Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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Citicorp make it clear that the risk-analysis systems

used by some of the world’s largest banks are any-

thing but foolproof.

Another relatively simple method is based on

LIBOR (London Interbank rate). LIBOR, rel-

atively risk-free, is the interest rate charged for

loans between banks. Nonbank borrowers, of

course, have to pay a premium over LIBOR, with

the premium (i.e., the spread between the loan rate

and LIBOR) indicating the extent of risk involved.

A borrower from a country with a high risk of

default must expect a high premium.The premium

is thus a good indicator of risk because it reﬂects a

lender’s assessment of the country in terms of debt

levels and payment records. Since all loans are not

comparable, adjustment must be made for volume

and maturity. Euromoney magazine has devised

a formula to allow for this adjustment, and its

formula to compute a country’s spread index is the

following:

[(volume X spread) / Euromoney index] /

(volume X maturity)

By simply examining the spread index of a particu-

lar country and comparing it with those of other

countries, an investor can arrive at the conclusion

of a degree of risk associated with the country of

interest.

Although Euromoney’s and Institutional Investor’s

country risk ratings are derived in different ways,

the two measures are highly correlated and strongly

agree on the creditworthiness of the assessed coun-

tries. Both magazines’ ratings can be replicated to a

signiﬁcant degree with a few economic variables.“In

particular, both the level of per capita income and

propensity to invest affect positively the rating of a

country. In addition, high-ranking countries are less

indebted than low-ranking countries.”

One study examined the projections of The

Economist, Political Risk Services (PRS), and BERI

(Business Environment Risk Intelligence) against

losses incurred in the 1987 to 1992 period.The PRS

predictors, when decomposed, appeared to be the

most reliable. On the other hand, BERI’s projec-

tions were superior to The Economist’s.

One study examined eleven widely used mea-

sures of country risk across seventeen countries

over nineteen years.According to the results,“com-

mercial risk measures are very poor at predicting

actual realized risks.” Yet managers still continue

to rely on ratings agencies. One reason is that the

purchasing cost of this type of information is minis-

cule when compared to the amount of FDI to be

committed.

As assessment methods of political risks have

become more sophisticated, there has been a

shift from the earlier conceptual and qualitative

approaches to those that are quantitative and deriv-

ative of applied research.There is a need, however,

to integrate these two major kinds of approaches.

MANAGEMENT OF POLITICAL RISK

To manage political risk, an MNC can pursue a strat-

egy of either avoidance or insurance. Avoidance

means screening out politically uncertain countries.

In this, measurement and analysis of political risk

can be useful. Insurance, in contrast, is a strategy

to shift the risk to other parties. This strategy will

be covered in detail below.

There are other strategies that MNCs can use to

safeguard their foreign investments.They may want

to come to an understanding with a foreign gov-

ernment as to their rights and responsibilities.They

can increase and maintain their bargaining power

when their technical, operational, and managerial

complexity requirements are not within reach of a

host country’s abilities.

In addition, there are several managerial strate-

gies which are relevant.A ﬁrm may try to gain “con-

trol” of the situation through political activities,

market power, exchange of threats, vertical integra-

tion, and horizontal mergers and acquisitions.

Or it may try to gain “cooperation” through long-

term contractual agreements,alliances, interlocking

directorates, interﬁrm personnel ﬂows, and so on.

Furthermore, it may pursue product and/or geo-

graphic diversiﬁcation to gain “ﬂexibility.” Opera-

tional ﬂexibility can also be achieved through ﬂexi-

ble input sourcing and multinational production.

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POLITICAL ENVIRONMENT

The rapid changes in Eastern Europe present

both challenges and opportunities. In the former

days of centralization, a trade minister in the capital

could speak for the entire nation, but with decen-

tralized decision making, an MNC has to go to the

many republics for information and approval.When

doing business there, companies need to be creative

in terms of long-term thinking and ﬁnancing.

MEASURES TO MINIMIZE POLITICAL

RISK

Political risk, though impossible to eliminate, can

at the very least be minimized. There are several

measures that MNCs can implement in order to

discourage a host country from taking control of

MNC assets.

