Political environment: a critical concern
THESIS DEFENSE PRESENTATION TEMPLATE
Lecturer: PhD. Ilhamova Z.P
Learn objectives
01
The political environment and the concept of national sovereignty in international marketing
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Forms of government, political parties, and political stability.
03
Nationalism, directed fear, and international trade disputes.
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Political and economic risks: types and their impact on international business.
05
Managing political risk, insurance, and the role of international institutions.
According to Kotler, the marketing environment is the set of factors that influence a company’s marketing activities as well as the development and success of its business transactions with consumers in its target market.
Macroenvironment analysis
In international marketing, the political environment is the set of a country’s government structure, laws, political decisions, state ideology, national interests, and international relations in the market where a company operates or plans to enter.
No company can operate outside of politics.
The European Union, aiming to support its former colonies in the Caribbean and Africa, granted quotas and tariff preferences to bananas imported from those regions, while imposing restrictions on bananas imported from Latin America (Ecuador, Colombia, etc.).
The problem was that Latin American bananas were mainly distributed by U.S. companies.
The beginning of the dispute (the 1990s).
-Chiquita Brands International and Dole Food Company stated that, because of EU rules, they were losing $520 million per year, and they asked the U.S. government for assistance.Key political detail: Chiquita increased its contributions to political campaigns from $40,000 to $1.3 million.
The United States imposed 100% import tariffs not on European bananas, but on completely different European products, such as:
Prosciutto di Parma ham (Italy),
French handbags,
German bath oils and soaps, and others.
👉This was political pressure, not economic logic.
This shows that lobbying played a strong role.
The 16-year dispute finally ended in the Geneva negotiations; the EU reduced tariffs on Latin American bananas distributed by U.S. companies.
Reha was neither the cause of the dispute nor a beneficiary of it; however, political decisions pushed it close to collapse.
Reha Enterprises (a small company) imports products and distributes them in the domestic market (agricultural goods, spare parts, consumer products).
📌 For a business with annual sales under $1 million, this is disastrous.
In international business, losses or gains often arise not from the market, the product, or management mistakes, but from POLITICAL DECISIONS.
A political dispute can hit completely unrelated products (as in the banana dispute—where the impact fell not on banana sellers, but on ham, handbags, soaps, and bath oils).�Small businesses, in particular, are often the most vulnerable players in political games.
An international marketer must view not only consumers and competitors, but also governments, trade policy, tariffs, lobbying, and international conflicts as strategic factors.
Attitudes toward foreign purchases
Political stability
Foreign exchange
controls
Sovereignty
While some countries (e.g., Mexico) show a preference for such purchases, other countries (e.g., India) view them negatively.
Sometimes governments block/freeze their currency or prohibit converting it into other currencies.
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Countries’ governments change over time, and sometimes a country’s direction can shift very sharply.
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It is necessary to pay attention to the following political factors.
Sovereignty is a central concept in assessing the international marketing environment.
How does sovereignty affect the marketing environment?
Restrictions on market entry (restrictions on imports).
Obligation to adapt the product (standards, certification, language, and packaging requirements).
Effects on price and profit (increasing or decreasing the tax burden).
States may voluntarily relinquish certain aspects of their sovereign rights in order to live together and cooperate with other countries. For example, the European Union (EU), the North American Free Trade Agreement (NAFTA), the North Atlantic Treaty Organization (NATO), and the World Trade Organization (WTO) are organizations in which states have agreed to limit part of their sovereign rights in pursuit of common and mutually beneficial goals.
Sovereignty is a state’s right to make independent decisions within its own territory. In other words, the state decides for itself:
Mexico needed privately financed power plants to meet electricity demand and to modernize its outdated transmission networks. The Mexican government reached an agreement with a Belgian company to build a plant that would sell electricity directly to large producers, bypassing the state monopoly. However, the Mexican Constitution restricts private ownership in the energy sector, and making an exception requires a two-thirds vote in parliament. The Institutional Revolutionary Party (PRI) considered this agreement a threat to Mexico’s sovereignty and blocked it.
Even if there is a market need, if it conflicts with state sovereignty, economic logic yields to political decision-making.
In most countries of the world, it is extremely important for a marketer to know the ideology and views of all major political parties in the country, because any of them can come to power and change existing relations and the overall business environment.
In countries where two strong political parties alternately govern, it is especially important to know in advance which direction each party will choose when it comes to power. For example, in the United Kingdom, the Labour Party has traditionally pursued a restrictive policy toward foreign trade, whereas when the Conservative Party has been in power, it has tended to favor liberalizing foreign trade.
During periods when the Labour Party came to power, imports were restricted, whereas during periods of Conservative dominance, foreign trade was liberalized. Therefore, a foreign company operating in the United Kingdom may experience “oscillation” between the Conservatives’ free-trade policy and the Labour Party’s restrictive policy. Similarly, in the United States, a Congress controlled by the Democrats showed reluctance to ratify free-trade agreements negotiated by the Republican administration led by President George Bush.
A savvy international marketer must deeply understand all aspects of the political landscape, because only then can they have a complete picture of the political environment. Unpredictable and abrupt changes in government policy, regardless of their cause, frighten investments. In short, continuously assessing the current state of domestic political philosophy and attitudes is important for determining the government’s stability and attractiveness from the perspective of market potential.
Economic and cultural nationalism exists to some degree in almost all countries and is another important factor in assessing the political environment. Nationalism can best be defined as a strong sense of national pride and unity, that is, the awakening of a people’s feeling of pride in their country. This pride sometimes appears in the form of a negative attitude toward foreign business, and the minor harassment and restrictions of foreign investment may be supported and even applauded.
