Political Forces

McGraw-Hill/IrwinInternational Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter nine

9-3

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

CommunismThe belief that the government should own all

the major factors of production

Production in these countries is at state-owned 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

ConservativeA 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 firm’s 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

• Britain’s 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 entitiesActivities previously conducted by the

state may be contracted outGovernments may lease state-owned

plants to private entitiesGovernments may combine a joint venture

with a management contract with a private group to run a previously government-operated 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

Government-Sponsored Terrorism: Act of War• 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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Traditional Hostilities

Long-standing enmities between tribes, races, religions, ideologies, or countries

Arab Countries—Israel

Hutus and Tutsis in Burundi and Rwanda

Tamils and Sinhalese in Sri Lank

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Government Stability

Stable GovernmentMaintains itself in power and whose fiscal,

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

Unstable GovernmentCannot maintain itself in power or makes

sudden, unpredictable, or radical policy changes

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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 country’s 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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Country Risk