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North Korea is one of the world’s most centralized

economies. Agricultural production is collectivized,

state-owned industry produces nearly all manufac-

tured goods, and the heavy and military industries

have traditionally been favored at the expense of con-

sumer goods. North Korea’s major industries include

military and machinery production, chemical produc-

tion, mining (coal, iron ore, magnesite, graphite,

copper, zinc, lead and precious metals), metallurgy,

textiles, and food processing.

Dos

■ Be sure that the ultimate purchaser and end-user

of the items is not associated with North Korean

missile technology exports. This is especially

important when a license is not required (e.g.,

export of an EAR99 item).

■ Be aware of the instability of the North Korean

ﬁnancial sector. There is little, if any, fungible

capital in the consumer economy since everything

is provided by state enterprises. Initially, cash deals

with prepayment may be the best way to structure

your exports to the North Korean government until

you gain conﬁdence that you can be paid by more

conventional (e.g., electronic, letters of credit)

methods.

■ US exporters are encouraged to establish direct

contact with the North Korean government, either

in Pyongyang itself, through the North Korean

mission to the United Nations or the North Korean

embassy in Beijing, to ascertain DPRK laws and

regulations for doing business in North Korea.

Familiarize yourself with North Korean import

guidelines.

■ Be sure to make whatever agreements you reach

with prospective customers in North Korea con-

tingent on your receiving an appropriate US

Department of Commerce export license for the

particular export transaction, if goods require a

license.

Don’ts

■ Don’t assume that North Korea is like a Western

environment for business and investment.

■ Don’t expect there to be any real infrastructure

for your proposed production or assembly venture

in North Korea, or assume that basic industrial

resources such as water, electricity, roads, or air-

ports will be available.

■ Don’t mix controlled and noncontrolled goods in

shipments to North Korea.

■ Be wary of doing noncash deals, at least until you

are comfortable with the payment performance of

your North Korean customer.

■ Don’t expect your customer to obtain the neces-

sary import, export or tariff permits for doing busi-

ness in North Korea, unless this is required. You

are better off approaching North Korean govern-

ment ofﬁcials directly with your request.

■ Don’t ship anything on the Commerce Control List.

There is a presumption of denial for all controlled

goods to North Korea.

Source:

William Golike and Chris Chesterﬁeld, “Export

Restrictions on North Korea,”

Export America

, 13.

IT’S THE LAW 4.1 “DOS AND DON’TS” FOR EXPORTING TO NORTH KOREA

Stimulation of the local economy

One defensive investment strategy calls for a

company to link its business activities with the

host country’s national economic interests. Brazil

expelled Mellon Bank because of the banks’ refusal

to cooperate in renegotiating the country’s massive

foreign debt.

A local economy can be stimulated in a number

of different ways. One strategy may involve the

company purchasing local products and raw mate-

rials for its production and operations. By assisting

local ﬁrms, it can develop local allies who can

provide valuable political contacts.A modiﬁcation of

this strategy would be to use subcontractors. For

example, some military tank manufacturers tried to

secure tank contracts from the Netherlands by

agreeing to subcontract part of the work on the new

tanks to Dutch companies.

In 1985, all the Toyota vehicles sold in America

were imported.This practice is no longer in place.

Toyota now produces more than half a million

vehicles each year in Kentucky and California. The

company has invested more than $5 billion in

American operations, not counting another $6.2

billion through its Toyota, Lexus, and Toyota

Industrial Equipment dealers. It works with more

than 400 US suppliers to forge economic ties, and

its purchases of American parts and materials have

risen to more than $5 billion annually.Toyota boasts

that nearly every dollar earned by its US operations

since US manufacturing began has been reinvested

in American payrolls, purchases, plants, and other

facilities. The company’s American factories and

dealerships employ 123,000 Americans, more than

Coca-Cola, Microsoft, and Oracle combined.

Toyota’s top executives in the USA are increasingly

American.The success is easy to see:Toyota is now

selling more vehicles in the USA than in Japan, and

almost two-thirds of the company’s operating proﬁt

is derived from the US market.

Sometimes local sourcing is compulsory.

Governments may require products to contain

locally manufactured components because local

content improves the economy in two ways: (1) it

stimulates demand for domestic components, and

(2) it saves the necessity of a foreign exchange trans-

action. Further investment in local production facil-

ities by the company will please the government

that much more. At one time IBM was the only

foreign company allowed to sell switchboards in

France because the ﬁrm’s PBXs were made there.

