The Political Environment of International Market (IM 24 Nov 2020)

The Political Environment of International Market

 

Introduction to International Political Environment:

The political environment of the country of operation becomes increasingly important for an internationalizing firm as it moves from exports to foreign direct investment (FDI) as the mode of international market entry. Exporting firms use political pressure tactics to have free exportability of the products in their home country regulations, hassle-free procedures, and legislative requirements and export incentives.

Besides, diplomatic channels are utilized to get improved market access for imported goods in the target foreign country markets, reduced import tariffs, compatible quality regulations, etc. The dispute settlement mechanism, legal framework, and judicial independence are also critical to fair treatment expected in international business.

Cordial political relations between the firm’s home country and the host countries have a direct favourable impact on FDIs. As a firm expands internationally and begins to operate in multiple countries, the political and legal issues become increasingly complex.

Consequent to economic liberalization in the People’s Republic of China, multi­level marketing firms, such as Amway, Avon, Tupperware, and Mary Kay Cosmetics grew rapidly. By 1997, Amway had approximately 80,000 sales representatives who generated $178 million in sales, whereas Avon had nearly 50,000 representatives who generated sales of $75 million.

It was reported that some other companies using the so-called pyramid schemes were cheating consumers. Consequently, the Chinese government banned direct selling in April 1998. As a result, the direct marketing companies were prohibited to operate their business model in China. It was only after diplomatic pressures and negotiations between the US and the Chinese governments that the policy was reversed.

Firm-level economic and political interests of the home and the host countries may differ widely. International managers need to understand the significance of political decision-making in the host country that may severely influence its overseas operations.

International business relations between the firms are greatly affected by ‘affinity’ or ‘animosity’ among the countries based on historical or political reality. For instance, India’s political affinity with Sri Lanka and Mauritius has led to high level of trade and investment whereas the reverse situation exists in case of Indo-Pak trade.

 

International Political Systems and Ideologies:

International political and economic systems hardly function independently. The two are mutually inter-dependent. Political and diplomatic relations between two counties greatly influence their economic relations.

The political system of a country comprises various stakeholders, such as the government, political parties with different ideologies, labour unions, religious organizations, environmental activists, and various NGOs.

Each of these players in a political system has its own unique sets of beliefs and aspirations, and exerts its influence upon political decisions. The acquisition, development, securing, and use of power in relation to other entities, where power is viewed as the capacity of the social actors to overcome the resistance of the other actors is termed as political behaviors.

Ideology is a set of beliefs or ideas as to how the society or group should be organized, politically, economically, or morally.

Political ideology is a set of ideas or beliefs that people hold about their political regime and its institutions about their position and role in it. Ideologies of different groups or political parties are often conflicting and they keep on challenging each other. In democratic countries, such as India, the US, and the UK, the shift in the political parties and their ideologies puts pressure on business operations of foreign firms.

Power exerted by different pressure groups also varies from country to country. For instance, communist or socialist parties in countries, such as Russia and China hardly face any considerable challenge whereas such parties exert sizeable political pressure in countries like India, Sweden, Italy, and Greece.

On the other hand; these parties hardly have any political viability in the US. Most religious organizations are apparently politically neutral in India, whereas the Catholic Church played a crucial role in overthrowing Ferdinand Marcos in the Philippines and in the liberation of Poland from Soviet domination. Islamic religious leaders in Iran greatly influence political decision making.

Principal political ideologies may be categorized by way of economic systems, political systems, and governance structure as

 

(i) Types of Government: Economic Systems:

Communism:

Based on Karl Marx’s Theory of Social Change directed at the idea of a classless society, all the major factors of production in a country under communism are owned by the government and shared by all the people rather than profit-seeking enterprises, for the benefit of the society.

Since the government controls all the productive resources and industrial enterprises, it exerts significant control on determining production quantity, price, employment, and practically everything else. The focus of communism is on human welfare rather than profit making.

Typically, communism involves seizure of power by a political party, maintaining the power by suppression of any opposition and commitment to achieve the ultimate goal of a worldwide communist state. After the Bolshevik Revolution in 1917 in Russia, the government overtook all the private businesses and this was repeated after each communist take-over of a country.

Countries following the communist philosophy had non-market and weak economies and the governments had an active role in economic planning. These countries had rigid and bureaucratic, political, and economic systems and indulged in huge foreign debts. Countries such as China, the former Soviet Union, Eastern European countries. North Korea, and Vietnam are also referred to as ‘centrally planned economies’.

