 4 5

94 Macedonia 3.25 5 2.5 3 2 3 2 2 4 4 5

94 Mozambique 3.25 4 3.5 3 3 2 2 3 4 4 4

99 Djibouti 3.30 4 4 4 1 3 3 2 4 4 4

99 Gambia,The 3.30 4 3 3 2 3 3 3 3 4 5

99 Indonesia 3.30 3 2.5 3 3 3 4 2 4 4 4.5

99 Pakistan 3.30 5 3 3 2 3 3 3 4 3 4

99 Paraguay 3.30 3 2 3 3 3 3 3 4 4 5

104 Albania 3.35 5 3.5 3 2 2 3 2 4 4 5

104 Azerbaijan 3.35 3 3 3 1 4 4 3 4 4 4.5

104 Benin 3.35 4 3.5 3 2 3 3 3 4 4 4

104 Bulgaria 3.35 4 4 2 5 3 3 2 3 4 3.5

104 Cameroon 3.35 5 3 3 1 3 3 3 4 4 4.5

104 Egypt 3.35 4 5 3 1 3 4 3 3 4 3.5

104 Kyrgyz, Rep.,The 3.35 4 2.5 2 4 3 3 3 4 4 4

104 Lesotho 3.35 3 4.5 3 3 3 3 3 3 4 4

104 Tanzania 3.35 5 2.5 2 3 3 3 3 4 4 4

113 Chad 3.40 5 4 2 3 3 2 2 4 4 5

113 Fiji 3.40 5 4 3 2 4 2 3 4 3 4

113 Georgia 3.40 4 2 2 4 3 3 3 4 4 5

113 Ghana 3.40 4 3 3 2 3 3 3 4 4 5

113 Niger 3.40 4 3 3 2 3 3 3 4 4 5

118 Ecuador 3.45 4 2.5 2 5 3 3 3 4 4 4

119 Bangladesh 3.50 5 2 3 1 3 4 3 4 5 5

119 Ethiopia 3.50 5 3.5 3 1 4 4 3 4 4 3.5

119 India 3.50 5 4 3 2 3 4 3 3 4 4

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Table 4.2 continued

Rank 2003 Trade Fiscal Govern- Mone- Foreign Banking Wage/ Property Regula- Black