Finally, the company should attempt to assist the

host country by being export oriented. Both United

Brands and Castle and Cooke were able to survive

the Sandinista revolution in Nicaragua by imple-

menting this strategy. Their export dollars became

vital to the Nicaraguan government, thus shielding

their Latin American operations from expropria-

tion. AT&T was able to enter the French telephone

switch market by agreeing to assist CGE, a French

nationalized switch maker, in selling smaller digital

switches in the USA.

Employment of nationals

Frequently, foreigners make the simple but costly

mistake of assuming that citizens of less developed

countries are poor by choice. It serves no useful

purpose for a company to assume that local people

are lazy, unintelligent, unmotivated, or uneducated.

Such an attitude may become a self-fulﬁlling

prophecy. Thus the hiring of local workers should

go beyond the ﬁlling of labor positions. United

Brands’ policy, for example, is to hire only locals as

managers.

Firms should also carefully weigh the impact of

automation in a cheap-labor, high-unemployment

area. Automation does not go down well in India,

where job creation, not job elimination, is national

policy. Technology is neither always welcomed nor

always socially desirable. An inability to automate

production completely does not necessarily consti-

tute a negative for MNCs. MNCs may gain more in

less developed countries by using “intermediate

technology” instead of the most advanced equip-

ment. Intermediate technology, accompanied by

additional labor, is less expensive, and it promotes

goodwill by increasing employment.

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Sharing ownership

Instead of keeping complete ownership for itself, a

company should try to share ownership with others,

especially with local companies. One method is to

convert from a private to a public company or from

a foreign to a local company. Dragon Airline, claim-

ing it is a real Chinese company, charged that Cathay

Paciﬁc Airways’ Hong Kong landing rights should be

curtailed because Cathay Paciﬁc was more British

than Chinese.The threat forced Cathy Paciﬁc to sell

a new public issue to allow Chinese investors to have

minority interests in the company. The move was

made to convince Hong Kong and China that the

company had Chinese roots.

One of the most common techniques for shared

ownership is to simply form a joint venture. Any

loss of control as a result can,in most cases, be more

than compensated for by the derived beneﬁts.

United Brands’ policy in South America is not to ini-

tiate any business unless local joint-venture partners

can be found to help spread the risk.

In some overseas business ventures, it is not

always necessary to have local ﬁrms as partners.

Sometimes, having co-owners from other nations

can work almost as well. Having multiple national-

ity for international business projects not only

reduces exposure; it also makes it difﬁcult for the

host government to take over the business venture

without offending a number of nations all at once.

The political situation in South Africa was one of the

reasons Ford chose to merge its automobile opera-

tions there with Anglo American. The merger

reduced Ford’s exposure to a 40 percent minority

position.

Voluntary domestication, in most cases, is not a

desirable course of action because it is usually a

forced decision.The company should therefore plan

for domestication in advance instead of waiting until

it is required, because by that time the company has

lost much of its leverage and bargaining power.This

strategy is also likely to be perceived as a gesture of

goodwill, an accomplishment in addition to the

desired reduction of exposure. A wise strategy

may be for the company to retain the marketing or

technical side of the business while allowing heavy

local ownership in the physical assets and capital-

intensive portions of the investment.

Being civic minded

MNCs whose home country is the USA often

encounter the “ugly American” label abroad,and this

image should be avoided. It is not sufﬁcient that the

company simply does business in a foreign country;

it should also be a good corporate citizen there.To

shed this undesirable perception, multinationals

should combine investment projects with civic

projects.

Corporations rarely undertake civic projects out

of total generosity, but such projects make eco-

nomic sense in the long run. It is highly desirable to

provide basic assistance because many civic entities

exist in areas with minimal or nonexistent munici-

pal infrastructures that would normally provide

these facilities. A good idea is to assist in building

schools, hospitals, roads, and water systems because

such projects beneﬁt the host country as well as the

company, especially in terms of the valuable good-

will generated in the long run. Toyota has invested

in local communities. A portion of its US proﬁts

is allocated each year to support community

programs. Over a period of three years, it has con-

tributed $38 million to such philanthropic organi-

zations as United Negro College Fund, Teach

for America, and Special Olympics. In addition, the

company spent more than $1.5 million to help

the victims of the Midwest ﬂoods, East Coast hur-

ricanes, and the ﬁres and earthquakes in California.