One of the main goals of economic nationalism is to preserve national economic independence; that is, a country’s population links its interests with protecting the sovereignty of the state in which it lives. In other words, national interest and security are placed above international relations.
Nationalism is not constant; it strengthens or weakens depending on the economic and political situation.
1970-yillar oxiri
After independence, India prioritized the idea of “economic independence”:
foreign companies should not become excessively powerful;
technology and profits should remain in India;
national companies should be protected.
For this purpose, the Foreign Exchange Regulation Act (FERA) was introduced.
The Government of India demanded from Coca-Cola:
to disclose the recipe (formula) to local companies;
not to exceed 40% foreign ownership;
to transfer control to the Indian side.
❌ Coca-Cola did not agree and left India in 1977.�An interesting point: Coca-Cola returned only after 1991, during the period of liberalization.
The United States had a trade deficit with Japan, and in order to reduce it, it demanded that Japan open its market, especially the rice market.
The U.S. position was simple: “If Japan imports more rice, the trade deficit will decrease.” However, for Japan this was not a simple trade issue, because rice is the basis of their national cuisine and a national symbol.
Pressure was applied through the World Trade Organization. In 1993, due to bad weather in Japan, the rice harvest was not good, and it yielded.
Here, Japan found a very delicate political solution 👇�🔹 Imports were allowed, but:
foreign rice was not sold separately;
it was mixed with Japanese rice;
only after that was it released to the market.
Even if a market appears to be open, culture and national pride can completely change a marketing strategy. For a foreign company, tariffs may not exist, but consumer behavior and the political mood can remain a major barrier.
(Targeted Fear and/or Animosity)
For marketers, it is very important not to confuse nationalism—that is, hostility usually directed generally toward all foreign countries—with a broad fear or hostility directed at a particular country. Toyota made this kind of mistake in the United States in the late 1980s and early 1990s.
At that time, sales of Japanese cars in the United States had begun to decline. Taking the problem as American nationalism, an advertising campaign was developed and implemented. However, this was a wrong diagnosis, because German car sales were not experiencing the same decline. The real problem was “Americans’ fear toward Japan.”
Therefore, when Toyota spent millions of dollars on an advertising campaign showing Camry cars being produced by American workers at its plant in the state of Kentucky, this action may have further intensified the fear that the Japanese were “economically colonizing” the United States.
“We are not foreign; we are part of the U.S. economy.”
Issues of sovereignty, different political ideologies, and nationalism are reflected in many decisions implemented by governments, and these decisions increase risks for global business.
The most severe political risk is confiscation, that is, the state’s seizure of a company’s assets without any payment. Two well-known cases of confiscation involving U.S. property occurred when Fidel Castro came to power in Cuba and later when the Shah of Iran was overthrown. Confiscation was especially widespread in the 1950s–1960s, and many less developed countries accepted it as a means to achieve economic growth (even though it was ineffective).
A relatively less severe, but still serious, risk is expropriation, in which the government takes over foreign investment but pays some level of compensation for the assets. For example, in 2008, the Chavez regime in Venezuela expropriated operations belonging to Mexico’s CEMEX company and made payment based on an agreed price. Often, expropriated investments are nationalized, meaning they become state-managed enterprises.
The third type of political risk is domestication, in which the host country gradually transfers foreign investments to national control and ownership. This process is carried out through government decisions that make local ownership mandatory and strengthen national participation in company management. The ultimate goal of domestication is to force foreign investors to share ownership, management, and profit with local citizens to a greater extent than before.
Expropriation and nationalization have often produced state enterprises that are inefficient, technologically weak, and not competitive in the world market, rather than being a rapid solution to economic development. Over the last two decades, the risks of confiscation and expropriation have decreased (with some exceptions in Latin America, especially Venezuela), because experience has shown that the expected benefits after state takeover have rarely materialized.
In international marketing and international business, political risk cannot be completely eliminated, but it can be assessed in advance, reduced, and managed. Therefore, multinational corporations (MNCs) apply various strategies. In practice, there are four main strategies that are most commonly encountered:
Political risk management strategies
Avoidance
Avoidance is a strategy in which a company either does not enter countries with high political risk at all, or exits by stopping its existing operations.
McDonald’s (2022,)�After the Russia–Ukraine war began:�McDonald’s completely left the Russian market,�it sold more than 850 restaurants.�This was related to:�political sanctions,�brand reputation,�investment security.
Adaptation is the reduction of risk through a company’s active adjustment to the host country’s political, legal, and cultural environment. It takes the following forms:
Samsung: In India, it built one of the world’s largest mobile phone factories and adapted to the “Make in India” program.�Result: tax incentives, political support, and a sharp increase in market share.
Adaptation
Diversification is a strategy of spreading political risk by a company operating:
- in several countries,
with different products.
Nestlé operates in more than 180 countries and works in various segments of the food industry. If there is a political crisis in one country, the company’s overall revenue does not suffer.
Contractual protection is the reduction of political risk through legally strong contracts concluded with the government or local partners. The main instruments are: investment guarantees, arbitration clauses, stabilization clauses, and a condition of compliance with international law.
Google and Microsoft, before building a data center, sign a special investment agreement with the host state. This is not an ordinary lease contract, but rather a comprehensive agreement that:
is designed for 15–30 years,
protects large capital investments (USD 1–10 billion),
guarantees political and legal stability.
👉 For example, Microsoft’s data centers in Europe and Google’s data centers in Southeast Asia operate on the basis of such agreements.
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