Scores burden of ment tary invest- and prices rights tion market

govern- inter- policy ment ﬁnance

ment vention

119 Kazakhstan 3.50 4 3 2 3 4 4 3 4 4 4

119 Nepal 3.50 5 2 2 2 4 4 3 4 4 5

119 Turkey 3.50 3 4.5 3 5 3 3 3 3 4 3.5

119 Venezuela 3.5 4 3 2 4 3 3 4 4 4 4

119 Zambia 3.50 4 4 2 5 3 3 3 3 4 4

127 China 3.55 5 3 4 1 4 4 3 4 4 3.5

128 Equatorial Guinea 3.60 5 2 2 3 3 4 4 4 4 5

128 Haiti 3.60 3 2 2 4 4 3 3 5 5 5

128 Togo 3.60 3 3 3 2 4 4 3 4 5 5

131 Malawi 3.65 4 4 3 5 3 4 3 3 4 3.5

131 Rwanda 3.65 5 2.5 3 2 4 3 3 4 5 5

131 Ukraine 3.65 3 4.5 3 4 4 3 3 4 4 4

131 Yemen 3.65 3 4.5 3 3 3 4 3 4 4 5

135 Congo, Republic of 3.70 5 4 3 1 4 4 3 4 4 5

135 Russia 3.70 4 3.5 2.5 5 3 4 3 4 4 4

135 Vietnam 3.70 5 3 3 1 4 4 3 5 5 4

138 Romania 3.75 4 4.5 3 5 3 3 3 4 4 4

139 Bosnia 3.80 2 4 5 2 4 3 3 5 5 5

140 Nigeria 3.85 5 3.5 3 4 3 4 3 4 4 5

140 Sierra Leone 3.85 5 3.5 2 3 4 4 2 5 5 5

142 Guinea Bissau 3.90 4 4 2 3 3 5 3 5 5 5

143 Suriname 3.95 4 4.5 4 5 3 4 3 3 4 5

143 Syria 3.95 4 4.5 4 1 4 5 4 4 4 5

143 Tajikistan 3.95 3 2.5 3 5 4 5 4 4 4 5

146 Iran 4.15 3 2.5 4 4 4 5 4 5 5 5

146 Turkmenistan 4.15 5 2.5 4 4 4 5 4 4 4 5

148 Burma 4.20 5 2 3 4 5 4 4 5 5 5

149 Uzbekistan 4.25 5 3.5 3 5 4 5 4 4 5 4

149 Yugoslavia 4.25 4 3.5 4 5 5 4 3 4 5 5

151 Belarus 4.30 4 4 3 5 4 4 5 4 5 5

151 Libya 4.30 5 3 4 1 5 5 5 5 5 5

153 Laos 4.40 5 3 3 5 4 5 4 5 5 5

153 Zimbabwe 4.40 5 4 3 5 5 5 4 5 4 4

155 Cuba 4.45 3 4.5 4 5 4 5 5 5 4 5

156 Korea, North 5.00 5 5 5 5 5 5 5 5 5 5

Due to economic and/or political instability, scoring was suspended this year for the following countries:

Angola n/a

Burundi n/a

Congo, Dem. Rep. Of n/a

Iraq n/a

Sudan n/a

Source: 2003 Index of Economic Freedom

,The Heritage Foundation/Wall Street Journal

As with the other two economic systems, there

are degrees of capitalism. Japan, when compared to

the USA, is relatively less capitalistic. Although

practically all Japanese businesses are privately

owned, industries are supervised very closely by the

state. Japan has the MITI and other government

agencies that vigorously advise companies what to

produce, buy, sell, and so on. Japan’s aim is to allo-

cate scarce resources in such a way as to efﬁciently

produce those products that have the best potential

for the country overall. Japan’s central bank also

intervenes by buying shares of the listed companies

from banks so as to manipulate the stock market.

In searching for the common characteristics of

successful corporations, Chandler examined the

200 largest companies in the USA, Britain, and

Germany from the 1880s through the 1940s

and found that capitalism took a different form in

each country.

It was “managerial capitalism” in the

USA, where managers with little ownership ran

companies and competed ﬁercely for markets and

products. In Britain, “personal capitalism” took place

as owners managed their companies. In Germany, it

was “cooperative capitalism”; professional managers

were in charge, and companies were urged to share

markets and proﬁts among themselves.This kind of

Rhineland capitalism attempts to forge social con-

sensus through behind-the-scenes deal making

among big business, trade unions, and politicians.

But global competition is now threatening this type

of cooperation.

There are some other variants of capitalism.

Quebec has state-assisted capitalism as the govern-

ment runs the health system, all colleges and univer-

sities, liquor stores, and even a parking monopoly in

downtown Montreal. While Quebecers seem to

endorse the idea that the government is looking after

their economic interests, they do not realize that

there are hidden costs in terms of higher taxes,

higher prices, and lost economic output.

POLITICAL ENVIRONMENT

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

2000 per capita GDP in purchasing power parities

5.00 4.00 3.00

2003 Index of economic freedom score

2.00 1.00

FreeMostly freeMostly unfreeRepressed

Asia Pacific

Europe and North America

Africa and the Middle East

Latin America

Fitted Line

Figure 4.2 Economic freedom and income

Note

Per capita GDP ﬁgures were not available for the following countries: Armenia,The Bahamas, Bahrain, Bosnia,

Democratic Republic of Congo, Cuba, Djibouti, Iraq, North Korea, Kuwait, Lebanon, Libya, Malta, Oman, Qatar, Suriname,

Taiwan,Tajikistan, United Arab Emirates,Yugoslavia. Per capita GDP ﬁgures are in current international dollars and are from

1999.

Source:

The World Bank,

2001 Development Indicators on CD-ROM

In the case of China, Russia, Cambodia, and

Vietnam, their economic system may be called

“frontier capitalism”. These communist or socialist

countries are essentially at a new frontier as they

experiment with capitalism. Government agencies

themselves may even be involved in production for

proﬁt. While they are moving away from commu-

nism, their capitalistic infrastructure is not yet quite

in place. It is thus difﬁcult for anyone, including the

government, to tell with certainty whether the

property rights of local and foreign investors will

be respected. Business laws simply fail to keep up

with economic changes.