However, there exists marked difference between the communist countries too. Since there had been lack of incentive and motivation to workers and managers under communism to improve productivity, the system suffered from gross inefficiencies.

For instance, the former Soviet Union and China follow the same basic communism ideology, but under the new type of communism Chinese citizens are allowed to work for themselves and keep the profit. Despite economic liberalization in China, the state’s permission is needed for operation of ‘free markets’.

 

Socialism:

In a socialist form of government, basic and heavy industries are operated by the government, whereas small businesses may be privately owned. Basic industries, such as mining, oil exploration, steel, ship building, railways, roads, airlines, etc., are kept under government control.

The extent of government control under socialism is lower than communism. Countries following socialist system include Sweden, France, India, Poland, etc. However, the socialist countries too differ from each other in terms of the degrees of public and private ownership.

 

Capitalism:

Capitalism is the economic system in which there is a complete freedom of private ownership of productive resources and industries. Thus, there is full freedom to both the business enterprises and the consumers that provides for a ‘free market economy’.

Under capitalism, individuals are allowed to produce goods and services under competitive conditions giving rise to a ‘market- oriented system’. Market prices are determined by the forces of demand and supply.

Capitalism too differs among countries. For instance, the US is highly capitalistic compared to Japan. Although business enterprises in Japan are privately owned, the Japanese Government does meticulously supervise their activities and, therefore, exerts indirect control.

The prevalence of the purest form of capitalism, laissez-faire, wherein the economic activity is left to the private sector with no government interference, is rare. Govern­ments significantly influence a country’s economic system. There is hardly any country that allows complete ownership either by the private sector or the govern­ment. Thus, the pure form of capitalism or communism hardly exists.

 

(ii) Types of Government: Political systems:

Democracy:

It means rule of the people or government by the people where citizens are directly involved in decision making. Over a period of time, there has been proliferation of population across the world and societies have become more complex.

This has led to decision making by people’s elected representatives in democratic countries. The most comprehensive definition of democracy is the government ‘of the people, for the people, and by the people’. India is the largest democratic country in the world.

 

Totalitarianism:

It is a dictatorial form of centralized government that regulates every aspect of public and private behaviour. Power is centralized in the hands of a dictator who operates through a mixture of cultivating devoted followers and terrorizing those who do not agree with its policies.

Citizens in a totalitarian state are generally deprived of their basic rights of freedom of expression, organizing meetings, free media, tolerance, and elections, which are available under democracy.

 

Major forms of totalitarianism include:

Secular totalitarianism:

In secular totalitarianism, the government uses military power to rule.

Fascist totalitarianism:

Fascism is a right-wing nationalistic political ideology fundamentally opposed to democracy with a totalitarian and hierarchical structure. The term ‘fascism’ is derived from the Latin world/faces which refer to the bundle of rods bound around a projecting axe-head as a symbol of power and authority.

In Italian, the word ‘fascism’ refers to radical political groups of many different and sometimes opposing orientations. Fascist totalitarianism prevailed in Italy under Mussolini, Germany under Hitler, Spain under Franco, and Portugal under Salazar.

Authoritarian totalitarianism:

Authoritarianism aims to control both the minds and souls of people and to convert them to its own faith whereas totalitarianism aspires to just rule people. Chile under Pinochet and South Africa prior to apartheid are the examples of such authoritarian totalitarianism.

Communist totalitarianism:

This is the most widespread form of secular totalitarianism which advocates that socialism can be achieved only through totalitarian dictatorship. It is the left-wing totalitarianism that believes in equal distribution of wealth and complete government ownership and control on national resources.

Since 1989, communist dictatorships in the former USSR and East European countries have collapsed and the former communist countries are moving gradually towards democratic governance. Moreover, countries, such as China, North Korea, Cuba, Vietnam, and Laos that follow communism also exhibit the signs of decline in the political monopoly enjoyed by communist power.

Theocratic totalitarianism:

Religious leaders also assume political leadership in theocratic totalitarianism, for instance, in the Islamic Republic of Iran.

 

(iii) Types of Government: Structure

Parliamentary:

The government consults its citizens from time to time and the parliament has power to formulate and execute laws. The British parliamentary system is one of the oldest in the world whereas in the US, the congress passes the law and the executive branch of the government is independent. India follows a Westminster form of parliamentary democracy. Major forms of government are discussed below.

Parliamentary republics:

In parliamentary republics, the prime minister is the executive head of the government and also the leader of the legislature. The president is more of a titular head of the state with little executive power. India, Singapore, Finland, Italy, Germany, Austria, Greece, etc., represent parliamentary republics.

