chapter nine

Political Forces

McGraw-Hill/Irwin International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Identify the ideological forces that affect business Discuss the fact that although most governments own businesses, they are privatizing them in growing numbers Explain the changing sources and reasons for terrorism Explain steps that traveling international business executives should take to protect themselves from terrorists Evaluate the importance to business of government stability and policy continuity Explain country risk assessment by international businesses

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Ideological Forces

Communism

The belief that the government should own all

the major factors of production Production in these countries is at stateowned factories and farms (some exceptions) Labor unions are government-controlled

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Communism
Conceived by Karl Marx as classless society
Developed by his successors into control of society by the Communist Party and an attempted worldwide spread of communism

Expropriation and Confiscation

Government seizure of property within its borders owned by foreigners, followed by prompt, adequate, and effective compensation to the former owners
Generally expropriated becomes confiscation (no compensation)
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Ideological Forces
Capitalism An economic system in which the means of production and distribution are for the most part privately owned and operated for private profit

Ideal capitalism
Government restricted to functions that the private sector cannot perform National defense Police, fire, and other public services Government-to-government international relations
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Ideological Forces
Socialism Public, collective ownership of the basic means of production and distribution, operating for use rather than profit Socialist governments frequently perform in ways not consistent with the doctrine Many European countries have practiced socialism: Great Britain, France, Spain, Greece, Germany

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Socialism

Socialism in Developing Countries Government typically owns and controls

most of the factors of production Shortages of capital, technology, and skilled management and labor are characteristic Many of the educated citizens connected with government

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Conservative or Liberal

Conservative

A person, group, or party that wishes to

minimize government activities and maximize private ownership and business Right wing is a more extreme conservative position

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Conservative or Liberal

Liberal

In the contemporary U.S., a person, group,

or party that urges greater government involvement in business and other aspects of human activities Left wing is a more extreme liberal Careful! Terms may have entirely different meanings outside the U.S.

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Government Ownership of Business

Why Firms are Nationalized
To extract more money from the firms To increase the firms profitability

For ideological reasons

To preserve jobs

To follow previous government support (control follows money)

happenstance

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Unfair Competition?
Private-owned companies complain that government owned companies
Can cut prices unfairly Get cheaper financing Get government contracts Get export assistance Can hold down wages with government assistance

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Privatization
The transfer of public sector assets to the private sector, the transfer of management of state activities through contracts and leases, and the contraction out of activities previously conducted by the state Britains Margaret Thatcher, leader of privatization movement Airports, garbage, postal services frequent examples
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Privatization in on the Move

Trend all over the world China is allowing state-run enterprises to diversify ownership Usually the buyers have financial success

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Privatization Anywhere Any Way

Not always ownership transfer from

government to private entities

Activities previously conducted by the

state may be contracted out Governments may lease state-owned plants to private entities Governments may combine a joint venture with a management contract with a private group to run a previously governmentoperated business
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Privatizations by Region

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Government Protection

Terrorism

Unlawful acts of violence committed for a wide

variety of reasons, including for ransom, to overthrow a government, to gain release of imprisoned colleagues, to exact revenge for real or imagined wrongs, and to punish nonbelievers of the terrorists' religion Since the 1970s, the world has been plagued by terrorism

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Government Protection

World Wide Terrorist Groups

Al Qaeda, IRA, Hamas, other Islamic

fundamentalist groups, ETA, Japanese Red Army, German Red Army Faction Countries finance, sponsor, and train terrorists and/or provide sanctuaries for them Iran, Iraq, Libya, Syria, Afghanistan, Cuba, Lebanon, North Korea, and Sudan
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Government-Sponsored Terrorism: Act of War

Government Protection

Kidnapping for Ransom

Victims held for large ransoms Columbia and Peru dangerous places for
American executives U.S. executives practice commando management to avoid kidnap risk Arrive secretly, meet for a few days and fly off before kidnappers learn of their presence
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Countermeasures by Industry
KRE (kidnap, ransom, and extortion)
Insurance to cover ransom payments, antiterrorist schools

Cassidy and Davis

The worlds largest kidnapping and extortion underwriting firm is located in London

Antiterrorist Schools Checklists for executives

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Terrorism Developments
Ethnoterrorism
Tribe against tribe, race against race, religion against religion

Chemical and Biological Terrorism

Recipes from selftaught terrorists that can be downloaded from the Internet

Nuclear Terrorism
Failing security standards at former Soviet installations permit uranium to be stolen, then sold to terrorists

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Government Stability

Stable Government

Maintains itself in power and whose fiscal,

monetary and political policies are predictable and not subject to sudden, radical changes

Unstable Government

Cannot maintain itself in power or makes

sudden, unpredictable, or radical policy changes
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Traditional Hostilities

Long-standing enmities between tribes,

races, religions, ideologies, or countries

Arab CountriesIsrael
Hutus and Tutsis in Burundi and Rwanda

Tamils and Sinhalese in Sri Lank

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ICs and Political Forces

International Companies (ICs)

Make decisions about where to invest, where to conduct research and development, and where to manufacture products The financial size of many ICs provides them with a strong negotiating position

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Country Risk Assessment (CRA)

An evaluation that assesses the countrys economic situation and policies and its politics to determine how much risk exists of losing an asset or not being paid

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Country Risk Assessment (CRA)

Types of Country Risks
Political
Wars, revolutions, coups

Economic Financial
BOP deficits

Labor
Low productivity, militant unions

Legal
Laws may be changed

Terrorism
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Information Content for CRA

Nature of Business
The needs of the company Needs of a hotel company compared with those of heavy-equipment manufacturers

Length of Time Required

Utility of risk analyses of social, political, and economic factors decreases precipitously over longer time spans

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Country Risk

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