At a new frontier are China’s economic and legal

systems. The Chinese legal system was discarded

after the 1949 communist revolution that sent attor-

neys and law professors to farm collectives. At

present, China’s rule of law is quite rudimentary.

The country has only 150,000 lawyers, while the

USA has eight times that number to serve the US

population that is only a quarter of the Chinese pop-

ulation. Private business contracts are routinely

enforced by bureaucrats who rely on government

directives rather than on written case laws. E-com-

merce sales and contracts are not legally binding,

and regulations are largely unpublished.

Similarly, Russia is representative of transition

economies. It is difﬁcult to verify and enforce con-

tracts there. Private property rights are neither

secure nor credible. Given the lack of efﬁcient

methods for resolving commercial disputes, market

entry costs increase substantially. Even when one

wins in court, it is difﬁcult to collect debts because

of a notoriously weak enforcement system. Not sur-

prisingly, most businesspeople, instead of taking

their cases to the overburdened courts, prefer to try

to resolve any disputes among themselves.

No nation operates under pure communism or

pure capitalism, and most countries ﬁnd it neces-

sary to make some compromise between the two

extremes. Even Eastern Bloc countries provided

incentives for their managers, and China allows

farmers to sell directly to consumers in local

markets. Western European countries encourage

free enterprise but intervene to provide support

and subsidies for steel and farm products.The USA

is also not a perfect model of capitalism. It has

support prices for many dairy and farm products

and has imposed price controls from time to time.

Furthermore, the US economy is greatly affected by

the Federal Reserve Board’s control of the money

supply and interest rates. Laissez-faire, the purest

form of capitalism, is rare. In any case, there are

no nations that allow businesses to be completely

controlled by either the private or public sector.

Perhaps the only place that bears a close resem-

blance to an ideal free-trade market is Hong Kong.

It does not even have a central bank, and the legal

tender notes are issued by private commercial

banks. In 2003, the Washington-based Heritage

Foundation gave Hong Kong a rating of 1.45 on a

scale of 1 to 5, making it ﬁrst in terms of freedom

from government intervention. The Heritage

Foundation’s index uses ten criteria (e.g., govern-

ment policies toward trade, taxation, foreign invest-

ment, and money supply) to determine how much

a government interferes in economic freedom.

The Washington-based Cato Institute also gave ﬁrst

place to Hong Kong. Cato’s index, based on an eco-

nomic freedom scale ranging from 1 to 10, relies on

economic variables (e.g., inﬂation stability, tax

rates, government spending) and social indicators

(e.g., legal fairness and freedom to open a foreign

bank account).

It would be presumptuous to say that capitalism,

a system that encourages competition and efﬁ-

ciency, is the ideal system for all countries. It is true

that Russia and Poland, for example, once set prices

artiﬁcially low and thus had a great deal of difﬁculty

in solving a supply dilemma. As a result, citizens

were forced to stand in long lines for a small ration

to meet their needs. But capitalism may be inap-

propriate for such countries as China because the

system would allow wealth to be concentrated in

the hands of a few people and subsequently leave the

majority poor and hungry. Market action does not

always serve the nation’s best interests, particularly

in areas of social need. Efﬁciency may be derived at

the expense of jobs for the people, and the proﬁt

motive may intensify the inﬂation problem.

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In Eastern Europe and to a lesser but signiﬁcant

extent in Latin America, widespread government

interference and reliance on inefﬁcient public enter-

prises have obstructed the normal operation of

markets. After decades of state control and owner-

ship, the worldwide movement toward market

alliance and political freedom has forced both

regions to replace their command systems with

thriving private enterprises, which should allow

producers to efﬁciently make the goods that

consumers want.

The 1990s witnessed dramatic economic trans-

formations. The former Soviet Union and Eastern

European countries abandoned central planning.

