THE NATURE AND PERCEPTION DE POLITICAL RISK}; 5; , EOR THE INTERNATIONAL CORPORATION AN """" f , EXPLORATORII ANALYSIS WITH SPECIAL REFERENCE:51??? ‘mRmmL Fifi: , Thesis IOI the Degree Of Ph D ' ' MICHIGAN STATE UNIVERSITY EIIENNEF. CRACCO ' 1972 LIBRAR¥ . JHESII MiChigan 8” , - University , This is to certifylthat the thesis entitled THE NATURE AND PERCEPTION OF POLITICAL RISK FOR THE INTERNATIONAL CORPORATION: AN EXPLORATORY ANALYSIS WITH SPECIAL REFERENCE TO BRAZIL presented by Etienne F. Cracco has been accepted towards fulfillment of the requirements for Ph . D. (192er in Marketing Major professor Date May 15, 1972 0-7639 ABSTRACT THE NATURE AND PERCEPTION OF POLITICAL RISK FOR THE INTERNATIONAL CORPORATION: AN EXPLORATORY ANALYSIS WITH SPECIAL REFERENCE TO BRAZIL BY Etienne F . Cracco Political risk has become a by-word among the executives of international corporations. This research attempts to conceptualize the nature of political risk and test its perception, at the same time laying a more objective foundation for future analyses of this element of risk facing the international firm. The study tackled the objectives in a dual manner: on one hand, a conceptual framework was built around avail- able knowledge; on the other, field research analyzed the applicability of the conceptual framework developed. Finally, concluding remarks discuss the managerial implications of using this approach. The field research covered five manufacturing industries (motor vehicle, chemicals, electrical, metal working and office machine equipment industries) at their American and European headquarters and at their Brazilian subsidiaries . h. ”A .- ..' Etienne F. Cracco The author defines political risk as the subjective pumability that certain political decisions will be taken mr certain events occur) which will perceptibly change Hm existing business environment. The research shows amt two aspects of political risk, conceptual and qmrational, co—exist, and dominate in different degrees Hm thinking of those at the two levels of the corporation, Um headquarters and the subsidiaries. The research emphasizes three major variables in Um analysis of political risk: the host country, product dmracteristics and firm characteristics. The analysis of the host country and particularly itslevel of economic development underlines the importance ofrmtionalism as a source of political influence. The research demonstrates that products are sub— rfltted to varying degrees of political pressure which qwear to be functions of the level of technological Umnsferability, complexity of product use and market size. The executive's discernment of the obstacles he fans appear to be more a function of the firm's resources mm managerial philosophies than of its nationality and Onhlminor variations in perception were found between ham office and operating subsidiary levels. THE NATURE AND PERCEPTION OF POLITICAL RISK FOR THE INTERNATIONAL CORPORATION: AN EXPLORATORY ANALYSIS WITH SPECIAL REFERENCE TO BRAZIL BY .(3 \‘L. ‘ , ‘IT‘E‘ Etienne FT Cracco A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing 1972 CDCopyright by Etienne Francis Cracco 1972 u, I ACKNOWLEDGMENT S This research has received generous support from both Michigan State University and the Escola de Admin— istrapao de Empresas de Sao Paulo, Fundagéo Getulio Vargas. The support was in the form of a grant, release time from my research assistant duties, and logistical support from the institutions. To my committee, especially its chairman, Professor Dole A. Anderson, my gratitude for their patience and their much needed advice in the elaboration of the research and in reading through the many drafts. To the Escola de Administracao das Empresas de 850 Paulo, and particularly to the former director, Professor Gustavo de Sa e Silva, to the current director, Professor Carlos Malferrari, and to Professor Alysson Mitraud and the school's secretaries who made this research feasible, I offer my appreciation. To the companies that agreed to participate in this research and their executives who spent several hours in interviews; to the Division of Research, Graduate School Of Business Administration, Michigan State University, and its members who, by their constant support, made this research possible; and to Elizabeth Marcus who performed ii L—___ m . II“ I the invaluable function of editing, listening, and offering advice as the manuscript took shape, I am most grateful. My greatest debt is to my wife, Gilberte, who accepted the rivalry of the research and, with her moral support, helped me finish the dissertation. iii TABLE OF CONTENTS ACKNOWLEDGMENTS . . . . . . . LIST OF TABLES . . . . . . LIST OF FIGURES . . . . . . Chapter I. INTRODUCTION TO THE NATURE OF POLITICAL RISK . . . . . . . . . . Defining Political Risk . . Models and Frameworks for Political Risk Analysis . . . . . Models for Specific Risks . . . . . II. Nehrt' 5 Model . Techniques for Analysis of Political Risk The NICB Studies . Model for Political Risk Analysis Research Methodology . Research Assumptions Hypotheses . . . . . . . . . . The Sample . . . . . . . . . . Data Collection . . . . . . . . Scope of the Study . . . . Organization of the Dissertation . . . THE HOST COUNTRY . . . . . The Political System . . . . . . . Political Socialization . . . . . Interest Articulation . . . . . Political Communication . . . . Sources of Political Influences . . . . Politico— Ideological Influences . . . Nationalism . . . . . . . Socio— Political Influences . . . . . Summary . . . . . . . . . iv Page ix H \O - 106 Chapter Page III. THE PRODUCT . . . . . - 109 Introduction . - - 109 Measuring Technological Transferability . . 109 The Product——Its Political Meaning and Attributes . . . . . . - - . 113 The Literature . . - - 114 Industry's Perception of Political Pressures . . . . 124 Subsidiaries and Headquarters' Perception of Political Pressures . . . . . 131 Political Risk and Technological Transferability . . . . . . 136 Spectrum of Political Pressures . . . 137 Transferability of Product Technology . . 138 Transferability of Component Technology . 141 Summary . . . . . . . . . . . . 142 IV. THE FIRM: I. NATIONALITY AND POLITICAL RISK ANALYSIS . . . . . . . . . . . 147 Attributes of a Firm . . . . . . 149 The Firm and its Nationality . . . 150 Historical Importance of Nationality . . 150 Interview Results Reflecting the Importance of Nationality . . . . 154 Firm' 5 Size and the Pursuit of Total Subsidiaries' Control . . . . . . . 167 Managerial Practices: The Firm's Analysis of Political Risk . . . . . . . . 170 Reporting Political Risk . . . . . . 170 Analysis of Political Risk . . . . . . 171 Sources of Information . . . . . . . 175 Summary . . . . . . . . . . . 177 V. THE FIRM: II. PERCEPTION OF POLITICAL RISK . 180 Comparison of the Cracco (1970) and 1961 Robinson Study . . . . . . . 181 Overall Perception of Obstacles . . . . . 185 Economic Policies . . . . . 190 Interference With Remittance Policy . , 191 Local Capital Participation . . . , 193 Other Obstacles . . . . . . . . . 194 Emerging Obstacles . . . . . . . . 195 Debt Limitation . . . . . . 198 Expropriation and Corruption . . . . . 199 Analysis by Functional Areas . . . 201 Financial Obstacles . . . . . . . 202 I Chapter Management Risks . . . . . . - - Marketing Obstacles . - - . ° Perception of Political Risk by Organizational Level . - Headquarters' Perception of Political Risk. Subsidiaries' Perception of Political Risk. Comparative Analysis of the Viewpoints Comparative Analysis of the Results by Nationality . . . . . . Summary . . . . . VI. CONCLUSIONS. MANAGERIAL IMPLICATIONS AND RECOMMENDATIONS . . . Managerial Implications . . . . . The Nature of Political Risk Two Types of Political Risk . Orientations of Political Risk Analysis The Political Risk Triad . . The Host Country . The Product . . . . The Firm . . Planning for Political Risk Planning the Objectives Planning Strategies An Illustration . . . . . . A Look at Brazil . Summary Recommendation for Future Research BIBLIOGRAPHY APPENDICES o o u . o o 0 vi Page 207 207 212 212 212 215 216 220 222 223 223 224 226 227 228 232 233 235 235 240 241 243 245 246 250 264 LIST OF TABLES Firm and host country characteristics Conceptual framework of the political process . . . . . . . . . Sample size of companies interviewed . . . Sample of firms by nationality . . . . Number of executives interviewed . Structural influences on business environ- ment as shown by frequency of occurrences of major obstacles. Coups and revolutions in Brazil, 1922-1964 Frequency of coups per country in Latin America . . Motivation for strikes in 1952 in Brazil . . Managerial implications of the product taxonomy . . . . . Nationality issue. Question 1: Are there advantages or disadvantages for a corpora— tion in being a citizen of a large economic power? . . . . . . . . . Foreign concentration issue. Question 2: Is it advantageous or disadvantageous to have a large group of firms of the same nationality in the same foreign country? Home country's international role issue. Question 3: What are or have been the repercussions of the home country' s role in international events upon your business environment? . . . . Page 24 26 37 38 39 7O 72 87 144 155 161 166 Page Sources of information for the international 176 business environment . . . . . ~ - - Comparative ranking of obstacles by headquarters . . . . . . . . . - 182 Ranking of obstacles to foreign investment . 186 Ranking of financial obstacles . . . . . 203 Ranking of management and production obstacles . . . . 208 Ranking of marketing obstacles . . . . . 209 Box analysis of the sources of political influences and strategic planning . . . 237 Marketing box analysis of the political strategic planning . . . . . . . . 238 Management production box analysis of the political strategic planning . . . . . 239 viii Figure l-l. 1-2. 2-1. LIST OF FIGURES Investment climate analysis . . . . . Simple model of political interaction . . Nationalism as measured by managerial restrictions and the level of economic development in 69 countries . . . . . Obstacles to foreign investment as a function of the level of economic development . . . . . . . . . . Obstacles to foreign investment as a function of the level of economic development . . . . . Latin American imports from Great Britain and the United States and the incidence of coups, 1854—1910. . Coups in Latin America: five—year moving average, 1823—1966 . . . . Probability of a military coup as a function of the Latin Business Cycle Brazil's economic fluctuations and coups d'etat . . . . Curves of ISO——importation and threshold of production for electrical material Evaluation of obstacles to foreign investment by industry . . . . Evaluation of obstacles to foreign investment by industry subsidiaries 0 Evaluation of obstacles to foreign invest— ment by industry headquarters Spectrum of political pressures Dimensions of a product . . . ix Page 19 24 63 90 91 97 99 100 102 112 125 132 134 143 Figure Page 5-1. Evaluation of obstacles to foreign investment by all industries head- quarters, subsidiaries and by nationality . . . . . . . . . . 189 5-2. Evaluation of obstacles to foreign invest— ment by headquarters (U.S. and foreign) and by subsidiaries (U.S. and foreign) . 214 CHAPTER I INTRODUCTION TO THE NATURE OF POLITICAL RISK Assume one is responsible for investment policy hra multinational firm. He has been provided with the following resumés of newspaper clips from countries A, B, and C. Would he invest in: Country A, where five political leaders have been assassinated in the last eight years, which has been involved for the last seven years in a major international conflict, where unemployment and inflaction are at their post World War II all— time high, and where strikes, student riots, and bombings are common events? or Country B, where political stability has been the rule despite some street riots, where the country has been involved in two international conflicts during the last eight years, where unemployment, although stabilized, is still a problem, and which has not devalued its currency in the last five years? or Country C, where military dictatorship is said to have prevailed since April 1964, where since that time inflation has run between 20 and 35 percent, where devaluation is a bimonthly event, and where repatriation of earnings is limited to 12 percent of the registered capital? Based on the above data, Country B would appear to Offer the least political risk. However, many observers hlpossession of a wider array of facts would consider it Um least attractive. The above newspaper-type descriptiOns l cmfld simply reflect the politico-economic situations of the muted States, India, and Brazil. Clearly, political risk from the multinational firm's vieWpoint is not merely a function of political instability but also incorporates a wide range of other elements; consequently, there is a need to develop a framework for its analysis. Defining Political Risk Political risk has been equated with political hmtability by many writers, with revolution by political scientists, with nonbusiness risk by economists, who claim the discount rate accounts for it, or with the probability of expropriation by many neophytes in international business. Lee Nehrt's study, Political Climate for Private Investmentl views the investment climate as a composite of economic, social, administrative, and political factors. The political climate encompasses a variety of risks-—of nationalization or expropriation, of being forced out of business by deliberate government action, of forceful government participation in the ownership of a company, and the risk of future direct competition from a publicly— owned company. Nehrt indicates that it is the administrative climate about which investors voice the most frequent lL. Nehrt, Political Climate for Private Invest- TEEE (New York: Praeger, 1970). complaints, including exchange controls, import permits, restrictions on the use of foreign personnel, corruption, and price controls. Apparently Nehrt does not see any relationship between the political and administrative climates, although the latter could very well be dependent on the former. The United States Agency for International Develop— ment (AID) guarantee programs offer investment guarantees 'Hmough application of insurance which covers specific and extended risks. Specific risk coverage encompasses hmonvertibility and expropriation, and war, insurrection, or revolution; extended risk coverage encompasses both business and nonbusiness risks, including currency devaluation and creeping expropriation not insured by the specific risk coverage.2 Stefan Robock believes political risk exists when 'Wa) discontinuities or radical changes occur in the business environment, (b) which are difficult to anticipate and (c) which result from political fluctuations and 2These programs cover only countries which have entered into bilateral agreements. See David B. Zenoff and Jack Zwick, International Financial Management Englewood Cliffs, N.J.: Prentice Hall, Inc., 1969), pp. 109—111. Also AID, Specific Risk Guaranty Handbook (Washington, D.C.: 1966); AID, Extended Risk Guarantees Of Loans for Private Projects (Washington, D.C.: 1964); Marina Von Neumann Whitman, Government Risk Sharing in Egreign Investment (Princeton: Princeton University Press, 65). DI dis ietemi ’IeyonI attitm and 0t] Artie Isproa iefini IIIIer View I NEED CErIIir d A: A). 4 disturbances."3 He states that these three considerations we necessary, and should potentially affect the profit picture of the enterprise, or one of its other goals. A few lines later, however, he modifies his definition, writing that in some cases "the difference between normal business risk and political risk may be a matter of degree and it becomes difficult to draw the line between continuity and discontinuity, between certainty and uncertainty and to determine that political forces are dominant."4 Franklin R. Root defines political risks as those "beyond normal business risks that are generated by the attitudes, policies, and overt behavior of host governments and other local power centers such as rival political parties, labor unions, and nationalist groups."5 This approach to political risk broadens the above-mentioned definitions but tends to infer that government and local power centers are the sources of political influence, a View which, as will be explained later in the chapter, appears incomplete. These definitions reflect widely held views con— cerning political risk, but they do not define its nature. _~________________ 3Stefan H. Robock, "Political Risk: Identification and Assessment," Columbia Journal of World Business, VI, N0. 4 (July-August, 1971), 6—20. 4 Op. cit., pp. 7—8. 5Franklin R. Root, "U.S. Business Abroad and the Egéétical Risks," MSU Business Topics, XVI, No. 2 (Winter, ), 72. Expropriation or nationalization are extreme events, but 'Umy will occur long after other symptoms appear. Quite often expropriation may be a relief for the harassed firm. The heart of political risk seems to lie in events which mflminate in these major obstacles; when expropriation takes place, it is too late to react. Political risk encompasses smaller risks which taken as a whole, might become an important political risk. If these definitions are stretched far enough it might be possible to incorporate everything into them. However, definitions alone do not supply a conceptual framework of analysis, which is necessary for understanding the political process and/or for planning for political risk. What is political risk? Political refers to the system of governing a nation, that is, the means which public authorities, charged with preserving the independence of their nation, use to reach their socio—economic goals, much may vary over time. Risk refers to objective uncertainty. T. D. Hammond, in analyzing the meaning and measurement of risk, writes: Risk has been equated with uncertainty and with chance of loss, with different writers giving to the concept different meanings . . . uncer- tainty of loss . . . a psychological phenomenon that is meaningful only in terms of human reactions and experiences . . . objective doubt concerning the outcome in a given situa- tion . . . . If taken to mean something that 11 is measured by a probability statement, there is the problem of accurate inputs for the statement. Frank H. Knight, in Risk, Uncertainty and Profit, stresses that a change of some kind is prerequisite to the existence of uncertainty . . . that we live in a world full of contradiction and paradox, a fact of which perhaps the most fundamental illustration is this: that the existence of a problem of knowl— edge depends on the future being different from the past, while the possibility of the solution of the problem depends on the future being like the past . . . . The significance of change is that it gives rise to the problem of control of action, and in this reSpect the difference between pre— dictable and unpredictable change is conspicuous. The fundamental difference is one of degree only, and consists in the greater unpredictability of some actual progressive changes. Thus, political risk is defined in this study as Um subjective probability that certain political decisions will be taken (or certain political events will occur) which will perceptiblyychange the present business environ- EEQE; it is the posSibility of change in a government‘s behavior which affects the business environment. The implications of such a definition are numerous. The political outcome could lead to favorable or unfavor— able changes in the business environment. Political risk htthe traditional prejudicial sense for one corporation 6J. D. Hammond, Essays in the Theory of Risk and Insurance (Glenview, 111.: Scott, Foresman and Co., 1968), ' I 7Frank H. Knight, Risk, Uncertainty and Profit Wew York: Kelley and Millman, Inc., 1957), pp. 313—315. .iv lay ”J. ugh all. n “A. "! . "h C24 1 l; cmfld be political opportunity for another; from that per— spective political risk and opportunity are two sides of Um same coin. The author recognizes that, in general, nwre emphasis is placed on the unfavorable possibility. Political risk is not equated with political instability. Although there might be some relationship between economic development and coups d'etat, political risk in inter— national business is only concerned with changes in the business environment. A country that has ten different presidents in as many years because of coups d‘etat or political crises does not present ipsg fagpg more political risk than a country that has democratically elected a new president every four years. This approach to political risk broadens con- siderably the too narrow concept used in the past which encompassed only extreme situations: expropriation; nationalization; risk of being forced out of business; forced government participation in the ownership of a company; risk of future direct competition from a publicly Owned company; and the like. It encompasses such politico— economic decisions as product-line control, minimum exPort quotas, price controls, foreign personnel restric— tions, local capital participation, local and foreign debt limitation, and discriminatory practices in administra— tive action or legislation. SC'IICQS C # :Nituti rations ENslati :Nt,are Ithe s< revarie emnomic 5Ipolit iebusi Tidical . iltimate o; I" .q iCal EICumul a tuSiIIESs Iatmnal vieWedi A defini Political risk analysis focuses, then, on the sources of political influence and on the channeling hmtitutions which translate influence into political decisions which affect the business environment. Expro— priations, minimum export quotas, and discriminatory ‘legislation, commonly called obstacles to foreign invest- nmnt, are only symptoms, or outcomes, of these changes in the sources of political influence. These sources are varied, ranging from ideological to social and/or economic. Political risk analysis, from that vantage point, is closely related to the study of socio—economic changes that might disrupt the present equilibrium of forces in the long run. Changes in the business environment brought about by political decisions may maintain,8 regulate, or modify the business environment. Changes need not be abrupt or radical. Quite often a multitude of small changes ultimately creates a worse business environment than a radical change. India is a case in point; continuous accumulation of petty harrassments has transformed India's business environment into a "nightmare for any multi- national corporation" in the words of an executive inter— viewed in this study- 8To artificially maintain a status quo in an environment that usually was under constant change is a definite change in the environment. I._ 0-5 :Neinsi isvelop a aNcreas anully INlems tats are ET and Auntry i isbasic gtvate 1 SAN gove LTS'Iable POlit natur Viewe polit 9arli POlit Ad I NW York Objectives and Value of the Research The basic objective of the research is to provide nwre insight into the nature of political risk and to develop a framework for its analysis. Thus, if successful, a decrease in the level of emotionalism and uncertainty impefully would be achieved. In the process, communication problems between multinational corporations and govern- ments are pointed out. As Nehrt observes, "in addition to myth and misinformation, the political climate of a cmnfiry is surrounded by vagueness and uncertainty . . . Hm basic problem in evaluating the political climate for private investment is a lack of mutual understanding.“9 Some governments, responding to the accusation that their mmtable political system led to uncertainty, stated that political differences that would pass at home as natural discord become disturbing imbalances when viewed by investors in a distant country. The political struggles that take place within a parliamentary regime should not be mistaken for political instability.10 Misunderstanding concerning political risk often leads to poor evaluation of investment opportunities, much has two effects. On the one hand, the multinationa1 corporation might discard good investment opportunities; 9Nehrt, op. cit., pp. 9-10. 10National Industrial Conference Board, Obstacles and Incentives to Private Foreign Investment 1962—1964 (New York: Studies in Business Policy No. 115), p. 10. I TINA 01 I vicious The I research. elements Entry, amines Aliiysis TICEesSO HYPOERI fiNES o hithe 'HI ~Iestig III 17, fi— 10 mithe other, the host country may become the victim of a vicious circle; The developing countries urgently need foreign capital investment to promote their economic growth, which is a fundamental factor of stability and the only opportunity for training skilled labor. But precisely because of the lack of stability and the shortage of skilled labor, the foreign investment escapes from these areas.11 The secondary objectives of the research are directly derived from the primary one. First, the researcher attempts to describe and explain the different elements in the nature of political risk, namely, the host country, the firm, and the product. Secondly, the study examines the question of whether perception in the analysis of political risk introduces any built—in bias? Professor Emile Benoit writes that most multinational corporations instinctively tend to think in nationalistic frames of reference, which are inappropriate for conduct- ing the business of international corporations.12 An investigation of built—in bias seeks to explain the often widely varying opinions regarding the investment climate hla given country, that is, the same obstacle may be appraised quite differently by two corporations. llNICB, op. cit., p. 10. 12East—West Trade Hearings before the Subcommittee on International Finance of the Committee on Banking and Currency, United States Senate, Ninetieth Congress, 2nd Session on Senate Joint Resolution 169, June 4, 13, 27; July 17, 24, 25, 1968. Th :ly among :a'Iionalit tion at di TEISUS sub lean to a ::a decre 35rporatio :3 foreign Eilitical EI'IJEVer' V (fiikthrol; frecast t iTOblems C rite prob] liiionaliz fzreign it firm and t New fr Kent's Sc AI RObEIt “*9 foreic 7—7 11 The analysis intends to pinpoint differences not mfly among products, but also between firms of different nationalities, and within the same multinational corpora- tion at different levels of operations (headquarters versus subsidiaries). The awareness of such a bias could lead to a re-evaluation of political risk, and consequently to a decrease in the level of host government-international corporation conflicts. Models and Frameworks for Political Risk Analysis A survey of the literature reveals that obstacles to foreign investments which are only some symptoms of political risk have been widely recognized and described. lbwever, very few research results have achieved any breakthrough in devising tools or developing theories to forecast the risk under consideration. The major problems covered in the literature are: foreign exchange rate problems (devaluation, controls); expropriation and nationalization; political instability; obstacles to foreign investment; and conflicts between the multinational firm and the nation—state. Only relatively recently haVe general frameworks of analysis appeared, among them Lee Nehrt's schema of the political climate in North Africa, and Robert Stobaugh's suggested techniques for evaluating Um foreign investment climate. TENN the TRON 3%,. sigh Ring ANNA 12 Models for Specific Risks Foreign exchange control and devaluation.—-As a potential risk, foreign exchange control and devaluation derives mainly from a country's economic situation. This topic has always been at the forefront of international trade, and institutional arrangements have been developed Uncover such risks. The foreign exchange market provides facilities for hedging anticipated or actual claims by 1ming forward contracts which enable a firm to cover its exchange risks. Theories and descriptions of the foreign exchange market and controls abound in the literature.13 At the level of the multinational corporation, where a sizeable investment is made in fixed assets and working capital, and where a flow of earnings is expected, forecasting methods and defensive measures have been devised.14 Bernard Lietaerd suggests the use of a computer nmdel incorporationg expected risk (the probability dis- tribution of a devaluation) and cost (importance of the 13Charles P. Kindleberger, International Economics, 3rd ed. (Homewood, 111.: Richard D. Irwin, 1963), Chapter L pp. 47—62; Chapter 15, pp. 289—309. l4Mordechai E. Kreinin, International Economics, A Polic A roach (New York: Harcourt, Brace, Jovanovitch, 1971), pp. 120—137. International Monetary Fund, A Re ort WIExchange Restrictions (Washington, D.C.: published mmually since 1950), gives a country by country recount 0f existing regulations. jea'aluat E'jIAOIIit Iggesc is'saluaI attrirom zeztatiI m", I him" ln ithori- {Aprop , L2 5' (D f——( 13 devaluation).15 The optimizing model is similar to Mmkowitz's portfolio investment model. Zenoff and Zwick magest a three—step approach to forecasting inflation and 16 (l) identification of the relevant devaluation: emdronmental variables; (2) the businessman next reaches tamative conclusions regarding the steps he would take if he were the government policy maker in the executive branch; and (3) step 2 is reanalyzed to reflect how the politician in the legislative branch is likely to react Hathe same information. Expropriation, nationalization, and forced sales.-— Since the Cuban crisis and the emergence of new, politically unstable nations in search of national identity, expropriation, nationalization, and forced sales have been back in the international business limelight. The most authoritative study on the subject is John F. Truitt‘s "Expropriation of Private Foreign Investment: A Framework to Consider the Post-World War II Experience of British 17 mm.American Investors." Truitt's framework is 15Bernard Lietaerd, "Managing for Exchange Risk," Ibrvard Business Review, March-April, 1970. _ 16David B. Zenoff and Jack Zwick, International Efigggial Management (Englewood Cliffs, N.J.: Prentice Ihll, Inc., 1969), Chapters 3 and 4. 17John F. Truitt, "Expropriation of Private Foreign InVestment: A Framework to Consider the Post World War 11 Experience of British and American Investors," unpub- h5hed Ph.D. dissertation, Indiana University, 1969. essentiallj :IITulnerI fiction 0: :IIics. TI TENN na eItrac'Eive its f0: TitiOIIal CI £80109}! 0; sector mix greneurs, . E‘Ilitical I As The st' AAtion. indica- Priate t0 beI SuAges- nOt pr. 3‘9 Study . IEIEnt aspI isscribe U EbroPriat. \ l8. imeriCa; RS % 14 essentially a bi-dimensional model where propensity of, mfl.vulnerability to expropriation is analyzed as a flnwtion of the host nation's and the firm's character- istics. The firm's three most important characteristics are the nature of its economic activity (that is, extractive, manufacturing), its strategic vulnerability, and its foreign exchange activity. The five most important national characteristics are the GNP per capita, the ideology of the ascendant elite, the public-private sector mix, the supply or character of domestic entre- preneurs, and the degree and frequency of internal political crises. As the author points out: The study is essentially a taxonomic study of national and firm characteristics which might indicate the propensity of a nation to expro— priate and the vulnerability of an investment to be expropriated . . . . The framework suggests in a systematic way to explain, if not predict, expropriations. The study also has an extensive bibliography on the dif— ferent aspects of the subject. Other studies merely describe U.S. business experiences and the extent of expropriation,l8 attempt to provide clues to avoid E 18Franklin Root, "The Expropriation Experience Of American Companies: What Happened to 38 Companies," Eminess Horizons, April, 1968. IIpIOpriat settlement I *—:l fiJ s:ate.--Cc rIltinatic Tidely pot 9:.Erican ( x "a l I ANION S fignty, ll 21 x 15 3103, " Ha: :cIoberT 2( Settlemen- 2: Paris; 22 xitiOnal . Nil, 19 Enterpris. 15 expropriation,19 or offer models for expropriation settlement.20 The multinational corporation and the nation state.--Consideration of the interaction between the nmltinational corporation and the nation-state has been widely popularized by Jean-Jacques Servan Schreiber's American Challenge,21 but especially studied by Raymond Vernon's "Multinational Enterprise and National Sover- eignty,"22 and many other writers.23 This approach to 19William R. Hoskins, "How to Counter Expropria- tion,‘ Harvard Business Review, XLVIII, No. 5 (September— October, 1970). 20David K. Eiteman, ”A Model for Expropriation Settlement," Business Horizons, April, 1970, pp. 85—91. 21Jean Jacques Servan Schreiber, Le Défi Americain Waris: Editions Denoel, 1967). 22Raymond Vernon, "Multinational Enterprise and National Sovereignty," Harvard Business Review, March— April, 1967, pp. 156-163; also "The Multinational Enterprise; Power versus Sovereignty," Foreign Affairs, July, 1971, pp. 736-751. 23Jack N. Behrman, National Interests and Multi— national Enterprises (Englewood Cliffs, N.J.: Prentice Hall, Inc., 1970); Jack N. Behrman, U.S. International Business and Governments (New York: McGraw Hill, 1971); Charles P. Kindleberger, American Business Abroad (New Haven; Yale University Press, 1969), Lecture 6; Charles P. Kindleberger, The International Corporation: A Symposium mambridge: M.I.T. Press, 1970); Stephen Hymer, "The Efficiency (contradictions) of Multinational Corporations," American Economic Review, Papers and Proceedings, LX, No. 2, 1970; Rainer Hellmann, The Challenge to U.S. Dominance of the International Corporation (New York: Dunellen, 1971), 348 p.; Raymond F. Mikesell and is problem of p0 ion of corporati The baSi‘ :IIetlev Vagts‘ (l) The W structure ant develop a St: in vieprint EHtltYI that national 303 (2) the MNE': both a formi< ahigle deS alarge scal' available re market posit Politicai \ apolitical risk scientists. Alt] Sportance, few : "Apart of politiI Allan and Terry Ides. 25 On th' \ liters, F ' k‘ orei --Austries: g 16 Um problem of political risk limits itself to a descrip- tion of corporation practices and host nation reactions. The basic points of conflict have been summarized by Detlev Vagts: (l) The MNE [multinational enterprise] has a structure and orientation which allows it to develop a strategy that is more nearly global in viewpoint than that of any previous business entity, that is, one which pays less heed to national frontiers in pursuit of its objectives; (2) the MNE's emphasis on technology makes it both a formidable competitor or antagonist and a highly desirable guest; and (3) the MNE is a large scale enterprise with many readily available resources and frequently a commanding market position. Political instability.——Political instability as a political risk has been studied principally by political scientists. Although businessmen acknowledge its importance, few studies have been undertaken to show the impact of political instability upon business climate. Vivian and Terry correlate military coups and business cycles.25 On the other hand, over a greater period of others, Foreign Investment in the Petroleum and Mineral Industries: Case Studies of Investor-Host Country Relations (Baltimore: Johns Hopkins Press (for Resources for the Future), 1971); Detlev F. Vagts, "The Multinational Emterprise: A New Ch.alenge for Transnational Law," Harvard Law Review, LXXXIII, No. 4, 1970. 24 Op. cit., p. 19. 25 . . T. M. Vivian and C. J. Michelsen Terry, "The Military Coup in Latin Politics," Worldwide P & I Planning, November, December, 1970, pp. 16—24. Re (1823-1966), W ill economic- " 901139 :f the studies corr :Istacles to priVélt szrdy analyzing the rrss,Adelman arr Dumsare relativ its impact (or mull: snmucdevelopmen richer factors Nfiuy,importanc Ecr’orth.27 Some politi LZIEXES measuring t We Russett used im‘estic group Viol SinkSandRobert Te filings.” Two Fei 17 time (1823-1966), Warren Dean could not prove definitely any economic-"golpes" relationships.26 Nevertheless, none of the studies correlate coups with expropriations or other obstacles to private foreign investment. In a research study analyzing the key factors in the economic development process, Adelman and Morris showed that socio-political factors are relatively more important than economic ones. The impact (or multiplier) of political stability on economic development ranks in only eleventh place behind amh other factors as extent of literacy, dualism, social nmbility, importance of the indigeneous middle class, and so forth.27 Some political scientists have tried to develOp indexes measuring the extent of political instability. Bruce Russett used as an index the number of deaths from domestic group violence per million population.28 Arthur Banks and Robert Textor used political instability ratings.29 Two Feierabend developed an index based on 6 . . Warren Dean, “Latin American Golpes and Economic Fluctuation, 1823—1966,” Social Science Quarterly, June, 1970, pp. 71—80. 27Adelman and Morris, "An Econometric Model of Socio-Economic and Political Change in Underdeveloped Countries," American Economic Review, LVIII, No. 5, Part 1 mecember, 1968), 1184—1217. 28 Bruce M. Russett, World Handbook of Political and Social Indicators (New Haven: Yale University Press, 1964), p. 99. 29 _ Arthur S. Banks and Robert B. Textor, A Cross— POIIty Survey (Cambridge: M.I.T. Press, 1963). he occurrence of s suffer from a sever :3 business executi Lee Nehrt' S 3%, develop LIIestment climat’te airinistrative, and The element :lirate (as defined an policy statemen Dust in which pc facts. As the auth 7N key to its appl ranges rumors intC 30I ~ V0 K. FE 31035 National - aanDiegm lDatc PUDliC 31 in Lee NEhrt $ (New Yor - flint IS ' ILA economlC ng IL‘ framework fc D n .‘ . l t-Ilortan a or . c] 18 Hm occurrence of socio—political events.30 These indices suffer from a severe limitation: their lack of relevance to business executives. Nehrt's Model Lee Nehrt's study, Political Climate for Private Investment, develops its own framework of analysis: the investment climate is composed of the economic, social, administrative, and political climate (see Figure l-l).31 The elements of Nehrt's model of the political climate (as defined in footnote 31) for private investment are policy statements, actions, and the historical context in which political statements turn into political facts. As the author puts it: "The model is very simple. The key to its application is a systematic study which changes rumors into facts and facts into understanding."32 3 . . . 0Ivo K. Feierabend and Rosa11nd L. Fe1erabend, Cross National Data Bank of Political Instability Events San Diego: Public Affairs Research Institute, 1965). 