Semi-presidential system:

Under such systems, a president and a prime minister co­exist. The president has genuine executive authority, unlike in a parliamentary republic. But the prime minister is the head of the legislature and also heads the government Systems followed in France, Russia, Pakistan, and the Republic of Korea fall under this category.

 

Fully presidential system:

The president is both head of the state and head of the government in fully presidential systems and there is no prime minister. This type of systems is followed in the US, Philippines, Mexico, Indonesia, Brazil, Tanzania, etc.

 

Commonwealth countries:

These countries represent constitutional monarchies that recognize the British monarch as head of the state over an independent government. A governor-general to each country other than the UK is appointed by the Queen as a representative.

However, the active head of the executive branch of the government and also the leader of the legislature is the prime minister, such as in the UK, Australia, New Zealand, Canada, Jamaica, etc.

 

Monarchies:

Constitutional monarchies:

A form of government in which a king or queen acts as head of state, while the ability to make and pass legislation resides with an elected parliament. Under such form of government, the monarch governs according to the constitution, i.e., according to rules rather than his/her own free will.

The constitutional monarch cannot make or pass legislation, and must remain politically neutral. Countries that follow constitutional monarchies include Japan, Thailand, Spain, the Netherlands, Denmark, Sweden, Belgium, etc.

 

 

 

Absolute monarchies:

It includes countries that have monarchs as the executive heads of government, exercising all powers, such as in the UAE, Saudi Arabia, Oman, Qatar, Bhutan, Swaziland, etc.

 

Theocracy:

It is derived from the Greek word theokratia, which means the rule of god. The civil leader is believed to have a direct personal connection with god in a pure theocracy. For instance, the religious leadership in Iran exerts considerable political influence.

 

How the political environment can impact international marketing environment

Every campaign, product launch or global market initiative has the chance/probability to go wrong. The factors that could pose threat to the launch are countless and while some are predictable and can be controlled, many others cannot. In general, the factors that can be controlled are pertinent to the company and its organization and are called internal factors. Those that cannot be controlled are the external factors, or the environment. Politics is one of the main environmental factors and is in general out of companies’ ambit. When a company launches a product, a campaign or operations in a foreign market, it can be entangled in problems if the launch runs into issues that are political in nature.

Structural influences are determined by elements that are already in place and to a certain extent predictable like active legislation, taxation, trade regulations, international treaties and agreements, the ruling party or government in place until the end of the mandate, etc. Public factors pertain to public identities and sensitivities that are linked to people’s political identity and it can be related to ideology, history, nationalism, even mythology; any element that is constitutive of people’s political identity has the potential to backlash if people feel it is being challenged or disrespected or if it undermines their belief. Public factors are far more volatile in nature and are notoriously difficult to predict. However, in the digital age, they have the potential to be even more disruptive than the structural ones as reactions can be shared and spread online in a matter of minutes and regaining control can be very costly and challenging.

Structural Challenges in Political Environment

An environment could help the decision makers during the early phases of the business strategy, PESTEL or PESTLE, with the addition of the Legal and Environmental factors as they progressively became more important from a business standpoint. These factors are tremendously important and they represent huge hurdles on businesses both domestically and internationally. At the global level, all the factors get importance by every country that is part of the business strategy and are added to the international treaties, conventions, customs and practices. The enterprise can be daunting and a detailed analysis of the environment is an absolute must. Obviously, some factors are more stable and more predictable than others, however there is always a potential for change and a continuous scanning of the political landscape can make a big difference when planning a campaign or an international business expansion.

Several recent examples of rapid and unexpected changes in the political environment that brought considerable uncertainty to global business operations. Ex: Brexit referendum in the UK has significantly increased the risk factors for certain industries and the international operations. Even for companies that weren’t directly affected by these changes, the increase in the uncertainty and risk factors is bound to impact every international business as it affects the overall economic environment and most of all the financial one.

 

Some of the questions that the PESTEL analysis will help you answer are:

In East Asia the instability caused by North Korea’s erratic policies going to affect the mobile phones market? If there is a launch campaign for Samsung’s phones accessories, then will a business have to wait when political stability is restored?

Offices in London and international marketing operations based there, what should a business do after Brexit goes into effect? should the business relocate offices to Ireland or to Amsterdam? Which location offers advantages in terms of logistics, taxation incentives, labour laws, etc.

How is the current stance of Elon Musk look towards the current administration after Musk is going to affect marketing campaign for solar panels and electrical storage batteries. Will the new administration try to boost the image of traditional fossil fuel industry? Will they offer incentives to fossil fuel industries that could potentially harm products’ popularity and sales?

