Chapter 6

The Political Environment

The Political Environment

I. Sovereignty

- Nationalism

II. Embargoes and Trade Sanctions

III. Export Controls

IV. Political Risk

- Types

- Assessment

Export ControlsU.S. export control systems

Export Administration Act (Commerce Department) Munitions Control Act (State Department) Determinants for export controls

• National security, foreign policy, short supply, nuclear nonproliferation

Critical commodities list Sensitive to national security Controlled for other purposes

No License Required (NLR)Export license

Should a Given ProductShould a Given Product be Exported? be Exported?

To a Given Country?To a Given Country?

To a Given End User?To a Given End User?

Decision Steps in the Export Decision Steps in the Export Licensing ProcessLicensing Process

U.S. Export Control System

For A Particular End Use?For A Particular End Use?

Typical Forms of Host Country Controls

Expropriation Taking of private property with compensation

Confiscation Taking of private property without compensation

More subtle forms of control Domestication Local-content Exchange controls “Over investment” Tax policies Price controls

Political Risks of Global Business Confiscation Expropriation Domestication Economic Risks

Exchange ControlsLocal-Content LawsImport RestrictionsTax ControlsPrice ControlsLabor Problems

815

16

422

602

93

122

73

0 200 400 600 800 1000

Africa

Asia

Eurasia

LatinAmericanMiddle East

N. America

W. Europe

International Terrorist IncidentsBy Region 1992-1997

SOURCE: http://www.state.gov/www/global/tourism/1997report

International Casualtiesby Terrorist Incidents, 1992-1997

815

16

422

602

93

122

73

0 200 400 600 800 1000

AfricaAsiaEurasiaLatin AmericanMiddle EastN. AmericaW. Europe

SOURCE: http://www.state.gov/www/global/terrorism/1997reportIrwin/McGraw-Hill

6-6

4

Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Irwin/McGraw-Hill

Forecasting Political Risk

6-8

● Decide if risk insurance is necessary

● Devise an intelligence network and an early warning system

● Develop contingency plans for unfavorable future political events

● Build a database of past political events for use in predicting future problems

● Interpret the data gathered by a company’s intelligence network in order to advise and forewarn corporate decision makers about political and economic situations

Strategies to Lessen Political Risk

Joint Ventures

Investment Base Expansion

Marketing and Distribution

Licensing

Planned Demonstration

Other

Country Risk Assessment Criteria

Index Area Criteria

Stability of the political system

Political and economic Degree of control of economic system

environment Constitutional guarantees

Effectiveness of public administration

Labor relations and social peace

Country Risk Assessment CriteriaIndex Area Criteria

Population size

Per capita income

Domestic economic Economic growth during previous 5 years

conditions Inflation during previous 2 years

Accessibility of domestic capital market to

foreigners

Availability of high-quality local labor

Possibility of giving employment

Traffic system and communication channels

Country Risk Assessment CriteriaIndex Area CriteriaRestrictions imposed on imports

Restrictions imposed on exports

Restrictions imposed on foreign investments in the country

External economic Legal protection for brands and products

relations Restrictions imposed on monetary transfers

Revaluations of currency during previous 5 years

Drain on foreign funds through oil or other energy imports

Restrictions on the exchange on local money into foreign currencies

Examples of Country Risk RatingsCountry* Political Risk Financial Risk Economic Risk Composite Risk

1. Switzerland 92 50 43 942. Germany 83 49 41 873. Japan 85 49 42 884. U.S. 83 49 38 855. Canada 83 46 39 846. U.K. 81 48 36 827. France 80 44 38 818. Italy 74 44 37 779. Mexico 68 32 28 6410. Hong Kong 67 41 39 7411. China 67 39 33 6912. India 49 30 31 5513. Argentina 62 23 21 5314. Romania** 55 29 15

49.515. Liberia** 10 8 12 15Note:*Lower scores represent higher risk (Highest Risk=1…100=Lowest Risk).

**Data from 1991.Source: Extracted from International Country Risk Guide, 1996, reprinted in Claude B. Erb, Campbell R. Harvey, and Trades E.Viskanta, “Expected Returns and Volatility in 135 Countries,” Journal of Portfolio Maanagement, 22(Spring 1996), p.46.