There are many examples of global philanthropy.

It is wise to remember that in many less developed

countries, a small sum of money can go a long way.

Political neutrality

For the best long-term interests of the company, it

is not wise to become involved in political disputes

among local groups or between countries. A

company should state clearly but discreetly that it

is not in the political business and that its primary

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concerns are economic in nature. Brazilian ﬁrms

employ this strategy and keep a low proﬁle in

matters related to Central American revolutions and

Cuban troops in foreign countries. Brazilian arms

are thus attractive to the Third World because those

arms are free of ideological ties. In such a case,

a purchasing country does not feel obligated to

become politically aligned with a seller, as when

buying from the USA or China.

Behind-the-scenes lobby

Much like the variables affecting business, political

risks can be reasonably managed. Companies as well

as special interest groups have varying interests, and

each party will want to make its own opinion

known.When the US mushroom industry asked for

a quota against imports from China, Pizza Hut came

to China’s rescue by claiming that most domestic

and other foreign suppliers could not meet its spec-

iﬁcations. Pizza Hut has a great deal at stake because

it is one of China’s largest customers as well as a

user of half of some nine million pounds of mush-

rooms for pizzas – not to mention the desire of

PepsiCo, its parent, to open a factory in southern

China. Subsequently, the petition of the US mush-

room industry was denied.

When practical, ﬁrms should attempt to inﬂu-

ence political decisions. Mobil Corporation, for

example, ran newspaper advertisements emphasiz-

ing the importance of the USA–China relations (see

Figure 4.3).

Even though a ﬁrm’s operation is affected by

the political environment, the direction of the inﬂu-

ence does not have to ﬂow in one direction only.

Lobbying activities can be undertaken, and it is wise

to lobby quietly behind the scenes in order not to

cause unnecessary political clamor. For importers,

they must let their government know why imports

are crucial to them and their consumers.

Companies may not only have to lobby in their

own country, but they may also have to lobby in

the host country. Companies may want to do the

lobbying themselves, or they may let their govern-

ment do it on their behalf. Their government can

be requested to apply pressure against foreign

governments.

Observation of political mood and

reduction of exposure

Marketers should be sensitive to changes in politi-

cal mood. A contingency plan should be in place.

When the political climate turns hostile, measures

are necessary to reduce exposure. Some major

banks and MNCs took measures to reduce their

exposure in France in response to a fear that a

Socialist–Communist coalition might gain control

of the legislature in the elections of 1978. Their

concern was understandable, since most of these

companies were on the Left’s nationalization list.

Their defensive strategy included the outﬂow of

capital, the transfer of patents and other assets to

foreign subsidiaries, and the sale of equity holdings

to foreigners and French nationals living abroad.

Once concluded, such activities made it difﬁcult for

the socialist government to nationalize the com-

panies’ properties. Prudence required that these

transactions be kept quiet so as to avoid reprisals.

Other measures

There are a few other steps that MNCs can under-

take to minimize political risk. One strategy could

involve keeping a low proﬁle. Because it is difﬁcult

to please all the people all the time, it may be desir-

able for a company to be relatively inconspicuous.

For example, in the 1980s, Texas Instruments

removed identifying logos and signs in El Salvador.

Another tactic could involve trying to adopt a

local personality. A practice approach may require

that the company blend in with the environment.

There is not much to be gained by a company being

ethnocentric and trying to Americanize, Euro-

peanize, or Japanize the host country’s citizens. A

veteran of international business would very likely

realize that it is far better to be ﬂexible and adapt-

able. Such a ﬁrm would know that it should behave

like a chameleon, adapting itself to ﬁt the environ-

ment. The main reason that McDonald’s uses local

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Figure 4.3 Politics and economics

Source:

Mobil Corp.

corporate staff is to make it look like a local

company.This is also the goal of Hawley Group.That

company is thought to be American in the USA,

British in the United Kingdom, and Australian in

Australia.

Multinational ﬁrms, due to their presence in a

large number of countries, must be mindful of ter-

rorist threats. According to the World Markets

Research Center, the top ten countries deemed to

be the most likely targets of a terrorist attack are:

(1) Colombia, (2) Israel, (3) Pakistan, (4) the USA,

(5) the Philippines, (6) Afghanistan, (7) Indonesia,

(8) Iraq, (9) India, and (10) the United Kingdom.