1Lee Nehrt, Political Climate for Private Invest— Egflg (New York: Praeger, 1970); Economic Climate (A): Country's current economic situation and its prospects fOr future economic growth. Economic Climate (B): institu— tional framework for doing business in the country. Social Climate: “labor climate" but broader in content and importance. Administrative Climate: practices from the local administration and bureaucracy. Political Climate; the risk of nationalization or expropriation, the risk of being forced out of business by deliberate government aetiODI the risk of forceful government participation in the capital of a company, and the risk of future direct ComPctition from a publicly owned company. 3 2Ibid., pp. 15-16. [ff- Economic Clima' Eoteotial economic . ___.__._._—.__—— Economic Clima Economic structure ornrsrrative Clim :uncal Climate Figure l-l. Source: L. Nehrt, P (New York? .orrt's main goal 1 lpolrtrcal clima fell hoped country C gf'glilues for Anal WI: RObert B. RIVA L Salient Climates 33 . ILJ‘dfr p. . 34Rob . 0561‘, 19691mdte5 I pp. Economic Climate (A) Potential economic growth A Economic Climate (B) Economic structure for doing business i i i I I I I I I I I I I I _ I ———————————e fBus1nessA__ nvestmentl IClimate f Climate I ( (Social Climate (~——1 I ‘ | Administrative ClimateJ——<—I i I I I I l | l I l Figure l—l.——Investment climate analysis. Source: L.Nehrt, Political Climate for Private Investment (New York: Praeger, 1970?, p. 2. Nehrt's main goal is to develop and test a model by which the political climate for a newly independent under- deve10ped country can be evaluated.33 Techniques for Analysis of Political Risk Robert B. Stobaugh, Jr., in "How to Analyze Foreign Investment Climates,“ describes four techniques for 33Ibid., p. 8. 34Robert B. Stobaugh, Jr., "How to Analyze Foreign Investment Climates," Harvard Business Review, September— October, 1969, pp. 100—108. feeling with the "tr stability."35 These risk, the range 0f 6 :er'miques. The first ir factors for the go-r hlly arbitrary anc merience, manageri The premium Redevelopment of e :heir investment cl: mortally obstacles Imital participatiI lillability, tariff Structure, and poll 39 rather superfic Arromal business , 3 The range 0 I ' P b Alpprov a :llty ; Aluat (ch °n§t jlllronm c.1118 fi'fi 20 dealing with the "tricky questions of economic and political stability."35 These four are the go-no go, the premium for rifim the range of estimates, and the risk analysis techniques. The first involves the consideration of one or more factors for the go-no go decision, these factors being wmflly arbitrary and intuitive, based on previous bad experience, managerial philosophy, or principle. The premium for risk analysis involves, in general, the development of a type of scale for rating countries by their investment climates. The elements analyzed are basically obstacles to foreign investment such as local capital participation, capital repatriation, currency hmtability, tariff protection, inflation, local financial structure, and political instability. Although such models are rather superficial, they are widely used in inter— national business.36 The range of estimates technique rests on the evaluation of the variables that will affect the project's 35Ibid., p. 100. 36F. T. Haner, special adviser to Litton Industries, developed a more comprehensive "environmental risk index“ nmorporating fifteen environmental factors that could be grouped into six categories: cultural compatibility; attitude toward foreign investment and incentives; political stance of governments; ability to enforce con- tracts; probability of takeover or destruction; and delays lrlapprovals, construction time, and so forth. See "Evaluating the Risks in Investment Decisions: The Emdronmental Risk Index," Business “Latin America“, Mwember 7, 1968, pp. 353-354. profitability. The Li looks at the pro :oi: on a continuing to: explicit. Finally, th in of probability some of politica aprobability tree , fey assume the inf gererally is not th arenot made explic into the analysis C technique could app lengthy research or Indy in this field flaw in all these t their initial aim C iParticular projec “"3111 0n~going anal) Ale . a 11mm 5 ary pres lilision .—: 21 profitability. The major flaw of this approach is that it looks at the problem only at the time of investment, not on a continuing basis, and underlying assumptions are not explicit. Finally, the risk analysis technique is an applica— tion of probability theory. Estimates of the probable outcome of political decisions are made, are plugged into a probability tree, and the "right" information is pro- vided if the right data were searched for to start with. The major drawback of these approaches is that Hwy assume the information is readily available, which generally is not the case. The underlying assumptions are not made explicit, and little insight is provided into the analysis of political risk. The risk analysis technique could appear to be the final phase in the lengthy research on political risk, but, unfortunately, study in this field is just beginning. The general flaw in all these techniques is their static nature and their initial aim of evaluating the political risk facing a particular project. Such approaches are not concerned With on—going analysis, but are merely tools used to make a summary presentation of information for a final decision. A major s idertaken jointl Inference Board 37 n . an. the obje behind the flow < findings is the < governments rega: :cinvest."38 T] denotes foreign Sex are foreign PeliCies attract ifter investment for the descript In 1965 effort by PUblis an . w! Wth ’“Vflte foreign although these 3 / 37H Pei arr i‘gtlonal Develop .el), Investmen 38I . 39 ma NICB, igstaCleS amSitme ‘67~68’ v0 Ir 1.1 / 22 The NICB Studies A major study of private foreign investment was undertaken jointly in 1961 by the National Industrial Conference Board (NICB) and the Stanford Research Insti- tute.37 The objectives were to explore the motivations behind the flow of investments. "One of the major findings is the difference between what businessmen and governments regard as major factors influencing decisions "38 The study asked several questions: What to invest. promotes foreign investment? What determines location? Ebw are foreign investments financed? What government policies attract investment? What government policies deter investment? The results laid the basic foundations for the descriptive aspects of political risk. In 1965 and 1969 the NICB pursued its earlier effort by publishing Obstacles and Incentives to Private Investment, which were updated reviews of major obstacles private foreign investment in different countries.39 Although these studies do not provide a framework for 37Harry J. Robinson, The Motivation and Flow of Private Foreign Investment (Menlo Park, Calif.: Inter- national Development Center, Stanford Research Institute, 1961), Investment Series #4. 381bid., p. 1. 39NICB, Obstacles and Incentives to Private Foreign Investment, 1962—64 (New York: NICB, 195§T; and Obstacles and Incentives to Private Foreign Investment 1967-68, Vol. I and II (New York: NICB, 1969). to fldiYSiS, they do g. :5 political risk a. betel for Political The two maj' Eneloped in the PI' the firm. Their ma 1-1. The basic app- :‘renost country as resources as inputs :e the objectives , Variation between r to types of risks: Into market risks If: these include d Iirporate resources independent of poli The host Co 2:0 . ' Cessor which evo “I in logical, geogra POlltICall SOCia filer . Slde, the fir; an . 23 analysis, they do give valuable insights into the nature of political risk as perceived by businessmen. Model for Political Risk Analysis The two major factors involved in the framework developed in the present study are the host country and the firm. Their main characteristics are shown in Table l-l. The basic approach to political risk is to consider the host country as a processor, the firm's decisions and resources as inputs, and the firm's results, as compared to the objectives, as outputs (see Figure l-2). The variation between results and objectives derives from two types of risks: market and political. Variations due to market risks are not considered in this study, but these include discrepancies due to mismanagement of corporate resources and general economic fluctuations independent of political influence. The host country may be viewed as a dynamic processor which evolves over time. Its dynamics are due to two sets of forces: external influences (for example, ideological, geographic, and economic) and internal (such as political, social structure) as in Table l—l. On the other side, the firm has its characteristics as its product, its nationality, its managerial philosophies, Ian l-l.--Firm an ’— Ein: Characteristic Exiuct iiszienality iiregerial Philosophy {ta Resources Tesnological Resource. Ftancial Resources Relative Size of Inves fer the host country itagerial Resources Figure 1-2‘ 24 TABLE l—l.--Firm and host country characteristics. Firm Characteristics Host Country Characteristics Product Nationality Managerial Philosophy Human Resources External: Internal: Technological Resources Financial Resources Relative Size of Investment for the host country Managerial Resources Economic Dependency Ideological Dependency Geographic Dependency Political Structure Social Structure Economic Structure Ideological Trends Level of Socio—Economic Development Natural Resource Endowment Demographic Factors Firms Characteristics ——Inputs External Influences Host Country Obstacles and Feedback Figure l-2.——Simple model of political interaction, J‘ 2: from other forei 40 net countrY- me; rich influence the three-step politica hinge in the sourC gclitical pressure; :hanneled and filte rd (3) these polit affect the business :Inaintaining its iecisions create ri 53! others. The three 8 ditcountry are so 3519 1‘2). These iineacountry's P idsiness environmen Entry in which so iirxist~dominated g :Ilnciples, althoug 25 or from other foreign firms which have invested in the host country.40 Host country.--The host country's internal forces, much influence the business environment, do so in a fluee-step political process (Table l—2): (1) there is a change in the sources of political influences which exert political pressure; (2) these political pressures are channeled and filtered through the political institutions; and (3) these political institutions, by their decisions, affect the business environment by regulating, modifying, or maintaining its present structure. Such political decisions create risks for some corporations, opportunities for others. The three sources of political influence in the host country are social, ideological, and economic (see Table l—2). These socio-ideologico-economic interactions flmpe a country's political decisions concerning the business environment. Chile is a good example of a country in which social pressure groups are forcing the nmrxist-dominated government to follow democratic principles, although the government still has many ways M 40Either from the same nation, or from other countries. It is true, nevertheless, that the greater Um number of firms of a given nationality, greater will be the fears of economic imperialism by that home country much are expressed in the host country. TABLE 1'2 . “CODC head Poliliul [Inna linmlmd informal) I. IDEOIDGICAL mm 4 Connoninn ‘_ hhnliim Million 1 Mill hdrulimal Groups Amy [lion-l: Illnuumcy Politiui Parties —. .\'m~lni|iluliunal Group: .— lfiddle Om Enos Penn's hank Groups Revolutionaries Amhtioml Groups lhiom Tune Amdllions 1 HONOMIC E S s s: E 1’ CAT Growth kale Unemployment Level TABLE l-2.--Conceptual framework 26 of the political process. Sources of Political Influences (formal and informal) Institutions Channeling Political Influence (political structure) Type of Influence on Business Environ ment Firm‘s Dependent Variables LA IDEOLOGICAL Socialism Communism Nationalism Capitalism . SOCIAL Institutional Groups Army Church Bureaucracy Political Parties Non-Institutional Groups Middle Class Elites Peasants Anomic Groups Revolutionaries Associational Groups Unions Trade Associations . ECONOMIC GNP/Capita chcl Balance 0f Payments GNP Growth Rate Unemployment Level ‘Hr -H Fl National Legislature (legislative body) Government (executive body) Agencies (administration) Local Legislature (regional body city government) Tl ‘I‘J, TIL RIEGULATI-fi MAINTAIN MOLD Ti “H. T‘L bwtxlw Marketing Variables l. Price 2. Product 3. Promotion 4. Physical Distribution 5. Environment Financial Variables l. Capital Structure 2. Remittance Policy 3. Investment Policy 4. Environment 5. Accounting 6. Taxation Management Variables I. Foreign Personnel Policy 2. Local Personnel Policy 3. Labor Legislation 4. Taxation Production Variables Inputs Plant layout . Machinery . Product design of achieving certa' in goods, but let It can be lieological influe nununist, and/or suength is often influences: for e terica, Nasser's influence in Asia. economic structure Social inf lloups as well as liesociety's histc letemine any trenc‘ lilitary, bureaucra Static, intellectua Play major roles in Studies have analy: ‘u‘erica, but its i! 5518. where it has lforce or threat. During a cc i‘lfluences tend to 27 of achieving certain political objectives, such as limiting profits made by private enterprises. For example, hil970 the Chilean government blocked price increases for goods, but let wages rise 60 percent. It can be said that, in general terms, politico- ideological influences are of a liberal, socialist, communist, and/or nationalist nature. Their character and strength is often substantially affected by external influences: for example, Cuba's influence in Latin America, Nasser's influence in Africa, and Red China's influence in Asia. Ideological influences will mold the economic structure and philosophy of the host country. Social influences reflect the vested interests of groups as well as the host country's social structure. The society's historical evolution is important to determine any trend in that structure. In general, IMlitary, bureaucratic, middle class, bourgeois, aristo— cratic, intellectual, elitist, and religious organizations Play major roles in the political process. Numerous studies have analyzed the role of the military in South America, but its influence is also great in Africa and Asia, where it has also been used to take over government by force or threat. During a country's developmental process, economic hfiluences tend to isolate the country from external and internal pressu fiebusiness enviro 3f growth on trade mansion or contra 15 internal demand fareign trade which adeveloping countr relative diminutio fall into that cate iccentuated by decl iey need an incre Jf the requirements lads to a better international corpo Entry of exchange L‘centives for acce firsonnel restricti Political i Ate these ideologi into political deci hintain, or mold t firectly the depend w 41Charles P :fional Econom (N .. ~9 28 and internal pressures. The resulting measures influence the business environment. Charles P. Kindleberger, in Foreign Trade and the National Economy, shows the effects of growth on trade and the resulting impact on trade expansion or contraction.4l Concurrent with .the growth of internal demand and decline in the importance of foreign trade which has been the source of foreign exchange, a developing country needs an inflow of capital and a relative diminution of imports. Most developing countries fall into that category, and trade contractions are accentuated by declining terms of trade at a time when they need an increase in export revenues. An understanding of the requirements of the economic development process leads to a better analysis and understanding by the international corporation of the significance to the host country of exchange control, import restrictions, incentives for accelerating import substitution, foreign Personnel restrictions, and export promotion. Political institutions channel, filter, and trans— late these ideological, social, and economic influences into political decisions. These, in turn, regulate, maintain, or mold the business environment by influencing directly the dependent variables of the firm (that is, -_______ 4‘lCharles P. Kindleberger, Foreign Trade and the National Econom (New Haven: Yale University Press, 1962), PP. 177—194. urketing, financi< he institutions c] affect the sources executive body or pressure groups, a: influence). Instii eaces exist on fOUJ (political parties eutal agencies (a and administrative :ent). Depending country, there wil institutions . Political uces and affectim C‘ifferent types, a1 faich regulate the hality standards : ifor example, tempt or those which molt lions, expropriatii tEquirements) . A 1 local capital part: W different sou: “istocrats , army 1 29 umrketing, financial, production, and managerial variables). The institutions channeling political influences can also affect the sources of those influences (for example, the executive body or governmental institutions may affect pressure groups, and suppress an overt type of political influence). Institutions which channel political influ— ences exist on four levels: the national legislature wolitical parties included); the executive body; govern- mental agencies (administrative); and the local legislative and administrative bodies (regional bodies or city govern- nmnt). Depending upon the political structure in the country, there will be from one to four active levels of institutions. Political decisions resulting from political influ— ences and affecting the business environment are of three different types, and are not mutually exclusive: those which regulate the environment (for example, minimum quality standards in marketing); those which maintain it fior example, temporary price controls or a surcharge tax); or those which mold it (for example, new import restric— tions, expropriations, local capital participation requirements). A political decision, as in the case of local capital participation (see Table 1—2), could come from different sources of influence such as nationalists, aristocrats, army factions, unions, balance of payments é pressures, and a 10V eillbe channeled t] irectly through the uutries, the prOpv he legislature befv haduunistrative a auutries, the king action overnight. Political d viewed as the resul political influence 9! economic sources Search for popular long run if it wan Licorporates implic herrilla action, I forth, which would iianomic groups, 1 The writer elements in the fri éuluate the relat. istacles. If inf itween various eC iire available, CE iWiromuent could 3O pressures, and a low investment level. These influences wLU.be channeled through the national legislature, or directly through the executive body. In developed countries, the proposed law would have to be submitted to Um legislature before becoming a law and being enforced kw administrative agencies or the executive. In developing countries, the king or the president might take such action overnight. Political decisions, in this dissertation, are VieWed as the result of the interactions of different political influences deriving from ideological, social, or economic sources. The government will not always search for popular decisions, but it will do so in the long run if it wants to remain in power. The framework hworporates implicitly the destruction of wealth by guerrilla action, riots, revolutionary take over, and so forth, which would be a case of direct influential action by anomic groups, for example. The writer intends to show the relevance of the elements in the framework, indicate their impact, and evaluate the relative importance of various political Obstacles. If information on the possible relationships between various economic, social and ideological forces were available, certain hypothetical Changes within the environment could be posited, different political é situations and re Spv likely repercussion: analyzed. The firm.-—' tenature of its e is the essential el izuortant in the pu 'ntions to the coun so important that i existence of its 0 it. This extreme frou"a real failu ievelop a public r to explain and just investment in the In Most firms induct line and pc M 42 Truitt , 5 31 fituations and responses could be conjectured, and their hkely repercussions upon the business environment analyzed. The firm.——The major characteristic of the firm is Um nature of its economic activity, of which the product is the essential element. The product can become so important in the public mind that the firm's past contri— butions to the country become secondary. The product is so important that in many cases it comes to have an adstence of its own, independent of the firm producing it. This extreme case, writes Truitt, could result only frmn"a real failure on the part of . . . companies to develop a public relations effort that at least attempts u>explain and justify the role of private foreign investment in the host economy."42 Most firms do not produce a single product, but a product line and political pressure may be exercised on 42Truitt, op. cit., p. 221. é he, on some, or, c in in the electri uder great pressur iarqe, transformers very nature, indlue such as the foreig rev employment opp Other firm individual parts a product. Such ele viies, and corpora particularly impor risk. Franklin R. iives Towards Fore funities," emphasi: hp exists between investment opportul Situation, on the s isearch Assumpt i O W The basic ire that: W 43Franklin iives Towards Fore Titian" teasers iecenber, 1967) - 32 one, on some, or, on all segments of the entire line. A firm in the electrical industry, for example, could be infler great pressure to locally produce small, but not large, transformers. Furthermore, the product, by its very nature, indluences key host country characteristics mmh as the foreign exchange situation, investment growth, Iww employment opportunities, and so forth. Other firm characteristics create a whole of which hflividual parts are less visible in many ways than the product. Such elements as nationality, managerial philoso— wmes, and corporate resources are interrelated, and particularly important for the perception of political risk. Franklin R. Root, in "Attitudes of American Execu- tives Towards Foreign Government and Investment Oppor- tunities," emphasizes the human element and notes that a gap exists between "images" held by executives about foreign hwestment opportunities, on the one hand, and the "actual” Mtuation, on the other.43 Research Methodology Research Assumptions The basic assumptions underlying this research are that: . 43Franklin R. Root, "Attitudes of American Execu— tives Towards Foreign Governments and Investment Oppor— tunities," Economics and Business Bulletin, XIX (December, 1967). (l) Politi< ne‘er some form of :5 political influe :n be scrutinized notional reaction (2) All fin gauzerns of politi< :pon the character: (3) Plannir liacontinuing bas innironnent and ad: szrategies. The framewc §?0‘&ndvork for the search in this f‘ rented to the firr .eintryes level of W H . W 33 (1) Political risk analysis can be developed under some form of rational approach whereby sources of political influence and the importance of obstacles cmabe scrutinized and evaluated with a minimum of emotional reaction. (2) All firms are subject to some definite patterns of political risk, with variations depending upon the characteristics of the product they manufacture. (3) Planning against political risk is possible maa continuing basis by analyzing the host country environment and adjusting managerial philosophies and strategies. The framework is only a beginning, but lays the groundwork for the development of future analytical research in this field of inquiry. Hypotheses Within the framework, five hypotheses which are related to the firm's nationality, the product, and the country's level of economic development are tested: Hypothesis 1: There is an identifiable pattern ——___—_—__—__ of obstacles to foreign invest- ment which are a function of the level of economic development. Hypothesis 2: Nationalism is not related to the —___—_______ level of economic development, although its expression may vary from one country to another. ‘ i x Hypothesis Hypothesis Minis Hypothesis a:'- rlCtlons, eXCha 233' trOlSIrestrict- 5111 L‘ mo“ 0f econom' ( Hypothesis "‘q} .35. a k is perceiVed :‘Sk' What is it? ::1ta functiOn 0 guy Wing to be ith Greater depenc ihefiands, LuXem F Hypothesis 3: Changes in economic activity are relatively more important in influencing the business climate than is the absolute level of economic activity. Hypothesis 4: (a) Different products are subject to varying degrees of political pressure. The more trans- ferable the product technology, the greater will be the pressures for local production. (b v The less transferable the product technology, the greater will be the pressures for pro- ducing one or more components which are technologically transferable. Hypothesis 5: The greater the past and present power of the firm's home country, the greater will be the harassment. Hypothesis 1 has been researched by analyzing the frequency of occurrence of certain obstacles (managerial restrictions, exchange controls, devaluation, price controls, restriction on repatriation of earnings) as a function of economic development. The data base for such research was secondary sources. Hypothesis 2 deals with the problem of nationalism, much is perceived by many businessmen as a major political risk. What is it? Is it limited to developing countries? IS it a function of economic development? Or is everyone firmly trying to be as nationalist as possible? Countries wiflngreater dependence on others, such as Belgium, Netherlands, Luxembourg, Ireland, Ivory Coast, Portugal, i__ Sewleaiand, Tunis alist. T0 teSt th interviews and lib Hypotheses unstructured int business firms, re hypotheses. Hypot iteinportance of point, and the per :yclical patterns and at analyzing lithe total polit rational wisdom, in agricultural i SiiSiiive” investm VzL ‘. yeti} the manufact Tanufacturing indu 1: such cases where tie chosen for th. firth moving eqllipl hiring, and office ' Hypothesis “it's nationality iternational poli' “iii Upon the busii Elie an Y prOblems I 35 New Zealand, Tunisia, and Morocco, should be less nation- alist. To test this hypothesis, the writer relied upon interviews and library research. Hypotheses 3, 4, and 5 are exclusively based on semistructured interviews with executives of international business firms, relating company experiences with the hypotheses. Hypothesis 3 was mainly intended to examine the importance of business cycles from a political stand- point, and the perception by businessmen of such possible cyclical patterns of political pressure. Hypothesis 4 aimed at analyzing the importance of a manufactured product hithe total political environment. According to con— ventional wisdom, extractive, petroleum, public utilities, and agricultural industries are ”risky" and 'politically sensitive" investments. Very little research has investi— gated the manufacturing industries. Within or among manufacturing industries are there any differences, and unsuch cases where are they vulnerable? Five industries were chosen for this study: the automotive (including earth moving equipment), chemical, electrical, metal working, and office machine equipment industries. Hypothesis 5 sought a relationship between the firm's nationality and its home country's involvement in international politics and the repercussions this could have upon the business environment. Do French corporations haVe any problems, such as loss of sales or markets, because of the Alg suhuitted to polit independence Congo ariering from the lost sales? As noted, nine were selecte :etal working, and hey were selected couonly called ma: industry covers tho gassenger cars, en tractors, and so f it whole range of if the petroleum i ;lastics, fertiliz 3irus studied in t ioducts, but in t ire directed to t iiiustry's product not as light bulb indicts, such as i turbines and te iiiing industry i ill steel tubes 36 because of the Algerian war? Are Belgian corporations submitted to political pressures due to the post— independence Congolese situation? Are U.S. corporations suffering from the Vietnam War in terms of goodwill or lost sales? The Sample As noted, five different groups of manufacturing firms were selected: automotive, chemical, electrical, metal working, and office machine equipment industries. They were selected to represent a cross-section of what is commonly called manufacturing industries. The automotive industry covers the whole motor vehicle sector: trucks, passenger cars, engines, earth moving equipment machines, tractors, and so forth. The chemical industry includes Um whole range of chemical production (with the exception Of the petroleum industry and its related activities): plastics, fertilizers, dyes, paints, and basic chemicals. Firms studied in the sample also produced pharmaceutical products, but in the interviews questions and responses were directed to the former product line. The electrical industry's product line ranges from consumer products, mmh as light bulbs or hi—fi equipment, to industrial Products, such as simple resistors and electrical motors to turbines and telecommunication centers. The metal working industry incorporates a product line ranging from steel tubes and cans to machine tools. The office achine equipment writers, calculat The firms international ori oitheir sales ta lone corporations in foreign countr' absolute size of this variation al :ions or in the t 05 the firms by in interviews were co levels to analyze political risk . Elli l~3.--Sample W intonotive Ethical itctrical éill Working :fiice Machine Equ TOTAL 37 machine equipment industry covers such products as type— writers, calculators, computers, and adding machines. The firms were chosen on the basis of their international orientation, that is at least 25 percent of their sales take place outside their home countries. Some corporations do more than 90 percent of their business in foreign countries, others barely 27 percent. The absolute size of the firms varies considerably. Despite this variation all firms were in the tOp 500 U.S. corpora— tions or in the top 100 European corporations. The sample of the firms by industry is illustrated in Table l—3. Interviews were conducted at headquarters and subsidiary levels to analyze any difference in conceptualization of political risk. TABLE l-3.-—Sample size of companies interviewed. Brazilian Headquarters Subsidiaries Automotive 4 6 Chemical 5 6 Electrical 6 7 Metal Working 4 5 Office Machine Equipment _§ _2 TOTAL 25 2 9 k The firms European (German, his) and Americ because of their trade. The distr lable 1-4 . TABLE l-4.--Sampl §———_——___. loreign" us. \____________ * Mostly 3 Brazil was chosen lilo! reasons: ti tiationship exist ii the Fundagao Tutry of 100 mi if not its potent' illitical history fine or another b i'lIOPriations , h ' Ll’ort substituti 38 The firms were divided into two nationality groups: European (German, French, Belgian, Italian, Dutch, and Swiss) and American. European companies were chosen because of their long time involvement in international trade. The distribution by nationality is seen in Table l-4. TABLE l-4.-—Sample of firms by nationality. d t Brazilian Hea quar ers Subsidiaries Foreign* 12 16 U.S. 13 13 * Mostly European Brazil was chosen as the foreign country for study for two Hajor reasons: the characteristics of the country, and the relationship existing between Michigan State University and the Fundacao Getulio Vargas, Sao Paulo. Brazil is a Country of 100 million inhabitants, and its market size, if not its potential, eliminates most market risks. The P01itical history in Brazil has been highlighted at one time or another by coups, bOth rightiSt and leftiSt' exPropriations, high inflation rates, and a forceful - . - ' ‘ relationshi lmPort substitution policY- The lnStltUtlonal p between Michigan hsiness School ( time. The Fundac; author, including tarial help, and inless than two The numbe 'nthe field is 9 Per control purpo company executive firm to cross val: related to the fr; he interviews are TABLE 1-5.——Numbe1 M..— M Foreign* :Isl 39 between Michigan State University and the Sao Paulo Business School (E.A.E.S.P.) allowed enormous savings in time. The Fundacao provided general assistance to the author, including entree to necessary persons and secre- tarial help, and the Brazilian field research was completed in less than two and one-half months. The number of executives interviewed (Table 1—5) in the field is greater than the number of firms visited. For control purposes, the writer interviewed the same company executive twice, or other executives in the same firm to cross validate responses. The list of questions related to the framework and the hypotheses asked during the interviews are presented in Appendix A. TABLE l—5.-—Number of executives interviewed. Brazilian Headquarters Subsidiaries Foreign* 28 24 U.S. 23 21 TOTAL 51 45 it Mostly European Data Collection Time cons Brazil impossible available data in asthe Banco do B Getulio Vargas, F Fazenda (Ministry The field from 1 July to 26 is September to l 26 October to 27 us the most diff relative inaccess rather difficult Vacation months . explained in Apper All but OI insurance the rese iuing the intervi i'hlch ranged from lean of two and OI tape. Obstacles uecutives at bot} “ithe following 1 ‘ Very , Tortant Imp“.t 1 2 40 Data Collection Time constraints made a complete case study of Brazil impossible. The writer limited himself to directly available data in the libraries and in institutions such as the Banco do Brasil, Banco Central do Brasil, Fundaoao Getulio Vargas, Fundacao I.B.G.E., and the Ministerio da Fazenda (Ministry of Finance). The field research data from Europe were collected from 1 July to 26 August 1970; in the United States from 15 September to 15 October 1970; and in Brazil from 26 October to 27 December 1970. The European interviewing was the most difficult because of European inefficiency, relative inaccessibility, and because appointments are rather difficult to make or maintain during the summer vacation months. The procedure for the interviews is explained in Appendix B. All but one interview was recorded, and as added hmurance the researcher transcribed on paper answers given during the interview and on the questionnaire. Interviews, much ranged from one and one—half to four hours, with a mean of two and one-half hours, are stored on 100 hours of tape. Obstacles to foreign investments were evaluated by eXeCutives at both the headquarters and subsidiary levels Onthe following five point scale: Very - Occasionally Rarely Not EEEEEEEE_. Important Important Important Important 1 2 3 4 5 fl he researcher ma] interview. In order 1 against responses personal bias rat} ule researcher es1 (1) Some c stage and were re: first interview t1 reinterviewed . (2) In sor executives were i1 second executive I irtervi ewed . (3) Some < 'n‘ere interviewed E corporations whicl since withdrawn we represent 10 perce (4) At the Viewed corporatioz Tuters' selectic When the a ‘Jlthor found an ar Tspite some signz‘ 41 The researcher marked the answers himself during the interview. In order to control the quality of data (to guard against responses which could reflect the interviewer's personal bias rather than the corporation's viewpoints) the researcher established some controls. (I) Some executives were interviewed in the pretest stage and were reinterviewed six months later. During the first interview the executives did not know they would be reinterviewed. (2) In some international corporations, two top executives were interviewed within one week, with the second executive not being advised that the first had been interviewed. (3) Some corporations with investments in Brazil were interviewed at the headquarters level only. Other corporations which formerly operated in Brazil and have since withdrawn were also interviewed; these interviews represent 10 percent of the sample. (4) At the subsidiary level the researcher inter— Viewed corporations which were not included in the head— Quarters' selection. When the results were compared in each case, the aUthor found an amazingly similar pattern of responses, deSpite some significant environmental changes in Latin The researcher interview. In order against response personal bias ra the researcher e (1) Some stage and were r first interview reinterviewed. (2) In executives were second executiv interviewed . (3) Some were interviewer corporations wh since withdrawn represent 10 pa (4) At viewed corporat quarters' selec When tl author found a: despite some 3 41 The researcher marked the answers himself during the interview. In order to control the quality of data (to guard against responses which could reflect the interviewer's personal bias rather than the corporation's viewpoints) the researcher established some controls. (1) Some executives were interviewed in the pretest stage and were reinterviewed six months later. During the first interview the executives did not know they would be reinterviewed. (2) In some international corporations, two top executives were interviewed within one week, with the second executive not being advised that the first had been interviewed. (3) Some corporations with investments in Brazil were interviewed at the headquarters level only. Other corporations which formerly operated in Brazil and have since withdrawn Were also interviewed; these interviews represent 10 percent of the sample. (4) At the subsidiary level the researcher inter— viewed corporations which were not included in the head— quarters' selection. When the results were compared in each case, the author found an amazingly similar pattern of responses, despite some significant environmental changes in Latin luerica between t lagentina' s coup Scope of the Stu The majo base, which limi the automotive 0 rs difficult to unuiacturers . selection proces nonparametric te firms within th are engaged in their diverse p Other In years), the lim: uneven quality) cal influences , The writer had tion or general into the nature further researr Other 1 data. The dan interviewees h could stem f rc 42 America between the time of Chile's election and Argentina's coup d'etat. Scope of the Study The major limitation of this study is its data base, which limits the use of statistical techniques. In the automotive or office machine equipment industries it is difficult to find more than ten major international manufacturers. Such a small number and the nonrandom selection process prevented the writer from developing nonparametric tests, such as a Chi Square. Furthermore, firms within the same industry are not homogeneous; they are engaged in different economic activities reflecting their diverse product lines. Other major constraints were time (one and one—half years), the limited data available (limited quantity and uneven quality) for the analysis of the sources of politi— cal influences, and the huge scope of the topic itself. The writer had to limit himself to constructing a founda— tion or general framework. Hopefully these incursions into the nature of political risk will indicate areas for further research. Other problems arose in the process of collecting data. The danger of personal bias on the part of the interviewees has been mentioned, but another possible bias Could stem from the personality differences existing between staff and executive called interviewed a st instances, some tion in a differ accustomed, whic between the rese think a differen to overcome, but Finally, in a fe because of prior of political ri. of political ini defined, and ob: ment are invest, product is so i: separately in C vulnerability O logical transfe point. In Char resources, and host country. That is the imp 43 between staff and line executives. Several times a line executive called attention to the fact that the writer had interviewed a staff executive at headquarters. In other instances, some businessmen refuse to look at the situa— tion in a different light than the one to which they are accustomed, which created problems of communication between the researcher and the executive. "Businessmen think a different way" was a common attitude and difficult l to overcome, but a rewarding part of the interview. b Finally, in a few cases, some executives were inaccessible l { because of prior commitments or were away on holidays. Organization of the Dissertation The approach followed is developed in the framework of political risk. The host country is analyzed: sources 1 of political influences are examined, nationalism is defined, and obstacles as a function of economic eevelop- ment are investigated in Chapter II. The nature of the product is so important that this element is studied separately in Chapter III, in particular the relative vulnerability of industries and the importance of techno— logical transferability from a politico—economic vantage POint. In Chapter IV, the firm's nationality, managerial resources, and philosophy are analyzed in relation to the host country. In Chapter V, the investigation is pursued: What is the importance of nationality? What is the i;— __ importance of si: risk? How do fi] and how do diffe] binat conclusions the writer inten< can be blended i1 continuing basis, importance of size? risk? How do firms' 44 How does a firm analyze political nationalities affect risk perception, and how do different levels of management perceive risk? What conclusions can we draw? Finally, in Chapter VI, the writer intends to show how analysis of political risk can be blended into rational corporate planning on a continuing basis. In the p of political ris tions of the StL‘ variables emerge product, and the unknown that the pletely determix can the host cor writer's approar analyze the ele] contribute to t‘ In that perspec nationalism, it and to determin of economic den of obstacles tc The ma or develop a p Cynthia Taf ts CHAPTER II THE HOST COUNTRY In the preceeding chapter the framework for a study of political risk has been laid, and the limits and inten— tions of the study have been presented. Three major variables emerged from the model: the host country, the product, and the firm. Is the host country an element so unknown that the international corporation must be com— pletely deterministic about analyzing political risk? Or can the host country be analyzed in a rational manner? The writer‘s approach to the concept of political risk is to analyze the elements of the system and show how they contribute to the host country's socio—economic objectives. In that perspective an attempt will be made to define nationalism, its impact upon the business environment, and to determine the effect of the host country's level of economic development upon the frequency of occurrence of obstacles to private foreign investment. The Political System The main thrust of this study is not to analyze or develop a political model. Instead, as Ira Adelman and Cynthia Tafts Morris have said, "since there are no firmly 45 validated theorie tical change . Almond an The political to be found 1' forms the fuI (both intern; means of the of more or 16 BY System, W( 0f Prepertie: properties a] dePendence, ,- interdependeb one subset o: the other su] AChange in the ‘ uiil influenCe t' fore, is to pinp ence Which might and Which, in tu the businesS env Differer different ECOUOI fluencesl and h: lIra Ad metric MOdel of Underdeveloped LVIII, No. 5' P . 