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Unit 5: Political and Economic Environment

between India and Pakistan, both the countries have fought three wars and the relations are notes
strained to the extent of even using nuclear power in case of extreme emergencies. Now, with
the movement of Bus from Delhi to Lahore and back in which both the prime ministers will be
travelling, the tension seems to have been reduced and there is likelihood that both the countries
will have a common nuclear programme and also sign a no-war pact in the near future.
Companies can derive positive economic benefits when the relationship between two countries
improves or when the host government adopts a new investment policy. As in the case of
India, the country was a highly regulated, closed economy, which discouraged foreign direct
investment. It was only in 1991 that a new government began the reform programme, which
could transform India into one of the world’s most dynamic economies.
On the other hand, serious problems can develop when the political condition deteriorates. A
favourable investment climate can disappear overnight. For example, the United States withdrew
Chile’s duty free trade status because of Chile’s failure to take “steps to afford internationally
recognised worker rights”. Chile, thus, joined Romania, Nicaragua and Paraguay being
suspended from the Generalised System of Preferences (GSP). The economic sanctions imposed
by America, Japan and other European countries on India and Pakistan after they had exploded
the nuclear devices is again unjustifiable. Prior to the explosions, both the countries, especially
Pakistan, had very cordial economic and military relations with USA. Pakistan’s economy is at
the lowest ebb under the present sanctions.

5.1.5 factors affecting Global Business

Political risk analysis
There are a number of political risks which are to be faced by international marketers. The
risks, which the marketers face from the host government, are – confiscation, expropriation,
nationalisation, domestication and creeping expropriation. Such actions are more likely to be
levied against foreign investments though local firms are not totally immune. For example,
Charles de Gaulle nationalised France’s three largest banks in 1945 and more nationalisation
occurred in 1982 under the French socialists.
Confiscation is the process of a government’s taking ownership of a property without
compensation. For example, the Chinese government seized American property after the Chinese
communists took power in 1949. Occidental Petroleum Company, wanted the United States to
review Venezuela’s GSP eligibility after the country confiscated the company’s assets without
compensation.
Expropriation differs from confiscation in that there is some compensation though not necessarily
just compensation. More often than not, a company whose property is being expropriated agrees
to sell its operations – not by choice but rather because of some explicit or implied coercion.
Nationalisation involves government ownership and it is the government that operates the
business being taken over. Myanmar’s foreign trade, for example, is completely nationalised.
Generally this action affects the whole industry rather than just a single company. Mexico
attempted to control its debt problem. President Jose Lopez Portillo nationalised the country’s
banking system. In another case of nationalisation, Libya’s Col. Gaddafi’s vision of Islamic
socialism led him to nationalise all private business in 1981. India nationalised its banking,
transportation and insurance industries in 70s.
In domestication, foreign companies relinquish control and ownership either completely or
partially to the nationals. The result is that private entities are allowed to operate the confiscated
or expropriated properties. The French government, after finding out that the state was not
sufficiently proficient to run the banking business, developed a plan to sell 36 French banks.
Domestication may sometimes be a voluntary act that takes place in the absence of confiscation
or nationalisation. Usually, the causes of this action are either poor economic performance or

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