20111125 Session 5 - Political Environment

8/3/2019 20111125 Session 5 - Political Environment

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Political Environment


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Session Objectives

Political Systems Political Risk Analysis

Definition

Empirical relationships

Evaluation and Management

May 5, 2012 Session 5 - Political Environment 2


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PEST Framework for Country Analysis


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Country Attractiveness

BenefitsSize of Economy

Likely Economic Growth

Costs

CorruptionLack of Infrastructure

Legal Costs

Risks

Political Risks: Social Unrest/Anti-Business TrendsEconomic Risks: Economic Mismanagement

Legal Risks: Failure to Safeguard Property Rights

OverallAttractiveness



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Political System

Political system includes the structures,processes, and activities by which a nation

governs itself.

Political systems can be assessed according totwo dimensions

Degree to which they emphasize collectivism as opposedto individualism - Socialism

Degree to which they are democratic



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The Political Spectrum

TotalitarianismDemocracy

Democratic

Government

Nondemocratic

Government



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Totalitarianism


Either theocratic (religion-based) or secular

Neither recognizes nor permits opposition

Single party, group, or individual (dictator) monopolizes political

power

Power sustained via secret police, propaganda, regulation of free

discussion and criticism.

Order is often imposed through military power

Lack of constitutional guarantees

Common in the 20th century, command economies proved so

inefficient that most have gradually died out. Examples: China (19491980s), Germany (19331945), Soviet

Union (19181991), Spain (19391975) certain countries in

Central Asia, Eastern Europe, and Middle East.


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Government controls all economic and political matters.

The state is responsible for making all decisions: what goods

and services the country produces; quantity of production;

prices at which they are sold; and distribution.

The state owns all wealth, land, and capital, and allocates

resources based on which industries they want to develop.

Prices play little or no role in resource allocation

National plan gives road map with output targets for

industries and firms

Input-output analysis often used in devising the national plan

Inconsistencies in plans and failure to anticipate real consumer

wants often lead to unwanted production

Many ex-totalitarian states have much government

intervention, red tape, and bureaucracyMay 5, 2012 Session 5 - Political Environment 8

Totalitarianism


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Democracy Freedom of opinion, expression, press and organization

Associated mainly with capitalism

Elections and Limited terms for elected officials

Independent court system

High regard for individual rights

Respect for property

Nonpolitical bureaucracy and defense infrastructure

Accessibility to the decision-making process

Price acts as signals to both consumers and producers

Profits aid resource allocation Direct resources to the most profitable activities

Reward risk taking

Encourage productive efficiency (minimum costs)

Provide resources (ploughed back profits)



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Features of authoritarianism and democracy


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Degrees of democracy States vary in democratic accountability, participation

and civil rights.

Most modern societies are pluralistic politically

Arise due to differences in languages, ethnicbackground, tribal groups or religions

Many transition economies are building democraticinstitutions alongside market structures; however,

legacies of authoritarianism remain.

Mixed economies have features of both market and

command economies, combining state intervention andmarket mechanisms (e.g., Sweden, Singapore)

May 5, 2012 11Session 5 - Political Environment


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Political Ideologies

Both private and publicgroups need to balance

each others power

Every aspect ofpeoples lives must be

controlled to preserve order- No individual liberties

Only individuals andprivate groups can

preserve personal liberties

Totalitarianism AnarchismPluralism



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Types of Political Systems



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The Spread of Democracy



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Definition of Political Risk

The probability that political forces willnegatively affect a multinationals profit orimpede the attainment of other criticalbusiness objectives. Expropriation

Corruption

Breach of contracts

No contract law, no property right, or no enforcement

Examples

In China, the government censors material thatcriticizes the government. Yahoo must monitorthe information that appears on its Web site toprevent the Chinese government from shuttingdown its China operations



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Sources of Political Risks

Unstable Political System

Political involvement of religious ormilitary leader

Frequent changes in government

Corrupt or poor leadership

Civil disorder due to: Economic conditions

Human rights violations

Conflict among races, religions & ethnics

Group animosityMay 5, 2012 Session 5 - Political Environment 17


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Effects of Political Risks

Procurement difficulties

Work stoppages

Shipment delays

Property damage


I t l liti l i k


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Internal political risks


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International political risks


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Levels of political risk

Macro political risk: a risk that affects all

foreign enterprises in the same way.

Micro political risk: a risk that affects selected

sectors of the economy or specific foreign

businesses



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Types and levels of political risk



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Types of Political Risk

PoliticalRisks



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Arises from:Peoples resentment

toward government

Territorial disputes

between nations

Ethnic, racial orreligious disputes

Reduces ability to: Obtain materials

and equipment

Manufacture and

distribute products

Protect employees livesand firms assets

Conflict and Violence



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Terrorism and Kidnapping Kidnapping and the taking of hostages may be used

to fund a terrorist groups activities. Executives of

large international companies are prime targets.

Terrorist acts infrequent, but spectacular

L. America #1 esp. kidnappings

U.S. owned corps. Esp. targets, U.S. public

institutions

China, India, Turley, Israel etc.

