True False
Multiple Choice Questions
Essay Questions
Chapter 06 The Political Environment: A Critical Concern Answer Key
True / False Questions
TRUE
Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members. A state sets requirements for citizenship, defines geographical boundaries, and controls trade and the movement of people and goods across its borders.
Foreign investment can be perceived as a threat to sovereignty and thus become a rallying cry by opposing factions.
Adherence to the WTO inevitably means the loss of some degree of national sovereignty, because the member nations have pledged to abide by international covenants and arbitration procedures that can override national laws and have far-reaching ramifications for citizens.
FALSE
At the top of the list of political issues concerning foreign businesses is the stability or instability of prevailing government policies.
Radical shifts in government philosophy when an opposing political party ascends to power, pressure from nationalist and self-interest groups, weakened economic conditions, bias against foreign investment, or conflicts among governments are all issues that can affect the stability of a government.
Saudi Arabia precludes women from voting and appears to be the only state still completely in the dark ages with regard to suffrage.
Nationalism can best be described as an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. This pride can take an anti-foreign business bias, where minor harassment and controls of foreign investment are supported, if not applauded.
Generally, the more a country feels threatened by some outside force or the domestic economy declines, the more nationalistic it becomes in protecting itself against intrusions.
Although militant economic nationalism has subsided, nationalistic feelings can be found even in the most economically prosperous countries.
The most severe political risk is confiscation, that is, the seizing of a company’s assets without payment.
The ultimate goal of domestication is to force foreign investors to share more of the ownership, management, and profits with nationals than was the case before domestication.
Expropriation and nationalization have often led to nationalized businesses that were inefficient, technologically weak, and noncompetitive in world markets.
Risks of confiscation and expropriation appear to have lessened over the last two decades (with exceptions in Latin America, particularly Venezuela) because experience has shown that few of the desired benefits materialize after government takeover.
Today, countries often require prospective investors to agree to share ownership, use local content, enter into labor and management agreements, and share participation in export sales as a condition of entry; in effect, the company has to become domesticated as a condition for investment.
Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living.
History indicates that sanctions are almost always unsuccessful in reaching desired goals, particularly when other major nations’ traders ignore them.
Although not usually officially sanctioned by the government, the impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change. When well organized, the actions of PSAs can succeed.
Often associated with political activism, nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments.
Although not usually government initiated, violence is another related risk for multinational companies to consider in assessing the political vulnerability of their activities.
International warfare is fast becoming obsolete.
One problem in tracing cyberterrorists and criminals is that it is hard to determine if a cyberattack has been launched by a rogue state, a terrorist, or a hacker as a prank.
Although there are no specific formulas to determine a product’s vulnerability at any point, there are some generalizations that help identify the tendency for products to be politically sensitive.
Products that have or are perceived to have an effect on the environment, exchange rates, national and economic security, and the welfare of people or that are publicly visible, subject to public debate, or associated with their country of origin are more likely to be politically sensitive.
Although a company cannot directly control or alter the political environment of the country within which it operates, a specific business venture can take measures to lessen its degree of susceptibility to politically induced risks.
Relations between governments and MNCs are generally positive if the investment made by the MNCs (1) improves the balance of payments by increasing exports or reducing imports through import substitution; (2) uses locally produced resources; (3) transfers capital, technology, and/or skills; (4) creates jobs; and/or (5) makes tax contributions.
Licensing can be effective in situations in which the technology is unique and the risk is high. Of course, there is some risk assumed, because the licensee can refuse to pay the required fees while continuing to use the technology.
As a reasonable response to the potential of domestication, planned domestication can be profitable and operationally expedient for the foreign investor.
Bribery poses problems for the marketer at home and abroad, because it is illegal for U.S. citizens to pay a bribe even if it is a common practice in the host country.
The Department of Commerce (DOC) is the principal agency that supports U.S. business abroad.
The Export-Import Bank (Ex-Im Bank) underwrites trade and investments for U.S. firms.
In the context of international law, a sovereign state is independent and free from all external control; enjoys full legal equality with other states; governs its own territory; selects its own political, economic, and social systems; and has the power to enter into agreements with other nations.
Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members.
The leaders of the G20 nations ceded some sovereignty in their hugely important April 2009 agreement to “reject protectionism” at the nadir of the 2009 crash, when world trade had declined more than 12 percent.
The ideal political climate for a multinational firm is a stable, friendly government. Because foreign businesses are judged by standards as variable as there are nations, the stability and friendliness of the government in each country must be assessed as an ongoing business practice.
There are five main political causes of instability in international markets: (1) some forms of government seem to be inherently unstable, (2) changes in political parties during elections can have major effects on trade conditions, (3) nationalism, (4) animosity targeted toward specific countries, and (5) trade disputes themselves.
Circa 500 BC, the ancient Greeks conceived of and criticized three fundamental forms of government: rule by one, rule by few, and rule by many. The common terms for these forms in use today are monarchy (or dictatorship), aristocracy (or oligarchy), and democracy.
The common terms for the various forms of government in use today are monarchy (or dictatorship), aristocracy (or oligarchy), and democracy.
Saudi Arabia precludes women from voting. It appears to be the only state still completely in the dark ages with regards to suffrage.
In Peru, police and military are not allowed to vote.
Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only” (e.g., “Buy American”), restrictions on imports, restrictive tariffs, and other barriers to trade.
Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only” (e.g., “Buy American”).
The most severe political risk is confiscation, that is, the seizing of a company’s assets without payment. Confiscation was most prevalent in the 1950s and 1960s when many underdeveloped countries saw confiscation, albeit ineffective, as a means of economic growth.
Confiscation is the seizing of a company’s assets without payment.
Expropriation is when the government seizes an investment but makes some reimbursement for the assets.
When the expropriated investment is nationalized, it becomes a government-run entity.
Domestication occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees that mandate local ownership and greater national involvement in a company’s management.
Domestication occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees that mandate local ownership and greater national involvement in a company’s management. As Clint’s company is gradually transferred to the control of the Chilean government, his company is facing domestication.
Exchange controls stem from shortages of foreign exchange held by a country.
Exchange controls stem from shortages of foreign exchange held by a country. When a nation faces shortages of foreign exchange and/or a substantial amount of capital is leaving the country, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange for the most essential uses.
In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts. As Thailand has required that all milk products sold in its country must use the milk produced from Thai dairy farms, it has used a local-content law to force local purchase. This causes an economic risk for foreign investors.
In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts. Therefore, the United States used local-content laws to force Toyota Motor Company to purchase locally made parts.
Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements.
Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements. As the Nigerian government has used taxing as a means of controlling foreign investments, the economic risk in discussion here is tax controls.
Essential products that command considerable public interest, such as pharmaceuticals, food, gasoline, and cars, are often subjected to price controls. Such controls applied during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests.
In addition to economic risks, one or a group of nations may boycott another nation, thereby stopping all trade between the countries, or may issue sanctions against the trade of specific products.
The Internet and cell phones have together become effective tools of PSAs to spread the word about whatever cause they sponsor.
Some NGOs have received global recognition—the Red Cross and Red Crescent, Amnesty International, Oxfam, UNICEF, Care, and Habitat for Humanity are examples—for their good works, political influence, and even their brand power.
There are reasons to expect that businesses will become increasingly attractive to terrorists, both because they are less well defended than government targets and because of what they symbolize.
Always on the horizon is the growing potential for cyberterrorism and cybercrime. Although still in its infancy, the Internet provides a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught.
The Melissa virus and the denial of service (DoS) attacks that overloaded the websites of CNN, ZDNet, Yahoo!, and Amazon.com with a flood of electronic messages, crippling them for hours, were considered purposeful attacks on specific targets. The “Slammer” brought Internet service to a crawl. It doubled its numbers every 8.5 seconds during the first minute of its attack and infected more than 75,000 hosts within 10 minutes. After infecting hundreds of thousands of computers in Europe and North America, the “Goner worm” traveled to Australia overnight and brought down government agencies, financial and manufacturing sites, and at least 25 MNCs.
Political risk assessment is an attempt to forecast political instability to help management identify and evaluate political events and their potential influence on current and future international business decisions.