A survey of US-based MNCs found that less than

50 percent had formal programs to deal with a ter-

rorist attack.

Most of the MNCs with anti-terror-

ist programs focus on security equipment rather

than on training executives and their families.

Some of the activities included in anti-terrorist

training are: defensive driving, self-defense, kidnap-

ping avoidance, behavior after/during kidnapping,

negotiating skills, weapon handling, collecting

information from local sources on terrorists, and

protection of assets.

Finally, various defensive precautions can be

implemented.Automobile drivers should be trained

in how to react to a kidnapping attempt, and man-

agers themselves should be instructed in how to

deal with the unexpected and taught especially

to avoid driving routine routes. Very basic precau-

tions might be undertaken. For example, in El

Salvador, Texas Instruments erected protective

walls for its facilities and employed extra guards. It

is better to be safe than sorry (see Marketing

Strategy 4.1).

POLITICAL INSURANCE

In addition to the strategies of risk avoidance and

risk reduction, MNCs can employ the strategy of

risk shifting. Insurance coverage may be obtained

from a number of sources.

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POLITICAL ENVIRONMENT

Chubb, IG and Lloyd’s of London are among a small

group of insurers which have long offered policies to

cover ransom demands for kidnappers. The coverage

has been expanded to include legal and psychiatric

fees, and compensation for loss of trade secrets and

product tampering. Some policies may cover costs

incurred when evacuating a politically unstable

country. Executives may receive training on how to

avoid being kidnapped.

Premiums may run from $1000 to $100,000 a

year – depending on the coverage. The premium also

varies according to the countries which executives

visit most often. As an example, the premium is

higher if it involves Latin America, and lower in the

case of Europe and Japan. Individuals may buy the

insurance if their employers do not provide such a cov-

erage. There is extra cost to cover accidental death

and dismemberment. Since it is illegal to purchase

ransom insurance in Germany and Colombia, execu-

tives visiting these countries need to buy the coverage

elsewhere.

The US government sent $50 billion to state and

local governments for homeland security, and private

contractors will beneﬁt from it. Security companies

guard against employee theft,train bodyguards in eva-

sive driving techniques, teach executives to minimize

dangers (e.g., no name and title on a limousine win-

dow),and arrange ransom payoffs.They currently offer

emergency response (e.g., evacuation and repatriation

of overseas personnel),business continuity (e.g., back-

ing up the data system and anti-hacker defenses),

vulnerability assessment (e.g., identifying weak

points in anti-terror defense), and background checks

(identifying problem workers and subcontractors).

Source:

“Your Jitters Are Their Lifeblood,”

Business Week

April 14, 2003, 41.

MARKETING STRATEGY 4.1 BETTER SAFE THAN SORRY

Private insurance

Through ignorance, a large number of companies

end up as self-insurers. A better plan would be to

follow Club Med’s example by shifting political risk

to a third party through the purchase of political

insurance.

Some insurance companies even insure sales and

proﬁts. British Aerospace, for example, has a $70

million policy that guarantees $3.7 billion in

revenue from aircraft leasing until the end of 2013.

Honeywell has a blanket policy to insure its foreign

exchange exposure and other risks, and may expand

to include interest rate hedges, weather, and com-

modity prices.

Currency inconvertibility is often the most

common type of political risk claim. A coverage of

this type does not protect against currency devalu-

ation. On the other hand, political violence (e.g.,

civil disturbances and wars) has been increasing. In

addition, political disruption can stem from such

multilateral bodies as the United Nations, and the

disruption includes sanctions and embargoes. Once

a company plans to cover commercial risk, it may

as well include political risk. After all, the extra

premium is not that great.

Although property expropriation seems to be

the most common reason for obtaining political

insurance, the policy should include coverage for

kidnapping, terrorism, and creeping expropriation.

Information about most companies’ coverage is

rather scarce, since it is both imprudent and imper-

missible for companies to reveal that they are car-

rying kidnap insurance. Revelation of such coverage

would only serve to encourage such activity.While

AIG and other insurers have been offering corpo-

rate and individual kidnapping-and-ransom insur-

ance policies for quite some time,Chubb now offers

a free kidnapping-and-ransom upgrade for home-

owners’ insurance.