2Gabrie W UniverSitY Pres 46 validated theories of the process of socio—economic poli- tical change . we let the data specify the model."1 Almond and Coleman write that The political system is that system of interactions to be found in all independent societies which per— forms the functions of integration and adaptation (both internally and vis—a—vis other societies) by means of the employment, or threat of employment, of more or less legitimate physical compulsion. By system, we mean to attribute a particular set of properties to these interactions. properties are: Among these dependence, (1) comprehensiveness, (2) inter- and (3) existence of boundaries. By interdependence, the authors mean that a change in one subset of interactions produces changes in all the other subsets.2 A change in the ideological, social, or economic structure will influence the political subset. Our objective, there— fore, is to pinpoint the major sources of political influ- ence which might lead to a change in a political system and which, in turn, would modify, maintain, or regulate 1 the business environment. Political Socialization Different political structures have emerged from different economic and social structures, political in— fluences, and historical accidents. This process of M Ira Adelman and Cynthia Taft Morris, "An Econo— metric Model of Socio—Economic and Political Change in Underdeveloped Countries," American Economic Review, LVIII. No. 5, Part 1 (December, 1968), 1134. . Gabriel Almond and James S. Coleman, The Poli— Ei$§_g£_§he Developing Areas (Princeton, N.J.' .—_PriEEEton University Press, 1960), PP- 7I8~ transmitting 901 socialization, a structures throu socializing infl tures (that is, which the young ation. The stat degree of politi clientelistic pc population from Goulart's failur mass politics . different intere society. Interest Articui Almond 1 structures may i (l) institution political execu (2) nonassociat leaders (such a demonstrations ] as trade union: trialists , and W 3Ibid. 47 transmitting political heritage is called political socialization, and it tends to perpetuate cultures and structures through time. It achieves this by means of the socializing influences of the primary and secondary struc— tures (that is, family and the educational system) through which the young of the society pass in the process of matur- ation. The state of political socialization reflects the degree of political inertia within the system. Brazil's clientelistic politics, for example, tend to isolate the population from the government, which partially explains Goulart's failure in developing receptive and efficient mass politics. Political decisions are influenced by the different interests which are articulated within the society. Interest Articulation Almond and Coleman write that four main types of structures may be involved in interest articulation:3 (l) institutional interest groups (such as legislatures, political executives, armies, bureaucracies, and churches); (2) nonassociational interest groups represented by their leaders (such as kinship and lineage groups, or riots and demonstrations); (3) associational interest groups (such as trade unions, organizations of businessmen or indus— trialists, and anomic groups). The articulation of w 3Ibid., p. 33. interests Will VE necessary to stuc political milieu :oiitical Commull The pOli ant element, 935 ence of an activ Political commun channeling Of PC iunication might coup. A communi maintained with hctatorship, ca Such a : politics within mhhaiout, th tion between "0 this may be an fact remains th hhun the army Persons. POliti< id - eOlogl-Cdl, S< 48 interests will vary from country to country, and it is necessary to study each country in order to understand the political milieu. Political Communication The political communication function is an import— ant element, essential to the development and/or mainten- ance of an active and effective electorate and citizenry. Political communication constitutes the institutional channeling of political influences. Poor political com- munication might jeopardize the regime and generate a coup. A communication system not actively and effectively maintained with the army, even under a benevolent military dictatorship, can lead to dangerous political tensions. Such a situation could easily develop in Brazilian politics within the next five years. As an executive pointed out, there appears to be poor political communica— tion between "old" generals and "young" colonels. Although this may be an example of a universal generation gap, the fact remains that rumors concerning potential dissension within the army do circulate among politically informed persons . Sources of Political Influences Political influences stem from three sources: ideological, social, and economic. fi interests will \ necessary to str political milieu The poli int element, ess ance of an activ Political commur channeling of pc nunication might coup. A communi maintained with dictatorship , c2 Such a : politics within pointed out, thi tion between "0 this may be an fact remains th within the army persons . d \ Politi« ideological , st 48 interests will vary from country to country, and it is necessary to study each country in order to understand the political milieu. Political Communication The political communication function is an import— ant element, essential to the development and/or mainten— ance of an active and effective electorate and citizenry. Political communication constitutes the institutional channeling of political influences. Poor political com— munication might jeopardize the regime and generate a coup. A communication system not actively and effectively maintained with the army, even under a benevolent military dictatorship, can lead to dangerous political tensions. Such a situation could easily develop in Brazilian politics within the next five years. As an executive pointed out, there appears to be poor political communica— tion between "old" generals and "young" colonels. Although this may be an example of a universal generation gap, the fact remains that rumors concerning potential dissension within the army do circulate among politically informed persons . Sources of Political Influences Political influences stem from three sources: ideological, social, and economic. fi Poiitico-Ideolog A countr influences. In said that three liberalism, soci modified by nati or totalitarian such as anarchis minimal. Internat phies pervasive The former is re liberalization c of factors of pr puts). National feeling of coll< lective search : building proces to the interest so important to next section is 4An 11: Public sector : Public Sector : Publishing Hou: Investment in ‘ ness Law, Univ W 49 Politico—Ideological Influences A country cannot isolate itself from ideological influences. In order to simplify the exposé, it can be said that three major ideologies exist presently, namely, liberalism, socialism, and communism, although they may be modified by nationalism or internationalism and democratic or totalitarian philosophies.4 Other ideologies do exist, such as anarchism and feudalism, but their importance is minimal. Internationalism and nationalism are two philoso— phies pervasive throughout the above—mentioned ideologies. The former is related to the laissez—faire ideology of the liberalization of world trade and international movement of factors of production (capital, labor, and other in— puts). Nationalism is more complex. It refers to the feeling of collectivity, and is the expression of a col— lective search for identification during the nation— building process. The dictionary defines it as ”devotion to the interests of a particular nation." Nationalism if so important to the perception of political risk that the next section is exclusively dedicated to that concept. 4An illustration of the participation of the Public sector in developing economies is seen in I. Sachs, Public Sector in Underdeveloped Countries (New York: ASia Publishing House, 1961); and H. Landau, "Direct Foreign Investment in Developing Countries," International Busi— ness Law, University of Washington PrEEETTT§757_fi_———T" ‘— fi Nationalism The com nebulous in inte the one of polit misunderstood . Definiti torically has be ruled or oppress geographic, soci ism "an escape i "dignifies a mar direction in wh: depending on a : 5 foreigners" ? Kindlebi uneasiness that contemplate the within their ec the political l: and defines nat 5K. R. Batsford, Ltd. 6Charl (New Haven: Y 50 Nationalism The concept of nationalism appears to be more nebulous in international business executives' minds than the one of political risk, and it seems to be the most misunderstood. Definition.—-In the literature, nationalism his— torically has been associated with hatred of foreigners who ruled or oppressed a group of persons with similar geographic, social, and cultural attributes. Is national— ism "an escape from triviality,‘ or a noble struggle which "dignifies a man's sufferings, and gives him a hopeful direction in which to work," or a "political movement depending on a feeling of collective grievance against foreigners"?5 Kindleberger describes "pure" nationalism as "the uneasiness that many people instinctively have when they contemplate the fact that the activities of institutions within their economy and polity are controlled from outside the political unit."6 Business International describes and defines nationalism as 5K. R. Minoque, Nationalism (London: B. T. Batsford, Ltd., 1967), pp. 25, 32. 6Charles P. Kindleberger, American Business Abroad (New Haven: Yale University Press, 1969), p. 5 “ fi a universal consciousne and placing interests a It is an in (or nation- constructivi nationalism aims to max and potenti‘ its people. Althougl benefit from na nationalism to which have a ne market shares. or economic pol order to pull t a common enemy and is in some host of these d the development motivation has of business. To be a be defined as i Control, and ii .7 See B Table, "Corpor Miami, Decembe P. 4. 51 a universal phenomenon, in the sense of national consciousness exalting one nation above all others and placing primary emphasis on promotion of its interests as opposed to those of other nations. It is an important element in nation-building (or nation-changing), and as such can be a constructive force. The same is true of economic nationalism, which may be defined as the force that aims to maximize and develop the economic resources and potential of the nation and the well-being of its people.7 Although some executives realize that they may benefit from nationalist policies, they only use the term nationalism to refer to the foreign nation's policies which have a negative effect on their profit picture and/or market shares. Nationalism whether reflected in political or economic policies, is necessary for nation—building in order to pull together an aggregate of people who fought a common enemy and drove the former controlling power out, and is in some ways a necessary catalyst for a country. Most of these decisions are made to promote and control the development of local economic resources, and their motivation has generally not been to drive foreigners out of business. To be all inclusive, nationalist policies should be defined as all those having as objectives the promotinn, control, and identification of the socio—economic 7See Business International Latin American Round Table, "Corporate Response to Nationalism in Latin America," Miami, December 3—6, 1969, Briefing paper (unpublished), p. 4. development of a set of aspiratior ' not "ag selves , ' aspiration level national interes identity . National to political de level of subsis and bringing gu the overriding lesser extent i From an be accepted as 1 increases the e1 import restrict secure local su Red China and T interests from try to prevent from engaging i at a cost to Re Econom interest, alth and cultural i If 52 development of a nation. Nationalism is composed of a set of aspiration levels orienting policies "for them- selves," not "against the foreigners." These various aspiration levels can be identified as those related to national interests, national sovereignty and national identity. National interests.--National interests give rise to political decisions which aim at providing a minimum ‘level of subsistence to politically independent nations and bringing guarantee of economic survival. In this case, the overriding rationale is mainly economic, and to a lesser extent ideological. From an economic viewpoint, foreign investment will be accepted as long as it accelerates economic growth and increases the economic autonomy of the nation; similarly, import restrictions will help rapid industrialization and secure local supply of certain products. In the case of Red China and Taiwan, for example, for the sake of national interests from an ideological standpoint, the former will try to prevent firms which are willing to trade with her from engaging in business relationships with Taiwan, even at a cost to Red China. Economic nationalism is similar to national interest, although it does not cover social, political, and cultural issues. ,Acting in the national interest, the government is r the host countr government purs economic realm, improvement of allocation of t collective need goods. Differe priorities, and determination o of national in process where priateness of ' naitre chez soi national sovere acountry to fe own relates to must prove to : uhich "they" or ability to con' Country's ecom its corporatio Power (indirec ,F_____________n_ 53 government is responsible for achieving what is best for the host country's development. To this end the host government pursues a set of objectives which, in the socio— economic realm, aim at full employment, price stability, improvement of the balance of payments, improvement of the allocation of the factors of production, satisfaction of collective needs, and the security of a supply of essential goods. Different governments of course have different priorities, and these priorities change over time. The determination of a public economic policy, in the pursuit of national interest objectives, is usually a rational process where the compatibility of objectives and appro— priateness of instruments are very much emphasized. National sovereignty.——The need or desire to be maitre chez soi is the basic underlying motivation of national sovereignty conflicts. The needs of people within a country to feel they belong to an entity which is their own relates to national sovereignty. A host government must prove to its citizens that they belong to a nation which "they" control and must develop. Sovereignty, or the ability to control, is challenged not only by a foreign country's economic or political influence exercised through its corporations abroad, but also by the potential economic POWer (indirect political influence) that these foreign corporations pos investments with At the n are becoming mor level of educati bureaucracy, and of social influ the citizens of involve control ingrowing nati With th point, countrie rather than see relative size 0 significance of invested determf control. The u: Utilities, extrz insurance, trani Vantage point, flirectors and SI Objectives at t is reflected i 54 corporations possess due to the relative size of their investments within the host country. At the national sovereignty level, social influences are becoming more important if not predominant. The general level of education of the population, the middle class, the bureaucracy, and labor are key variables. The development of social influences is in some ways the ratification by the citizens of the nation-building process, and will involve controlling strategic industries and participating in growing national industries. With that perspective, and from an economic stand— point, countries will try to push reinvestment of earnings rather than see them repatriated to another country. The relative size of the foreign investment and the social significance of the economic sector in which it is invested determine the strategic importance for investment control. The usual sectors clearly involved are public utilities, extractive industries, banking, agriculture, insurance, transportation, and petroleum. From a social vantage point, some nativization of personnel (such as directors and skilled personnel) and capital are prime Objectives at that national aspirational level. National identity.—-A country's need for fulfill— ment or self—actualization within the concert of nations iS reflected in national identity. Such self-actualization must be per among other level requi certain per national id world champ lnies, such could he s tnonic indu tion proces narket pens cies as whe Lac tions on tl subjective country, tl resisting, foreign co: of any vio extra~ter tive shou the host 55 must be perceived by the citizens as a national identity among other countries. The national identity aspiration level requires recognition from the outside world. For a certain period, Brazil soccer performed the role of a national identity symbol, especially in view of the three world championships the team has won. In developed coun— tries, such as in France or Great Britain, national identity icould be sought through the development of a national elec- ‘tronic industry at any cost, with subsidies to the produc- tion process or by impeding foreign corporations from market penetration through discriminatory purchasing poli— cies as where the government buys only national products. Lack of understanding of national identity aspira— tions on the foreign executive's part may lead to the very subjective perception that xenophobia exists in the host country, that is that the government is objecting to, resisting, or combatting the entry of the presence of a foreign company simply because it is foreign, irrespective of any violation of the national interest, or the issue of- extra-territorial application of foreign laws. The execu— tive should understand that what is involved is loyalty to the host country, cultural empathy, and solidarity of one group against another. National identity boils down to a feeling of participation in a national struggle "for themselves" (as a president of a U.S. subsidiary in Brazil PUt it) in order to protect one's way of life, pride, and independen local nati Th sovereignt conpletely Each level particula: others, an n the Open- Brazil; I ranging f in local turn to t Sovereigr manpower, for the c interest ItsQuI-CeE inaction Vertical justifiaj Olin dESc First . \r l fif,fi 56 independence. It is translated into a bias in favor of local nationals. The hierarchy of these motivations (interests, sovereignty, and identity) does not imply that one must be completely fulfilled before the next becomes important. Each level seems to be present in any country, but at a particular point in time one level would prevail over the others, and basic trends can be predicted. Nationalism as perceived by international business executives in Brazil.-—"What is nationalism" was one of the openeended questions asked during the interviews in Brazil; responses varied tremendously among executives, ranging from synonyms to examples of manifestations: pride in local product, independence in economic decisions, a turn to the left, creation of conditions for development, sovereignty, restrictions on flow of capital goods and manpower, nationalization of product content, what's best for the country; feelings of the weaker position, self- interest, nation—building, local ownership of fundamental resources or industries, recognition of one's adulthood as a nation, price in community participation, and more vertical integration of industries than is economically justifiable. In other words, most executives had their own description derived from their own experiences. These definitions do have four common elements. FirSt, in each definition is the direct or indirect allusion investnen nationali cent, but self-perc then to u element, was the i hatred fc against 1 to the Le some illv Percent llOi Char, CeSpite for fore earnings ProduCti ECOnomic hays, an 57 allusion to nationalism's negative effect on foreign investment. Second, in general, executives felt that nationalism was motivated by a drive for national develop- ment, but this drive usually was unsuccessful. Third, the self-perceived adulthood of some countries often leads them to want more control and participation. The fourth element, less often stated, but implicit in many reSponses, was the irrational behavior of some governments and their hatred for foreigners. Comments such as, "prejudice against foreigners," ”social not economic reasons," ”turn to the Left," and "feelings of the weaker position" are some illustrations of that point. Curiously enough, 90 per cent of the executives of subsidiaries in Brazil did not characterize Brazil as a strongly nationalist country despite its laws concerning visas, work permits, quotas for foreign personnel, limitations on repatriation of earnings, the "law of similars,"8 which protects local production, and foreign investment restrictions in certain economic sectors (for example, petroleum refining, rail— ways, and electricity). 8This refers to the policy originally introduced in the 1890's of tariff protection against the importa— tion of items locally produced in sufficient quantity and quality to supply the local market; the policy has since been generalized and is commonly referred to as the "law Of similars." For more details see Lincoln Gordon and Englebert Grommers, United States Manufacturing Investment i2_§£§5il (Boston: Elvision of Research, Harvard Uni— VerSity, 1962), pp. 13, 21—27, 35—39, 147—148. ieiinit were ve sonnel . quickly than in luropee his enc cost he that up ist co acre 11. States and In 58 Nationalism as perceived by headquarters.~—The definitions of nationalism at the headquarters' level were very similar to those provided by subsidiary per- sonnel. However, at headquarters the discussion turned quickly to nationalism in general and to examples other than in Brazil. When the vice-president of a major European chemical firm was asked "What is nationalism?" his emotional reaction was: "293, Americans, ygu are the most nationalist country in the world. We should ask you that question!" Curiously enough, the four most national— ist countries mentioned, in order of response frequency, were not developing countries, but were Japan, the United States, Germany, the United Kingdom, followed by Mexico, and India. The way in which nationalism is expressed in dif- ferent countries is also interesting; the more developed a country, the more subtle and the less visibly national- ist are its policies. The situation in Japan is well known, but often mentioned as nationalist strategies of the United States were the American selling price in the Chemical industry, safety standards, anti—trust legisla— tion, the "peril point clause," government purchasing practices, customs and FDA (Food and Drug Administration) regulations, lengthy visa procedures, and the exclusive use of English in correspondence. Technical standards in the United Kingdom were also often mentioned, and governme suhsidie Germany . developn vas: Ne developn to anotl vere des can be ( tron, t1 59 government purchasing policies and research and development subsidies were the two major complaints against West Germany. Nationalism as a function of the level of economic development.——Hypothesis 3, enunciated in the first chapter, was: Nationalism is not related to the level of economic development, but its expressions may vary from one country to another. In the preceding paragraphs, these variations were described. It remains to be seen whether nationalism can be directly or inversely related to, or is independent from, the level of economic development. In choosing a sample, the GNP per capita appeared to be the simplest and most easily understood and accepted indicator of economic development, despite its weaknesses and the availability of other indicators.9 The 69 coun— tries examined are subdivided into 6 groups by geometri— cally decreasing level of GNP per capita. The first group includes all countries having GNP per capita of U.S. $2,000 and over; the second, all those between $1,000 and $2,000; the third between $500 and $1,000, and the sixth all those under $125. Table 2—1 shows the percentage of countries in each group where the following obstacles to foreign investment were in effect during the periods 1962—64 and 1967-68: price controls, devaluation, repatriation of .____________________ 9See Appendix C "Country Classification." nan dS [Iii t: 60 TABLE 2—l.-—-Structural influences on business environment as shown by frequency of occurrences of major obstacles. OBSTACLES RFPATRMTION PRKI DEVALUAnON or MANAGEMAL EXCHANGE CONTROL EARNINGS RFSTRKHWONS CONTROL COUNTRIES 6264 6163 62e4 eves 6264 6168 eze4 6168 6264 6I68 4 Per pent of countries inposirg obstacles n: Groupl 0 0 0 0 0 0 75 75 0 0 Under $125 n=l3 Groupll 15 15 0 38 15 23 54 54 54 46 $125—$250 n:10 Grouplll 30 20 30 60 20 40 50 60 80 60 $250-$ 500 n=15 Groupr 47 60 27 33 40 47 60 87 87 87 $500—$ 1000 n=l6 Group\/ 25 44 31 12 50 44 62 69 62 62 $1000—$200c n=ll Group VI 27 27 27 18 55 73 73 82 73 91 $ 2000 and over SOURCES N. /. C. B. .' ”Obstacles and Incentives to Foreign Investment 1962—7964“, New York, N. I. CB, 1965. N. I. C. B. : ”Obstacles and Incentives to Foreign Investment 1967-1968”, Vol. 5, N. I. 0.8., 1969. Business International: ”Indicators of Market Size for 140 Countries”, New York, 1970. earnings The late by the 1 executin obstacle local ca been gr< restric najor We avery : and in 1 has for. for the iiOllS i COlllplet. requil‘e. illite d B01illia floatin Placeme tiOns. 61 arnings, exchange controls, and managerial restrictions.lo he later obstacle requires further explanation. It was felt that nationalism could be quantified 3y the use of the two proxies most often mentioned by executives, or their frequency of occurrence of two obstacles: foreign personnel restrictions and required local capital participation. These two obstacles have been grouped into one index, which is termed "managerial restrictions." This indicator of nationalism contains a major weakness. Foreign personnel restrictions may have a very different significance for the firm in developed and in developing countries. Switzerland, for example, has foreign personnel restrictions, but their importance for the firm may be very different than similar restric- tions in Malawi, where the pool of local manpower has a completely different mix of talent and skills. Similarly, required local capital participation in Canada could create quite different problems than a similar requirement in Bolivia or Ecuador. In Canada, the alternatives vary from floating equity in the local capital market to direct placement with private investors, or with Canadian corpora— tions. .In Bolivia, the choice might be limited to sale to ___________________ loPeriods before 1962 were avoided due to the number of countries who achieved their independence in the late 1950's and very early 60's. The data were gathered from the NICB reports "Obstacles to Foreign Investment," and Business International Newsletters. aveal option nultir due n. to ac local forei in Me featt Count Suit: hove hith< iiVe indi< Coun' mC‘ljo: in t POpu 62 a wealthy social class or the government, both of which options might increase the political risk confronting the multinational enterprise. The managerial restrictions index is shown graphi— cally in Figure 2—1 where the major feature is the almost U shaped line through the different groups of countries in 1962-64, but a relatively more horizontal one in 1967-68. Between the two periods, only Group IV, countries from $250 to $500 GNP per capita, had an upward movement. This is due mainly to an increasing concern among these countries to accelerate local capital formation and the number of local entrepreneurs in order to become less dependent on foreign corporations and their technology (as was the case in Mexico, Peru, Chile, and Algeria). Another interesting feature is the high frequency (75%) among developed countries of an attitude which could be illustrated by Switzerland's policy toward foreign personnel, and Canada's move against foreign capital participation in the economy. Although this indicator is by no means totally representa- tive of nationalism, it nevertheless gives a strong indication of the universal nationalistic drives of every country in the world. If the level of economic development is not a major determinant of nationalism, the explanation lies in the country's other characteristics: size of the pOpulation, natural resources, and dependence (geographic, SOUR 63 I - 1 F100 .. . . . . . . . . , . . . . . . , _ . l _ l R I ‘ . l E . o - l U ‘ i E . N l C ,.,' v , J o _ | F ‘ l 50%.. . . l 0 l c . c . U i R R E N l C l E l . l o L l L n , | 1 I GROUP v1 GROUP v GROUP nv GROUP lll GROUP n GROUP 1 Under 125 125 & over 250 500 1,000 over 2,000 LEVEL OF ECONOMIC DEVELOPMENT (in $ of GNP per capita) SOURCES: N. l. C. B. .' ”Obstacles and Incentives to Foreign Investmenl 1962-196 ” ,New York, NI. CUB , N / C B. ”Obstacles and Incentives to Foreign Investment 62-64 _ _ .. _ _ .— ._ _ _ _ _ _ 1967- 1968”, Vol.5, New York N I. C.B 1.969 67—68 Business International, ”Indicators of Market 8/29 for 740 Countries”, New York, 1970. Figure 2— l. ~—-Nationalism as measured by managerial restrictions and the level of economic development in 9 countries. polil seems and x this Russ Aust that woul L'nit Ecua Soci act elec and am notj inte wili 64 political, and economic) upon other nations. Every country seems driven toward preserving its sovereignty, identity, and wealth, and toward developing its own resources. If this is true, then a nation with a potential for a cer- tain level of self-sufficiency because of its natural resources or manpower reserves should tend toward more nationalistic policies in the long run. If such a state— ment is valid, then the most nationalist countries in the world would be those like the United States, China, Russia, Brazil, and India, and, to a lesser extent, Australia, Mexico, Canada, and South Africa. Countries that could not afford to be nationalistic in the long run would be, for example, Japan, Belgium, Netherlands, United Kingdom, France, the Scandinavian countries, Ecuador, Bolivia, and Paraguay. Socio—Political Influences Pressures from social groups force governments to act to keep themselves in office and win public or electoral support. Such political activity is universal, and no country or political leader fails to follow that Pattern. A key element of that pressure is interest articulation which, as we mentioned earlier, emerges from mOtivational, nonassociational, anomic, and associational interest groups. The characteristics of these groups Will be reviewed with special reference to Brazil. insti fere Cath unde and stat soci infl O H (D / 65 Institutional interest groups.—-The quasi-universal institutional interest groups are the church, the army, bureaucracies, political executives, and legislatures. (l) The church. The church always has had a direct or indirect influence upon leaders. In the past it was synonymous with conservatism and the status quo, with ”helping to maintain an anachronistic social system and economic under—development-—low level of education, a rigid class system, disinterest in economic achievement . . . "ll and valuation of order and tradition. Yet today in Latin America no institution is Changing more rapidly than the Catholic church, and in directions that have important implications not only for defining new relationships between Christianity and the values of soc1ety, but also for the role that the church will play in the region's development. A major distinction should be introduced here: a dif- ference exists between the mass of the people who are Catholic by tradition and the elite who have a greater understanding of what their religious commitments are. The elite are composed of priests, bishops, intellectuals, and businessmen whose educational level, pOSition, and status in the society permit them to make significant Social decisions according to Catholic teaching, and to influence their environment. 11Thomas G. Sanders, "The Church in Latin America," EEEEEEE.§££E££EI January, 1970, p. 286. lZIbid. al< cal and the chu: men' nor: 311101 66 George I. Blankstein underlies the fact that for a long time the church pursued political objectives, and in some cases its functions resemble those of a politi— cal party.l3 Only recently in Latin America have church and state begun to separate. Published assessments of the church as an interest group are rare, but, in gen— eral, the Pope enunciates broad principles and the local church adopts and adapts these principles to its environ- ment. Recent changes in the outlook of the church (its more social orientation) have produced a wide reaction among the elite. The Catholic elites are under two 14 influences: (l) the various interpretations of social reSponsibility prevalent in the Catholic community; and (2) nonreligious factors (such as relatives, social Classes, economic interests, and other educational influ— ences) which shape the values and responses of an individual. Brazil typifies this break with tradition. In early 1964, two divergent Catholic viewpoints appeared. On the one hand was the traditional Catholic view that Communism and corruption should be fought to save the world; On the other, a new generation of Catholics pre— occupied with the issues of underdevelopmcnt and soc1al l3Almond and Coleman, op. cit., p. 502. l4Sanders, op. cit., p. 287. men Ame €00 Ame sov maj awa rat iss 67 injustice joined Leftist movements. Today the church is most vocal in its opposition to the government, and many clergymen have been jailed and tortured. The Pope has told Bishop Helder Camara of Recife: "The Church will no longer tolerate the commission of atrocities and tortures in a country that calls itself Christian."15 The concept of conscientizagao (awakening of con— sciousness), developed in radical Brazilian circles in the 19608, describes very well the new movement of the church, which separates itself from the traditional state. From one politico-economic standpoint, many Catholics now hold a set of convictions that may be shared by communists and many noncommunists alike: (I) develop— ment requires control of vital national resources by Latin Americans; (2) public control of key sectors of the economy is preferable to private control; (3) Latin Americans must unite to prevent violations of their sovereignty based on ignorance of local reality; (4) the majority of the population should acquire a critical awareness and establish organizations through which they, rather than the minority, can exert political Pressure on . . 