There was an initial outcry as output declined

sharply, but by late 1990s recovery had taken place,

albeit unevenly across countries. As in the case of

the CIS, real output fell by 50 percent and did not

recover until 1999. However, by 2000, Central and

Southeastern Europe and the Baltics (CSB) had

more than restored their original output levels.

Transition economies have shown a varying degree

of economic performance. Those that have per-

formed best are the ones which were most com-

mitted to the reform at the start and they have

carried out reforms rapidly and consistently.

POLITICAL RISKS

There are a number of political risks with which

marketers must contend. Hazards based on a host

government’s actions include conﬁscation, expro-

priation, nationalization, domestication, and creep-

ing expropriation. Such actions are more likely to

be levied against foreign investments, though local

ﬁrms’ properties are not totally immune. Charles de

Gaulle nationalized France’s three largest banks in

1945, and more nationalization occurred in 1982

under the French socialists. Coca-Cola Co. managed

to re-enter India in 1993, after being thrown out of

the country ﬁfteen years earlier by India’s socialist

government.

Conﬁscation is the process of a government’s

taking ownership of a property without compen-

sation. An example of conﬁscation is the Chinese

government’s seizure of American property after

the Chinese communists took power in 1949. A

more recent example involves Occidental Petro-

leum whose assets were conﬁscated without com-

pensation by Venezuela.

Expropriation differs somewhat from conﬁs-

cation in that there is some compensation, though

not necessarily just compensation. More often than

not, a company whose property is being expropri-

ated agrees to sell its operations – not by choice but

rather due to some explicit or implied coercion.

After property has been conﬁscated or expropri-

ated, it can be either nationalized or domesticated.

Nationalization involves government ownership,

and it is the government that operates the business

being taken over. Burma’s foreign trade, for exam-

ple, is completely nationalized. Generally, this

action affects a whole industry rather than only a sin-

gle company.When Mexico attempted to control its

debt problem, then-President Jose Lopez Portillo

nationalized the country’s banking system. In

another case of nationalization, Libya’s Colonel

Gadhaﬁ’s vision of Islamic socialism led him to

nationalize all private business in 1981. Unlike com-

munists in Hungary and Poland, Czech communists

nationalized 100 percent of their economy. Chile

nationalized its large copper mines in 1971. By

1980, it had readmitted foreign investment and even

provided incentives for foreign investment in the

mining sector.

In the case of domestication, foreign com-

panies relinquish control and ownership, either

completely or partially, to the nationals.The result

is that private entities are allowed to operate the

conﬁscated or expropriated property. The French

government, after ﬁnding out that the state was not

sufﬁciently proﬁcient to run the banking business,

developed a plan to sell thirty-six French banks.

Domestication may sometimes be a voluntary act

that takes place in the absence of conﬁscation or

nationalization. Usually, the causes of this action are

either poor economic performance or social pres-

sures.When situations worsened in South Africa and

political pressures mounted at home, Pepsi sold its

South African bottling operation to local investors,

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POLITICAL ENVIRONMENT

and Coca-Cola signaled that it would give control

to a local company. General Motors followed suit by

selling its operations to local South African man-

agement in 1986. Shortly thereafter, Barclays Bank

made similar moves.

Another classiﬁcation system of political risks is

the one used by Root.

Based on this classiﬁcation,

four sets of political risks may be identiﬁed: general

instability risk, ownership/control risk, operation

risk, and transfer risk.

General instability risk is related to the

uncertainty about the future viability of a host

country’s political system. The Iranian revolution

that overthrew the Shah is an example of this kind

of risk. In contrast, ownership/control risk is

related to the possibility that a host government

might take action (e.g., expropriation) to restrict an

investor’s ownership and control of a subsidiary in

that host country.

Operation risk proceeds from the uncertainty

that a host government might constrain the

investor’s business operations in all areas, including

production, marketing, and ﬁnance. Finally, trans-

fer risk applies to any future acts by a host govern-

ment that might constrain the ability of a subsidiary

to transfer payments,capital,or proﬁt out of the host

country back to the parent ﬁrm.