Perhaps the greatest risk to international marketers is the threat of the government actually failing, causing chaos in the streets and markets.
Relations between governments and MNCs are generally positive if the investment (1) improves the balance of payments by increasing exports or reducing imports through import substitution; (2) uses locally produced resources; (3) transfers capital, technology, and/or skills; (4) creates jobs; and/or (5) makes tax contributions.
Relations between governments and MNCs are generally positive if the investment (1) improves the balance of payments by increasing exports or reducing imports through import substitution; (2) uses locally produced resources; (3) transfers capital, technology, and/or skills; (4) creates jobs; and/or (5) makes tax contributions. Therefore, if Meteora uses locally produced resources it is most likely to maintain positive relations with the Kenyan government.
Typically less susceptible to political harassment, joint ventures can be with locals or other third-country multinational companies; in both cases, a company’s financial exposure is limited. So, Juliet is most likely to use joint ventures to enter the market to minimize political harassment.
The strategies used by MNCs to minimize political vulnerability and risk are joint ventures, expanding the investment base, licensing, planned domestication, political bargaining, and political payoffs.
Including several investors and banks in financing an investment in the host country is a strategy that minimizes political vulnerability and risk. This approach has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened.
A strategy that some firms find eliminates almost all risks is to license technology for a fee. Licensing can be effective in situations in which the technology is unique and the risk is high. Of course, there is some risk assumed, because the licensee can refuse to pay the required fees while continuing to use the technology.
In those cases in which a host country is demanding local participation, the most effective long-range solution is planned phasing out, that is, planned domestication.
Including several investors and banks in financing an investment in the host country is an effective strategy to lessen the political vulnerability of a company. This approach has the advantage of engaging the power of the banks whenever any kind of government takeover or harassment is threatened. This strategy becomes especially powerful if the banks have made loans to the host country; if the government threatens expropriation or other types of takeover, the financing bank has substantial power with the government.
One approach to dealing with political vulnerability is the political payoff—an attempt to lessen political risks by paying those in power to intervene on behalf of the multinational company. Bribery poses problems for the marketer at home and abroad, because it is illegal for U.S. citizens to pay a bribe even if it is a common practice in the host country.
Within the same country, some foreign businesses may fall prey to politically induced harassment, while others may be placed under a government umbrella of protection and preferential treatment. The difference lies in the evaluation of a company’s contribution to the nation’s interest.
The most important reason to encourage foreign investment is to accelerate the development of an economy.
Export-Import Bank (Ex-Im Bank) underwrites trade and investments for U.S. firms.
The International Trade Administration (ITA), a bureau of the DOC, is dedicated to helping U.S. business compete in the global marketplace.
A sovereign state is independent and free from all external control; enjoys full legal equality with other states; governs its own territory; selects its own political, economic, and social systems; and has the power to enter into agreements with other nations. Sovereignty refers to both the powers exercised by a state in relation to other countries and the supreme powers exercised over its own members.
The ideal political climate for a multinational firm is a stable, friendly government. Radical shifts in government philosophy when an opposing political party ascends to power, pressure from nationalist and self-interest groups, weakened economic conditions, bias against foreign investment, or conflicts among governments are all issues that can affect the stability of a government. At the top of the list of political issues concerning foreign businesses is the stability or instability of prevailing government policies.There are five main political causes of instability in international markets: (1) some forms of government seem to be inherently unstable, (2) changes in political parties during elections can have major effects on trade conditions, (3) nationalism, (4) animosity targeted toward specific countries, and (5) trade disputes themselves.
Nationalism can best be described as an intense feeling of national pride and unity, an awakening of a nation’s people to pride in their country. This pride can take an anti-foreign business bias, where minor harassment and controls of foreign investment are supported, if not applauded. Economic nationalism has as one of its central aims the preservation of national economic autonomy, in that residents identify their interests with the preservation of the sovereignty of the state in which they reside. In other words, national interest and security are more important than international relations. Feelings of nationalism are manifested in a variety of ways, including a call to “buy our country’s products only” (e.g., “Buy American”), restrictions on imports, restrictive tariffs, and other barriers to trade. They may also lead to control over foreign investment. Generally speaking, the more a country feels threatened by some outside force or the domestic economy declines, the more nationalistic it becomes in protecting itself against intrusions.
