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Unit 5: Political and Economic Environment

from international dispute may lead to a direct confrontation between the two countries. Romania notes
and Hungary, who have deep-rooted grievances against each other, could become involved in
this form of conflict. India and Pakistan are also deeply involved in this form of conflict though
the main cause is the Kashmir problem.
attitudes of nationals

An assessment of the political climate is not complete without an investigation of the attitudes
of the citizens and government of the host country. The nationals’ attitude towards foreign
enterprises and citizens can be inhospitable. Nationals are often concerned with foreigners’
intentions with regard to exploitation and colonialism, and these concerns are often linked to
concerns over foreign governments’ actions that may be seen as improper. Such attitudes may
arise out of local socialist or nationalist philosophies, which may be in conflict with policy of the
company’ home country government. The governments may come and go, but citizens’ hostility
may remain. For example, 12 US firms decided to leave El Salvador in 1980s.

Policies of the Host Government

Unlike citizens’ inherent hostility, the government’s attitude towards foreigners is often relatively
short-lived. The mood can change either with time or change in leadership and it can change for
either the better or the worse. The impact of change in mood can be quite dramatic especially in
the short run.
Government policy formulation can affect business operations either internally or externally. The
effect is internal when the policy regulates the firm’s operations within the home country. The
effect is external when the policy regulates the firm’s activities in another country.

Example: An internal policy is Quebec’s Bill 101. The Bill requires all business to be
conducted entirely in French and dictates where the investments of insurance and trust companies
will be placed. When this Bill was passed, the reaction was a massive capital flight of some $ 57
billion. One major investment company alone moved in $90.2 billion portfolio from Montreal to
Ottawa.
Although an external government policy is irrelevant to firms’ doing business only in one country,
such a policy can create complex problems for firms doing business in countries that are in conflict
with each other. A company in one country, for example, may be prohibited from doing business
with other countries that are viewed as hostile. A dispute over the boundary between Chile and
Argentina prompted Argentina to restrict traditional exports to Chile including petrochemicals,
pharmaceuticals, vehicles and vehicle parts. The restriction disrupted the marketing plans of
General Motors, Peugeot and Renault all of which supplied Chile with automobile parts from
Argentina plants. Similarly, India and Pakistan have restricted their export-import because of the
long outstanding Kashmir boundary dispute between the two countries.
The use of unfriendly rhetoric before an election may be nothing but a smoke screen and the
‘bark’ will not necessarily be followed by a ‘bite’. Companies need not take drastic action if they
are able to endure through the election. Ronald Reagan, an advocate of free trade, became much
more of a protectionist just before his election in 1984. After the election, a policy of free trade
was reinstituted.
The experience of Enron Corporation with the $ 2.8 billion Dhabol project in India is an example
of this nature. In 1992, Enron and Prime Minister Narsimha Rao’s reformist government quickly
signed memoranda of understanding to build the massive power complex in Maharashtra.
Having no domestic partner, the deal’s secrecy coupled with company’s efforts to keep the
details confidential, the lack of competitive bidding, government loans guarantee and a high rate
of return (23%) all contributed to a negative public perception. The company failed to seriously

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