The 1970s was the peak period for expropriation

activities.The number of expropriation acts peaked

at eighty-three (involving twenty-eight countries) in

1975, representing 14.4 percent of all such acts

(575) which took place between 1960 and 1992. It

is encouraging to note that the trend may have

reversed. Based on the 1980 to 1992 data, expro-

priation is unlikely in the future.

As a matter of

fact, developing countries now appear to even want

to protect foreign investors from it.

Governments’ rationale for nationalization varies

widely and includes national interests, vote getting,

prevention of foreigners’ exploitation, and an easy,

cheap, and quick way of acquiring wealth.The risk

of expropriation will likely be less in the future for

several reasons. Many governments have experi-

enced very poor records in running the businesses

nationalized and have found that their optimistic

projections have not materialized. Furthermore,

many nations have realized that such actions have

created difﬁculties in attracting new technology and

foreign investment as well as in borrowing from

foreign banks. There is also the possibility of open

retaliation by other governments.

Although the threat of direct conﬁscation or

expropriation has become remote, a new kind of

threat has appeared. MNCs have generally been con-

cerned with coups, revolutions, and conﬁscation,

but they now have to pay attention to so-called

creeping expropriation. The Overseas Private

Investment Corporation (OPIC) deﬁnes creeping

expropriation as “a set of actions whose cumulative

effect is to deprive investors of their fundamental

rights in the investment.”

Laws that affect corpo-

rate ownership, control, proﬁt, and reinvestment

(e.g., currency inconvertibility or cancellation of

import license) can be easily enacted. Because coun-

tries can change the rules in the middle of the game,

companies must adopt adequate safeguards.Various

defensive and protective measures will be discussed

below.

A more recent but increasingly signiﬁcant risk is

creeping expropriation.As in the case of Conoco, it

reached a joint venture agreement in 1992 and set

up Polar Lights in Russia.

At that point in time in

the early days of post-communist Russia, potential

rewards for a pioneering oil company appeared to

exceed risks, but in recent years, Russian govern-

ment ofﬁcials have issued demands from time to

time to renegotiate the terms of the agreement.The

government has claimed that its ofﬁcials who nego-

tiated the original deal did so illegally. A great deal

of confusion and disagreement came from Russia’s

evolving laws dealing with underground resources.

Since Russia is a good example of frontier capital-

ism, such ambiguities have to be expected.

BP, likewise, invested $500 million in Sidanco.

BP was upset when TNK bought Chernogorneft, a

prized Siberian oilﬁeld from Sidanco in a 1999

bankruptcy auction. Claiming that the purchase was

illegal, BP threatened to leave. An understanding

was reached in 2001 to return the oilﬁeld to

Sidanco. Subsequently, BP completed the biggest

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foreign direct investment in post-communist Russia

– a $7.7 billion deal giving BP a 50 percent share in

the newly formed TNK-BP. Given the fact that

Russia is the world’s biggest crude oil producer, the

country offers a great deal of potential. However,

this potential in the country with frontier capitalism

is also accompanied by a signiﬁcant risk.

PRIVATIZATION

Both multinational and local ﬁrms should notice a

trend toward privatization and its competitive

implications. Government-owned enterprises are

often characterized by overstafﬁng, poor ﬁnancial

performance, dependence on subsidies, centralized

and politicized organizations, and lack of competi-

tion.

Among the objectives of privatization are:

promotion of competition and efﬁciency, reduction

of debt and subsidies, return of ﬂight capital, and

broadening domestic equity ownership.

Countries which are likely to pursue privatiza-

tion tend to have the following characteristics: high

budget deﬁcits, high foreign debt, and high depen-

dence on such international agencies as the World

Bank and the International Monetary Fund. In Latin

America and Asia, countries pursuing privatization

are those which have overused state enterprises

and those with the private sector growing faster

than average, making them more ready to assume

tasks once assigned to state enterprises. In Africa,

however, privatization may have been imposed by

external agencies, even though these countries are

not necessarily ready for this task.

Governments have learned a number of lessons

from privatization. Policy makers need to under-

stand that privatization is a political process and that

support from the highest political level is necessary.

A successful program requires economic reform,

and the privatization strategy should be tailored to

a country’s circumstances. In addition, the privati-

zation process should be transparent.