Confiscation is the seizing of a company’s assets without payment. Expropriation occurs when the government seizes an investment but some reimbursement for the assets is made. Domestication occurs when the host country gradually causes the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s management. The ultimate goal of domestication is to force foreign investors to share more of the ownership, management, and profits with nationals than was the case before domestication.
The text lists six economic risks. Exchange controls: When a nation faces shortages of foreign exchange and/or a substantial amount of capital is leaving the country, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to conserve the supply of foreign exchange for the most essential uses. Local-content laws: Countries often require a portion of any product sold within the country to have local content, that is, to contain locally made parts. Import restrictions: Selective restrictions on the import of raw materials, machines, and spare parts are fairly common strategies to force foreign industry to purchase more supplies within the host country and thereby create markets for local industry. Tax controls: Taxes must be classified as a political risk when used as a means of controlling foreign investments. In such cases, they are raised without warning and in violation of formal agreements. Price controls: Controls applied for essential products during inflationary periods can be used to control the cost of living. They also may be used to force foreign companies to sell equity to local interests. Labor problems: In many countries, labor unions have strong government support that they use effectively in obtaining special concessions from business. Layoffs may be forbidden, profits may have to be shared, and an extraordinary number of services may have to be provided.
The impact of political and social activists (PSAs) can also interrupt the normal flow of trade. PSAs can range from those who seek to bring about peaceful change to those who resort to violence and terrorism to effect change. Often associated with political activism, nongovernmental organizations (NGOs) are increasingly affecting policy decisions made by governments. Many are involved in peaceful protests, lobbying, and even collaborations with governmental organizations. Many also are involved in mitigating much of the human misery plaguing parts of the planet. Some NGOs have received global recognition for their good works, political influence, and even their brand power.
Cyberterrorism and cybercrime are growing threats for businesses. Although still in its infancy, the Internet provides a vehicle for terrorist and criminal attacks by foreign and domestic antagonists wishing to inflict damage on a company with little chance of being caught. One problem in tracing cyberterrorists and criminals is that it is hard to determine if a cyberattack has been launched by a rogue state, a terrorist, or a hacker as a prank. Moreover, each wave of viruses gets more damaging and spreads so rapidly that considerable harm is done before it can be stopped. The “Slammer,” for example, brought Internet service to a crawl. It doubled its numbers every 8.5 seconds during the first minute of its attack and infected more than 75,000 hosts within 10 minutes. Whether perpetrated by pranksters or hackers out to do harm, these incidents show that tools for cyberterrorism can be developed to do considerable damage to a company, an entire industry, or a country’s infrastructure.
Relations between governments and MNCs are generally positive if the investment: (1) improves the balance of payments by increasing exports or reducing imports through import substitution; (2) uses locally produced resources; (3) transfers capital, technology, or skills; (4) creates jobs; or (5) makes tax contributions.
Ranzan Inc. could choose to implement planned domestication. Domestication occurs when host countries gradually cause the transfer of foreign investments to national control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a company’s management. As a reasonable response to the potential of domestication, planned domestication can be profitable and operationally expedient for the foreign investor. Planned domestication is, in essence, a gradual process of participating with nationals in all phases of company operations.
The Department of Commerce (DOC) is the principal agency that supports U.S. business abroad. The International Trade Administration (ITA), a bureau of the DOC, is dedicated to helping U.S. businesses compete in the global marketplace. Other agencies also provide assistance to U.S. companies. Export-Import Bank (Ex-Im Bank) underwrites trade and investments for U.S. firms. Foreign Credit Insurance Association (FCIA), an agency of the Ex-Im Bank, provides credit insurance that minimizes nonpayment risk caused by financial, economic, or political uncertainties. The Agency for International Development (AID) provides aid to underdeveloped countries and has limited protection in support of “essential” projects in approved countries and for approved products. The Overseas Private Investment Corporation (OPIC) provides risk insurance for companies investing in less-developed countries.
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