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INTERNATIONALINTERNATIONALPOLITICALPOLITICAL

ENVIRONMENTENVIRONMENT

SUBMITTED BY:SUBMITTED BY:DHANYA RAMACHANDRANDHANYA RAMACHANDRAN

III SEM MBAIII SEM MBA

NO:9NO:9

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POLITICAL ENVIRONMENTPOLITICAL ENVIRONMENT

Political environment refers to the influence of the systemPolitical environment refers to the influence of the system

of government and judiciary in a nation on internationalof government and judiciary in a nation on international

business.business.

In todays world economy, international political eventsIn todays world economy, international political eventsgreatly affect marketing activities. For example movementgreatly affect marketing activities. For example movement

toward free trade and away from protectionism. Studiestoward free trade and away from protectionism. Studies

show that countries with the free trade have the highestshow that countries with the free trade have the highest

GDP growth.GDP growth.

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ContiConti

ELEMENTS OF POLITICAL ENVIRONMENT ARE:ELEMENTS OF POLITICAL ENVIRONMENT ARE:

1.DEMOCRACY1.DEMOCRACY

2.TOTALITARIANISM2.TOTALITARIANISM

3.ETHICAL ISSUES3.ETHICAL ISSUES

4.POLITICAL RISK.4.POLITICAL RISK.

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DEMOCRACY:DEMOCRACY: It refers to the political arragement inIt refers to the political arragement inwhich the supreme power is vested in the people .itwhich the supreme power is vested in the people .itmaintains stable business environments through itsmaintains stable business environments through itslaws protecting individual property rights.laws protecting individual property rights.

TOTALITARIANISM:TOTALITARIANISM: It is also called asIt is also called asauthoritarianism; individual freedom is completelyauthoritarianism; individual freedom is completely

subordinated to the power of the authority of state andsubordinated to the power of the authority of state andconcentrated in hands of one person or in a smallconcentrated in hands of one person or in a smallgroups , which is not constitutionally accountable togroups , which is not constitutionally accountable tothe people.the people.

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ETHICAL ISSUES:ETHICAL ISSUES: There are ethical issues involvedThere are ethical issues involved

in having business deals with military reasons and alsoin having business deals with military reasons and also

issues related to the payment of bribes to theissues related to the payment of bribes to the

government officials.government officials.

POLITICAL RISK:POLITICAL RISK: It is any government action orIt is any government action or

politically motivated event that could adverselypolitically motivated event that could adversely

affective long term profitability or the value of theaffective long term profitability or the value of the

firm. It varies from nation to nation.firm. It varies from nation to nation.

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SOURCES OF POLITICALSOURCES OF POLITICAL

PROBLEMSPROBLEMSPOLITICAL PROBLEMS IS OF TWO TYPESPOLITICAL PROBLEMS IS OF TWO TYPES

1.political sovereignty1.political sovereignty

Political sovereignty is the exclusive right to have controlPolitical sovereignty is the exclusive right to have control

over an area, to operate the government, enact laws, andover an area, to operate the government, enact laws, andregulate activities and commerce.regulate activities and commerce.

2.political conflict2.political conflict

( political conflict consist of : turm oil, internalwar,( political conflict consist of : turm oil, internalwar,

conspiracy.)conspiracy.)political conflict is of twotypes:political conflict is of twotypes:

Direct effect.(kidnapping,strikes etc)Direct effect.(kidnapping,strikes etc)

Indirect effect.(change in economic policy)Indirect effect.(change in economic policy)

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Sources of political problems

Political sovereignty Political conflict

Direct effect Indirect effect

Motivated to straighten things out

To divert public attention from other problems

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POLITICAL INTERVENTIONPOLITICAL INTERVENTION

Actions on the part of government that affect economicActions on the part of government that affect economic

activity, resource allocation, and especially the voluntaryactivity, resource allocation, and especially the voluntary

decisions made through normal market exchanges.decisions made through normal market exchanges.

It is of different forms:It is of different forms:1.1. Expropriation.Expropriation.

Compulsory seizure or surrender of private party for theCompulsory seizure or surrender of private party for the

state's purposes, with little or no compensation to thestate's purposes, with little or no compensation to the

property's owner.property's owner.2.2. Domestication.Domestication.

it is the process by which controls and restrictions placedit is the process by which controls and restrictions placed

on the foreign firm gradually reduce the control of theon the foreign firm gradually reduce the control of the

owners.owners.

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CONTICONTI

3.3.Other forms which include:Other forms which include:

Exchange control .Exchange control .

Import restrictionImport restriction

Market controlMarket control

Tax control .Tax control .

Price control.Price control.

Labor restriction.Labor restriction.

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POLITICAL PERSPECTIVEPOLITICAL PERSPECTIVEIt should be examined according to:It should be examined according to:

1.1. Type of government (democratic republics, communistType of government (democratic republics, communistdictatorships, dictatorships, monarchies.)dictatorships, dictatorships, monarchies.)

