Ch 6-- Political Environment

Question 1

What is sovereignty?

Answer 1

Right that every country has to be ruled and independent of external influences

(when a country is sovereign, others are NOT allowed to interfere with local politics)

Question 2

Under what conditions do nations give up part of their sovereignty?

Answer 2

When they enter treaties, join supra-national organizations (WTO, IMF, NAFTA)

Question 3

What is extraterritoriality?

Answer 3

When a country wants to make its laws apply OUTSIDE of its territory

Question 4

Name 4 U.S. laws that are extraterritorial.

Answer 4

1. Sherman antitrust act
2. U.S income tax code
3. Helms Burton Act
4. Foreign Corrupt Practices Act

Question 5

What is the Sherman Antitrust Act?

Answer 5

Prohibits monopolies + attempts to monopolize. The U.S applies this to ANY company overseas that influences business in the U.S

An extraterritoriality law

Question 6

What is the U.S income tax code?

Answer 6

Wherever you go, you have to pay taxes. Sometimes this results in paying double: country of residence + U.S

An extraterritoriality law

Question 7

What is the Helms Burton Act?

Answer 7

Any investment by foreign company into property formerly owned by American org. or person in Cuba is prohibited under penalty

The idea is to prevent foreign investments in Cuba + scare ppl off

An extraterritoriality law

Question 8

What is the Foreign Corrupt Practices Act?

Answer 8

Strongest anti-bribery law in the world

An extraterritoriality law

Question 9

What is the main political condition Multi-National Corporations (MNC’s) want when working overseas?

Answer 9

Predictability and stability/consistency of foreign politics

Know the laws + keep them the same once entered the Mkt

Analysis of political parties
- are they nationalistic (favoring local&raquo_space; foreign)
- favor free trade?

Question 10

What are risks companies run when doing international business/

Answer 10

Confiscation
Expropriation
Domestication

Question 11

What is confiscation

Answer 11

No payment
Foreign gov. takes over property + does NOT make payment for it

Question 12

What is expropriation

Answer 12

Some reimbursements
- alternative to confiscation
- can be paid w. $$ or bonds (worthless)
- can be put off ( as a promise on a piece of paper –>worthless)

Question 13

What is domestication

Answer 13

transfer to national control
- every company in country HAS to be owned by nationals
- forces company to find local buyers (can drive price down)
- take foreign company and make it local

Question 14

What is privatization

Answer 14

revert national owned companies –> private ownership
- OPPOSITE of domestication
- local company and make it foreign

Question 15

When do countries use exchange controls and how are they applied?

Answer 15

Reasons: a country might be low on foreign exchange, might have multiple exchange rates

Applied bc countries are low on foreign exchange

how: apply for exchange permit to the national bank, they deny it

Question 16

What are exchange controls?

Answer 16

multiple rates to regulate trade in specific commodities + block repatriation of profits

Question 17

What is a local-content law?

Answer 17

part of the product MUST be manufactured in the LOCAL market

(Ford sold in Mex– must have a Ford plant in Mex. Encourages local jobs)

Question 18

What is an import license and when do countries require them?

Answer 18

Permission to import a product
acts as a non tariff trade barrier

Question 19

When do countries use price controls and how are they applied?

Answer 19

Price controls: maximum prices
used in times of inflation ( very rapid increase in prices bc too much $ in economy)

Question 20

What types of products are more at risk politically in a foreign country?

Answer 20

Any product that has or is perceived to have an effect on
- environment
- exchange rates
-national + economic security
- welfare of ppl
- publicly visible or subject to public debate

Question 21

What are some of the strategies that you can follow to lessen political risk overseas?

Answer 21

joint ventures
investment base expansion
control of Mkt and distribution
licensing
planned domestication
political Payoffs

Question 22

What is investment base expansion

Answer 22

borrow money from local banks/investors

Question 23

What is control of mkt and distribution

Answer 23

only YOU use that product – not of value for a foreign country to take the plant over

Question 24

What is licensing

Answer 24

give permission for someone else to produce your product

Question 25

What is planned domestication

Answer 25

for you to get AHEAD of domestication, go to local investors and ask them if they want to buy into the company

Question 26

What is political payoffs

Answer 26

donate to party in power

Question 27

What is joint venture

Answer 27

do not go in by yourself, partner with someone politically influential

Question 28

What agencies provide political-risk insurance to U.S. companies working overseas?

Answer 28

Foreign Credit Insurance Association
Agency for International Development (AID)
Overseas Private Investment Corporation (OPIC)

Question 29

What type of political risk insurance does the Foreign Credit Insurance Association offer

Answer 29

Agency of export-import bank, insures against nonpayment risk caused by financial, economic, or political uncertainties

Question 30

What type of political risk insurance does the Agency for International Development offer

Answer 30

limited protection on certain projects + products

Question 31

What type of political risk insurance does the Overseas Private Investment Corporation offer?

Answer 31

Risk insurance for companies investing in less- developed countries

Question 32

What are som pol risks?

Answer 32

Boycotts, Political + social activists, violence +terrorism, cyber- terrorism