Should centrally planned economies adopt the

big bang approach or gradualism in reforming their

economies? Evidence from the ex-communist coun-

tries appears to indicate that it is better to quickly

switch to capitalism so that market forces can do

their work.

In the case of Eastern Europe, all tran-

sition economies took the big bang approach by

rapidly liberalizing the goods and foreign exchange

markets, resulting initially in a steep fall in output.

On the other hand, China and Vietnam chose the

gradualist approach and have fared better. However,

both countries, unlike their Eastern European coun-

terparts, did not begin the reform process in the

wake of revolutionary political changes and a col-

lapse of central governing systems which forced

the Eastern European economies to move quickly

to free prices while imposing current account

convertibility. Therefore, the choice of strategy is

dependent on the economy’s political circumstances

and economic structure. In any case, no working

model exists of a “functioning market economy with

a massive state enterprise sector.”

One study examined the impact of governance

structures on privatized ﬁrms in terms of export

intensity. Based on a longitudinal multi-industry set

of data involving private ﬁrms in Russia, Ukraine,

and Belarus, it found that export intensity was

mediated by strategies involving product develop-

ment, acquisitions, and links with foreign partners.

The relationship between managerial control and

foreign partners changed from positive to negative

over time, and it is thus crucial to take a dynamic

perspective in transition economies.

INDICATORS OF POLITICAL

INSTABILITY

To assess a potential marketing environment, a

company should identify and evaluate the relevant

indicators of political difﬁculty. Potential sources

of political complication include social unrest, the

attitudes of nationals, and the policies of the host

government.

The breakup of the Soviet Union should not

come as a surprise. Human nature involves mono-

stasy (the urge to stand alone) as well as systasy

(the urge to stand together), and the two concepts

provide alternative ways of using resources to

meet a society’s needs.

Monostasy encourages

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POLITICAL ENVIRONMENT

competition, but systasy emphasizes cooperation.As

explained by Alderson, “a cooperative society tends

to be a closed society. Closure is essential if the

group is in some sense to act as one.” Not surpris-

ingly, China, although wanting to modernize its

economy, does not fully embrace an open economy,

which is likely to encourage dissension among the

various groups. For the sake of its own survival,

a cooperative society may have to obstruct the

dissemination of new ideas and neutralize an

external group that poses a threat. China has appar-

ently learned a lesson from the Soviet Union’s

experience.

A liberated political climate can easily lead to a

call of the long-suppressed national minority groups

for cultural and territorial independence. The

groups’ past conﬂicts, unsettled but subdued during

the communist period, are likely to escalate.Three

kinds of conﬂict may result.

First, a domestic

dispute may escalate into violence that is conﬁned

within the boundaries of the country in question.

The civil war that started in 1991 between Serbs

and Croats in Yugoslavia is a good example.Another

example is the centuries-old ethnic animosity

between Christians in Armenia and Muslims in

neighboring Azerbaijan, which led some 600

Armenian nationalists to clash with Soviet soldiers

during earthquake rescue efforts in Armenia.

Second, an internal dispute may draw interested

parties outside the country in question into the

conﬂict. For example, problems in Yugoslavian

Macedonia may force Bulgaria and Greece to inter-

vene. Finally, the third form of conﬂict, resulting

either from the ﬁrst two kinds of conﬂict or from

an international dispute, may lead to a direct con-

frontation between two countries. Romania and

Hungary, which have deep-rooted grievances

against each other, could become involved in this

form of conﬂict.

Attitudes of nationals

An assessment of the political climate is not com-

plete without an investigation of the attitudes of the

citizens and government of the host country. The

nationals’ attitude toward foreign enterprises and

citizens can be quite inhospitable. Nationals are

often concerned with foreigners’ intentions in

regard to exploitation and colonialism, and these

concerns are often linked to concerns over foreign

governments’ actions that may be seen as improper.

Such attitudes may arise out of local socialist or

nationalist philosophies, which may be in conﬂict

with the policy of the company’s home-country

government. Any such inherent hostility is certain

to present major problems because of its relative

permanence. Governments may come and go, but

citizens’ hostility may remain.This kind of problem

may explain why twelve US ﬁrms decides to leave

El Salvador in the 1980s.Their departure meant the

loss of some 20 percent of US capital investment in

that country.