16 issues of public pollCY~ 15H. J. Steiner and David M. Trubek, "Brazil—— 3 All Power to the Generals," FOreign Affairs, XLIX, No. (April, 1971), p. 473. 16 299. Sanders, op. cit., p. indi p08: reg: ste] rep' helc 5n0' 68 Nevertheless, as an institution (composed of individual members with diverse motivations) with a position, the church seems certain to share in the regional consensus favoring nonviolent change. (2) The military. In Latin America "the last step in a military career is the presidency of the republic."17 The experience of most Latin American republics confirms this statement and it seems to have held also for many countries in the world at one time or another: Lamusse and Ongania in Argentina, Franco in Spain, Mobutu in Congo, Lon Nol in Cambodia, Boumedienne in Algeria, Nasser in Egypt, DeGaulle in France, and Amin in Uganda. Everywhere high-ranking army officers are, or may come to be, important politicians. A new trend is taking place, however, as the new generals move to the Left, as in Argentina, Bolivia, and Peru. In Africa, the pattern is somewhat different: the country wins its independence; opposition is suppressed and a one—party state is created; African SOCialism is introduced, partly for reasons of ideology and partly to buy time and popular support; Opposition grows as policies are Slow to produce results and there is increaSing Africanization in the army; then, if there is enough l7See Almond and Coleman, op. cit., p. 503. tri rep "It the kin the 0: dev ind 69 tribalism and corruption, the civilian government is replaced by a military one.18 In Latin America, the preferred military way is a mixture of "isms," combining capitalism, socialism, and Icommunism, and with a leading role given to nationalist ideologies. These ideas are based on communitarianism preached by radical priests, influenced by the Christian philosophy and the social traumas their nations face: "It is perfectly logical to men whose ancestors rode in the Crusades--and to whom 1492 was also the year Catholic kings drove the Moors from Spain."19 It may be noted that Adelman and Morris found that the political strength of the military had, overall, a neutral effect on economic development:20 on the one hand it positively influences industrialization; on the other, it increases the probability of coups and revolutions, which play a negative role in the country's capacity for economic growth. This situation is reflected in the Brazilian experience: since 1922 every coup has been supported or executed by the military (see Table 2‘2). The influence l8"Uganda May Not be the Last," The Economist, January 30, 1971, p. 15. . ng. M. Vivian and C. J. Michelson Terry, "The Military Coup in Latin Politics," Worldwide P & I Planning, November-December, 1970, p. 15. 20Adelman and Morris, op. cit., p. 1210. of Chi EXC Chi the 70 TABLE 2—2.-—Coups and revolutions in Brazil, 1922—1964. Date Main Location Group 1922, July 5 Rio de Janeiro Military 1923, January 25 Rio Grande do Sul Civil and military 1924, July 5 Sao Paulo Military 1924, October 28 Rio Grande do Sul Military 1924—1927 Sao Paulo—-—Rio Grande do Sul Coluna Prestes 1926, October 24 Rio Grande do Sul Naval 1930, October 3 Rio Grande do Sul Civil and military {1932, July 9 Sao Paulo Civil and military ‘1935, November 23 Rio de Janeiro——Natel Civil and military 1937, November 10 Rio de Janeiro Civil and military 1938 Rio de Janeiro Civil and military 1945, October 29 Rio de Janeiro Civil and military 1954, August 24 Rio de Janeiro Civil and military 1955, November 11 Rio de Janeiro Military and civil 1961, August Brasilia Military and civil 1964, April 1 Brasilia Military and civil Source: Octavio Ianni, Crisis in Brazil (New York: Columbia University Press, 1970), p. 11. of the military in Chile is the exception. In 130 years, Chile has had a long history of a noninvolved military, except for its role as warden of political institutions. Chile has had twelve coups d'etat since 1823, but most of them occurred between 1823 and 1830, or 1924 and 1926. Since 1930, all governmental changes have been democratic. If the history of coups (or golpes) is analyzed, we see they indi sufi dire ac< the hen Sig tut the 71 they do not take place at regular intervals, as Table 2-3 indicates. In an analysis of coup frequency, the important factor for the business environment is not the number of coups, but any concomitant, significant shifts in national politico—economic policies. A coup is not a necessary or sufficient condition for a change in national economic directions. Furthermore, there is the problem of defining a coup: Allende's election in Chile is surely not a coup in the traditional sense, but from a national politico- economic viewpoint the election created a discontinuity in policies. A coup could be a military takeover, as in Bolivia, or a civilian revolution, as in Tunisia. The relevance of coups should be analyzed from the standpoint of impact, importance, and long—term repercussions upon the business environment. Political analysis (by business— men) should pay less attention to people, and more to the significance of events. In Brazil, the role of the military is consti- tutionally established to maintain law and order within the country's borders and on its external boundaries. Socially, the military is an instrument of upward social mobility for less privileged people. Such upward mobility led to the building of middle-class societal values. Much Idissatisfaction in the army stems from low pay (for example the "Memorial of the Colonels" submitted in 1954 TABI 72 TABLE 2—3.-—Frequency of coups* per country in Latin America. } PE R I ODS 1823-1965 1930-1970 1956-1966 I a b a h i COUNTRIES Frequency Ranking Frequency Ranking Frequency Ranking Hflfi 29 1 8 7 5 1. Dominimn Republic 28 2 6 12 5 1 Ecuador 27 3 12 1 2 4 Peru 27 3 1 0 1 10 Bofivm 26 5 11 2 1 10 ElSaWador 21 6 8 7 2 4 Guatemala 21 6 8 7 2 3 Paraguay 21 6 10 4 0 16 Mexico 21 6 1 18 0 16 Hondu ras 16 10 4 14 2 4 Nicaragua 16 10 3 16 1 10 Chfle 16 10 0 20 1 10 Venezuela 15 13 6 12 , 2 4 Argentina 14 14 8 7 1 10 Colombia 1 1 1 5 3 1 5 0 1 6 Costa Rica 1 1 17 10 4 2 4 Uruguay 8 1 8 1 18 0 1 6 Cuba 7 19 8 7 1 18 Pananm 5 20 7 11 0 16 *Pefinition of Coups: ”Overthrows of an executive, not SlmPly an ephemeral one.“ l indicates the highest frequency, 136-. the least 'stable‘ country. (Dean's definition) Vivian-Terry do not define a coup. Sources: l‘61-1823-1966-Dean Warren, “Latin American Golpes and Economic ‘Flyctuation, 1823-1966”, Social Science Quarterly, June 1970, P. 2. lbjl930-l970—J.M. Vivian and C. J. Michelsen Terry, ”The lMllitary Coup in Latin Politicsz, Worldwide PM Planning, hNOV.-DeC. 1970, p.l8. iiim . gov: strl 111161 In OCC. OI ide phi in to the Brazilian Ministry of War, and the mutiny of Tanzania's army in 1964)21 or idleness. Many writers believe the military's political power is activated when the country's objectives (as perceived by the military) are not pursued. This situation might arise when extremist policies are followed by the government, or when the system does not enable the political structure to respond to civic and economic emergencies, or when electoral procedures are slow. As Octavio Ianni writes concerning Brazilian political life: "On the ’occasions of important historic events, the military forces come forth as a decisive power to lead, to expedite, or to expound the events."22 The military is not a homogeneous group. Every ideology is found among its members, but an authoritarian philosophy of the world predominates. In many cases, as in Argentina and Brazil, the military schools are among the best in the nation and produce the country's intellectual leaders and technocrats. H. J. Steiner and David Trubek emphasize the fact that many of Brazil's officers were drawn to the philosophical camp of positivism with its stress upon efficiency and material progress, discipline and order. The army developed among its officers 21Octavio Ianni, Crisis in Brazil (New York: COIumbia University Press, 1970), p. 131, and "Uganda May Not be the Last," op. cit., p. 15. 2Ianni, op. cit., p. 132. r1- O "‘00-- I—h of th the (i and c' highe lieut ian ] ante. stru. Stru. the The - bOdy ith POWe (Apr 74 technocratic skills in advance of most of the civilian world. Through its recruitment from different regions, the training given its officers, and its large public works, the army represented one of the significant "national" forces in Brazilian life.23 Therefore, it is important to analyze the dynamics of the military in a country. This involves distinguishing the different cliques, determining how they are formed, and discovering how communication flows from lower to higher echelons in the military. Certain ranks—-major, lieutenant, colonel—-appear to be particularly important in the military. The relationship between the different Inulitary branches also is important, although the army is lusually the most important. In Brazil, the navy has been directly responsible for only one of sixteen coups-—on 24 October 1926. The increasing influence of the military in Brazil- ian politics is the result of the increasing tension and antagonism between economic interests and social classes struggling for power. The lack of order surrounding these struggles, especially under Joao Goulart on the eve of the 1964 revolution, facilitates military intervention. The military has not entered politics as a single massive body, but is as divided as the civilians. Nevertheless, it has succeeded in appearing united and through compromises 23H. J. Steiner and David M. Trubek, "Brazil-—All POWer to the Generals," Foreign Affairs, XLIX, No, 3 (April, 1971), p. 468. M has n was a and 1 bush econ< systr cont: slim. have ran ihei an ( Ita Pro; 75 has managed to act en bloc. The 1 April 1964 revolution was a military coup, backed by technocrats and women, and tacitly accepted by the middle class and cheered by business. Its four-fold objectives were to restore economic integrity, reintegrate Brazil into the capitalist system under the technocratic leadership of Roberto Campos, control inflation while developing the economy, and eliminate the risk of adopting a Leftist policy which might have created a break between Brazil and the United States. (3) The bureaucracy. In many ways, the bureaucracy is the backbone of many regimes: politicians come and go, but the bureaucracy remains. Performance of their day—to- day operations is fundamental in the implementation of government policies. If bureaucracies are not involved in a revolution, it is unlikely that changes will occur. Bureaucrats are from the middle class in most nations, and generally have rebelled when salary conditions deteriorated sufficiently to threaten their economic security and stability. This was one of the major factors for the middle-class support given the 1964 Brazilian revolution. Bureaucracies usually play a buffer role. Their inertia makes them a conservative force, but they also are an economic stabilizer in most countries. Belgium and Italy, for example, have experienced periods of economic Prosperity without governments, and business executives 76 with long Brazilian experience often mention the stability of the bureaucracy and its importance in times of crisis. Headquarters of corporations interviewed generally agreed that the role of bureaucracy in countries with volatile governments was beneficial. They believe the danger lies in changes in ideological trends which affect society's basic structure, especially when the bureaucracy is actively involved. This is seen as a political point of no return. Robert Daland enunciates four major functions of Brazilian bureaucracy:24 (1) to provide a channel for upward mobility for the educated middle class, which can assert itself through its skills rather than personal wealth; (2) to provide permanent incomes for that portion of the middle class which supports the regime; (3) to pro— vide a low level of certain services; and (4) to provide opportunities for private entrepreneurship based on the powers attaching to certain offices. Daland continues: these functions are essentially political in nature . . . . It would be a mistake, however, to regard the bureaucracy as dependent on the political elite in power at a particular time. The bureaucracy has succeeded in insulating itself from all but the most chaotic changes of political direction . . . . The bureaucracy has a will of its own and a more or less independent base of power is underlined . . . 24 Robert T. Daland, Brazilian Planning, Develop- ment, Politics and Administration (Chapel Hill: University Of North Carolina Press, 1967), p. 210. inst: socie COmI tiox Objg | The bureaucracy comprises a set of vested interests established and protected by the law.25 77 (4) Political parties. Political parties as iinstitutional interest groups represent groups within :society who share similar ideologies, aims, or interests. :As such they are an institutionalized communication system :for the articulation of certain objectives. Political i I i =their objectives. parties are characterized not only by their ideological content, but also by their attitudes and ways of pursuing 26 In the Brazilian case, two political parties, IARENA (majority) and MDB (opposition), have such similar .objectives that the voters can barely see the difference. In fact, many Brazilians suggest that the opposition is merely a gimmick of the dictatorship, which wants to project an image of democracy. These parties have very little power, cannot criticize major governmental issues, and their representatives must be officially approved. Actually, politics has always been subordinate to three cults: soccer, loteria esportiva (lottery), and carnival. The Brazilian government has, in effect, "closed down k 251bid., pp. 211-212. 6Vivian and Terry, op. cit., p. 20; the authors compare various Latin American political parties in rela— tion to the ways and means they pursue their political Objectives. ' poli does and [10112 no 0th The 11108 | :politics but opened up the economy."27 Real opposition 78 !does not cOme from.such institutional interest groups. Nonassociational interest groups.--Socia1 classes -and regional, familial, religious, and status groups are inonassociational interest groups. Their interest articu— '1ation structure is informal, and their importance varies :over time. The two most important are the middle class land the elite. Labor, for the most part, is organized iinto unions, and is represented by associations. Other |groups are the peasants and students, and the tribes or lother less universal groups, depending on the country. The role of the middle class is considered by many as the most important. (1) The middle class. The importance of the middle 28 class is underlined in the Adelman and Morris study, which showed its contribution to socio—economic integration, and its support in enlarging the country's developmental capacity. Their research indicated the size of the middle class is the sixth most important political factor; it is the primary impetus for development and economic oppor— tunities, which further the possibility of social mobility. The political importance of the middle class increases geometrically as its numbers increase. Larger y 27Steiner and Trubek, op. cit., p. 470. 28See Adelman and Morris, op. cit., p. 1201. Latil Tene: coun‘ atti basi This of n nati hene The hana Spir cons eche worl O I-h 4—O— deve fOCI ofj d0e: 79 Latin American countries like Mexico, Brazil, Argentina, and Venezuela bear this out, and the middle classes in those countries is a cornerstone for any political party. The attitudes of this group are not homogeneous, but certain basic nationalistic trends emerge from the heterogeneity. This nationalism is not blind, and emphasizes the concept of national interest, that is, the maximum benefits for the nation and cooperation with other nations as long as the benefits generated are superior to the negative aspects. The middle class tends to favor law, order, and effective management in the private and public sector, and this spirit exists in every economic sector. The civil service constitutes the backbone of the class, although the middle echelon of the army, as well as skilled and semi—skilled workers share the same views. In some ways, the emergence of the middle class leads to a political positivism, and development and firm commitment to it become the major focuses. This is illustrated by the Brazilian revolution of 1964 which was made possible and successful partially by the tacit acceptance of "the middle classes prizing their greater economic security."29 (2) The elites. Another group or class which does not share universal tendencies is the elite. In M— 29Steiner and Trubek, op. cit., p. 464. some C decisi hinima W their and er an agg and ur these cal 11 Then isoial there litera Treati dePem orien‘ elite COllnt; urban The b. the d The i 80 some countries (for example, Chile) the elite plays a decisive role; in others, such as Mexico, its role is minimal. There are three major classes of elites: the traditional, composed of rich families who accumulated their wealth by land exploitation; the business or indus— trial, the new rulers in many nations, who participate in and enhance economic development; and the intellectual, an aggregate of professionals such as lawyers, doctors, (and university professors. The only common element of these elites is their limited membership. Their politi- cal influence is spiritual or intellectual, and the majority of them are not understood by the masses and isolate themselves politically. In morocco, for example, there is some freedom of the press, but because of limited literacy the impact of the elite through the press is greatly reduced. The political importance of the different elites depends on the socio-economic structure. A rural, export- oriented economy will tend to be linked to the traditional elite of landowners. This is a normal phenomenon in countries with low population density, a relatively small urban population, and an embryonic industrial structure. The business elite's importance is a direct function of the development of the country's industrial structure. The intellectuals have no definite patterns of influence but tc level throng indire elites oppos: new tj progr. appro impor in hi the e polit aqrar Works 81 but to some extent their impact depends upon the general level of education. Few in number, they exert pressure through printed words, which may influence the government indirectly, through shaping public opinion, or directly. Although their impact is difficult to assess, the elites usually can be found in one of three groups: in opposition to foreign investment, which they regard as a new type of culturo—economic colonialism; in favor of programs or policies which derive from a Marxist-Leninist approach to society; or in favor of foreign investment if it benefits society's development. The Brazilian case aptly illustrates the relative importance of these elements over time. Bresser Pereira, in his book Desenvolvimento e crise no Brasil, describes the evolution of the different social classes and their politico—economic influences.30 Situated between the agrarian—commercial oligarchy and the large mass of workers,31 was a middle class, barely vocal, but growing: At the time of Brazilian independence its role increased because administrative and military slots had to be filled. 0See L. C. Bresser Pereira, Desenvolvimento e crise no Brasil (Sao Paulo: Edition Brasiliense, 1970), p. 77ff. 31The commercial aristocracy was mainly based on an export—import type of enterprise with very little Productive functions. This m1 and nor class i new urt the pol :iddle Brazili hing, l relatii plied ‘ nentiOI societj politi. voices 1930 m any la the la in 196 irOUps aliOids 82 This middle class was linked with the traditional elite and worked for their objectives. As urban areas expanded, the role of the middle class increased correspondingly with the development of new urban activities, small business, new jobs, the army, the police, and the civil service. The growth of the middle class, writes the author,32 occurred as the Brazilian economic conditions allowed it. At the begin- ning, the middle class was mainly composed of distant relatives of wealthy families, and they naturally multi- plied through the years. They lived, as Helio Jaguaribe mentions, as parasites on the productive class of the (society, and this dependence prevented them from being 33 Only in the early 19208 were some politically active. voices heard, and the revolution of the lieutenants in 1930 marked a turning point for the middle class. Curiously enough, in Brazil there has not been any large political involvement of the masses except during the last five years of the democratic regime which ended in 1964. Brazilian politics are such that each of these groups have their own personalistic leaders, and each avoids any permanent alliance which would dilute his primary ____L________________ 32BreSSer Pereira, Op. cit., p. 78. 33Helio Jaguaribe, O Nacionalismo na Actualidade Eggiggiira (Rio de Janeiro: Instituto Superior de Estudos Brasileiro, 1958), P- 41: loyaltj system nation of intu th ar is ra of ex ac The in ness p result relati tacit] .2”: a; 7%“ H- L? 83 Wloyalty. A consequence of this political pattern is the isystem's failure to provide sizeable support for any one lnational policy or leader through the democratic pursuit of interest groups' objectives. Daland stresses the fact that the elites of Brazil have not remained polarized around distinct interests. The political battle is pre-eminently a struggle for access to power rather than for ideology, policy or protection of a particular interest. This broad backdrop explains why development policies found general acceptance among Brazil's ruling elites. 4 .The influence of the elite is accentuated by the lack of lmass participation (except in extreme cases), which lresults in politics among political elites who are relatively free in their actions, but who are sanctioned tacitly by the military and the middle class.35 The political arena is limited to the circle of governmental executives, professional politicians, and those journalists who have been proven to be relatively independent and nation conscious. The ability of politicians to separate the total electorate from polit- ical life is reflected in the 1960 election results: a hippOpotamus from the zoo of Sao Paulo received more write-in protest votes than any of the candidates. This 34See Daland, op. cit., p. 207. 35See also Nathaniel H. Leff, Economic Policy Making and Development in Brazil 1947—1964 (New York: John Wiley and Sons, 1968). p- l35ff- did I régin attii some obse: voca. tend clas a na inve ener as c soci mili Octa Left vers with Stud thei (for for % _ did not happen during the last elections under the military J urégime, but at the height of the "mass" politics. Such {attitudes do not reflect a lack of democracy, but rather V *some a acultural characteristic which could lead the unwary 1 I =observer to wrong conclusions. (3) The students. A noninstitutional although vocal group, students have relatively little power. They fitend to support intellectuals, and labor and the lower classes regard them with suspicion. They are basically ,a nationalist group, and almost always oppose foreign investment. Nevertheless, the students constitute an energetic, potential political force, and they could serve as catalysts in a radical solution of a complacent society's dramatic social ills. When President Joao Goulart was overthrown by the military, however, the students reacted very little. Octavio Ianni stresses that point when he shows that the Left found its greatest success with the core of the uni— versity youth, and went beyond the university milieu only with difficulty.36 Despite independent and disunited Student activity in nationalistic and reform movements, their impact has been felt in their immediate surroundings (for example, university reforms and agitation for amnesty for political prisoners). 36Ianni, op. cit., p. 107. S b C e d I F C» IV). ) \l/ c .I. .L\ ‘ u a -1.- u \Fld n u p a LL In. S -l h“ h e e e 0 U e h 0 \ \m\ n In s S t a r 0 C l ( .!l\\ t e t \h ”i r L11. r b t b t A 85 (4) Workers. In Latin America, the workers' role has not been as important as in developed countries (pos— ¥sible exceptions may be countries with large urban areas, 37 such as Argentina). This is due to several factors: (1) the considerable percentage of its members whose cultural ;and interest levels are at an absolute minimum; (2) the grural origins of a large number of workers who have the 4 I I Opportunity to return to their rural homes in extreme cases; (3) the individualist and fatalistic peasant mental— iity of workers, who have no interest in social quarrels; (4) the small participation of women in the labor force; ‘(5) the relatively privileged situation of workers in rela— tion to peasants; and (6) the lack of labor legislation enforcement and the prohibition of labor strikes. The Latin American revolution has been developed by the bourgeoisie, and labor still plays a secondary role. Nevertheless, it constitutes a regulating force which pre— vents extreme solutions. The unions still must prove they represent social interests, and that they can attract forces able to generate active participation in urban and rural areas. Workers' influence on economic policies has been minimal, reflected in the little space reserved to that topic in Nathaniel Leff‘s or L. C. Bresser Pereira‘s books. * 37Victor Alba, "Labor in Latin America," in Latin American Politics, ed. by Robert T. Tomesek (New York: Anchor Books, 1970), p. l98ff. l 86 Associational interest groups.-- (1) Labor unions. Unions have not been successful in attracting a large number of members for reasons mentioned above. In Brazil the number of strikes increased as industrialization progressed, but their frequency indicated more the strength of the proletariat and the salaried workers in general in defending the buying fpower of their salary than the power of unions. Union :political affiliation exists only to the extent that .Leftist groups have helped them in their organization. In iunion activities such as strikes, economic, rather than lpolitical reasons are basically the most important. In the words of Octavio Ianni (Table 2—4): "Even strikes bearing a deliberate political stamp, such as the general strike of July 6, 1962, are not free from immediate and explicit economic objectives."38 Such motivations are fundamental to any actions. (2) Industrial interests. Industrial interests, represented by industry associations or Chambers of Commerce, were hampered by the fact that politicians pushing them followed "clientelistic" politics. They also met some resistance from government and the general Brazilian political culture, which believes in policies designed for the general interest of the nation. Such an ¥ 38Ianni, op. cit., p. 96. l—n—L \ 87 TABLE 2—4.--Motivation for strikes in 1952 in Brazil. — ! 3 -Motivation Number of Strikes Percent iSalary increase 96 36.3 Payment of back salary 38 14.4 Sympathy with other workers 27 10.2 Improvement of working conditions 13 4.9 Payment of Christmas bonus 9 3.4 Warnings 7 2.6 Against shortages 7 2.6 Against government for the minimum salary 3 1.1 ,Various reasons or no information _23_ 24 TOTAL 264 l00.0 Source: Jover Telles, O Movimento Sindical no Brasil (Rio de Janeiro: Editorial Vitoria, 1962), p. 8 in Octavio Ianni, Crisis in Brazil (New York: Columbia University Press, 1970), p. 97. approach is valid even today, and was reflected in every interview with every executive mentioning his view that top government executives were open to any modifications in their policies which would benefit the nation as a whole. Unfortunately, as a few businessmen interviewed PUt it, business interests customarily come in contact With the Brazilian government only when they need favors Or adjustments in their favors. This general attitude has limited the Sphere of influence and the national interest I"; credibility of trade associations. Recently, some members 88 of the American Chamber of Commerce in Brazil mentioned jthe need for adoption of a more open policy, and they Eintend to suggest and give opinions on matters not directly ?relevant to their own interests as long as they feel their sparticipation might contribute to the "national interest." Anomic interest groups.--Anomic interest groups [generally are found at the local level, or constitute small irevolutionary cadres, such as guerilleros or communist Igroups. Their influence has been minimal: they have not ;succeeded, for example, in rallying popular support, despite the worldwide publicity given the kidnapping of the U.S. and Swiss ambassadors in Brazil, or the Tupamaros' actions in Uruguay. One main characteristic in the social dimension of Brazilian politics is the long—run, pacifist outlook. Bloody violence and repression is found in Brazilian political history, but the general note is one of concilia— tion.39 Conciliation seems to be an end rather than a means. Brazil is an exception in this respect, and generalizations about conflict resolution in Brazil are not likely to be true for other countries. ¥ 39José Honorio Rodrigues, Conciliacao e Reforma no Brazil: Um Desafio Historico- Cultural (Rio de Janeiro: fifi Ed. Civilizacao Brasileira, 1965), p. 237ff. 89 Politico-Economic Influences Two major circumstances influence political decisions and, in turn, have an impact upon the business environment: structural and cyclical politico—economic influences. Structural influences refer to those economic policies which the host country must devise in order to develop in the long run. This requires fundamental long run political decisions associated with necessary short— term politico—economic policies. These policies, which have varying effects on the business environment, are: price controls, devaluation, repatriation of earnings, exchange controls, and import restrictions. Although many corporations perceive theSe policies as obstacles to foreign investment and consider them political risks, they are natural concomitants of the economic evolution of developing countries. C. P. (indleberger summarized the structural relationship in his book, Foreign Trade and the 40 National Economy. The frequency of occurrence of these obstacles as a function of economic development in the 69 countries shown in Table 2-1 is discussed in the next four sections and Shown graphically in Figures 2—2 and 2-3. 40The table showing the structural relationships has been briefly discussed previously, see Chapter I. untry. Exchange controls.--Exchange controls (see Figure -2) can take many forms, but usually involve regulations a the entry of capital for investment,limiting the avail— bility of foreign exchange for certain kinds of imports, r the obligation to export. Even the transfer of salaries nd savings of foreign nationals working in a given country an be submitted to controls. Multiple exchange rates, ith different rates applied to different priority uses of ources Of funds, are another form of exchange control. he graph on exchange controls shows that the less developed .country is, the more likely it will be to make use of xchange controls. Such controls exist in 50 percent of he countries with GNP between $1,000 and $2,000 dollars, )ut 75 percent of the countries with GNP from $500 to $1,000 lollars practice some sort of exchange control. Of the hree lowest groups, 90 percent have such obstacles. Limitation of repatriation of earnings.-—Restric— ions related to the repatriation of earnings vary from :omplete to partial restrictions (a dimension which is not .ncorporated in these data), and could apply to royalties 1nd patents. These limitations serve to restrict the out— flow of foreign currencies needed by the host country, but i also to a 1967-68, such poli nonic dev formatior balance ( countrie: 1 [1962-64 deterren tries, a ing grou was deva between periods . may a: ence an (the p01 suddenl cases , latter 94 150 to accelerate capital formation. In 1962—64 and 967—68, as shown in Figure 2—3, the frequency of use of uch policies was inversely related to the level of eco— omic development, reflecting efforts to increase capital ormation, modify the economic structure, and/or solve the alance of payments problem among the less developed ountries. Devaluation.—-During the first period studied 1962—64), the probability of encountering the devaluation bterrent was almost nonexistent in industrialized coun- :ries, and could be estimated at 30 percent for the remain- .ng groups (see Figure 2.3). In 1968 the pound sterling ras devalued, which accounts for the great discrepancy )etween the curves representing the 1962—64 and 1967-68 Jeriods. Such a discrepancy shows the influence of our— :ency areas, and also indicates a strong economic depend— ence among the countries within the same currency area (the pound sterling in this case). Devaluation may be massive, and can occur fairly suddenly, as in the British (1968) and the French (1969) cases, or may be minor, as in the case Of Brazil. The latter kind lends itself to easier planning and less risky financial management. When the British pound devalued in November 1968 by 17.5 percent, about 30 countries followed suit; the shift in the value for Group 3 great t 699599 uraphi method Americ The la rency, contrc exchaI count] their to de' 6001103 econo in tu anal} tions Worlc 0f 51 Lati: Amer 95 roup II from 0 to 38 percent is an indication of the reat economic interdependence of these countries. The ggregate figures do not pinpoint differences among geo- raphical and political regions concerning traditional ethods (or economic policies) for devaluation. South merican countries devalue more often than most others. he latter's currencies usually are pegged to a major cur— ency, and devaluation is contained by stricter price bntrols, restrictions on repatriation of earnings, and mchange controls. Devaluation is also used by certain :ountries as a tool for economic development: making :heir products relatively cheaper leads some countries :0 devalue even in the absence of problems of structural economic inbalance. Politico-economic influences.——Fluctuations in economic activity which affect the political climate may, in turn, affect the business environment; the following analysis of such influences is divided into three sec— tions-—an investigation of the literature, Brazil's post— World War II experience, and interviews with executives of subsidiaries in Brazil. (1) The literature. The two major articles on Latin American politico—economic interaction are "Latin American Golpes and Economic Fluctuations, 1823—1966," by We the < and t relai the < past sent to 1 but rela on e esta trac ,— na (3 L4 ;—- ,_.. c: c/rr 96 y Warren Dean, and "The Military Coup in Latin Politics," y J. M. Vivian and C. J. Michelsen Terry.42 Dean attempted 0 identify a pattern in the occurrence of the 351 Latin merican coups between 1823 and 1966. His thesis was that :he coups are accompanied by short—term economic fluctuation, end that both the golpes and economic fluctuations are :elated to international trade cycles. Dean noticed that :he coups did not occur at regular intervals, and that past frequency of coups is a poor predictor for the future (R2 = .06).43 Interestingly, he found that no one country iad a pattern of occurrence similar to others. Figure 2—4 shows Dean's effort to correlate economic fluctuation and coup frequency. Fluctuations are repre— sented by the level Of Latin American imports; from 1854 to 1904 there is a slight correlation between the two but after 1904, the correlation is rather loose. Such a relationship is explained by the dependence of governments on export revenues. "However, it is not possible to establish the direction of the causal linkage between con— tractions in the export trade and coups because 42See J. M. Vivian and C. J. Michelsen Terry, 92‘ Cit.; and Warren Dean, "Latin American Golpes and Economic Fluctuations, 1823-1966," Social Science Quarterly (June, 1970), pp. 70-80. 43See Dean, Op. cit., p. 73. 97 . 4.0- ‘ 3.0 / J . 29 42 Coups, 5-yr moving average - —————- B imports to Latin America, 1.0 GB and US, 11 millions - W \ SOURCE: Dean Warren, ”Latin American Golpes and Economic Fluctuations: 1823-7966‘”. Social Science Quarterly, June 7970, p.76. Figure 2—4.-—Latin American imports from Great Britain and the United States and the incidence of coupe, 1854—1910. insurre cause ( Figure the le' ment i 1965, dollar during husine cannot such 5 areas milite in Fig cr n1 a? :3 W'TSHO Q40 I'd-C17 I 98 insurrectionist activities were sometimes a contributing cause of the business slump.44 The post—war increase in coup frequency (see Figure 2-5) could partially be explained by a decrease in the level of investment per capita. "In 1930, U.S. invest- ment in Latin America amounted to $56 per inhabitant; in 1965, it was only $39, although the real value of the 45 dollar had fallen by about 75 percent. Coup frequency during the post-war period seems to be in phase with U.S. business cycles. The economic factors, as Dean stresses, cannot fully explain coup frequency, but social factors such as societal transformation and rapidly growing urban areas add more complex variables to the analysis. The Vivian and Terry View of the probability of military coups as a function of business cycles are shown in Figure 2—6. In their opinion, When coups do take place, their cause, and life Span are remarkably similar. The Coup Cycle is a mirror image of the Business Cycle, but a little behind and greatly exaggerated. . Coup probability is slight as buSiness expands. But with the boom, demand for imports grons and inflation increases. Racing inflation, foreign companies repatriate profits and serVice foreign debt. The shaky trade balance declines, pre—th Cipitating a financial criSis. Then perhaps e IMF forces a devaluation and the govirpgegioéoses 0 ul r't . With devaluation, impor e _ Engin:,laid foreign firms slow capital investment. M 4 4Ibid., p. 78. 