Page 64 - DMGT547_INTERNATIONAL_MARKETING

Unit 3: Political Environment of International Marketing

In addition, there are several managerial strategies which are relevant. A firm may try to gain Notes
“cooperation” through long-term contractual agreements, alliances, interlocking directorates,
inter-firm personnel flows, etc. Furthermore, it may pursue product and geographic
diversification to gain “flexibility”. Also, operational flexibility can be achieved through flexible
input sourcing and multinational production.

!
Caution The rapid changes in Eastern Europe present both challenges and opportunities.

In the earlier days of centralisation, a trade minister in the capital could speak for the entire
nation but with decentralised decision making, an MNC has to go to many republics for
information and approval. Table 3.2 provides some tips for doing business in East Europe.

Table 3.2 Description of Explanatory Variables

Variables Motivation Expected
sign
Gross National Poorer countries may have less flexibility to reduce +
Product (GNP) per consumption than richer countries. Countries with low
capita GNP per capita may thus be able to solve debt service
difficulties by implementing austerity programmes.
Propensity to invest This variable captures a country’s prospects for future +
growth. The incentive in default is a decreasing function of
the propensity to invest since the cost of default (an
embargo on future borrowing or a higher cost of future
credit) increases with future outputs.
Reserves-to-imports The larger reserves are relative to imports, the more reserves +
ratio are available to service external debt the lower is the
probability of default.
Current account This variable is negatively related to the probability of +
balance on GNP default since the current account deficit broadly equals the
amount of new financing required.
Export growth rate Since for most countries exports are the main source of +
foreign exchange earnings, countries with high export
growth rates are likely to service debt.
Export variability Traditionally, the literature has argued that countries with ?
volatile exports are more vulnerable to foreign exchange
crisis and are less credit worthy. In contrast, Eaton and
Gersovitz show that default risk will be smaller, the larger
the export fluctuations. The underlying rationale is that
countries with more volatile exports are more frequently in
need of borrowing to smooth consumption across periods of
varying income and are, therefore, incited to maintain a
good credit record.
Net foreign debt to A country with higher debt foreign net to exports ratio is -
exports more vulnerable to foreign exchange crisis and more likely
to default.
Debt service When a country is known to have asked some of its creditors -
for debt relief, other creditors are apprehensive of default
difficulties – and the credit rating is likely to fall.
Dummy variables
Political instability Aliber shows that political instability can reduce a country’s -
indicator willingness to service debt.

Source: International Marketing, Ch-5, P. K. Vasudeva

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