Policies of the host government

Unlike citizens’ inherent hostility, a government’s

attitude toward foreigners is often relatively short-

lived.The mood can alter either over time or with

a change in leadership, and it can alter for either

better or worse. The impact of a change in mood

can be quite dramatic, especially in the short run.

Government policy formulation can affect busi-

ness operations either internally or externally (see

Marketing Ethics 4.1). The effect is internal when

the policy regulates the ﬁrm’s operations within

the home country. The effect is external when the

policy regulates the ﬁrm’s activities in another

country.

Although an external government policy is irrel-

evant to ﬁrms doing business in only one country,

such a policy can create complex problems for ﬁrms

doing business in countries that are in conﬂict with

each other. Disputes among countries often spill

over into business activities. A company in one

country may be prohibited from doing business with

other countries that are viewed as hostile.

A company should pay particular attention to

election time. Elections post a special problem

because of many candidates’ instinctive tendency

to use demagoguery to acquire votes. Candidate

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activities and tactics can very easily create an unwel-

come atmosphere for foreign ﬁrms. When French

politicians cited the fact that one French worker

became unemployed for every ﬁve to ten Japanese

cars imported, the government held up imported

cars when the election was a few weeks away. The

industry minister used every conceivable excuse to

avoid signing the required certiﬁcates.

The use of unfriendly rhetoric before an election

may be nothing but a smokescreen, and the “bark”

will not necessarily be followed by a “bite.” In such

cases, a company need not take drastic action if it is

able to see through the election. Ronald Reagan,

long an advocate of free trade, became something of

a protectionist immediately before his re-election in

1984. After the election, a policy of free trade was

reinstituted.Therefore, a company must determine

whether early threats are just that and nothing more

or whether such threats constitute the political can-

didates’ real intention and attitude for the future.

One theory focuses on the cooperation-based

relations between MNCs and host government.

There are four building blocks that will allow MNCs

to improve their cooperative relationships with gov-

ernments: (1) resource commitment, (2) personal

relations, (3) political accommodation, and (4)

organizational credibility. A study of 131 MNCs in

China conﬁrms the importance of these blocks.

One model proposes that organizations may

employ three political strategies: information,

ﬁnancial incentive, and constituency building.While

an MNC may have a particular global strategy when

dealing with governments, its subsidiaries may still

have to employ speciﬁc activities in host-country

contexts. As such, a subsidiary’s response must be

consistent with a host country’s characteristics as

well as with the imperatives of the headquarters.

The more integrated a subsidiary is with its afﬁliates

in a strategic sense, the greater it is integrated with

the other subsidiaries in a political sense.

ANALYSIS OF POLITICAL RISK OR

COUNTRY RISK

Although political scientists, economists, business-

people, and business scholars have some ideas about

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POLITICAL ENVIRONMENT

The military junta of Myanmar (Burma) is viewed

with disdain and disgust in most parts of the world –

except by the governments of India and Thailand.

While India is the world’s largest democracy, it does

not mind doing business with the Myanmar dictator-

ship.To India, it is a matter of necessity. India recog-

nizes that its two threats, China and Pakistan, supply

defense equipment to Myanmar. As a result, it feels

compelled to engage Myanmar’s military regime in a

friendly way. India has been quiet about the military

junta’s policies toward Aung San Suu Kyi and has

assisted Myanmar in building crucial border roads.

In spite of worldwide pressure and condemnation,

Thailand has refused to join the world community in

demanding the Burmese rulers to end their violent

oppression of their own people. Thailand’s prime

minister, Thaksin Shinawatra, even stated that he

would side with Myanmar. His deputy prime minister

unabashedly proclaimed: “China and Thailand are

Burma’s good allies.”This position is surprising, given

the Rangoon government’s hostile attitudes toward

Thailand. Could it be that the prime minister, who also

happens to be a business tycoon, is supporting the

Burmese dictators for personal (i.e., business)

reasons? As commented by the

Bangkok Post

,“In the

future, when the military dictatorship collapses, as

they all do, Thailand will be singled out as a junta-

friendly reason for the delay in democracy. This will

affect the treatment of Thailand and Thais by the next

Rangoon government.”