451bid., p. 80. novir z E: 0H m H0 H U 0 mg m Z EH... M0 H09 U 0 “WHIP m 99 0.0000 1.0 . mmcoo mo MmQESZ Loam Ammo dwmm ammo Loam dune “mum Lowe awnm ammo Lm_m dmso doom deco 1 a . . 0 0. 0 O 5 l 3 at. l 0 II mmdoo m0 HQQESZ Social Science Quarterly, I I ”Latin American Golpes and Economic 7823- 7 .966 ’ Fluctuations: June 7970, p.74. SOURCE: Dean Warren, five—year 5.-—Coups in Latin America: Figure 2— 1823—1966. moving average , HUSlh'E (YCLE EXPh‘l ll RECE DEPR 100 BUSINESS CYCLE M an 40 PROBABILITY OF A COUP H10 a; (coup probability is highest) ~50 ~ a (coup probability POINT A I!!! ll... 11"! I'll. llllllllllllllll ".1" I'll! I!!! 'll e ’ \ (coup probabfifiy is lowest) DEPRESSION Coup probability curve IIIIIIIIIIIIIIIIIII Business cycle ——— (.___ ”The Military Coup in Latin Politics”, SOURCE: J. M. Vivian and C. J. Michelsen Terry, 3 Worldwide P & / Planning, Nam—Dec. 7970. p.2 . ——Probability of a military coup as a Cycle. Figure 2-6. . function of the Latin Bus1ness 101 Inflation skyrockets. Local production continues to fall and a recession is at hand. At this point some unforeseen calamity usually occurs: govern- ment corruption is exposed; the world price for the country's major agricultural export suddenly declines; increased anti—U.S. political activity results in a reduction of U.S. foreign aid. Lacking adequate planning capability, the government decrees drastic and highly unpopular austerity measures. The probability of a coup is now at its highest (Point B in the Figure). 6 The authors also base their analysis of political risk on the role of "personalistic vacuums" in the respective Latin American countries. One point the above researchers did not mention is that economic fluctuations might influence executive Changes, but executive changes (that is, coups d'etat) do not necessarily mean a modification in the business cli- mate or creation of economic fluctuations. (2) The Brazilian experience. Brazilian history from 1948 to 1967 does not disprove that coup probability iS low when business expands (See Figure 2-7). The coups in 1954, 1955, 1961, and 1964 did not occur during a business expansion. In 1953, when the econOmic growth rate was negative, nothing was done by the Opposition, led by President Vargas (Who less than a year later committed suicide). The 1954 ePiSOde, however, can barely be considered a coup. The COUP d'etat of 11 November 1955 is closely related to 22. 46 lsen Terry, Op. cit., p. Vivian and Miche 102 ECONOMIC FLUCTUATIONS (95 growth per capita) November I [:55 Angus ‘61 Angus 24,34 April I .'64 _;_J-flL.L_,llil.l.|.l ll II II I ‘48 ‘49 '50 '51 ‘52 '53 '54 ‘55 ‘56 '57 '58 ‘59 '60 ‘61 ‘62 1,3 ‘64 ‘65 .66 SOURCE: Fundacao — lBGE, ”Bras/I Se'ries Estatisticas Retrospectivas - 7970”, Rio, Brasil, 7970, p.276. Figure 2—7 .—-Brazil's economic fluctuations and coups d'etat 103 President Vargas' suicide: his succession was contested and the military intervened to re—establish Brazilian democracy. Thomas Skidmore refers to such a move as "a coup for legality."47 The third coup, in August 1961, resulted when Janios Quadros' sudden resignation left the country in complete disorganization and an unexpected presidency to Vice—President Joao Goulart, a populist dis— liked by the military. At the time Of the resignation, Goulart was visiting Communist China, and the three mili- tary ministers of war, Minister of the Army General Odilio Denys, Minister of Air Brigadier Moss, and Minister of the Navy Admiral Silvio Heck, held effective power and declared martial law. The result Of the confrontation of the three military ministers and the legalists, who were pursuing legality to the extreme, was a compromise. It was made possible because Goulart was supported by one dissident military commander, General Machado Lopez, commander of the Third Army, backed by the governor of Rio Grande do Sul province, Leonel Brizola (who happened to be Goulart's brother—in-law). The last coup, perhaps the only one that could be named coup, which happened on the night of 1 April 1964, emerged from a combination of systemic weaknesses and historical accidents which had led to widespread 47Thomas E. Skidmore, Politics in Brazil: 1930— 1964: An Experiment in Democracy (New York: Oxford University Press, 1967), P- 154- 104 disillusionment with Goulart and the political system. A drastic change was needed. The middle class suffered from skyrocketing inflation (140 percent the last quarter before the coup); the traditional political balance was threatened; Goulart's regime was trying to buy off social groups with new programs and a rise in the minimum wage; and the mili- tary was afraid of a possible shift to the extreme Left. All these factors led to the 1964 revolution, which was backed by the technocrats, the middle class, the industrial sector, and, of course, the military. l Beyond any doubt, economic factors have had a strong influence on the occurrence and social acceptability of Brazilian coups. Furthermore, a "coup for legality" appears to be the general rule in Brazil. The latest coup is merely the exception which confirms the rule; neverthe— less, it translated the desires of a broad spectrum Of the population which were not developed through the normal political channels. (3) The interviews. Executives at the subsidiary level were asked: "DO the periods of economic slow—down or economic difficulties aggravate the obstacles which are naturally present in the process of economic development?" Of those interviewed, 87.4 percent agreed strongly with the statement, although one businessman claimed that his Operations grew at a minimum rate of 20 percent and that 105 1e never felt any major change due to obstacles. The :espondents agreeing with the statement did so without making distinctions about the sources of economic fluctua- tions (internal or external to the host country). The internal fluctuations were relatively more important. Corporations in Brazil were asked to enumerate the difficult business periods during their stay. If Hypothesis 3 is correct (see Figure 2—6), some additional political pressures should have existed in 1953 (negative growth rate), 1956 (2 percent growth rate), 1963-1964— 1965 (negative growth rate), and possibly in 1959 (decline in growth rate from 4.6 to 2.5 percent). Curiously, every corporation but one mentioned the difficult times encountered during the Goulart regime. This was particu— larly due to the inability (probably the inexperience) of the corporations to conduct business in such an infla— tionary environment. Furthermore, inexperience may have been involved,and most corporations (60 percent) affirmed that if similar inflationary pressures occurred today they would be able to cope with and Offset most Of the financial distress. The author asked: "What were the other difficult periods for your corporation?" Some executives answered they did not know because they only recently had arrived in Brazil (10 out of 45 executives had lived in Brazil an average of l to 3 years). Other executives mentioned the 106 initial production period without mentioning political cause-effect relationships, or some other, independent of the political situation, and caused most often by past ' as one executive said. "mismanagement of the corporation,’ The author examined the chronology of Official decrees; although their time frequency or numbers are not a very good index, he noticed a significant increase in Official decrees published during those slow down periods which would not support the corporation's answers. During the 1953-1956 period, there had been the decrees establishing a Brazilian automotive and electrical industry. The "law Of similars" was also enforced more strictly as a Brazilian official of the Banco do Brasil mentioned during one interview. There are several plausible explanations: corporations may have a short memory for past history; or perhaps management does not believe experience could be gained by analyzing past corporate history when a new Officer takes Office; or, finally, at one time corporations may have misread govern— ment actions (as in the electrical or automotive case), and later realized that the apparent Obstacles actually offered a competitive asset in the long run. Summary The political process in the host country results from the interactions Of ideological, social, and economic influences. These influences are channeled into the business environment through the political institutions, whic? fest coun nati as 11 card L levi gro deg but in C0] 107 which act as filters and catalysts. Nationalism is mani- fested in any policy decision which favors the host country's socio-economic goals, aiming at national identity, national sovereignty, or national interest. Nationalism, as measured by personnel restrictions and local capital participation, appears not tO be directly related to the level of economic development. Social influences are articulated through different groups which, depending on the country, have varying degrees of power. These groups include the church, bureaucracy, army, middle class, labor, elites, and intellectuals. The church is both a progressive and conservative element: some members favor the traditional structure, while others preach Christianity modified by local needs and situations. The involvement of the bureaucracy in any change is an important factor if the long—term political and economic policies of a new government are to be implemented. The army plays a major role in every country, with or without civilian support. The middle class plays a major role in achieving political stability in any country. Politico-economic influences could result from structural factors (such as the level Of economic develop— ment), or from fluctuations in economic activity. There is some evidence of an identifiable pattern of obstacles resulting from structural factors. On the other hand, the evidence accumulated by researchers who tried to —;i, 108 correlate economic activity and coups has limited value, and further research should be done in this area. It is most important to analyze the effects of broad changes in economic policy rather than changes of personnel in executive Offices. Analysis of the political situation seems feasible, but there is no universal body of theory. A corporation, therefore, must periodically study each individual country if it wants to develop sensitivity to political processes. The automotive and electrical industries have been mentioned as being subjected to political pressures in the mid-19505, and the signifi— cance Of the product (nature of economic activity) from the political standpoint will be investigated in the following chapter. CHAPTER III THE PRODUCT Introduction This chapter centers its attention on the product, its political visibility, and its technological transfer- ability. Two hypotheses are specifically studied: 1. Different products may be subject to varying degrees of political pressures. 2. a. The greater the transferability of product technology, the greater will be the pressures for local production. b. The less transferable a product technology is, the greater will be the pressures to produce a component which is technologically transferable. The first hypothesis has a high face validity when one compares different industries such as petroleum, mining, and manufacturing. The research tries to pinpoint dif— ferences within manufacturing industries, which many . 1 writers generally put under one category. Measuring Technological Transferability Superficially, it seems valid to say that political pressures are a function Of the level Of technological 1See for example Stefan H. Robock, "Political Risk: Identification and Assessment," COlumbia Journal of World Business, VI, No. 4 (July-August, 1971), 10. 109 —¥—_—, tran proé auti cal its uhe tec for qui of prc ste cor la: au Co pr 110 transferability, but problems in the measurement of a product's technological transferability prevented the author from categorically confirming the hypothesis. As the interviews reveal, the level of technologi- cal transferability depends not only on the complexity of its manufacture, but also the market size of the country where local manufacture is contemplated and on a product's technological complexity of use. Certain chemical products, for example, are very easy to use, but their production is quite complicated. Large market size will permit economies of scale in the production process. Another example is the production of pharmaceutical products, which is a multi- stage process. The first phases Of production are quite complex and require a high level of technology, but the last phase is similar to the assembly operation in the automotive industry, and is simple and standardized. Computers are an extreme example: both the production process and product use require a high level of technology. At the other extreme is the textile industry, where Production process and product use are easily transferable. Very little research has been done in this field, and the measurement of technological transferability has not gone Very far, especially when inter-product comparisons have to be made. Some iso—technological transferability PrOduct curves should be developed for this purpose. lll Albert J. Jadot, a Belgian economist, has shown (see Figure 3-1) a relationship between local manufacturing of electrical material of different level of technological complexity, and the market size, using as variables the gross national product per capita and the population.2 The graph indicates the threshold for local manufacturing of small electrical goods. Double logarithmic coordinates have been used along the axes in order to incorporate countries small in population or per capita income. The vertical axis shows the income per capita in Belgian francs (50 Belgian francs = $1 U.S.). The horizontal axis indicates the population; the indices beside the country's name indicate the level Of imports per capita of electrical products. The threshold curves separate producers from nonproducers, and, in general, countries close to that threshold are countries where production is relatively recent: those under the curve are countries where production could be planned or forecast. Typical is the case of Thailand, which established its first electrical manufacturing facilities in 1959. The curve done on the basis of 1952-57 data would have helped executives in developing long—term planning. Similar approaches could be developed for other products and help PUblic policy planners in devising economic development Pelicies and executives in screening new markets. ___________‘______ 2Albert J. 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I, O I 533w ' I I ' I ' ' I I ' O O" P 113 Refinements in the research for iso—technological transferability product curves associated with market potential could provide a valuable tool for foreign investment strategy. The size of the market potential creates the political visibility and viability of govern- mental action aiming at some technological transferability, but the size of the market potential also is determined by the two dimensions of the product, namely its use and production. Thus, political pressures for technological transferability will be exerted on these two dimensions. Therefore, the researcher developed an indirect approach by which products were analyzed in function of their political meaning, and transferability was analyzed in cases where comparability was feasible. The Product-—Its Political Meaning and Attributes The product in many cases is seen by the sources of political power more as a fulfiller of national needs than as a satisfier of consumer wants.3 Every product con- tributes not only to the consumers' satisfaction,but also has an impact on a country's economic, social, and political goals which could supersede individual consumer interests. \_ 3A first major consequence of this approach is that eCOnomic rationale based for example on the law of com— Parative advantage might not be the most attractive and convincing argument when a multinational corporation or a SOVernment negotiate with the host country. 114 The local manufacture of products, even if it does not provide the best allocation of resources, could Still be undertaken for social or ideological reasons. The Literature John F. Truitt has advanced the hypothesis that the risk of expropriation is related to the area of economic activity in which the firm is engaged.4 The results of the Truitt study showed that among 28 cases of expropriations of U.S. corporations, 12 extractive industries, 4 service’ industries, 6 manufacturing, and 6 public utilities firms were involved; 65 percent concerned extractive industries or public utilities. If the experience of British and U.S. firms are combined, the vulnerability in each sector, in descending order, is: (1) insurance; (2) export—import trade and commercial banking; (3) petroleum distribution; (4) other extractive industries; (5) public utilities; (6) manu— facturing; (7) other service industries; and (8) agri— cultural and non-extractive industries. These figures are biased because many expropriations occurred after the 4John F. Truitt, "Expropriation of Private Foreign Investment: A Framework to Consider the Post World War II Experience of British vnd American Investors," unpublished Ph.D. dissertation, Indiana University, 1969, pp. 168—222. 115 decolonization period in British colonies; a more meaning— ful tabulation would be by each act of expropriation by industry effected. Truitt maintains that "high profiled" distribution, that is, highly visible distribution network industries, uereaauajor factor in expropriation, but the data could be interpreted differently. First, most nationalized service industries were the result of sweeping nationalization (such as banking and insurance) on the basis of socialist ideals. Second, other distribution networks were nationalized along with small manufacturing facilities as the result of external events (for example, the Middle East crisis). Third, in most African and Asian countries the degree of firms' involvement is so limited that the distribution network represents almost the only sizeable foreign investment. Fourth, the low expropriation rate in agriculture is due to the fact that expropriations occurred before World War II; since that time agricultural investment has declined sharply. On the other hand, Vernon mentions that chronicles concerning raw materialsdevelopmentare filledvdjfliexamples 0fthestrugglesbetweenforeign investorsandhost governments. On the record the foreigner who invests in raw materials exploitation in the less developed countries has no reason to hope for long—run tranquility and stability. The investments of foreigners in tropical plantations, popular during the late 19th and early 20th century have almost passed into history. The invest— ments in minerals and petroleum are under 116 constant pressure. But there appears to be system and order in the timing and effectiveness of the pressure. Those undertakings that have least to offer in the way of capital, technology and markets appear to be the most vulnerable. The Vernon and Truitt studies aptly summarize the conventional wisdom about product-host government relation- ships. These views, nevertheless, consider only the two extreme cases of expropriation and of royalties in the extractive industries, which may often be considered as creeping expropriation. For example, manufacturing industries, listed as sixth in vulnerability to expropria- tion, could be more subject to internal pressures (because sales are mostly oriented towards the domestic market), than are extractive industries (whose output is externally oriented and beyond the control of the host nation as soon as it leaves port). A Taxonomy Products have different images or roles which may influence the host government's actions. In this per— Spective, the product is vieWed as: (1) an economic good; (2) a social good; (3) a prestige symbol; or (4) a neutral good. 5Raymond Vernon, "Foreign Enterprise and Developing Nations in the Raw Materials Industries, Proceedings 0 ference of Allied SOCial the December 27—30, 1969 Con _2 6 New Yor I PP- 2 - SCiences Assoc1ation, 117 The product as an economic good.-—A product's image may be perceived by political sources in relation to the economic expectations that could be derived from its local production. Its utility could lie in the economic growth or the economic self—sufficiency (or independence) it would promote. (1) Economic growth. The produce contribution to economic growth relates to the national interest aspira— tion level, and could be evaluated in several terms: its contribution to the GNP growth per capita, the forward- backward linkages its production creates in the industrial structure; its public revenue effect; its growth generating effect; and its allocational effect in terms of inflow and development of new technology as well as a foreign exchange earner. The economic good aspect Of a product appears based on sound economic reasoning. Most import— substituting industrialization falls in the economic growth category. Albert Hirschman notes that the import- substitution concept has stemmed from four impulses:6 (l) wars and depressions; (2) balance of payments diffi- culties; (3) growth of the domestic market; and (4) an official development poliCY- 6Albert 0. Hirschman, "The Political Economy of Import-Substituting Industrialization in Latin America," The Quarterly Journal Of Economics, LXXXII, No. 1 (February, 1968), 1-32. 118 Import—substitution policies are implemented through four instruments: protective duties; an assortment of credit and fiscal policies; other political pressures for local manufacturing such as non tariff barriers; and development of state—owned enterprises, regional development corporations, or banks which have specific priority projects. Balance of payments difficulties, as mentioned in previous paragraphs, were also one of the major factors necessitating conscious economic development policies. Import—substitution policies frequently led to frustration in the long run because imports of some products were easily substitutable at the beginning, but the process became increasingly difficult as opportunities were exhausted. These policies resulted in distorted factor prices within the domestic market, and did not improve the balance of payments problem; in addition, of course, they led to poor world—wide allocation of resources. With that problem in mind, developing countries are increasingly imposing the export test. Export development programs have become the latest weapon for pressuring foreign corporations into local manufacturing, to serve not only the internal, but also external markets. Such a governmental policy may have severe repercussions if applied in countries with rather small markets and with no unique factor endowments. 119 (2) Economic self—sufficiency. The economic self- sufficiency aspect of a product relates to the country‘s national sovereignty aspiration level. It is translated into an import-substituting industrialization strategy mainly for products whose supply is uncertain in the event of wars or depressions, or whose technology is seen as a cornerstone for economic independence. In addition, pro- viding a level of employment which does not depend upon foreign economic conditions also becomes an objective. Small manufacturing in Brazil and Argentina, for example, developed mainly in reaction to the Great Depression. Corporations which entered a market with the inten— tion to serve only the local demand could find themselves in difficult positions one day. For example, if, to reach economic efficiency protective tariffs in a country were lowered; some local manufacturing, which caters to a small, protected market, is exposed to import competition, the resulting outcome is obvious; either the plant must be closed, or its capacity increased in order to compete, but then it becomes necessary to export. Such a situation occurred in Colombia's chemical industry. Mexico, Brazil, and Colombia are trying to implement such a policy, and other countries are expected to follow suit. The effect will be to make the old law of comparative advantage relevant to multinational corporations within their inter- national sales networks. 120 The chemical industry in Brazil is perceived presently by the government as an economic good not only to insure self—sufficiency but particularly to create forward and backward linkages in the industrial structure. As such, the chemical industry should be the industry which is most pressured by the Brazilian government. On the other hand, the automotive and the electrical industries have been forced to produce 100% locally, and the companies now operating in Brazil have chosen to remain in the market and are now subject to less pressures than the chemical industry. Due to technological complexity metal working (and office machine equipment industries are apparently not at the same level of priority in the government industriali— zation plans and consequently the pressures applied to them should be the least important at the present time. The product as a social good.--A social good refers to the product's role in the social system, and the concept is Closely related to the national sovereignty aspiration level. It is a good which society believes it should Control for its well—being. This control may be exerted through regulatory practices (such as public utilities in the United States), joint ventures with government (such as som banks in France, Belgium, and other countries), state— Owned enterprises (such as insurance in India, or petroleum refineries in Brazil), or the requirement that the sector 121 be locally owned or controlled (such as broadcast corpora— tions in the United States, or agriculture in Brazil). The main sectors usually involved in this social Fspect are industries closely associated with the economic hnfrastructure, or with public health (such as banking, firansportation, public utilities, pharmaceuticals, and staple foods). A social good is a necessity for the social system as a whole, and strategic goods for defense purposes also could be classified among these. Of the industries analyzed, two industries might be indirectly concerned: the chemical industry because it supplies raw materials to the pharmaceutical industry, and the electrical industry as a supplier of products for the regulated or state-owned electricity enterprises which produce social goods. Consequently, a government might find it essential to control a vertically integrated industry, or by its price control of the end product the government might induce a reduction in the derived demand. A decline in the reinvestment or the investment of public utilities due to a squeeze on profits, or due to a high probability of expropriation, can lead to a lack of demand for turbines, transformers, and so forth. Brazil experienced such a situation in the late 50's and early 60's. The product as a prestige symbol.—-A steel mill Complex, a national airline, or an automobile factory are 122 typical showcase industries producing products which serve as prestige symbols. The prestige aspect does not exclude the economic good concept, but many developing countries have established steel mills in order to show they are industrialized, despite the lack of sufficient internal market demand, human resources, or capital. The prestige symbol fulfills the need of a country to identify itself as a member of the concert of modern nations. Fortunately, in the case of the automotive industry, most Latin American nations are realizing their error and are limiting the number of manufacturers, as in Colombia and Chile. Only ‘Brazil has succeeded in developing a vertically integrated automobile industry, which is expected to become one of the world's most important. The Brazilian experiment began in 1956 under harsh criticism from industry executives and the world press. Since then, automotive executives have reversed their Opinions, but still are dubious about governmental policies of export promotion. Private enter— prise is generally unwilling to invest in prestige— oriented ventures without investment and revenue protection. As a prestige symbol, exports of goods are becoming Very important. The exports of automotive products, some metal products, as well as some electrical products as appliances, for example, seem particularly good targets for pressures. 123 The product as a neutral good.—-The neutral good category includes nonclassifiable items whose impact—— emotional, social, economic, or strategic—-is marginal. Such products, in general, do not appear on investment priority lists, and do not receive any special attention. The government does not care what foreign corporations do as long as they operate within general legislative con— straints. In that category are products whose technology is beyond the foreseeable reach of the host country, or whose market is limited. Some products in the electrical industry field, such as tape recorders, or completely inte- grated computers, in office machine equipment field constitute neutral goods for the short and medium term. From this taxonomy it can be expected, in the Brazilian case, that the chemical industry will be subjected to the most pressure. The metal working and electrical industries are logically second in the level of pressures. The automotive industry should be less vulnerable due to its past experience and its vertically integrated local production, while office machine equipment is presently less susceptible because of its high technology and because it will be asked to produce only components. The taxonomy provides only an approach for a general country analysis. Two countries could have a dif— ferent set of products in each category, and the categories Could vary over time. There is, however, correlation with 124 the level of economic development. In the case of Brazil, the automotive industry constitutes an economic good which generates growth, while the steel industry is more related to the self—sufficiency aspect of an economic good. The Brazilian steel industry evolved from a prestige symbol into an economic good, although the recent pressure to export at any cost recategorizes it as a prestige industry. Public utilities and the petroleum industry in Brazil fall into the category of social goods. Industry's Perception of Political Pressures8 To the question: "Will there be any perceived differences in pressures among manufacturing industries?" most industries in the sample (automotive, chemical, electrical, metal working, and office machine equipment) showed relatively similar reactions to obstacles confront- ing them. Figure 3—2 depicts graphically the overall evaluation (headquarters and subsidiary) of political pressures while Figures 3—3 and 3—4 show the perception at subsidiary and headquarter levels respectively (see 7The Brazilian government has recently concluded a contract with several firms requiring them to export 16,500 tons of steel (bars) monthly, even in the event of shortages in the domestic market, despite Brazilian prices higher than world prices. See Brazilian News Briefs, No. 28, July 19, 1971, p. 9. 8For the analysis of the interviews, when no country is specifically mentioned, the author is referring at the Brazilian environment. Degree of Importance C O B E. o :1 H r: ~< I . --,(ra,\ . ff-Klamu Price Controls _— 14;- i 1 :VC, 1.. Pricing Regulations—-'——_ - - l » iv- ”— )umrodur] Patent Protection— ' AUTOMOTIVE INDUSI‘RY CHEMICAL INDUSTRY Requirement of Producing — » I--—-—-—----r Patented Product ELECTRICAL INDUSTRY l - l - l- ' - ' - ' - I - Discrimination in Production— ' Licenses METALWORKING INDUSTRY lllllllllllIIIIIIIIIIIIIIIIIIIIIIIIIII OFFICE MACHINE EQUIPMENT INDUSTRY Minimum ExPorts Quotas—— wvywvavwwwvwwxw Govcmmenl as a Customer ____, Competitors Subsidized -———, Foreigi Personnel Restrictions ____, Debt Limitations -———-——" Local Capital Participation ——-—- Transfer of Capital —-————‘ Dividends ————-——-—" Licensing Fces —-———-— Reinvestment Policy —-—' ' ‘ Expropriation—————— . - . . . . Economic Development--. . . . I . Policies ' Government as a Supplier — Local Content Requirements —— Discriminatory Technical Standards —- Figure 3‘2.--Evaluation of obstacles to foreign investment by industry 126 Appendix D, I and E for details and numerical scores). The one major exception to the trend were attitudes about licensing restrictions in the chemical and metal working industries where license fees and royalties are particularly important. This could be explained by the nature of the industries, whose secret formula or methods are the key to profit in their manufacturing processes. The chemical industry.-—The chemical industry appears subject to the greatest pressures, and is the one relatively most sensitive to marketing obstacles such as price controls, patent protection, discrimination in distributing production licenses, and minimum export quotas (although in the latter case the automotive industry believes it is exposed to a greater risk). Executives in the chemical industry also believes it is exposed to extreme pressures concerning financial management, in particular local capital participation and restrictions on remittances policies (such as direct transfer of capital, repatriation of earnings, dividends, and licensing and management fees). The industry‘s reinvestment policy is also under pressure. In the production area, it seems that chemicals are very vulnerable to import restrictions. Curiously enough, the chemical industry is less subject to small obstacles, or nuisance policies. It is least subject to pressures from government as a customer l’i and as a supplier of inputs, or to indirect discrimination 127 through subsidies given to competitors. The office machine equipment industry.—-At the other extreme is the office machine equipment industry, which suffers least from political pressure. Only in the case of indirect discrimination through subsidies or other means, such as government purchasing policies, is this industry affected. Interviews pointed out that discrimination was present only in developed countries, and was a means to counteract the American challenge. Although England was submitted to particularly severe criticism from inter— viewees, it appeared that indirect discrimination was the rule in most other European countries such as Belgium, Germany, France, or Holland. Discrimination is rationalized on the grounds that a local computer industry should be developed. If there is a national corporation, that firm enjoys special governmental protection and market, as in the United Kingdom. If the country does not host a computer industry, corporations are wooed with subsidies, tax holidays, and preferential treatment in government markets. The industry does fear legislation that might force local capital participation, and another matter of concern is the emerging discriminatory pattern of technical 128 standards in developed countries. There is a tendency to favor a local product which is the only one to benefit from a patent or specific characteristics, such as a special typewriter keyboard (as in one Brazilian state that required additional keys which were a standard item for a local manufacturer) or an electrostatic filter (as in Sweden). Office equipment considers itself little influenced by the role government plays as a supplier, by governmental economic development policies, by restrictions on remit- tance of earnings, by reinvestment policy legislation, by patent protection legislation, or by pricing rules. The electrical industry.--After the chemical industry, the electrical industry is the most pressured. In most areas it fared in the middle range with the exception of discriminatory standards, which were applied to electrical and office machine equipment companies primarily by developed countries. The industry is also very sensitive to economic development policies because most basic electrical investment projects are government planned and authorized. Government economic policies will determine the profitability of public utilities through rate regulation, which influences the derived demand in the industry. Government purchasing policies are also a weapon governments might use against electrical companies. 129 The metal working industry.——The metal working industry, including steel machinery and pipes, is subject to average pressure. Its treatment is more similar to that of the office machine equipment industry than that of the electrical or the chemical industries. Metal working does not consider itself much influenced by technical standards, patent protection, or a minimum export quota. It seems less sensitive to price controls, although in some instances rules not allowing for freedom in establishing profit margins were considered dangerous by the companies. The industry seems to have little difficulty staffing foreign subsidiaries, but there is fear of expropriation, nationalization, or forced sales, and the belief is somewhat stronger than average that the industry is subject to pressure from the government as supplier. The government as a customer is also a problem, and some discrimination occasionally occurs in favor of local national producers. Import restrictions and minimum eXport quotas seem to be applied to this industry less than others, possibly because metal working industries are considered prestige symbols. Only a small number of items are produced locally, and because of the small economies 130 of scale and the high protective barriers, no one could dream of exporting, except in products where the domestic market allows economies of scale. Quite often the nature of the product creates some built—in vulnerability. In most cases steel machinery manufacture requires highly skilled labor and a large market, and very few countries possess the necessary combination of factor endowment, capital, human resources, and markets. The size of the required investment in the metal working industry forces firms to find locally as many reliable financial resources as possible, and to keep equity investment at a minimum. Such characteristics would lead to a negative reaction to any restriction concerning the capital structure, as is evidenced by the answers to Question 31 in Appendix F on limitations of the debt structure. The automotive industry.