International Marketing, 5th Edition

The multiplicity of political environments exists because a multinational firm must cope with the politics of more than one nation. Foreign, domestic, and international political environments are highly interactive and may give conflicting signals and orders.

Parliamentary governments consult with citizens from time to time for the purpose of learning about opinions and preferences. Most industrialized nations and all democratic nations are parliamentary. Absolutist governments, in contrast, dictate government policy without considering citizens' needs or opinions. These governments include monarchies and dictatorships.

In a two-party system, there are typically two strong parties that take turns in controlling the government. In a multiparty system, there are several political parties, none of which is strong enough to gain control of the government. In a single-party system, there may be several parties, but one party is so dominant that there is little opportunity for others to elect representatives to govern the country. In a dominated one-party system, the dominant party does not allow any opposition, resulting in no alternative for the people.

Communism holds that all resources should be owned and shared by all the people for the benefit of the society. The degree of government control that occurs under socialism is somewhat less than under communism. A socialist government owns and operates the basic major industries but leaves small businesses to private ownership. The philosophy of capitalism, in comparison, provides for a free-market system that allows business competition and freedom of choice for both consumers and companies. A movement toward communism is accompanied by an increase in government interference and more control of factors of production. A movement toward capitalism is accompanied by an increase in private ownership.

It is tempting but probably incorrect to believe that a country is politically stable just because it is economically developed, democratic, and capitalistic. Such advanced and capitalistic countries as South Africa and such democratic countries as India have been beset with internal problems.

Confiscation is the process of a government's taking ownership of a property without compensation. Expropriation offers some kind of compensation, though not necessarily just compensation, for the property taken. Nationalization involves government ownership, and it is the government that operates the business being taken over. Domestication occurs when foreign companies relinquish control and ownership to the nationals.

Creeping expropriation is “a set of actions whose cumulative effect is to deprive investors of their fundamental rights in the investment.” The economic impact is due to the fact that laws that affect corporate ownership, control, profit, and reinvestment can be enacted. Companies thus must adopt adequate safeguards.

Some of the indicators of political instability are: social unrest, attitudes of nationals, and policies of the host government.

There are several methods, ranging from the qualitative approach to the quantitative one. A company may want to use checklists consisting of a large number of relevant issues that are applicable to each country. Or it can send questionnaires to experts or local citizens in order to gauge the political mood. Scoring systems, econometrics, and a premium over the LIBOR rate are other tools. The firm, of course, can also subscribe to reports prepared for this purpose.

Avoidance means screening out politically uncertain countries. Insurance is a strategy to shift the risk to other parties. In negotiating the environment, the idea is to develop an explicit concession agreement before committing the company to direct investment abroad. In the case of structuring the investment, the objective is to minimize potential threats by adjusting the firm's operating and financial policies. Such policies range from having local stakeholders and planned divestiture to short-term profit maximization and a change in the benefit/cost ratio.

Some of the measures that can be undertaken to minimize political risk include: stimulation of the local economy, employment of nationals, sharing ownership, being civic minded, political neutrality, behind-the-scenes lobby, observation of political mood, and reduction of exposure.

OPIC (Overseas Private Investment Corporation) is a U.S. government agency that assists economic development through investment insurance and a credit financing program. It is a business-oriented agency whose purpose is to support U.S. private investments. OPIC provides several forms of assistance, with political risk insurance as its primary business. Other types of assistance include loan guarantees, direct loans, local-currency loans, special project grants, and reconnaissance survey and feasibility study fundings.

MIGA (Multilateral Investment Guarantee Agency) helps its more than 100 member states to create an attractive investment climate. Its mission is to promote private investment in developing countries through insuring investment against noncommercial (i.e., political) risk. MIGA works as a coinsurer with, or a reinsurer of, other insurers. International marketers can receive four types of coverage: currency transfer, expropriation, war and civil disturbances, and breach of contract.