Sources:

“India’s Relations with Burma a Necessary Evil,”

Times of India

, October 19, 2000; “Editorial: On the

Wrong Side of the Burma Issue,”

Bangkok Post

, September

9, 2003.

MARKETING ETHICS 4.1 A NECESSARY EVIL

what political risk is, they seem to have difﬁculties

agreeing both on its deﬁnition and on methods to

predict danger. Perhaps due to this lack of agree-

ment on the deﬁnition, many different methods

have been employed to measure, analyze, and

predict political risks.

Political risk is an uncertainty that stems from

the exercise of power by governments and non-gov-

ernmental actors. Typical hazards include political

instability, politicized government policy, political

violence, expropriation, creeping expropriation,

contract frustration, and currency inconvertibility.

Some assessment methods are country speciﬁc in

the sense that a risk report is based on a particular

country’s unique political and economic circum-

stances.As such, there is lack of a consistent frame-

work that would allow comparison across countries.

Since an MNC must decide to allocate resources

based on potential opportunities and risk associ-

ated with each country, a common methodology is

essential.

Even when a systematic attempt is made for

cross-national comparisons, the methods used vary

greatly. Some are nothing more than checklists con-

sisting of a large number of relevant issues that are

applicable to each country. Other systems rely on

questionnaires sent to experts or local citizens in

order to gauge the political mood. Such scoring

systems, which permit numerical ratings of coun-

tries, have gained acceptance. Some institutions

have turned to econometrics for this purpose.

Marine Midland Bank, for example, uses econo-

metrics to rate various countries in terms of eco-

nomic risk.The method, however, is not perfect.

To many small- and medium-sized ﬁrms, doing

their own country-risk analyses is out of the ques-

tion because of the cost, expertise, and resources

required. However, there are some alternatives that

can provide a useful assessment of political risk.

One is to interview people who have some know-

ledge or experience with the countries of interest,

including businesspeople, bankers, and government

ofﬁcials. Molex Inc., a manufacturer of high-tech-

nology electrical products, has been able to protect

itself by listening to international bankers, lawyers,

and accounting ﬁrms.Another method is to rely on

the advice of ﬁrms specializing in this area.

Controlled Risks, a Washington area ﬁrm, advises

about 400 US companies on the danger of doing

business in seventy countries. For fees that can total

$9000 a year, the ﬁrm offers information and pro-

vides training for executives on how to protect

themselves, cope with kidnapping and extortion,

and guide their employees in political crises.

Many banks can help their clients to assess busi-

ness risks overseas. Bank of America, for example,

provides international economic analyses and fore-

casts to customers through World Information

Services (WIS). Subscribers of WIS receive Country

Outlooks, Country Data Forecasts, and Country

Risk Monitor. Bank of America uses a ranking

system based on a common set of economic and

ﬁnancial criteria to evaluate eighty countries for

business risk. In addition to current rankings, a ten-

year historical track of each country is also shown.

Country Risk Monitor allows risk comparisons of

countries with benchmark risk indicators for major

country groupings. Updates are regularly provided.

According to one study, in evaluating country

creditworthiness, banks use both political instabil-

ity and economic variables, with larger weight

assigned to economic variables.

In other words,

perceived country creditworthiness is a function of

a country’s economic performances which reﬂect

longer term political stability.The credit ratings are

also affected by the two proxies for political insta-

bility: armed conﬂicts and the frequency of changes

in the regime.

Another alternative is to subscribe to reports

prepared for this purpose. One valuable report is

the country credit rating prepared by Institu-

tional Investor magazine. Based on a survey of

approximately 100 leading international banks con-

cerning a country’s creditworthiness and the chance

of payment default, rankings are assigned to 100

countries every six months. Greater weight is given

to the responses of those banks that have the largest

global exposure and which possess the most sophis-

ticated systems of risk analysis.Yet the loan prob-

lems encountered by the Bank of America and

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POLITICAL ENVIRONMENT