-—The automotive industry perceives itself as more susceptible to political pressure than the office machine equipment industry, but less susceptible than the metal working industry. The obstacles it fears most are local capital participation, minimum export quotas, and local content and economic development policies, all of which are also reflected in the present Mexican situation. The industry is relatively unconcerned about expropriation, forced sales, nationalization, 131 reinvestment policies, and licensing and management fees, although these are considered serious impediments. Restrictions on capital structure (Question 31) and patent protection legislation rarely are problems. Subsidiaries and Headquarters' Perception of Political Pressures The Brazilian subsidiary levels.—-The immediate environment is reflected at the subsidiary level (see Figure 3—3). In Brazil, the key role economic policies play in the development of the economy, the predominance of price controls, and the recent governmental drive toward the opening of corporate capital in the local stock exchange are of particular concern. An acute problem for the automotive industry is the forced development of an export market through the requirement of a minimum export quota, given that every country desires to produce locally and export. The auto— motive industry, which, within its world—wide strategy, has catered its manufacturing policies to the South American market, fears particularly in Brazil the long-run conse- quences of building up capacity for exports outside the LAFTA area if financial incentives are withdrawn. Although it is not a serious problem elsewhere, the office machine equipment industry in Brazil faces a difficult decision if the government forces more local AUTOMOTIVE INDUSTRY CHEMICAL INDUSTRY ---------—--l ELECTRICAL [NDUSI‘ RY -I-I-l-I-l-l-I-I-l METAL WORKING INDUSTRY OFFICE MACHINE EQUIPMENT’INDUSIRY WWW . Figure 3—3. industry subsidiaries. 132 Price Controls—— Pricing Regulations—— Patent Protection—— Requirement of Producing Patented _ Pro Discrimination in Production—— Licences Minimum Exports Quotas—— Product Line Control ____—— Government as a Customer..— Local Capital Participation— Tmnsfcr of Capital _____—— Licensing Fecs___——— Reinvestment Policy__.___—- Exchange Contro|s__._——— Economic Development... Policies Local Content Requirements ___. Import Restrictions ____.——— Discriminatory Technical Standards— --Evaluation of obstacles Degree of Importance .—.(.laA ._1urruodur| d to foreign investment by J... 133 capital participation. Some of the companies interviewed fear that their bargaining power in the issue of "opening the capital to the Brazilian people” issue is weak, and a major change in company policies must occur if they want to remain in the country in the long run. At the sub- sidiary level, discriminatory technical standards are not as important for office machine equipment, but the spread between the electrical and other industry's shrunk significantly. The headquarters level.——Headquarters appear to take a more global approach (see Figure 3—4). This is reflected by headquarters attenuating certain important risks but in compensation by increasing the number of potentially critical obstacles. The major concerns are finances and pro— duction. Financial concerns in particular are local capital participation, transfer of capital, licensing fees, exchange controls, and economic policies. These obstacles interfere directly with profits, managerial freedom, and are conceptual in nature. For example, the metal working industry at the headquarters level is extremely concerned about limitations on repatriation of earnings and the transfer of capital. Local content requirement and import restrictions prevent the international movement of goods, and might force local assembling or manufacturing despite the fact it is not the best allocation of resources. For these reasons, they constitute a major conceptual obstacle. 134 Degree of Importance —— iueuodw] _K|muoysuaao —Km,\ Price Controls —_—-—_— Pricing Regulations Patent Protection AUTOMOTIVE INDUSTRY CHEMICAL INDUSTRY Requirement of Producing — ------------ Patented Product ELECTMCALINDUSTRY .I-l-I-I-I-I-I-I- Discrimination in Production —— METALWORKINGINDUSTRY Lwemmg ‘IIIIIIIIII’. IIIIIIIIIIIIIIIIIIIIIIIII OFFICE MACHINE EQUIPMENT INDUSTRY Minimum Exports Quotas —— KXXXXXXYYXXYYYWYWYWYYW Product Line Control —— Arbitrary Tariffs Classification —- Government as a Customer—— Competitors Subsidized —— Foreign Personnel Restrictions ——~ Debt LimimtiOns _——————— Local Capital Participation ———-o q o i é.“ Transfer of Capital _— Licensing Fees —————— 3 .. Exchange Controls ———————. Economic Development.__. Policies 1 Government as a Supplier— Local Content Requirements“ . . . ‘ I . . .' . ‘ . . ‘ y _ I ' E i I: I . I I,’, . . . a+ ' ‘ , I Discriminatory Technical Standards... ‘ ‘+_,7 A, 7 L” “7‘1 . Figure 3-4.--Evaluation of obstacles to foreign investment by industry headquarters. 135 Foreign personnel restrictions, although actually not an important obstacle as shown in Figure 3.4, are I nevertheless perceived in some headquarters as significant. Discriminatory technical standards are clearly more important than in other industries, and are so perceived at headquarters. Government as a customer is signifi- cantly more important at the headquarters level, perhaps because of the peculiar pro—private enterprise attitude the Brazilian government takes in managing the country. The office machine equipment industry fears government as a purchaser or customer in developed countries but in Brazil at present such a risk is remote, since the Brazilian market is large and is expanding. Discrepancies in obstacle perception are visible by comparing Figures 3—3 and 3—4. Thus, headquarters executives perhaps project their apprehension of the government as customer in developed nations onto the Brazilian situation; executives in Brazil, however, are more realistic in viewing the risk of government as customer as minor. The emerging problem of minimum export quotas is becoming a serious one for foreign investment in general. Some executives believe that it is the political risk of the future, and consider it more significant than price controls. Many pointed out, however, that such export requirements quite often are accompanied by subsidies and l36 tax benefits, and that they could offer larger financial returns than domestic sales. Therefore, the risk of not participating in such a scheme will increase as time goes by. From a managerial viewpoint, this will lead to rethinking the corporation's intended strategy in terms of a world—wide country segmentation. Each country would specialize in specific products and in exchange allow import privileges for the corporate product line. Some products by their production or marketing characteristics could be particularly vunlerable to some obstacles which might be entirely inoffensive to other products. For instance, in the chemical industry patent protection is essential for survival, and it is reflected in headquarters' perception of the evaluation of obstacles. The same obstacle is perceived differently at the sub— sidiary level, where the problem is considered of rather‘ limited importance. Differences in vulnerability to political pressures do exist among products; they are the result of product characteristics and of their impact on the goals of the general policies followed by the government. Political Risk and Technological Transferability Hypothesis 4 stated: (a) The more transferable the Product technology, the greater will be the pressures for 137 local production; (b) the less transferable the product technology, the greater will be the pressures for pro- ducing a component which is technologically transferable. Every corporate executive but one agreed with the two hypotheses. Thus, there is a high face validity. The executive who disagreed mentioned that it is possible to manufacture anywhere in the world if the corporation is free of governmental interference. Such a statement does not invalidate the hypotheses, since they are not concerned with the feasibility of creating technological wonders in the middle of the Sahara, with everything—-labor, technicians, and equipment—~imported. Rather, they are concerned with what is actually done, and on what products or production processes the host governments are putting pressure. They intuitively agree with the hypothesis, but none explicitly incorporates this evident phenomenon into long range planning. Spectrum of Political Pressures Governments quite often apply political pressure by simultaneously using positive and negative incentives, which may reinforce each other. As described by most executives, there is a chronological pattern in the application of 138 government pressure (Figure 3-5). Initially, government bureaucrats informally inquire about a corporation's future plans, and casually suggest a need for investment in a particular economic sector. In general, they add that such a m0ve will be greatly appreciated by all concerned. During this phase there usually are small administrative delays, with the subtle indication that compliance could solve some of the problems. The second stage is presentation of overt govern— mental opinions and suggestions, couched in broad directives for investment in the national plan. Subse- quently, the "law of similars,‘ or an equivalent system, is established for priority investments. Governments try to attract further investment by providing better incentives, such as subsidies and tax advantages. A failure of these positive incentives may open the door to a multitude of negative pressures, among them limitation on foreign personnel, import restrictions, increased local content requirements, deadlines for different levels of content requirements, and the threat of state-owned enterprise. Transferability of Product Technology The automotive industry is quite familiar with the pattern just outlined. Foreign manufacturing in developing Countries begins at the assembly plant level: the next step is the requirement that local content incorporated in 139 EXPROPRIATION OR GET IN NEGATIVE PRESSURES (AND POSITIVE PRESSURES 0R MEANS TO ACHIEVE POLITICAL AND INCENTIVES GET OUT) ENDS*) /' __ QXVL LOCAL INTEGRATION (*LEGISLATION) ] :— STATE OWNED ENTERPRISES I) —— ‘ .— \ 4DEADLINES FOR CERTAIN TEMPORARY LEVELS _ OF LOCAL CONTENT \ __ (*LEGISLATION) - — ‘LOCAL CONTENT REQUIREMENTS _ (*LEGISLATION) POSITIVE INCENTIVES I-OR LOCAL PRODUCTION? c.g.: Duty free capital equipment goods. Tax holidays. Subsidies. Government contracts. _ ‘lMPORT QUOTAS DISCRIMINATORY ENFORCEMENT OF LEGISLATION ._.._ IIIGIITARII-‘FS _ (*ADMINISTRATIVE ACTION & LEGISLATION) —— 1-I30RI-'IGN PERSONNEL QUOTA ,_ (*LEGISLATION) .— __ {-“LAW OI" SIMILARS" (*ADMINISTRATIVE ACTION & LEGISLATION p OPEN GOVERNMENTAL SUGGESTIONS-b —— _ ‘- RED TAPIi __ tug; Visa, Permits, Delay in licensing imports. INFORMAL GOVERNMENTAL OPINIONS-D "' (*ADM'NISTRATWE ACTION) OI“ WHAT COULD BE DONE V NO PRESSURE Figure 3-5.—-Spectrum of political pressures. 140 the vehicles be gradually increased by developing more technologically simple products. Government then applies pressure for maximum local content by enacting laws requiring a minimum percentage of local products by weight or value. This was the process in Brazil. In June 1956, a decree was issued directing the creation of a local auto- motive industry.9 The implementation of that plan followed the prediction of the hypothesis,and in July 1956 jeeps,lo pickups, vans, and trucks,ll were affected, followed in 1957 by cars. The difference in content requirement reflects the market and technological character— istics of the product. Minimum local content requirement, per— cent of weight Deadline Pickup Truck 31 December 1956 40 35 1 July 1957 50 40 1 July 1958 65 65 1 July 1959 75 75 1 July 1960 90 90 A similar process operates in other industries, and was described as follows by an electrical executive: The electrical industry is first required to assemble I ' ' ' a d Slmple electrical equipment, such as reSIstors n W 9Decree 39412, June, 1956. 10Decree 39676A, July 30, 1956. llDecree 39568, July 12, 1956. 141 cables, then the assembly of simple small electrical products such as radios, small engines, and transformers follows. Thereafter, the complexity of the required product develops as a function of the voltage and power of the equipment needed. The transfer of electronic com— ponents is the most difficult process. Some countries eliminate certain steps because national planning priori— ties de-emphasize the less prestigious products. Transferability of Component Technology In the case of highly technologically complex products, parts of the product are imported, others are manufactured locally, and the whole is assembled locally. This is the case in the production of large electrical equipment such as high voltage transformers. In the office machine equipment industry, where import of new technology is an important bargaining factor with many products, Political pressure might be applied to locally produce secondary goods such as carbon paper, ribbons, cards, paper, or typewriter keys. That industry indicated that local manufacturing had generally increased the growth rate in the value of imports of thier product line. The majority of corporations (78 percent) mentioned that such pressures forced them to make investment deCI5ions four or five years in advance of their economic justifica— tion in order to benefit from long-term governmental 142 advantages such as tax benefits and subsidies, which, in turn, provide a competitive advantage. Interestingly enough, strategic moves of the corporation activated by political pressures are perceived more as the result of a dynamic competitive situation than of the government's arm twisting; thus, the fear of losing market access was a prime motivation. Summary From a managerial vantage point, the product can be studied in three dimensions: its political meaning, its technological transferability, and the governmental pressures exerted upon it (Figure 3—6). Political pressures vary among products as a result of product characteristics (economic, social, or prestige goods) and of the general policies followed by the government. The perceived relative vulnerability reveals that even in countries where political risk is presently low, there is fear of certain risks which are reflected overall. The priority given various risks might differ among ' ‘ ' concerned in corPorations and industries, but all are some degree with the following political risks: (1) Capital restrictions (local participation, repatriation of earnings, and so forth); (2) Economic development policies; (3) Price controls; 143 9 Complex 63 Technological Transferability Easy Type of Products Economic Social Prestige Good Good Symbol Figure 3—6.-—Dimensions of a product. (4) Import restrictions and/or local content requirements; and (5) Minimum export quotas. From the complex mix of industries and products, major risks emerge: in the developed countries, in the name of safety, discriminatory technical standards are enacted; in the developing countries in the name of economic growth and efficiency some governments are fostering requirements for minimum export quotas (in Value or quantity, for either parts, or finished product). Superficially, it seems valid to say that political Pressures are a function of the level of technological transferability, but problems in the measurement of a Product's technological transferability prevent the author from categorically demonstrating the hypothesis. 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Further, it appears worthwhile to develop a scheme which portrays the cycle of industry pressures for different countries at different levels of economic development in order to plan investments and their timing in a worldwide strategy. From a managerial standpoint, the porduct taxonomy leads to development of specific strategies where the firm enjoys varying leverages at the bargaining table (see Table 3-1). Economic goods which are intended to lead to economic growth should reach economic efficiency in the long run, that is, the best national allocation of resources (for example, cars in Brazil). Goods produced locally with the purpose of national self—sufficiency are generally manufactured by companies dependent upon govern— mental aid or protection for survival. But the political importance of their survival is such that government stands ready to support part of the economic costs. Social goods are more prone to local control through price con— trols (for example, pharmaceutical products), nationaliza— tion (for example petroleum industry), or majority local capital participation (for example, banking industry). The corporation has to submit itself to society's regulations. Prestige goods require active support of the government if this activity is to be continued; in such a case the COrporation has a better bargaining position for invest- ment negotiations. 146 In strategy development, the most evident is most often easily forgotten. A firm has to evaluate period- ically its product line position and its bargaining power and adjust its strategy accordingly. In the Brazilian case, the automobile industry which began on a "prestige" basis became an economic good, and it is conceivable that it will become a prestige industry in the near future. Some products in the metal working industry which started as economic goods, with a self—sufficiency objective, are becoming prestige goods. As the environment changes, priorities change and affect the exports and local pro- duction of goods. CHAPTER IV THE FIRM: I. NATIONALITY AND POLITICAL RISK ANALYSIS In addition to the product, the firm's other vari— ables are important in determining vulnerability to politi- cal risk. A permanent challenge to private enterprises in international business results from continuing government intervention without clear—cut delineation between the public and private domain. One of the major reasons for this conflict is the developmental aspect of the politico— economic structure of the economy in most developing countries. In industrialized countries, government limits itself largely to regulating competitive practices; in developing countries, the competitive environment is non— existent, and many governments think unassisted and undirected development too slow and inefficient. Certain industries require a minimum size for economy of scale, and some countries, such as African and South American nations, cannot afford local, competitive, economic structures. The solution is creation of a monopoly situation for an enterprise within the Country, or a public 147 I48 enterprise, or a combination of both. The problem is further complicated by serious imperfections in the market and in price mechanisms due to the narrowness of the market and the prevalence of monopolistic conditions. The narrowness of the market may make governmental presence indispensable when a massive volume of capital is required, as was true in the development of petrochemical complexes in Brazil and Venezuela. Therefore, the role that a private enterprise is expected to play in international business might be quite different from the one it plays at home. In most developing countries, the foreign firm has more of a developmental function; it must create new jobs, develop the industrial structure, train skilled workers, and so forth. An enterprise must be conceived of as an effective instrument for socio—economic organization, and not simply as a means for profit. The aggregate of vari— ables which influence the achievement of this developmental role are contained within the firm. This chapter focuses on the general importance of certain attributes of the firm such as its nationality, size, or managerial policies which might influence the firm’s political environment and its Perception of that environment. I49 Attributes of a Firm All firms in the world share certain common attri— butes: they have a nationality, financial and technologi— cal resources, and their own managerial philosophies. The firm's nationality is one of its most contro— versial attributes. Does it have any bearing on the conduct of business? During the colonial period, nationality was a passport into any colony for a firm from the metropole, but independence supposedly changed that. Is there still systematic preferential treatment for certain nationalities? Some answers will be provided in the next section. A firm's financial resources determine basic inter- national business strategies. Most European companies, lacking funds after World War II, invested in developing countries not because they had surplus, but as a competi- tive move against the new American invasion which, by pro- ducing locally, put the Europeans out of their traditional eXport markets. In those circumstances joint venture was preferred to wholly owned subsidiaries for solely financial reasons, which might explain the greater number of joint ventures among European than American corporations. The size of the firm's financial resources also determines the possibility of external financing during periods of inflation, under monetary restraints, or during investment eXpansion. 150 Managerial philosophies reflect the flexibility of the firm toward the foreign environment. Managerial prac— tices, such as personnel policy, might be a significant reflection of a firm's perception of political risk. The I {turnover policy of foreign personnel, among other decisions, ‘could influence automatically the environmental perspec- ‘tive within the firm; high turnover, for example, could ‘create a short-term perspective, and a low turnover might ‘give managers more cultural insights and experience. Local managerial resources both determine and reflect the extent to which foreign enterprises tap the local manpower market in staffing. Managerial resources of a corporation influence its strategies. For example, Most U.S. corporations see little political risk in governmental legislation limiting foreign personnel. Yet, these corporations face a serious shortage of skilled Americans willing to expatriate themselves, and are actively looking for local nationals who have the added advantages of knowing the culture, speaking the local lanQUage, and requiring lower salaries. The Firm and its Nationality Historical Importance Of Nationalit Nations endowed with great economic power have always been the emotional target (for example, "Yankee Go Home") of underprivileged nations. This economic strength 151 was quite often linked with political power. The assumptions in this study were that corporations from economically powerful countries might be subject to more harrassment because of the political threat they represent to the host country. The importance of these interrelationships is reflected in statements (and concommitant policies) such as "trade follows the flag," and "tied foreign aid," and terms such as "political blocks.” Trade follows the flag.——The philosophy that trade followed the flag prevailed during the nineteenth century and until the pre-World War II period. Countries sought a position of influence in nations throughout the world under the pretext of opening markets for the home country. Spheres of influence followed in general a north-south direction: U.S.—South America, France—Africa, United Kingdom-Africa and Asia (which is an exception to the rule). Every developed country considered these spheres important sources of raw materials and purchasers of goods and services. This period coincides with the height of Western colonization, which institutionalized the existing relation— ship. World War II marked the beginning of the accession to independence of most colonized nations. In general, independence was granted in exchange for help received by the home country during the war. The period also witnessed f— a series of wars of liberation. Independence meant nation 152 building, and the concomitant desire for an economic structure more appropriate for a sovereign nation. With some exceptions, that need coupled with hatred of the dominant nation led to waves of expropriation. Prime targets were economic sectors with social and self— sufficiency overtones, and areas where colonialists pos- sessed an absolute monopoly. Specific sectors usually nationalized were public utilities, agriculture, mining, and export-import trade of key items. The assistance of the metropole during the decolonization period took the form of cultural and technical assistance, economic aid, and sometimes military aid, in which case the countries forged stronger political links. Often a different country replaced the metropole. Tied foreign aid.~—Economic aid can take many forms: bilateral, multilateral, commercial credits, or trade agreements. Most bilateral aid is tied aid—~one country provides financial resources to another in exchange for the purchase of goods from the donor country. In general, such aid is favored by large donor countries because it secures a captive export market for products and their servicing. Multilateral aid, in general, allo- cates aid from many nations among donee countries, in Which case donors lose their controlling power. 153 Other means of granting aid are through governmental xport credit insurance programs; low, long—term interest ate loans (export—import bank); or trading agreements herein one country agrees to buy at a fixed price the eading crop of another (for example, the French purchase f wine from Algeria and Tunisia), with the understanding hat the proceeds of the sale are used to buy goods in the urchasing country. In most cases, the assistance provided y the colonial power has been replaced by this kind of aid. In some countries the original colonial power has been replaced by a larger one: the United States replaced France in Indochina, Belgium in the Congo, and the Nether— lands in Indonesia; Russia replaced the United States in Cuba and the United Kingdom in Egypt. Cultural ties.——Another important factor of nationality is language, which, when shared by nations, might create cultural ties. In general, language and cultural similarities stem from a period of close politico- economic ties, such as existed between Spain and parts of South America, Portugal and Brazil, and France and Quebec. Cultural ties normally should bring nations together. If so, does this create any advantages for a company associated with that culture? Sharing of political ideology.--Do countries dis— criminate against products coming from a country with a 154 different ideology? If generalized, this constitutes another element of nationality since most economic group- ings develop strong trade links which are based on politico- economic grounds, such as COMECON, LAFTA, and the Common Market. Interview Results Reflecting the Importance of Nationality The previous section highlights the various reasons that could explain the importance of the firm's nationality. It could also be perceived as a home country's agent rather than a socio—economic organization existing for the mutual betterment of the host country and the parent corporation. The nationality question asked interviewees had three purposes: to reflect the importance of nationality in general; to determine how the nationality factor interacted with sizeable economic powres in the form of economic con- centration; and to assess the impact upon the firm's busie ness environment of the home country's involvement in world affairs. Question 1: Are there advantages or disadvantages for a corporation in being a citizen of a large eco- nomic power? The summary of the interview results are presented in Table 4—1, which show the mean Score on a five—point scale of executive responses. 155 TABLE 4—l.--Nationality issue.* Question 1: Are there advantages or disadvantages for a corporation in being a citizen of a large economic power? A11 Companies Headquarters SubSIdiaries By Industry Metal Working 2.00 1.50 2.40 Electrical 2.47 2.14 2.75 Chemical 2.60 2.80 2.40 Automotive 2.90 2.75 3.00 Office Machine Equipment 3.36 3.67 3.00 All Industries 2.67 2.62 2.72 By Nationality U.S. 2.85 2.86 2.83 Foreign 2.52 2.33 2.65 * c Measurement: 5-pOInt scale system 1.00 Many advantages 2.00 Few advantages 3.00 Neutral 4.00 Few disadvantages 5.00 Many disadvantages The overall pattern of response shows that being the Citizen of a large economic power does offer some advantages. Althoth not revealed in Table 4—1, it is curious that COmpanies from smaller countries such as Belgium, Holland, and SWitzerland were satisfied to be citizens from their 156 nations; in the sample they were outnumbered by companies from large economic powers and, due to aggregation, such results do not show. Thus, everyone seems to be satisfied with his nationality. There is, nevertheless, one major exception in that pattern: the office machine equipment industry feels that nationality is an important variable, especially for govern— mental contracts. One executive mentioned the fact that the French government first gives preference to a French manufacturer, then to a European, and last to an American. Such a deviation from the general pattern could be explained by the fact that the sample had a slight American bias and the office machine equipment (especially computers) industry is the heart of the American challenge. The American computer industry is presently under pressure not in the developing countries, but in industrial countries. Such pressures are in most cases automatically U.S. oriented due to their quasi—monopoly in that area. At the headquarters level, American and German metal working and electrical industries considered it an advantage (from few for the electrical industry to many for the metal working industry) to be citizens of a large economic power. The reason might be the financial backup the home country could provide to these capital—intensive industries. Chemical and automotive industries from large economic powers show a very slight advantage. The 157 difference in the results between this group of industries (automobile and chemical) and the previous (metal working and electrical) could be explained by the difference in absolute size of the enterprises which have a higher flow of internal revenue and an easy access to the capital markets. Among the advantages deriving from nationality, access to governmental aid in the form of long—term credit or investment guaranty programs were mentioned by several executives. The executives underlined the fact that their industries were dominated by foreigners and the differential advantage came from their home government policies. The chemical industry is close to the neutrality level; the slight advantage is mainly explained by financial con- siderations. As one would expect, at the headquarters level the office machine equipment industry is especially negative about any advantage. That industry feels that, in most cases on the basis of nationality, government is trying to develop a local computer industry at any cost, despite the fact that those countries are developed (the United Kingdom, Germany, and France), and some manufacturing usually is done locally. Generally, at the subsidiary level, it seems the influence of nationality decreases. Office machine equip— ment executives felt that foreigners were treated fairly because of the lack of local Brazilian producers. The f same attitude was prevalent in most industries inter- 158 viewed. The majority of executives said that "manufac— turers (foreign or Brazilian) are not discriminated against as long as they produce locally." A slight exception might be the chemical industry; the minor dis— crimination in Brazil is against foreigners in general rather than a specific group, or rather against foreigners who are avoiding joint ventures at any cost. Such a policy is in line with national development plans and open governmental opinions. When the analysis is done by nationality rather than by industry, it appears that overall for U.S. corpora— tions there is little difference between the subsidiary and headquarter view. The results show a very slight advantage given to corporations from a large economic power. Non-U.S. corporations, on the other hand, give more importance to nationality, especially at the headquarters level. They evaluate the nationality factor, on a five— point scale, .53 lower than their U.S. counterparts,while at the subsidiary level the difference is only .18. The dif— ference may be explained by three attitudes. European corporations perceive U.S. enterprises as "without financial limits." Second, there is the feeling that develOping countries would prefer technology from the United States, "the most powerful country in the world," rather than settle for second best. Third, there is an 159 opinion that countries receiving aid from the United States fear the consequences if they refuse or restrict American private investment; to reject a company from a smaller nation has fewer consequences. In some ways American companies benefit by the association with the image of American power and the quality of its technology. At the financial level, this benefit by association is perceived by other foreign cor— porations as translated into easier credit and lower interest rates. Some executives observed that nationality advantages could vary from country to country. In the automotive group, one executive noted that the United States might have an advantage in Brazil or Argentina, but not in Chile. Another top executive estimated that in Latin America his company's chances for holding a privileged manu— facturing position were 60/40, in French-speaking Africa 70/30, and in English-Speaking Africa 30/70. The View was expressed that the image of the firm was perhaps more important than its nationality. Along the same line, the executive of a major U.S. firm in Brazil Stated that the corporation, despite its internationally known name, was perceived by the Brazilians as a Brazilian corporation. This surprising opinion was investigated. Fifty different Brazilians in three different towns, ranging from janitors, cab drivers, civil servants, Students, and professors to executives were polled; not 160 Brazilian agreed. Admittedly, the sample was not random, but it clearly indicates that the executive, who could not speak Portuguese despite a one-year stay in Brazil, had misinterpreted his company's image. All industries seem to agree there is an overall advantage for corporations from a large economic power, with a slight decrease in importance at the Brazilian subsidiary level. Question 2: Is it advantageous or disadvantageous to have a large group of firms of the same nation— ality in the same foreign country? This question attempted to determine what advantage, if any, one nationality might have if the combined economic power of its subsidiaries was important and visible. The results of the interviews (Table 4—2) show an overall pattern of an almost neutral effect for national Clusters. The chemical and office machine equipment industries had a particularly neutral position (3.00). All other industries were within .25 of the neutral effect On the rating scale, but aIWays with a slight tendency toward a high concentration being advantageous. At the headquarters level, two industries perceived Such situations as a disadvantage: the chemical and the Office machine equipment industries. The latter showed a decrease (3.67 to 3.17) from the first question, that is, 161 TABLE 4—2.—-Foreign concentration issue.* Question 2: Is it advantageous or disadvantageous to have a large group of firms of the same nationality in the same foreign country? All. Headquarters Subsidiaries Companies By Industry Metal Working 2.75 2.50 3.00 Electrical 2.80 2.71 2.88 Automotive 2.80 2.75' 2.83 Office Machine Equipment 3.00 3.17 2.80 Chemical 3.00 3.20 2.80 All Industries 2.87 2.88 2.86 By Nationality U.S. 3.04 3.14 2.92 Foreign 2.71 2.58 2.81 * Measurement: 5—point scale system. 1.00 Many advantages 2.00 Few advantages 3.00 Neutral 4.00 Few disadvantages 5.00 Many disadvantages there was less disadvantage in high concentration than in being a national of a large power. In fact, this indicates a greater feeling of neutrality. The chemical situation is somewhat different: some executives felt that a high 162 :oncentration of corporations of the same nationality tught be perceived as a danger to national sovereignty in the long run. Other industries all moved closer to the neutral position. The metal working industry moved up one point on the rating scale (from 1.50 to 2.50); the electrical up .63 point (from 2.14 to 2.71); and the automotive remained unchanged. This overall upward movement might be explained by two different attitudes. The first was summarized by an executive in these words: "It doesn't matter who breaks the politically allowable, as long as it is foreign," that is, the foreign component of economic power is more important than the nationality component. The second attitude reflected an inherent dual problem: "On one hand, you have a greater bargaining position toward the host and the home government; on the other hand, you become a greater threat to the local government, who might think that you may become too power— ful." The better bargaining position toward the home government is translated into more economic aid and techni— cal assistance from home. It was also reflected in the Brazilian case, as many executives indicated, in a lobby— ing effort by American corporations through the Chamber Of Commerce to revise U.S. policies against Brazilian coffee. Relative to the host country, a large number of 163 corporations of one nationality facing the government are in a better bargaining position. At the same time, a too strong bargaining position threatens the government and might lead to conflicts. The resulting situation was sum— marized by the vice—president of a European corporation in the following words: "These two forces offset each other and you are in a neutral equilibrium, but you find your— self in a lot more unstable situation than before." At the Brazilian subsidiary level, wheie two nations, the United States and West Germany, have a very important proportion of private investment in many economic sectors (for example, in the automotive, chemical, and steel industries), the pattern of response, when compared with those of the nationality issue question, indicates a broad trend toward neutrality with the exception of the automotive and office machine equipment industries. On the five—point scale, the metal working industry indicates a greater neutrality (up to 3.00 from 2.40); the chemical and electrical industries show a smaller increase (up to 2.80 and 2.88 from 2.40 and 2.75); while the office machine equipment and automotive industries indicate a slight downward trend, that is, a high concentration is relatively more advantageous (down to 2.80 and 2.83 from 3.00). The explanation for this downward trend was not revealed through the interviews, and this writer hypothesizes that the prevailing high foreign concentration creates a feeling 164 of security among industry executives that local national production would not be undertaken, or foreign manufacturing properties expropriated. The overall analysis of industries confirms clearly the broad trend toward neutrality (from 2.67 to 2.87) in the question concerning the foreign concentration issue. Also, the headquarters-subsidiaries spread in the overall measurement decreased (from .10 to .02). On an analysis by nationality, a broad upward movement toward neutrality is observed; all U.S. and foreign corporations moved up respectively by .19. U.S. headquarters felt that a one—nation foreign concentra- tion would create some disadvantages; they moved from 2.86 to 3.14, which indicates a switch from there being a slight advantage for corporations from large economic power to there being a slight disadvantage when one nation has a too high economic concentration in the host country. Foreign corporations moved up by .25, from 2.33 to 2.58, which still indicates a small advantage for a one— nationality economic concentration. This slightly opposite View was not directly apparent during the interviews, and this writer can only explain this divergence by assuming that foreign (European) corporations might perceive that issue as one element of the U.S. corporation's success abroad. 