chapter 6
DESCRIPTION
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 Controls. U.S. export control systems - PowerPoint PPT PresentationTRANSCRIPT
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
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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.