Government insurance

MNCs do not have to rely solely on private

insurers. There are nonproﬁt, public agencies that

can provide essentially the same kind of coverage.

For US ﬁrms, the two primary ones are OPIC and

FCIA.

Overseas Private Investment Corporation

(OPIC) is a US government agency that assists eco-

nomic development through investment insurance

and credit ﬁnancing programs. It is a business-

oriented agency whose purpose is to support US

private investments. Chartered by Congress in

1981, OPIC is a ﬁnancially self-sustaining, indepen-

dent corporation that receives no public funds.

Its contracts, however, are fully backed by the US

government, a sole owner of the corporation.

OPIC provides several forms of assistance, with

political risk insurance as its primary business. It has

three type of insurance protection to cover the risks

of: (1) currency inconvertibility, (2) expropriation

(including creeping expropriation), and (3) loss or

damage caused by war, revolution, or insurrection.

A typical insurance contract runs for up to twenty

years at a combined annual premium of 1.5 percent

for all three coverages. Considering that private

insurers issue a three-year policy, OPIC’s coverage

is a positive feature. OPIC’s assistance was instru-

mental in Motorola Inc.’s decision to enter the

Nicaraguan market to install, operate, and maintain

a cellular telephone service.

The USA has the Ex-Im Export Credit Insurance

Program to help American exporters and their

export activities by protecting them against risks of

nonpayment for political or commercial reasons.

Political risks of default, often beyond a buyer’s

control, are caused by government action, and

examples of such risks are political violence or war,

government intervention, or cancellation of a ﬁrm’s

license. In contrast, a commercial risk stems from

the buyer’s inability to fulﬁll one’s payment obliga-

tions. This US program thus offers policies that

cover single or multiple export sales and leases.

Short-term policies cover 100 percent of principal

for political risk and 90 to 95 percent for commer-

cial risk, plus a speciﬁed amount of interest. Capital

goods may be insured for up to ﬁve years under a

medium-term policy.

Foreign Credit Insurance Association

(FCIA) is an association of some ﬁfty leading US

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companies in the marine and casualty insurance

ﬁeld. Created in 1961, FCIA makes it possible for

US ﬁrms to become internationally competitive by

insuring US exports of both goods and services

against commercial and political risks.

MIGA

MIGA (Multilateral Investment Guarantee Agency)

was established in 1988 to help its more than 100

member states create an attractive investment

climate. Its mission is to promote private invest-

ment in developing countries through insuring

investment against noncommercial (i.e., political)

risk. MIGA works as a co-insurer with, or a

reinsurer of, other insurers. It offers four types of

coverage: currency transfer, expropriation, war

and civil disturbances, and breach of contract.

Premiums depend on the type of project, type of

coverage, and project-speciﬁc conditions. Annual

premiums for each coverage are in the range of 0.50

to 1.25 percent of the amount insured. MIGA’s

rates are slightly higher than those of other national

insurers.

In sum, when it comes to political risk, com-

panies tend to be reactive. As a result, they often

have to devise an expensive strategy to deal with

damage control. It is much more desirable to be

proactive by developing a comprehensive and sys-

tematic view of the factors that drive risks.

There

are three basic sets. First, there are external drivers

such as political instability (e.g., coups and riots)

and poor public policy (e.g., hyperinﬂation and cur-

rency crises). Second, interaction drivers are based

on relationships between a company and external

actors. Finally, internal drivers include the

company’s quality of its political risk management

processes. In general, the company is not in a posi-

tion to inﬂuence external drivers (e.g., making a

host country more politically or economically

stable). It should therefore focus on assessing risks

and managing their impacts. As an example, since

kidnapping is a signiﬁcant risk, one should assess the

likelihood of its occurrence. In statistical terms, it

is more likely for a person to become a road trafﬁc

accident victim than a kidnap victim. On the other

hand, being kidnapped and held for ransom is

arguably the most traumatic experience for anyone.

As such, ﬁrms should train their employees to take

precautions and may want to offer them kidnapping

and ransom insurance.

CONCLUSION

The international marketer’s political environment

is complex and difﬁcult due to the interaction

among domestic, foreign, and international politics.