165 The headquarters—subsidiary spread decreased slightly (from .32 to .23), while among U.S. corporations it increased (from .03 to .22). In either case there was an upward movement, greater among headquarters than among subsidiaries (.25 versus .14). It is also interesting to note that the spread of U.S.—foreign headquarters did not change very much (.56 versus .53). The question elicited three comments. First, there is a time dimension involved: high nationality concentration in the past and present was and is an advantage; in the future it will be a disadvantage. Second, any advantage existing when cer— .tain political circles are in power might be lost when other political forces take over. In Brazil, for example, many executives speculated about the situation should the generals presently in power (mostly pro-foreign and pro- American) be replaced by the young colonels (mostly nationalist and anti-foreign). Third, managerial philos— ophies are important. The credibility of corporations, not the level of concentration, appears to be more significant. Question 3: What are the repercussions of the home country's role in international events upon your business environment? The general pattern of responses (Table 4—3) indi— cates that, with some exceptions, repercussions are not important. Exceptions, as executives mentioned, include 166 TABLE 4—3.-*Home country's international role issue.* Question 3: What are or have been the repercussions of the home country's role in international events upon your business environment? All Companies Headquarters SubSIdiaries By Industry Electrical 4.13 3.14 5.00 Chemical 4.80 4.60 5.00 Office Machine Equipment 4.82 4.67 5.00 Metal Working 4.89 4.75 5.00 Automotive 4.90 4.75 5.00 All 4.67 4.27 5.00 By Nationality U.S. 4.88 4.79 5.00 Foreign 4.45 3.67 5.00 * Measurement 1.00 Great repercussions 2.00 Many repercussions 3.00 Some repercussions 4.00 Infrequent repercussions 5.00 No repercussions the decolonization period, the Middle East crises and reactions of some Arab countries, and the Vietnam War's effect on Sweden. The greater spread between foreign headquarters' perceptions, in the electrical and other industries are due to biases stemming from the 167 decolonization period. The Middle East crises led to waves of confiscation of EurOpean and American properties in many Arab countries. In Sweden, some longshoremen refused to unload American vessels, and some companies mentioned possible loss in sales, but with minor effects on the local volume of sales. At the subsidiary level in Brazil no effect was seen. In conclusion, it seems that Hypothesis 3, "the greater the past and present power of the firm's home country, the greater will be the harrassments," is neither confirmed nor denied. Nationality does not seem to provide the advantages or disadvantages it provided during colonial periods. In general, nationality leads to repercussions only when the firm operates with or within countries closely involved in the conflicts. Firm's Size and the Pursuit of Total Subsidiaries' Control In his study, The Joint Venture Process,l James Tomlinson devoted much attention to the relationship between the size of the corporation and its attitude toward control. He found "a significant relationship between size of foreign firms and their attitudes toward . lJameS w. c. Tomlinson, The Joint Venture Process in International Business: India and Pakistan (CambrIdge: M.I.T. Press, 1970). 168 equity control.”2 As the size of the parents in assets or sales increased,the corporate attitude toward equity control moved toward a necessary total control over the subsidiary. Other authors reached similar conclusions. Michael Kidion commented that "a big international company is more likely to demand and get control of a new joint venture than any other."3 The NICB study of joint ventures stated that "the large internationally aggressive company . . . feels in a position to demand majority ownership in a joint venture, and, as a matter of policy will seek it out."4 The results of this present study tend to confirm that phenomenon: the smaller firms in international business that were interviewed had a more open attitude about the public sale of stock or joint ventures with private enterprise or the government. One executive of a small electrical corporation said: "We would love to have partners, or open our capital, but nobody knows us as well as the others; we don't have any drawing power." Tomlinson stated: 2Ibid., p. 74. 3Michael Kidion, Foreign Investment in India (London: Oxford University Press, 1965), p. 270. 4Karen B. Bivens and Enid B. Lovell, "Joint Ventures with Foreign Partners," New York, National Industrial Conference Board, 1966, p. 6. 169 in general terms, the need or desirability for control by the foreign parent of a joint venture's operations varies with different types of industry and activity. This is partly a function of the complexity of the technology involved and of its strangeness to the host environment. It depends too on the level of sophistication of the host environment . . . the study revealed that in the chemical group, 14 out of 15 cases, the executives felt that control was necessary or desirable . the most relaxed in their attitudes toward control, appear to be companies in the engineering, electrical, vehicles, and metal categories.5 From the evidence presented by Tomlinson for very large international corporations,6 64 percent entered into joint ventures because of governmental pressures. If international corporations had their choice, the great majority would prefer wholly owned subsidiaries, but governmental actions prevent that, and corporations settle for a policy of second best. This writer found in the Brazilian case that a vast majority of electrical, transportation, and metal working executives were against joint ventures, or even to Opening their capital for trading in the stock market. The attitude reflected a rigid policy coming from headquarters. This general corporate opposition to governmental pressure for local capital participation increases the risk of violent government reaction. "Dragging one's feet," as an executive noted, "may not be a bad solution, but a M 50p. cit., pp. 95—99. 6 Op. cit., p. 75. — 170 corporation must judge when compromise is on the agenda." The accuracy of this information might depend upon the firm‘s ability to analyze political risk. Managerial Practices: The Firm's Analysis of Political Risk The importance of political risk is reflected by the booming literature and many seminars dealing with that topic, including government—business relationships, multi- national firm-host country conflicts, and the issues of nationalism. The relative importance attached to political risk, for example, is reflected in priorities used in the selection of directors.7 Political factors are pervasive throughout every decision area of a corporation: political factors influence the structure of an economy as well as the workings of it, and might prevent the development of profitable operations. Surprisingly, political risk is not a decisive factor in decision—making, but is still present in every major decision. Reporting Political Risk It emerges from interviews that political risk seems to be a factor which is thoroughly analyzed at the headquarters level at the time of first investment, or in SPecial cases such as the recent Chilean election of ______________________ 7See Nils C. Salander, "The Business of the Board," Wm, June, 1970: P- 97- 171 marxist president, Salvador Allende, or the Peruvian political situation. Subsidiaries are not Specifically required to report to headquarters on the political situation periodi- cally. Executives in Brazil said that when reporting economic developments they would include information about government actions which might have an impact upon the business environment. The most sophisticated provide an idea of the politico-economic philosophies of the differ- ent ministers in power. One top executive mentioned that in his annual report to headquarters he volunteered a synopsis of the political situation as be perceived it. Other executives said that such tasks were not required, and that headquarters kept in touch with what was going on by reading newspapers or through personal contacts. Analysis of Political Risk Political risk can be analyzed under two different situations: at the time of a new investment, and on a continuing basis. New investment.——At the time of a new investment, Political risk becomes a constraint: it constitutes a go—no go situation. Some companies require a political risk analysis at first screening of the investment oppor— tunity and others as a last check in the investment analy— SiS, but the end results are similar. Such analysis —;—, _7 _...- 172 is a necessary, but not the sole, consideration. Other major factors are market size (present and potential), economic conditions, legal environment, and competition. In general, political factors mentioned by respondents, include: political stability,8 prevailing ideologies, political structure, political parties, and representative— ness of the people. In most cases, an historical and current analysis is done. Under that kind of screening, political risk is determined by the subjective feelings that corporate executives gather reading through the report. The second step in the analysis is a trip to the country under investigation. Top company officials meet with governmental representatives, the president, and their local counterparts (both nationals and expatriates) and within two or three days the situation has been evaluated. This second step appears to be given great weight. In one case an executive mentioned that "the corporatiOn was investing in some African countries despite a 'dark' political report, because the President likes Africa and we are all over!" In another case, a corporation invested in Brazil because it was there that the corporation's President received "his only warm welcome during his South M 8This factor was most often mentioned but no one Could give a clear—cut meaning. 173 American tour!" Another corporation mentioned that they would "be present in as many countries as there are United Nations members,‘ and that political risk was a secondary consideration in most cases, except when sizeable invest- ments were undertaken. From the interviews it appeared that political risk analysis has more of a historical than a projective emphasis. Very few of these reports speculate about the likely impact on politics of certain social changes that might occur. Even fewer indicate the factors to look for in the future, and procedures for collecting information at regular intervals. A reason for this neglect of politics is the pervasive feeling among businesmen "that business is in business to do business, not for studying politics." Corporate executives are reluctant to gather social or political information for "fear of being called C.I.A. agents," which might also explain their negative attitude toward their local representatives doing the research. On—going operations.——The general feeling at the subsidiary level, but particularly at headquarters, is that "there is nothing we can do now, we are in the boat." This deterministic view is pervasive among most executives: "We are married, for the best and the worst, and the only thing we try to avoid is expanding the family by investing more." If everything goes well, expansion is considered. 174 Otherwise, the subsidiary lives with what it has, plowing back some earnings to satisfy present demand, but it invests no new capital. I At the subsidiary level, the local manager reports only the unusual, on a voluntary basis. Subsidiaries believe that headquarters have better information than they have, and occasionally learn something from headquarters about the local situation. Nevertheless, headquarters feels it is important to hire or appoint politically influential local people. From the interviews it appears that many major corporations try to buy as much political information (perhaps even protection) as possible through appointing generals to their boards of directors, senators for counsel— ing purposes, and influential lawyers for handling legal matters. Experience has shown these practices could be of short-term validity, however. In Brazil one company is still in a precarious position due to political "protection" purchased before the revolution. Furthermore, the quality Of information is quite important. Corporations might buy information which comes from a minority position,'the group in power," which has a vested interest in the system and might have a biased view of the political situation. It became clear that not one corporation interviewed had any framework for the analysis of political risk, or ever hired 175 a Brizilian political scientist, even on a consulting basis, for such analysis. Sources of Information The key to the analysis of political risk becomes the sources of information.9 Warren J. Keegan, in his analysis of the process of acquiring information concerning the international business environment, found that the most important media development in international environmental scanning is the "jet aircraft," and not the electronic media. He found (Table 4—4) that the international division executive abroad gathered most of his information and was the best suited to provide that information. The author cites two executives: They [executives abroad] know the local scene and they know our business. Therefore, they are an excellent source. They know what we are interested in learning, and because of their local knowledge, they are able to effectively cover available information from all sources. Our manager there has his own staff which includes in addition to the usual business functions, a man in government affairs. The manager himself sees people in government, other companies, and of course the physical setting.10 The next most important source of data are service organizations, which provide technical information (on new 9Most data in this section are drawn from Warren J. Keegan, "Scanning the International Business Environment: A Study of the Information Acquisition Process," unpublished Ph.D. dissertation, Harvard University, 1967. loOp. cit., p. 92. 176 TABLE 4-4.——Sources of information for the international business environment.* Source Location Source Type Inside Corporation Outside Corporation Personnel International Division Competitors (1) Executive Abroad Local Persons ExecutIVe Headquarters Embassy Product Executives Government Officials Corporate Executives (2) Service Organizations Documentary Reports (3) Publications (4) LeLLers Service Organization Information Storage Reports Source: Warren J. Keegan, "Scanning the International Business Environment: A Study of the Information Acquisition Process," unpublished Ph.D. disserta— tion, Harvard University, 1967. * The numbers indicate the most important source in each cell, and the overall ranks of these most important cells. rulings, new financial decisions on foreign exchange, the import~export situation), general investment climate information, and competitive intelligence. Of the docu- mentary sources, the Wall Street Journal and the New York Times are the most important. If we add the information services to these publications, they become as important a source as the executives abroad. Correspondence is the single most important internal documentary source to the firm, although it seems of minor significance. It is also interesting to note that two respondents in Keegan's study mentioned reading foreign newspapers, and "the reported reading was confined almost exclusively to English language publications which were, with the exception of the Economist, almost entirely of domestic origin." Summary In addition to the product, the firm's other variables—~nationality, size, managerial practices—-are an important element influencing political risk. During the colonial period, nationality did provide ”closed" markets to corporations. The importance of nationality does not stem from its power, but rather from the economic and financial assistance the home country can provide. Nevertheless, corporations from smaller countries do not seem apprehensive over this situation. Most corpora— tions believed that size of home nations was lreatively un— important. The metal working industry, and to a smaller extent the electrical industry, mentioned the economic advantages that can result from the aid the home country can provide. High economic concentration of a nationality is perceived by most corporations not as a nationality problem, but as a national sovereignty problem from a host country vantage point. Most corporations felt that advantages offset disadvantages, and the result was a more unstable equilibrium. Many of the discrepancies between U.S. and 178 European corporations might be attributed to some kind of inferiority complex felt by non—U.S. corporations. The home country's role in international events as a source of political risk to the firm is regarded as of no consequence except where the firm operates with countries closely involved in the conflicts. Managerial practices for the analysis of political risk are at a primitive stage or nonexistent. Political risk becomes a maximum hurdle or a ceiling not to be ex— ceeded. Major analyses of political risk are done at the headquarters level, with subsidiaries reporting periodically on economic development and including some "relevant" political information. In general, political risk for new investment is undertaken, but not on a continuing basis, which prevents planning the political game. Corporations, according to Keegan's study, tend to rely on the international division executives abroad for information, but these executives do not seem to have formal methods of information gathering or communication processes related to political risk. Many subsidiaries enroll generals, senators, or lawyers to perform this information gathering function despite the fact they might be part of the group in power and communicate biased information based on vested interests. 179 The next chapter deals with the firm's perception of political risk, of which information source and quality are main elements. CHAPTER V THE FIRM: II. PERCEPTION OF POLITICAL RISK As defined in the first chapter, political risk is the subjective probability that a certain political event (that is, political decision) will occur which will change (that is, modify, maintain, or regulate) the busi— ness environment. Such changes constitute either obsta- cles or opportunities for international business. They reflect the overall business climate. To understand the nature and relative importance of those obstacles is a first step toward pinpointing problem areas and planning for solutions. In this chapter, the obstacles are ranked and com— pared with the 1961 results of Harry J. Robinson's study. The results show financial factors are the main obstacles in international business, although marketing restrictions are emerging as a new constraint. During this phase of the study, three other facts emerged. In general, head— QUarters executives perceive the world as having greater risk than do the executives in their Brazilian subsidiaries. 180 181 Furthermore, some obstacles appear to cluster in specific ‘areas of the world, or are characteristic of level of development in countries. Finally, American and foreign corporations seem to differ slightly in the perception of political risks. Comparison of the Cracco (1970) and 1961 Robinson Study In 1961 Harry J. Robinson undertook a study of international corporations' policies related to foreign investments.1 There were 205 responses to the question— naire (178 U.S. companies, 19 European, and 8 Japanese firms): Robinson made no distinction as to the type of industries involved, and dealt only with headquarters. To keep the comparison more valid, the present researcher took into consideration only the results coming from headquarters. The ranking of obstacles are shown in Table 5-1. Interestingly enough, some obstacles have completely dis— appeared from the ranking. These include: burdensome social security legislation, discriminatory enforcement Of laws, government—owned competitors, and special taxa— tion on foreign enterprises. Other obstacles, such as 1Harry J. Robinson, The Motivation and Flow of Private Foreign Investment, International Development Center, Stanford Research Institute, Menlo Park, Cali— fornia, 1961. r 182 TABLE 5—l.-—Comparative Ranking of Obstacles by Headquarters. Cracco Study (1970) Robinson Study (1961) l--‘ l 2. Repatriation of Earnings 2. Transfer of Capital 3. Exchange Rate Policies 3. 4. Licensing, Management 4. Fees 5. Reinvestment Policy 5. 6. Local Capital Partici— 6. pation 7. Import Restrictions 7. 8. Economic Development 8. Policies 9. Price Controls 9. 10. Expropriation 10. 11. Minimum Exports Quotas ll. 12. Debt Limitation 12. 13. Pricing Regulations 14. Government as a Customer 15. Product Line Control 16 Discriminatory Technical Standards Import Restrictions Repatriation of Earnings Licensing, Management Fees Local Equity Participation Burdensom Social Security Legislation Governmental Limitations on Flexibility of Management Transfer of Capital Special Taxation on Foreign Enterprises Discriminatory Enforce— ment of Laws Multiple Exchange Rates Government Owned Competitors Price Controls, Limita— tions on Profits Source: Harry J. Robinson, The Motivation and Flow of Private Foreign Investment, International DeveIOp— ment Center, Stanford Research Institute, Menlo Park, California, 1961, pp. 5—6. 183 transfer of capital, price controls, and multiple exchange rates climbed the rankings, while others, such as import restrictions, dropped. New obstacles also appeared: discriminatory technical standards, product line control, and minimum export quotas. The explanations for such differences are many: (1) The foreign environment has changed since 1961; among various reasons, the period of import—substitution at any cost is passé, which makes such items as import restrictions relatively less relevant. (2) One executive interviewed, reflecting the ‘majority opinion, stated that "what was previously perceived as discrimination against foreigners was, in fact, against large firms, most of which were foreign. The issue is actually a general one of large versus small corporations and in any country of the world the small are able to avoid taxes or legislation which the highly visible large firm cannot afford to disobey." (3) Many corporations in the early sixties were going multinational for the first time, and through igno- rance or lack of planning were unprepared to face foreign environments with legal, social, economic, and political structures quite different from their own. They learned by experience, often with bitter results. (4) Foreign countries have become more sophisticated and have adjusted their policies to their needs and objec— tives. Foreign investment is welcomed, but is channeled into high-priority investment areas under certain predeter- mined conditions such as local capital participation, export requirements, local content requirements, and product line controls. This shift in governmental policies, although occurring in other countries, is particularly apparent in South America. (5) It should be noted that variations could derive from the samples of the two different studies. This researcher's sample included only manufacturing industries, while Robinson included 17 companies in agriculture, mining, and petroleum, and 20 companies in the tertiary sector out of 205 cases, that is, nearly 20 percent of the sample. Then, among the 168 manufacturing firms in the sample, Robinson's coverage of industries is wider than the five manufacturing industries of the 1970 study. Variations could also have been introduced in the typology of obsta— cles studied: for example, governmental limitations on flexibility of management could incorporate all the market— ing variables and personnel policy. Another explanation could be the omission of certain variables in the first StUdY; the number of items was smaller, but some blank 185 lines were left for restrictions not specified, for the respondent to add his own. (6) The different blend of U.S. and foreign corporations in the two studies also could have changed the pattern somewhat, but that likelihood is remote. (7) The present list of obstacles is by no means exhaustive. Some of the obstacles mentioned in Robin— son's study are present, but their importance is minimal, varying from rarely important to not important. Never— theless, a comparison of the results points out some similarities in the importance of some obstacles, as well as an evolution in their relative standings. Overall Perception of Obstacles This study analyzes the perception of obstacles by corporations not only in the aggregate, but also disaggregated by the headquarters and subsidiary level viewpoints (Table 5-2). The tables show only the rank- ing, with the absolute value of the obstacles shown in the Appendix and in Figure 5—l. Within each level of analysis, marketing, financial, production, and manage— ment obstacles are reviewed to pinpoint their relative, absolute, and accidental values. Table 5-2 presents a ranking of the 19 most important obstacles as perceived 186 TABLE 5-2.—-Ranking of Obstacles to Foreign Investment. Overall Rankings Overall Obstacles All U.S. Foreign Economic Development Policies 1 3 Transfer of Capital Dividends 2 l - Management & Licensing Fees 3 2 3—4 Local Capital Participation 4 5 Exchange Rates 5 4 6 Price Controls 6 7—8 5 Reinvestment Policies 7 6 9-10 Import Restrictions 8 7-8 8 Pricing Regulations 9 9 7 Minimum Export Quotas 10 10 9-10 Debt Limitations 11 ll 11 Government As a Customer 12 14 12 Expropriation l3 l3 13 Product Line Control l4 l2 l4 Corruption 15 15 17 Discriminatory Technical Standards l6 l8 —— Arbitrary Tariff Classifications 17-18 19 16 Discriminatory Taxation 17-18 -- —- Gov't. Owned Banking Services l9 l7 —- Competitors Subsidized -- l6 —— Foreign Personnel Restrictions -- -- l5 Discrimination in Production Licences -— -- 18 Politics & Labor -- -- l9 TABLE 5-2.--Continued. Overall Obstacles Overall Rankings All U.S. Foreign Transfer Capital Dividends 1 1—4 1 Exchange Rates 2 l—4 4 Management & Licensing Fees 3 1—4 6 Reinvestment Policy 4 1—4 9—10 Local Capital Participation 5 5-6 2-3 Import Restrictions 6 5—6 5 Economic Development Policies 7 7—8 2—3 Price Controls 8 10 8 Expropriation 9 7-8 13 Minimum Export Quotas lO 12 9-10 Debt Limitations 11 15 7 Pricing Regulations 12 13 11 Government As a Customer 13 9 17-18 Product Line Control 14 ll 16 Discriminatory Technical Standards 15 16 l7—l8 Discriminatory Taxation l6 *- 14 Arbitrary Tariff Classifications l7 —— 15 Competitors Subsidized l8—l9 l4 —- Corruption 18—19 17 ~- Gov't. Owned Banking Services -— 18 —— Foreign Personnel Restrictions -— -- 12 188 TABLE 5-2.--Continued. Overall Rankings Overall Obstacles All U.S. Foreign Economic Development Policies 1 l 1 Local Capital Participation 2 2-3 Price Controls 3 4 3-4 Management & Licensing Fees 4 5 - Transfer of Capital 5 2-3 Pricing Regulation 6 6 6 Exchange Rates 7 8 7 Minimum Export Quotas 8 7 8-9 Debt Limitations 9 9 11 Import Restrictions 10 10 10 Reinvestment Policy 11 ll 8'9 Government As a Customer 12 16 12 Corruption 13 l3 13 Product Line Control 14 12 14 Diiggéfiégztion in Production 15 17—18 15 Policies & Labor 16 " l6 Expropriation 17'18 _' l7 Arbitrary Tariff Classifications l7—l8 l4 —— Gov‘t. Owned Banking Services -‘ 15 “ Limited Patent Protection ‘" 17‘18 ;; Discriminatory Taxation / 189 Degree of Importance . :_,(m A —-£nzuoiseooo Price Controls _— . , +—1urzuodm| Minimum Exports Quotas— . . . Product Line Control_____—ui. ..... ALL INDUSTRIES Arbitrary Tariffs Classification ___‘ ALL HEADQUARTERS . - - - - - - - - - I Government asa Customer—— ALL SUBSIDIARIES I-I-I-I-I-I-I- L U.S. Competitors Subsidized—— IIIIIIIIIIIIIIIIIIIIIIIIIII_IIII ALL FOREIGN Foreign Personnel Restrictions _ Debt Limitations____—— Local Capital Participation —. Transfer of Capital—— ..¢-‘~ Licensing Fees—.___——— Reinvestment Policy___———t “--* Exchange Controls—— Discriminatory Taxation .————. Expropriation—— Government Owned Banking— Services Economic Development_. . I _ Policies LomlConlent Requirements———., , - i l - Import Restrictions——, Milli -M y i . I , i A , ‘ ‘ Technical Ctantlardc- ‘ i 7 Figure 5-l.—-Evaluation of obstacles to foreign inVeStment by all industries headquarters, subsidiaries and by nationality. 190 by headquarters and/or subsidiaries of both U.S. and foreign firms. Economic Policies Economic policies appear to be the most important single obstacle or incentive to foreign investment. Cor— porations appear to pay very much attention to national development plans. As one top executive of a European elec— trical firm observed: "National plans are [that is give us] our sales forecast." Nevertheless, this result was quite unexpected because most developing countries present overly optimistic national plans. The importance of eco- nomic policies cannot be underemphasized. As the world planning director of an automotive corporation pointed out: "Most countries in the world have relatively small markets and the impact of economic policies could turn a 'decent' market into a 'nightmare' overnight." The Brazilian experience illustrates the importance of this factor. A truck manufacturer indicated that immediately prior to the March 1964 revolution when the uncertainty over the economic policies was greatest, his company sold only 11 trucks in one week. On the other hand, the Brazilian economy, presently is very responsive to economic policy incentives and eXecutives often use the traditional characterization of Brazil as "the country 0f the eternal future." Many executives and Brazilian 191 professionals attribute the recent economic boom to the economic policies devised by the Minister of Finance, Dr. Delfim Netto. Economic policies are a key element in long term planning, which should be flexible enough to integrate unexpected investment opportunities due to changes in the immediate investment climate. They may favor investments to which a high priority has been assigned by providing attractive incentives such as subsidies,tax advantages,and duty free imports of capital goods. Similarly, they may discourage low—priority investment by suppressing financial incentives such as low interest loans, subsidies, and imports restriction, or by making the availability of foreign personnel more difficult through red tape for work permits and visas for highly technical personnel. From a managerial standpoint, it is important to know if your product might fall in a high—priority period in order to take advantages (financial, legislative) of a temporary nature . EflEggference With Remittance Policy The second major obstacle is gOVernmental inter— ference with corporation's remittance policy, which includes repatriation of earnings, transfer of capital, dividends, royalties, and licensing and management fees. In Brazil 192 a limit is established on annual repatriation of earn- ings up to a maximum percentage of the firm's "registered" capital, which means the officially invested equity of the firm in the country as recognized by the Brazilian government. Such registered capital is in general below the economic value of the investment because the admin— istration "processes very slowly" the re—evaluation of the initial investment. Such practices reduce the attractiveness of bor— rowing as a means of financing investment if equity is the basic standard for repatriation. Because of currency devaluation periodic re—evaluation of a corporation's equity base is at a certain lag with its economic value. In recent years, the maximum percentage varied between 8 and 14 percent. Thus, for 1970 the Brazilian govern— ment permitted a firm to repatriate up to 12 percent, but there was the possibility of the ceiling being raised to 14 percent. In absolute terms, those limitations would not be restrictive, but in practice, due to the lag in re—evaluating the equity base, the registered CaPital could be as low as 50 percent of its current eco— nomic value in dollar terms, which means a maximum repatriation rate of 4 to 7 percent. Another issue is the recognition of royalties, and licensing and management fees as deductible tax 193 expenses. Most developing countries are presently deny- ing this right if more than some stated percentage of the local subsidiary's equity is owned by the foreign corporation holding the patents or the human skills. These policies are particularly important for the chemi- cal industry, for example, where research and develop- ment are important and royalties are a major source of revenues . Local Capital Participation Local capital participation is a very emotional issue which centers around the national sovereignty of the host country. It involves a conflict between the multi— national corporation, which wants complete control over its operations, and the host nation, which tries to force the corporation to make decisions in the best interests of the country. There is a spectrum of alternatives ranging from minority local participation in a joint venture to complete nationalization of the foreign cor— poration which is then involved only through management contracts or licensing agreements. Although some corporations reject categorically any type of joint venture, many compromise and enter with the local partner taking a minority position. The case Of the local partner having a majority position, in general, is a priori not acceptable. However, when a 1* 194 "cooperate or get out" situation appears to be the only alternative open, the high opportunity cost of losing a market, especially to a competitor, pushes some corporations over this important emotional and managerial hurdle. Other Obstacles The next five obstacles--exchange rates, price controls, reinvestment policies, import restrictions, and l l pricing regulations—-have been standard politico- economic obstacles for some time, although perhaps the adoption of reinvestment policy guidelines for foreign subsidiaries by host country appears to be a recent development. One form of such "guidelines“ is to restrict the amount of repatriation of earnings and then force the remainder into local investment. To stimulate the develop— ment of the Brazilian Northeast, the government provides substantial tax advantages to a corporation investing in that region. Many corporations have found the above policies "full of opportunities and pitfalls.“ Some have been very successful and others not; the factors of success are not Very well—known. In Brazil, as many U.S. executives com— plained, a danger in these tax exemptions is the lack of fiscal agreement between the host and the home country. In the United States, those re—invested earnings (or 195 "Brazilian taxes") are considered profits, not taxes paid; in Brazil they are regarded as taxes fully paid. Such international fiscal conflicts are quite difficult to iron out, and, as a U.S. executive observed, create "more head— aches than profits." Exchange rate fluctuations, import restrictions, and price controls have long been on the international business scene and are not likely to disappear soon. In Chapter III, the relationship between level of economic development and price controls, devaluations, and imports restrictions was discussed. Those obstacles have not prevented international business from expanding exponen— tially for the last twenty years, and are not likely to do so in the future. It is interesting to note that European corporations that have experienced price controls in their home country tend to fear this form of restric— tion slightly more than U.S. corporations in relative as well as absolute terms. Emerging Obstacles Minimum exports quotas (ranked 10th), government as a customer (ranked 12th), and product line control (ranked 14th) are the emerging marketing obstacles in international business, particularly in developing Countries. By distributing production licenses, host governments can favor corporations presenting projects that are export oriented. This, in turn, can provide financial rewards through greater allowance for repatri— ation of earnings (eSpecially those derived from exports), incentives for exports (at the finished product level) through exemption from domestic sales tax, (at the pro- duction levelL through subsidies or duty free imports of capital goods, government contracts, and, perhaps, a monopoly position in the domestic market. Economic policies can always change. Import restrictions which were in governmental favor in the 19505 and early 1960s have attracted and protected many small investments. They now appear in danger of losing their tariff protection due to the "export test“ that many developing countries are instituting. As the vice— president of a German chemical firm explained: "When Colombia lowered some of its tariff barriers, some small— size investment was forced out of business; we also had to close because our plant was tailored to the Colombia market." Brazil is cutting some of its tariffs; one eXecutive noted that the Brazilian tire industry is no longer very well protected and foreign competition from imPorts, especially from Japan, is strong. Government as a customer indicates the key role it plays in many economic sectors, especially in socialist 197 oriented and developing nations, in generating growth by developing high-priority investments. In most of these countries hospitals, insurance companies, banking, school systems, highway construction, and the transport and petroleum industries are government—run. From the Brazilian interviews it appears that the government is not considered a high default risk, but it has other shortcomings. It is a slow payer, a tough bargainer, and asks for more fringe benefits (for example, credits in time and in absolute amounts, with low or no interest rates). As a German executive observed: "Handling the situation requires special skills and continuous com~ plaints to, and harrassment of, the right individual in the hierarchy." Product line control, on the other hand, is effected in two ways. The government may provide subsi- dies to the "pioneer" of a new industry or product, such as tax incentives, which give the corporation a long—term competitive hedge (from five to ten years). As is the case for some products in the Brazilian electrical indus— try, any subsequent competitors must be ready to face that kind of competition. If the market is too small for many Competitors, the government may allocate to various enter- prises the products to be manufactured on the basis of their proposals. Brazil adopts the first alternative, while Chile, Colombia, and Peru favor the latter. 