DEMOCRATIC REPUBLICSDEMOCRATIC REPUBLICS

A Republic is a form of government in which the peopleA Republic is a form of government in which the people

or some portion thereof retain supreme control over theor some portion thereof retain supreme control over thegovernment, and in which the head of government is notgovernment, and in which the head of government is not

a monarch.a monarch.

Limited government interference in business activity,Limited government interference in business activity,

but more than in capitalism.but more than in capitalism.COMMUNIST DICTATORSHIPCOMMUNIST DICTATORSHIP

Severe government interference in economics, but notSevere government interference in economics, but not

absolute. Centralized planning by the government, ONEabsolute. Centralized planning by the government, ONE

PARTY rule, and stresses that there should be only onePARTY rule, and stresses that there should be only one

class of people.class of people.

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DICTATORSHIPDICTATORSHIP

A government in which a single leader or party exercisesA government in which a single leader or party exercisesabsolute control over all citizens and every aspect of theirabsolute control over all citizens and every aspect of theirliveslives

Generic term used to describe any government controlledGeneric term used to describe any government controlledby a single individual and giving the people little or noby a single individual and giving the people little or noindividual freedom. Typically a person who rules by threatindividual freedom. Typically a person who rules by threat

of force.of force.MONARCHYMONARCHY

A government that has a single person who is generallyA government that has a single person who is generallyconsidered the ruler by the title and birthright. Titlesconsidered the ruler by the title and birthright. Titlesinclude: Czar, King, Queen, Emperor, Caesar, etc...include: Czar, King, Queen, Emperor, Caesar, etc...

Power is absolute and is either taken through conquest orPower is absolute and is either taken through conquest orpassed down to family members without regard for abilitypassed down to family members without regard for abilityor appropriateness.or appropriateness.

Society is formed around feudal groups or tribes in whichSociety is formed around feudal groups or tribes in whichthe ruling family delegates power and authority basedthe ruling family delegates power and authority basedupon the desires of a single individual.upon the desires of a single individual.

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Cont.Cont.

2.2. Stability of government.Stability of government.

3. Quality of host governments economic management.3. Quality of host governments economic management.

4. Change in government policy.4. Change in government policy.

5. Host countrys attitude toward foreign investment.5. Host countrys attitude toward foreign investment.

6. Host countrys relationship with the rest of the world.6. Host countrys relationship with the rest of the world.

7. Host countrys relationship with parent companys home7. Host countrys relationship with parent companys home

government.government.

8. Attitude towards assignment of foreign personnel.8. Attitude towards assignment of foreign personnel.

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Cont.Cont.

9.9. Extent of antiExtent of anti--privateprivate--sectar influence.sectar influence.

10.fairness and honesty of administrative procedures.10.fairness and honesty of administrative procedures.

11. Closeness between government and people.11. Closeness between government and people.

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POLITICAL RISK ASSESSMENTPOLITICAL RISK ASSESSMENT

Political risk assessment is the assessment of thePolitical risk assessment is the assessment of the

risk of loss when investing in a given country causedrisk of loss when investing in a given country caused

by changes in a country's political structure orby changes in a country's political structure or

policies, such as tax laws, tariffs, expropriation ofpolicies, such as tax laws, tariffs, expropriation ofassets, or restriction in repatriation of profits.assets, or restriction in repatriation of profits.

For example, a company may suffer from such lossFor example, a company may suffer from such loss

in the case of expropriation or tightened foreignin the case of expropriation or tightened foreign

exchange repatriation rules, or from increased creditexchange repatriation rules, or from increased credit

risk if the government changes policies to make itrisk if the government changes policies to make it

difficult for the company to pay creditors.difficult for the company to pay creditors.

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POLITICAL RISK ASSESSMENTPOLITICAL RISK ASSESSMENT

METHODS:METHODS:

1.1. QUALITATIVE METHODQUALITATIVE METHOD

2.2. QUANTITATIVE METHODQUANTITATIVE METHOD qualitative include:qualitative include:

Grand tourGrand tour

Old handOld hand Delphi technique.Delphi technique.

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STRATEGIC RESPONSESTRATEGIC RESPONSE

Based on MNCs bargaining power andBased on MNCs bargaining power and

bargaining power of host country strategicbargaining power of host country strategic

responses include:responses include:

1.1. TO ADAPTTO ADAPT

2.2. TO WITH DRAWTO WITH DRAW

3.3. TO TAKE COUNTERACTIVETO TAKE COUNTERACTIVEMEASURES , like;MEASURES , like;

Joint venture

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Cont.Cont.

Expanding the investment base (Local

financial partner)

Marketing and distribution

Licensing

Planned domestication (Greater local

participation)Use risk reduction through adequate insurance

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