If a product is imported or produced overseas,

political groups and labor organizations accuse the

marketer of taking jobs from people in the home

country. On the other hand, foreign governments

are not always receptive to overseas capital and

investment because of suspicions about the mar-

keter’s motives and commitment. When both the

host country and the home country have different

political and national interests, their conﬂicting

policies can complicate the problem further.

This chapter has covered the political dimension

of international trade. Due to the diversity of polit-

ical and economic systems, governments develop

varying philosophies. In some circumstances, their

political motives overshadow their economic logic.

The result is often that political risks – such as

expropriation, nationalization, and restrictions –

are created against exports and/or imports and are

probably inevitable.

Marketing decisions are thus affected by political

considerations.When investing in a foreign country,

companies must be sensitive to that country’s polit-

ical concerns. Because of the dynamic nature of

politics in general, companies should prepare a

contingency plan to cope with changes that occur in

the political environment. To minimize political

risk, companies should attempt to accommodate the

host country’s national interests by stimulating

the economy, employing nationals, sharing business

ownership with local ﬁrms, and being civic ori-

ented. On the other hand, to protect their own

economic interests, companies should maintain

political neutrality, lobby quietly for their goals, and

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shift risks to a third party through the purchase of

political insurance. Finally, a company should insti-

tute a monitoring system that allows it to systemat-

ically and routinely evaluate the political situation.

Some companies view politics as an obstacle

to their effort to enter foreign markets and as a

barrier to the efﬁcient use of resources. For other

companies, political problems, instead of being

perceived as entry barriers, are seen as challenges

and opportunities. According to ﬁrms with the

more optimistic view, political situations are merely

environmental conditions that can be overcome and

managed. Political risks, through skillful adaptation

and control, can thus be reduced or neutralized.

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CASE 4.1 HOA NI SHOE COMPANY

Lan T. Huong, National Economics University and Gary Oddou, California State University,

San Marcos

Hoa Ni Shoe Company (HNSC) was established in 1968 as a prefabrication plant to produce exported leather

goods and has for the last three years been listed as a Hanoi Joint Stock Company (though it is not yet listed on

the Vietnam Stock Exchange). The employees in the company own 49 percent of the company and the state

owns the rest. Before “doi moi” (the economic renovation) Hoa Ni Shoe’s main partners were in the East

European/Euro-Asian bloc countries of the former Union Soviet Socialist Republic, Czechoslovakia, and East

Germany (German Democratic Republic). Prior to “doi moi” and the opening up of Eastern Europe, business was

very difﬁcult. HNSC had to seek partners under restricted conditions and somewhat closed markets.

Since the collapse of the East European bloc and the introduction of the more open market policy in Vietnam,

businesses in general and with HNSC in particular have been positively affected. For example, in 1992 HNSC

began exporting to Italy and Thailand, and in 1996 it found an additional South Korean partner. In more recent

years, HNSC has also developed a reputation for on-time deliveries and high product quality. These two elements

have been key in retaining its customers and developing new partnerships.

THE COMPANY’S PRODUCTION

Hoa Ni Shoe manufactures products based on its foreign partners’ design preferences. Foreign partners are also

responsible for supplying the raw materials to HNSC and for helping it distribute and sell its products to inter-

national markets. Its products include gloves, shoes, briefcases, and men’s wallets.

The domestic market of HNSC is a very small part of its operations, totaling only 2 percent of its total pro-

duction. However, it has begun to realize that it needs to focus more on the domestic market. For the domestic

market, it had produced only for its showrooms in Hanoi and for a small number of local contract customers.

Although the quality of the company’s product is high, the number of people who are aware of it is very small.

It is difﬁcult to ﬁnd HNSC’s products in large shops in Hanoi compared to its competitors’ products. In general,

its product style has not been as suitable for Vietnamese consumers’ taste because their main markets have been

outside Vietnam.

The products for the Vietnamese market include women’s shoes, women’s sandals, small key bags, men’s

wallets, and briefcases. The shoes and sandals are inexpensive in comparison with other companies’ products.

Although HNSC has a large product line, the principal strategic products are leather shoes and sandals. In 1998

HNSC produced 600,000 women’s shoes, 500,000 gloves, and 600,000 different bags. In addition, the company’s

turnover was 51.5 billion dong. In the past few years these numbers have grown, but largely because of foreign

consumption due to agreements through LEFASO, HNSC’s primary regulator.