-sept 11, Iraq



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Property Seizure

ConfiscationThe forced transfer of assets

from a companyto the government without

compensation

ExpropriationThe forced transfer of assets

from a company to thegovernment withcompensation

NationalizationWhen expropriation involves

one or a small number ofcompanies in an industry,the government may take

over an entireindustry


i


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Property SeizureExpropriation

Peaked in the mid-70s; almost nil now Mostly Africa till 1980, then Latin America

Declined since:

- Key sectors already nationalized- Economic need = > privatization

- Regulate rather than expropriate

Many hosts have joined MIGA (MultilateralInvestment Guarantee Agency)


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Local Content Requirements

Laws stipulating that a specified amount of a

good or service be supplied by producers in

the domestic market. These requirements can

force companies to use locally available rawmaterials, procure parts from local suppliers,

or employ a minimum number of local

workers.



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Political Risks

Investment Restrictions

Sectoral restrictions

Requirements for JVs, local ownership

Transparency of licensing procedures

Requirements for disclosure of technology

Requirements for forced divestiture

Operating Restrictions

limits on expansion, ownership of land, etc.

Discriminatory access to labour, inputs Restrictions on local market access

Performance requirements (e.g. employment & exportlevels, etc.)

Unequal access to government procurement


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Political Risks

Restrictions on Cross-Border Transfer of Resources

Tariffs, NTBs inhibit sourcing, exporting FX controls limit repatriation

Capital controls

Labour regulations

Taxation Concerns

Restrictions on transfer pricing

Unitary taxation policies Withholding taxes

Availability of tax holidays and other incentives


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Political Risks

Crossfire Problems

Activities may lead to international or home countrysanctions or consumer boycotts against the country or

firms that deal there

- human rights abuses (e.g. imprisonment, torture or murder of

political opponents; use of prison labor; persecution of

minority groups; not abiding by election results)

- conflicts with neighboring countries

- lack of concern for the environment, endangered species, etc.

- disregard for international agreements (e.g. re nuclear non-

proliferation)

- the misuse of social issues as means of protectionism

Political Risk Index 2011
http://maplecroft.com/portfolio/mapping/maplecroft/landing/


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Political Risk Index 2011
http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/


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Political Risk Atlas

Includes 41 risk indices evaluating 196

countries

political risk areas

conflict,

terrorism,

the rule of law,

the regulatory and

business environment.

http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/


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Managing Political Risk

InfluencingLocal

Politics

InformationGathering

Adaptation

Avoidance

Risks

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Adaptation

Incorporate risk intobusiness strategies

Localization

Development assistance

Local equity / debt

Insurance

Partnerships

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Agencies specializingin political-risk services

Current employees

with relevant information

Information gathering

Gather data to betterpredict and manage risk

http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/


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Forecasting Techniques

OLD HANDS = ask experts for gut instinct, personal

evaluations- taps expertise, but may be dated, subjective orirrelevant

GRAND TOUR = send executives for personal visits- access to top decision makers, first-hand exposure, but

superficial- may hear self-interested pleading

QUANTITATIVEDelphi: obtain expert views, aggregate and give to same experts forchance to revise their views given what others think; repeat untilconsensus

-tends towards conventional predictions- econometric: use historical data, macro-orientation, butlow-cost, may be helpful for initial screening
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CorruptionForeign Corrupt Practices Act

Lobbying

Influencing local lawmakers

Influence local politics

Present firms viewson political matters

http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/


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Political Strategies for International Businesses

Identify the exact issue

Trade barrier?

Environmental standards?

Workers rights, etc?

Define/determine the political aspect of the issue Assess the potential political action of other companies

Identify important institutions and individuals

Formulate strategies

Key objectives

Alternatives

Probable effectiveness


G Zero
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G - ZeroG-Zero refers to an emerging vacuum of power in

international politics created by a decline ofWestern

influence and the domestic focus of the governments of

developing states. It is a reference to a perceived shift away

from the pre-eminence of the Group of Seven industrialized

countries and the expanded Group of Twenty, whichincludes major emerging powers like China, India, Brazil,

Turkey and others. It is also a rejection of terms like G2,

often used to identify a possible strategic partnership

between the US and Chinese governments, or G3, whichrepresents an attempt to align US, European and Japanese

interests to defend free market democracy from the rise of

Chinese-inspired state-dominated capitalism.May 5, 2012 Session 5 - Political Environment 40
http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://maplecroft.com/portfolio/mapping/maplecroft/landing/http://en.wikipedia.org/wiki/International_politicshttp://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/G7http://en.wikipedia.org/wiki/G20http://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Group_of_Twohttp://en.wikipedia.org/wiki/Group_of_Twohttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Brazilhttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Chinahttp://en.wikipedia.org/wiki/G20http://en.wikipedia.org/wiki/G7http://en.wikipedia.org/wiki/Western_worldhttp://en.wikipedia.org/wiki/International_politics


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Thank you

M 5 2012 S i 5 P li i l E i 41

Documents

20111125 Session 5 - Political Environment