A language service provider with offices in Barcelona, what is the likelihood of Catalunya gaining independence from Spain? If it happens at all, what are the chances of this being a peaceful, smooth transition? Will an independent Catalunya be business friendly or are they likely to increase taxation? Would a business be better off relocating to Prague, Paris, Madrid or Milan?

Through the use of predictive analysis, companies will not only have certainties but also, they will have to reduce the risk factors considerably and then they will have time to develop alternative strategies if the outcome they were hoping for, becomes more or less likely.

 

Political Constraints of Public

While structural political factors such as elections, referendum, treaty renewals, etc. are very big factors in the business environment, there are other ways in which political issues can impact companies’ marketing operations, and those are the reactions of the people that are linked to their political identities. These factors are even more difficult to analyse and more unpredictable than the structural political factors.

Examples of these are Google’s repeated gaffes over the labelling in Google Maps of territories that are disputed. It has angered or caused protest, boycotts, petitions and open condemnation from Israel, the Palestinians, China, India, Iran, Nicaragua, Turkey and even the forgotten Sahrawis, just to name a few.

The dispute over territory is particularly sensitive as territories are not just demarcated lines on a map, there is an entire social and psychological dimension that links people to territories. This has deep implications on people’s identities and their ties to social and political groups. Feelings of belonging to a territory, of the motherland, the homeland, of entitlement to a specific territory that have fuelled countless conflicts throughout history and are a major motivation for social and political action. Considering that Google Maps are used as reference by the wide majority of websites who want to indicate their location to the user, it is easy to see how Google has a major responsibility to ensure that naming and labelling on the maps are fair and respectful to the people involved. Moreover, disputed territories often acquire an ideological dimension and other groups, states and political parties will choose sides and might act in defence of or solidarity with the offended party. For example, a worldwide backlash against products that have even the slightest association with anti-Semitic groups.

While often the reaction comes from people, other times it comes directly from the government. Google has had several incidents with the Indian government as well as with the Chinese. With India the clash was both over the attribution of Jammu and Kashmir to Pakistan in 2005 and then again in 2010 over Arunachal Pradesh, a disputed territory between India and China next to Bhutan. Google had to modify the map after the official complaint of the Indian government, however, not to offend the Chinese, Google had to initially produce 3 different maps and has since changed to 2 versions of the map. Now, to the Indian user Arunachal Pradesh appears as part of India and to the rest of the world the territory is surrounded by a dotted line that indicates the disputed status. The same goes for Jammu and Kashmir, since India’s official policy is to deny its disputed status; Google Maps India shows the region as part of the Indian territory. See comparison from Google maps below. Now, while the dispute over Jammu and Kashmir is quite complex and extremely sensitive both for India and for Pakistan, Arunachal Pradesh is an area close to Tibet that is a very tiny fraction of territory when compared to the size of India and China, and while it might have had some strategic military value in the age of traditional warfare, in the age of long distance ballistic missiles and extensive air to ground warfare technology it is puzzling that the two countries still cling to that sliver of territory and feel offended if their perceived rights are not acknowledged. This clearly shows how the link between people, identity and territory goes beyond the realm of what we would consider a rational calculation of interest and into the realm of the feelings of group identity and belonging that can react to perceived insensitivity and escalate the reaction to a completely different level.

Public backlashes to an insensitive campaign can also happen when there will be no direct territorial or political implication, but the reference will be a cultural element that will come to embody a territorial conflict. For example, when Orange Telecom, a former telecom provider in the UK, wanted to open retail points in Northern Ireland, they were faced with huge problems because of the sensitivities that their name and slogan, “The future’s bright, the future’s Orange”, might evoke in a land where the two sides of the conflict have long associated each other with the colours, orange and green. Orange for the Protestants and particularly the members of the Orange Order, and the green for the Catholics and Unionists. The company was worried about the commercial backlash from the Catholic population, but also about possibly sparking violence in a situation where sectarian violence was sporadic but still very much a reality in the daily political life.

 

Conclusion

Every product launch or international expansion carries a certain amount of risk that, while it cannot be completely avoided, it can certainly be mitigated by extensive research. While retrieving information is easier than it has ever been, unraveling / discerning authoritative material from misleading information can be tricky. With regards to information on political issues this is even more important since political issues can very easily become partisan issues and view the facts though the powerful lenses of political ideology. Although it is not an easy task to understand the political environment through the PESTEL analysis and building strategic scenarios based on political realities in the markets a company is targeting, but is a fundamental step in creating a solid international marketing and business strategy.