198 These obstacles are beginning to replace the more gative types such as outright import restrictions. Local roducers whether national or foreign have no alternative ut to face competition in the domestic market with many mall firms, none large enough for economies of scale. he newer measures are more selective, and could be adapted 0 different industries according to their technological omplexity. They suggest that developing countries are aking a more sophisticated approach toward attracting oreign investment, while promoting industrial development y other means than plain import restrictions. ebt Limitation Another obstacle now emerging in international >usiness is debt limitation, which tends to regulate the ise of local and foreign debt relative to the amount of *quity. Some countries, such as South Africa, are not llowing repatriation of earnings as long as local debt S outstanding. The Banco do Brasil discriminates in the orm of interest rates or borrowing ceilings against oreign corporations which do not have a Specified mini— um of Brazilian capital in the venture. Most corporation xecutives there said they were satisfied with the system, ut that it could represent a threat if misused. Many executives pointed out that such restrictions ould become one of the most important pressures in 199 veIOped as well as developing countries as a means of rcing multinational corporations to use outside capital ther than dry up the local financial market. Such strictions are intended to develop a long—term, equity— sed growth in lieu of a highly leveraged one. A major ropean neWSpaper, Le Monde, printed the General Motors velation that it expanded its European operations with e investment dollar coming from the U.S. Such statements, executive mentioned, although satisfying most U.S. nators at the hearings on the impact of foreign direct vestment on the balance of payments, are irritating to ny Europeans, and are stimulating drives toward greater strictions on debt structure and local capital partici— ,tion. ipropriation and Corruption The two most emotion—laden obstacles—~expropriation anked 13th) and corruption (ranked 15th)——were the most fficult to deal with during the interviews. Many inciples or taboos are associated with them: they are e antithesis of the free enterprise system, based on e concept of private property, or are contrary to the ristian ethic of honesty or equity. Nevertheless, after otion subsided,most interviewees discussed the topic, me saying that expropriation could be viewed in two ys: “It meant the loss of a battle for the principle 200 :he free enterprise system," but especially "the finale 1 foreign venture which may have been doomed from the 1 beginning." Executives often mentioned that expro— ations are not always aimed at profitable ventures, the expropriation of the venture could be a "happy" ution terminating a "dragging" profit center in the .tinational corporation. Executives mentioned in every case that expropri- -on was the end of a battle, when other politically sed obstacles such as royalties, repatriation of earn— ;s, price controls, and administrative barriers had Lned the investment climate. These measures sometimes ad to such losses that expropriation is even hoped for. might, as an executive at the headquarters level said, Jme more as a life saver than a slaughter." Corruption is rarely important as an obstacle. ne executives, both at the subsidiary and the head— arters levels, think that local subsidiaries or sales tsonnel use the excuse of corruption of others to cover air loss of a contract or sale to competitors. Some com- lts from interviewees were: "Don't tell our competitors, : we never use corruption even for very important invest— ltS or contracts; they will not believe it but it is H le ; "We would rather lose a contract than go through e corruption] with it"; and "We have to live with it." une executive said, "for corruption, you need two persons, to give, the other to receive; both are as corrupt." ther said: "I don‘t see any difference; we might lose 3 sales in the short run, but in the long run we have uired an image of seriousness and are more successful n others who practice such methods at every occasion." Corruption is a minor factor in international ,iness, but it should be specified that we are referring high—level corruption. As a Dutch executive clearly ex— assed it, the payment of small gratuities to a low—level lil servant to gain admittance to his superior‘s inner Eice is traditional in some societies and is not viewed corruption by any international executive. Analysis by Functional Areas When the rankings are analyzed by functional areas-— rketing, finance, production, and management——certain ints come to mind. First, obstacles of a financial ture are overwhelmingly important (all 11 are in the tOp l. Second, no risks related to personnel management Dear in the top 19 obstacles. Third, marketing is the :ond highest source of risk, and appears to have the >ious honor of becoming the political risk of the future. irth, discriminatory technical standards, although ranked ‘elatively low 16th, are emerging as a device being used developed countries to protect local producers. 202 inancial Obstacles Interviewees were asked if financial obstacles Table 5.3) are overemphasized. During the interviews, lany reflected their View that foreign investments were L long—term growth factor in the corporation and that they Jere reinvesting all of their earnings to generate further growth. At the statement: "Thus, you don't give too much veight to restrictions on repatriation of earnings," one executive, who reflected the majority opinion, quickly changed position. He said: "It isn't that we don't care, of course it matters, but we want to be sure that if we wanted to, we could repatriate our earnings, we want to have the complete freedom to reinvest all our earnings within or outside of the country." Then they are confronted with the dilemma of "should we stick to our principles or analyze their real impact on our strategies?" From that standpoint, many corporations maintained that remittance policy interference was their major risk although during the interviews, significantly more time was spent discussing strategies to cope with local capital participation and unpredictable short-term economic policies. In this writer's judgment, then, their real political risk would have been other issues such as unpredictable economic policies and local capital partici— pation requirements. This statement is valid for almost 203 TABLE 5—3.--Ranking of Financial Obstacles. '— All U.S. Foreign Obstacles Ranking Overall Economic DevelOpment Policies 1 3 Transfer of Capital Dividends 2 l — Management & Licensing Fees 3 2 — Local Capital Participation 4 5 2 Exchange Rates 1 5 4 5 Reinvestment Policy 6 6 6 Debt Limitations 7 7 7 Expropriation 8 8 8 Corruption 9 9 10 Discriminatory Taxation 10 ll 9 Gov't. Owned Banking Services 11 10 11 Headquarter Rankings Transfer of Capital Dividends 1 1-4 1 Exchange Rates 2 1‘4 4 Management & Licensing Fees 3 1-4 5 Reinvestment Policy 4 1—4 7 Local Capital Participation 5 5 2~3 Economic DevelOpment Policies 6 — - Expropriation 7 — Debt Limitations 8 6 Discriminatory Taxation 9 ll Corruption 10-11 9 ll Gov't. Owned Banking Services 10-11 10 10 204 TABLE 5-3.-—Continued. All U.S. Foreign Obstacles Subsidiary Rankings Economic Development Policies 1 'l l pocal Capital Participation 2 2~3 2 ianagement & Licensing Fees 3 4 3 ransfer of Capital Dividends 4 2-3 4 xchange Rates 5 5 5 ebt Limitations 6 6 7 einvestment Policy 7 7 6 orruption 8 8 8 xpropriation 9 10 9 ov' t. Owned Banking Services 10 9 ll iscriminatory Taxation ll 11 10 f 205 75 percent of the corporations interviewed. Some corpora— tions were even repatriating earnings simply because of the principle involved or to establish a precedent. The rest of the corporations, particularly those in the chemical industry, were repatriating earnings in order to finance the research and development program of the parent cor- poration, or because they had no plans for eXpansion locally, or because no good investment opportunity was in sight. Local capital participation is another issue where principles have rendered many executives completely blind to alternatives available, and transformed that issue into a struggle between the power of the multinational firm and the sovereignty of the host country. Who is the loser? In the short run, perhaps the host country, but in the long run the odds would seem to be against the multinational corporations. Consider the Brazilian situation, which is probably one of the most favorable cases in the developing world. Brazil has opted for development along the lines Of free enterprise; during the last seven years the country has succeeded in recovering from economic chaos, and for the last three years has enjoyed an economic boom comparable to the Japanese experience. During these three years, the government tried with substantial success to develOp a local capital market, l eSpecially a stock market, in order to channel savings r—f 206 1from the whole population. In that time the volume of istock market transactions on a daily basis increased more ithan tenfold, as did the index of value of shares traded. 3A problem still is the relatively limited number of cor- gporations listed on the exchanges, although that number .also increased tremendously. The government asked foreign -corporations informally to open their capital to local :investors, but the results have been meager despite some light governmental incentives. Executives interviewed in Brazil replied: "We analyze the situation"; "We drag our feet"; "We will enter within two years"; "We are waiting for more incentives"; "We are basically for a wholly owned subsidiary and we don't want anyone to sneak into our business"; or "Investors might be foolish to invest in our corporation, we are not distributing divi— dends, we are reinvesting everything." Although some executives at the local level are worried about the situation that "good citizens" are creating, they insist that the headquarters are unrespon- sive to their warnings. Some corporations are even reducing their joint ventures by buying up shares from their Brazilian partners who prefer to invest in other businesses or in the stock market. What will be the government's next move-—more incentives or regulations? It is faced with corporations 207 that believe in the capitalist system, but will not promote it; who prefer a joint venture with a few wealthy indus- trialists rather than trying to Spread ownership to a growing middle class. Management Risks Management risks (Table 5.4) seem to have been solved. There is very little governmental interference in the selection and firing of employees. The two most burdensome obstacles, rated between rarely important and not important, are foreign personnel restridtions, such as visas and entry for highly skilled personnel, and the involvement of local labor in politics.' As mentioned in the following section, the evaluation of the obstacles results from the corporation's managerial policies, and from a certain lack of planning which makes foreign personnel restrictions more difficult to face. Some executives stated that they were advised to hire the son Of an influential politician, but hardly regarded this as a liability since if the person did not work out, they could always find a way to get rid of him politely. Marketing Obstacles Marketing obstacles (Table 5.5) are presently Viewed as of middling consequence, ranging from the occasionally important to the rarely important. Out of 208 TABLE 5—4.-—Ranking of Management and Production Obstacles. Obstacles . All U.S. Foreign Overall Overall iLocal Content Requirement 1 l l lDiscriminatory Technical Standards 2 2 3 |Foreign Personnel Restrictions 3 5 2 iPolitics & Labor 4 3 4 iGov't. As a Supplier 5 4 5 Headquarters Headquarters Local Content Requirement 1 1 l Discriminatory Technical Standards 2 3 Foreign Personnel Restrictions 3 2 Gov't. As a Supplier 4 — 4 Politics & Labor 5 - 5 Subsidiary Subsidiary L Local Content Requirement Politics & Labor Discriminatory Technical Standards Gov't. As a Supplier Foreign Personnel Restrictions m ¢> w RJIA e e: N I m Lo w m es w AJlA L 209 TABLE 5-5.--Ranking of Marketing Obstacles. Obstacles All U.S. Foreign Overall Overall Price Controls 1 l 1 Pricing Regulations 2 2 2 Minimum Export Quotas 3 3 3 Government As a Customer 4 5 4 Product Line Control 5 4 5 Arbitrary Tariff Classifications 6 7 6 Discrimination in Production Licenses 7 8 7 Competitors Subsidized 8 6 9 Limited Patent Protection 9 ' 9 8 Headquarters Headquarters Price Controls 1 2 1 Minimum Export Quotas 2 4 2 Pricing Regulations 3 5 3 Government As a Customer 4 l 6 Product Line Controls 5 3 5 Arbitrary Tariff Classifications 6 7 4 Competitors Subsidized 7 6 9 Discrimination in Production 8 8 Licenses 9 9 7 Limited Patent Protection rfi 209 TABLE 5-5.——Ranking of Marketing Obstacles. Obstacles All U.S. Foreign Overall Overall Price Controls 1 l 1 Pricing Regulations 2 2 2 Minimum Export Quotas 3 3 3 Government As a Customer 4 5 4 Product Line Control 5 4 5 Arbitrary Tariff Classifications 6 7 6 Discrimination in Production Licenses 7 8 7 Competitors Subsidized 6 Limited Patent Protection 9 9 8 Headquarters Headquarters Price Controls 1 2 1 Minimum Export Quotas 2 4 2 Pricing Regulations 3 5 3 Government As a Customer 4 l 6 Product Line Controls 5 3 5 Arbitrary Tariff Classifications 6 7 4 Competitors Subsidized 7 6 9 Discrimination in Production Licenses 8 .000 00 Limited Patent Protection 210 TABLE 5-5.-—Continued. Obstacles All U.S. Foreign Subsidiary Price Controls 1 l 1 Pricing Regulations 2 2 2 Minimum Export Quotas 3 3 3 Government As a Customer 4 6 4 Product Line Controls 5 4 5 Discrimination in Production Licenses 6 7-8 6 Arbitrary Tariff Classifications 7 5 — Limited Patent Protection 8 7—8 7— Competitors Subsidized 9 9 * See Key for Table 5-2. 211 9 marketing related obstacles, 6 appear in the top 19. Among them, in order of importance, there are all finan— cially related price controls and pricing regulations; marketing strategy obstacles, such a minimum export quotas, government as a customer, and product line control; and institutional problems, such as arbitrary tariff classi— fications. In the latter category, we could also classify marketing~production obstacles such as discrimination in production licensing, subsidization of competitors, and limited patent protection. Marketing obstacles are becoming key elements in developing a profitable, international business strategy. :Although not as visible as others, their presence can spell success or failure for an investment. These neglected elements of the political game in international business could lead to the development of worldwide marketing planning, which would allocate to selected countries responsibility for the production of certain items, with governmental blessings, and could minimize costs. Such a strategy would eliminate Certain countries, but some worldwide market segmentation will have to be done, dropping unworkable markets because they are too inaccessible, too small, or too expensive to reach. 212 Perception of Political Risk by Organizational Level Headquarters' Perception of Political Risk Risks viewed from the head office are relatively more principle oriented than from the subsidiary. More importance is given to the concepts of profit,2 the free enterprise system, and free trade. From that perspective (see Table 5-2) economic development policies should rank lower, while expropriations, import restrictions exchange rates, and dividend policies should rank higher from the point of View of U.S. headquarters. Table 5—2 indicates that these suppositions are correct. The worldwide strategy of multinational firms fosters such a conceptual perception of political risk: the political climate for many executives becomes a con— straint requiring a go—no go decision for the exploitation of market opportunities. Such an approach has been re— flected throughout the interviews, and could explain the relatively little attention executives paid to changes in the investment climate when no new investments were planned. Subsidiaries' Perception of Political Risk The emphasis at this corporation level is placed on the operational aspects of political risk (see Table 5—2 . 2See Victor H. Umbricht, "The Main Obstacle is Risk," CERES, April, 1969. 213 and Figure 5—2). Because managers are evaluated on the basis of annual results, they view political risk as those obstacles which might tarnish their record as managers. In the Brazilian case at present, the two major factors are economic policies (the fight against inflation and move toward an expansionary economy) and the possible require— ment of local capital participation (ranked second). Price controls, of course, are more important at the subsidiary level; there they are ranked third, while at the head— quarters level they appear in eighth position. Then, sub- sidiary executives rank the most important financial obstacle (licensing fees rating even higher than repatria— tion of earnings and exchange rate control), followed by the emerging marketing obstacle, that is, the minimum export quotas. The second major factor from the subsidiary view— point is the influence of the environment. The general optimism about Brazil's future, for example, eliminates risks which might have been in top five ranking less than a decade ago. Expropriation, corruption, and labor in— volved in mass politics are not considered "rarely important," but are rated as "not important." The politi— cal risk created by the surrounding environment, in the author's opinion, could lead to extreme shifts of position by the parent corporation if the political and economic 214 Degree of Importance O — (I o < E; = E z 2 = E SE O ‘< A ~< ~< " Price Conlmls—_————n i ‘ $1 , ‘ l . . . . a 1 ' t _ I 1 v’ , P_‘t Pricing Regulations—— Patent Protection _._————- Minimum Exports Quotas—- U.S. HEADQUARTERS ‘ Arbitrary Tariffs Classification __3 , , US SUBSIDIARIES - I- — — - — l FORE | IGN HEADQUARTERS Competitors Subsidized ———-—- FOREIGN SUBSIDIARIES IIIIIIIIIIIIIIIIIIIIIllllll Foreign Personnel Restrictions—~— Foreign Personnel Discriminatory-— Taxation Deb! Limitations————-——-I Local Capital Participation-—-—-- Transfer of Capital Dividends— > Reinvestment Policy———- Discriminatory Taxation ———-—o Expropriation _——————~ Economic Development—g . . i Polic1es Local Content Requirements—fl .. . . . ) Import Resuictions——+_ i 1’ I ‘ ' - i - , Discriminatory chlinimlsmndardsl,‘ Y ' ‘ ' ' Figure 5—2.-—Evaluation of obstacles to foreign investment by headquarters (U.S. and foreign) and by Sub— sidiaries (U.S. and foreign). 215 climate changes and assuming that local managers communi— cate this political information to the home office. Would you invest in Sao Paulo if you knew that there are more than 1500 bomb threats and explosions a year? Probably not, but a U.S. executive would not hesi- tate to invest in California where such a situation pre- vailed last year, to say nothing of other crimes. Distance, lack of understanding of the political situation, cultural differences, ignorance, and emotional and partial report— ing by news services tend to project half truths. From reading the New York Times only, one might easily get the impression that in 1970, Brazil was living through an inquisition. Comparative Analysis of the Viewpoints The two major results of the analysis of head— quarters' and subsidiaries' views were mentioned in the previous two sections: political risk may be perceived from a conceptual (at headquarters) or from an operational (at the subsidiary level) standpoint. In the headquarters View, the market determines the attractiveness of a foreign investment; the recognition of the basic free enterprise principles, that is, of the concept of profit and its free repatriation, by the host government consti— tutes a minimum level for a good investment climate. At the operational or subsidiary level, governmental economic 216 policies are seen as providing the general business climate, and these may create opportunities or risks regardless of adherence to the principles of free enterprise. The immediate environment also influences the over— all perception of risk. It tends to overshadow any pos- sibility of a negative outcome during boom periods, and vice versa when a poor political climate prevails. The repercussions of over— or underevaluating political risks by foreign investors can be detrimental to developing countries, especially when foreign investment constitutes a major source of growth. Perception tends to be exag— gerated positively and negatively, and economic effects—- during recession as well as during boom periods--aggravate the unemployment problem, or add fuel to the inflation spiral. The Brazilian government finds itself in recent years in a boom period—-every foreign corporation wants to invest—-although in 1964 and 1965 the reverse was true. Comparative Analysis of the Results by Nationality At present, it is virtually impossible to state that foreign corporations perceive more risks than their U.S. counterparts; more evidence is needed. It appears that foreign corporations have a tendency to perceive Political risk in the middle range compared to U.S. cor— porations. This is shown clearly in Table 5—2 at the 217 headquarters and subsidiary levels, where U.S. corpora— tions tend more toward extreme evaluation. Foreign corporations have a more operational con— ceptualization than U.S. corporations. Foreign head— quarters rank economic development policies 2—3 in Table 5—2, while U.S. headquarters rank them 7—8. Reinvestment policy is ranked 9—10 among foreign headquarters, and 1—4 by U.S. corporations, at the same absolute level as remit— tance policies and exchange rate fluctuations. The explana— tion for such a phenomenon could be the relatively smaller size of foreign corporations, which places them closer to their subsidiary and, therefore, makes them more responsive to its problems. Another explanation could be that past experience, mainly in exports, may have oriented them to Paying more attention to local economic development poli— cies, which had a direct effect upon headquarters. This reasoning is supported by the fact that import restrictions are ranked slightly higher for foreign corporations head- quarters. Perhaps many European executives, through educa— tion or business experience, are still basically influenced by a long history of heavy reliance on exports, and adjust more slowly to a new world environment. If the sample had included Japanese corporations, this explanation might have had further support- Foreign corporations mentioned that foreign per— sonnel restrictions occasionally could be significant 218 obstacles. A lack of manpower reservoir could indicate that they are relatively smaller corporations, or that they lack long-term personnel planning. Another explanation is that many potential managers would rather study business in the United States than in Europe. If this is the case, U.S. corporations would have better access to more quali— fied managers, drawing from a domestic and foreign pool, than would European corporations. Finally, a possible explanation is that many young nations, recalling the colonial period, resent managers from the former coloni— alizer, who looks like "the same old imperialist" under a new hat. U.S. headquarters rank risks involving proprietary principles quite high. Among these are: expropriation (7th as opposed to 13th), corruption (17th but not ranked in the top 19 by foreign firms), subsidization of competitors (14th, but not mentioned by foreigners), and government as a customer (9th, but ranked 17th by foreigners). One explanation could be a basic difference in managerial Philosophy, but this should also hold at the subsidiary level, which is not the case. Another possibility is that U.S. headquarters have a true worldwide view of the business, and cannot pay too much attention to the routine operational kinds of risks. Finally perhaps they are more subject to react emotionally to such risks as 219 corruption and expropriation, and the other two risks-- competitors subsidized and government as a customer-—are particularly found in European countries. The other foreign headquarters, because of their priviledged nation— ality, did not suffer from discriminatory subsidies or actions of the government as a customer. Further research in this area could reveal the bases of these differences. At the subsidiary level (see Figure 5—2), we find a great similarity between U.S. and foreign corporations. Nevertheless, one difference did emerge: foreign cor— porations during the interviews showed a broader view of the business situation than did U.S. subsidiaries. Several foreign executives mentioned past experience, and although they considered the recurrence of similar events in the future unlikely, they did not discount the possibility. this broader view also was reflected slightly in their ranking of government as a customer, politics and labor, and expropriation. Some U.S. executives have only a one— or two—year experience in the foreign country. This view of the environment is mainly due to the personnel policy followed by foreign corporations, which tend to develop nativization, consciously or unconsciously, and let managers integrate into the society. 220 Summary This research on the ranking of obstacles confirms previous studies, especially that of Harry J. Robinson for the NICB, and indicates new developments in this area. Some obstacles have disappeared from the list of important ones, including burdensome social legislation and discrimi— natory enforcement of taxation, while others have emerged, such as minimum export quotas, product line control, and discriminatory technical standards. The firm‘s managerial policies influence its per- ception, especially the extent of its worldwide outlook and its personnel policy. Nationality influences the perception of political risk basically through the inherited cultural, social, and economic concepts of a business phi- losophy. . At the organizational level, headquarters have a more conceptual, principle—oriented View of political risk, While the subsidiary views it more from an operational vantage point. In general, headquarters perceives the world as riskier than do their Brazilian subsidiaries. Furthermore, some obstacles are mainly confined to Specific areas of the world, as in the discriminatory technical standards in developed countries. American and European Corporations seem to differ slightly in the perception of political risk, particularly at the Brazilian subsidiary 221 level. It seems that the immediate environment overshadows the perception of the political risk, especially at the subsidiary level. Of the political risks perceived, the most important obstacles are the financially related ones: economic policies, remittance policy interference, exchange rate fluctuations, local capital participation requirements, and reinvestment policies. Marketing obstacles are secondary, but are increasing in importance. These include: price controls and regulation (which are closely related to financial variables), minimum export quotas (the emerging political risk), product line control, and the government as a customer. Last in rank are production— oriented obstacles such as import restrictions (also closely related to financial variables), and discriminatory tech— nical standards (especially in developed countries). T’— CHAPTER VI CONCLUSIONS: MANAGERIAL IMPLICATIONS AND RECOMMENDATIONS Political risk has become a by—word among multi- national corporations' top executives. In an effort to dispel the dramatic and emotional atmosphere surrounding the terms, this research has attempted to lay objective foundations for future political risk research. The major objective was to avoid the purely descrip- tive, illustrative approach, which contrasts the power of the multinational firm with the sovereignty of host coun— tries, by using a more conceptual and analytical approach to the problem. The research tackled the solution in a dual manner: on one hand, a conceptual framework was built around available knowledge; on the other, interviews were used heuristically in order to analyze the concept of political risk from an Operational viewpoint, and to dis— Cover the applicability of the conceptual framework developed. The concluding remarks of this chapter first discuss managerial implications, and then avenues for future research. 222 223 Managerial Implications One of the questions basic to the analysis of political risk was whether it is a really important factor. By the responses the corporations have given to this re— search, political risk must be considered an important factor in decision making. While many executives deny this directly, intuitively they incorporate it into other variables, but on a highly subjective basis. Furthermore, their answers to the questionnaire showed the importance they pay to political issues related to the business environment. The Nature of Political Risk A major area of confusion lay in the lack of a definition for political risk. The author has suggested as a definition the subjective probability that certain political decisions will be taken (n: certain political events will occur) which will perceptibly change the present business environment. This change could be favor~ able or unfavorable to the international corporation. A Political, negative risk for one corporation may be an Opportunity risk for another. More emphasis always has been placed on the negative aspects of risk, although it has its positive sides. This change due to political decision can occur Within a politically stable or unstable environment. The 224 important feature is that some influences of an economic, social and/or ideological nature have forced the institu- tions which channel and filter those influences into changing the present business environment. The final results generally are considered obstacles to or incentives for foreign investment. The objective of political risk analysis is to heuristically search for those sources of political influence which create the most important obsta— cles. Thus, the imposition of import restrictions could stem from ideological reasons (for example, trade with an enemy country),from economic reasons (for example, a deficit of the balance of payments, or the policy of import substi- itution, or economic growth),or others from social reasons (for example, safety standards). Two Types of Political Risk Using this general definition, the research has shown that two aspects of political risk, conceptual and Operational, co-exist, and dominate the thinking of those at the two levels of the corporation, the headquarters and the subsidiary offices and could be explained by the different perspectives that executives have in decision making. The major focus of conceptual political risk, usually Present at the headquarters level, is on the subjective probability that the current business environment may be 225 disrupted by certain political decisions which repudiate or erode the basic principles of a free enterprise system. Such basic principles include the recognition of the concept of profit, right of repatriation of earnings, freedom to manage, and respect for the commercial legislation as the law of contracts. This approach basically takes a long-term view of political risk. Primary obstacles from the vantage of conceptual political risk are interference in remittance policy (dividends, earnings, royalties, management or licensing fees), transfer of capital, reinvestment policies, and the imposition of national partners through legislation or discriminatory practices forcing local capital partici— pation. Operational political risk, found mainly at the subsidiary level, is influenced by the immediate environ— ment. It involves the subjective probability that govern— mental decisions will affect the profit picture or the Operations of the subsidiary. This view takes a basically short- or medium—term approach to the analysis of political risk. In the Brazilian case, particular attention was given to governmental economic development policies and the local capital participation issue. The present economic boom is credited to economic policies Very favorable to the business community. Government also would like to see foreign enterprises more prone to developing joint venture 226 for new investment, and to Opening their capital in the local stock exchange. At the moment these are only in- formal wishes, but the government could develop policies to achieve these aims. These two different conceptualizations of political risk could lead to mismanagement due to misunderstandings in line communication. Orientations of Political Risk Analysis Most definitions of political risk narrowed it to forceful political disruptions, but the broader ideological aspect, is more important. Expropriation, nation- alization, and direct governmental competition are some more blatant aspects of risk, but corporations should be interested in the full spectrum of sources of political influences, particularly in changes within the social structure and in ideological tendencies. Interviews revealed that political analysis was undertaken only when investment was first considered, or in a time of crisis, by which time it is generally too late.1 None of the corporations interviewed had any socio—ideologi— Cal orientation in their analysis of political risk, which was limited to economic trends, to the evaluation of lSuch statement is restricted to manufacturing industries, but some oil and mining companies are developing models analyzing changes in the overall socio—political situation of a country. 227 governmental attitudes toward private foreign investment, and to changes in the personnel Of government and their political significance. No general political report or information was periodically sought by the home office, and specific political information was only requested in the event of serious deterioration in the political climate. Thus, subsidiaries, who are capable Of gathering socio- ideological information, restrict themselves to Operational reports mainly oriented toward economic issues concerning iprofitability, while headquarters, conceptually oriented toward the analysis of socio-ideological trends, does not seek such information. In addition, the information system developed by most multinational corporations tends to foster misinforma— tion. Major sources--executives on the scene and services organizations-—generally are "foreign—sourced" or home— culture bound. No in-depth research analyzing basic social and ideological trends is undertaken. The two conceptualizations of political risk require two different sets of data if, at every level, decision making is to be fed with the right information. It seems that very little is done in the manufacturing industries to fulfill this informational gap. The Political Risk Triad Political risk derives from the interaction of the host country with the product and the foreign firm. The Host Country The basic premise is that every country is dif- ferent, and only a general framework of analysis can be provided. However, every country has three sources of political influence——economic, social, and ideological factors. They, in turn, are channeled through a country‘s political institutions, which filter those influences and translate them into political decisions. These mold the business environment by modifying, maintaining, or regu- lating it, which affects the profitiability of the foreign enterprise, and are commonly called obstacles (or incentives) to foreign investment (although local private corporations also are affected by them). Multinational corporations perceive economic factors as the major source of political influence. Curiously, it seems that major obstacles (for example, exchange controls repatriation of earnings, price control, and devaluation) are related to a country's level of economic development, and, consequently, firms should expect such obstacles in a country at certain stages of its development. One economic disequilibrium, such as the deficit of the balance of payments, can lead to different political decisions: import restrictions, minimum export quotas, devaluation, exchange controls, or incentives for new foreign investment. The political decision attempting to solve that problem will 229 reflect social and ideological influences, but in any case will lead to a change in the business environment. Social sources of political influence can be cate— gorized within institutional groups (such as the army, church, bureaucracy, and political parties), noninstitu— tional groups (such as social classes, the middle class, elites, and farmers), and anomic groups (such as revolu— tionaries) or associational groups (such as trade associ— ations and labor unions). The relative importance of any such group obviously varies from country to country. In the Brazilian case, the military plays an overwhelming role along with the bureaucracy and the middle class. The church seems to play an important role, but very little research has been oriented toward its impact on the busi— ness environment. More academic research by economists and political scientists should be directed toward gathering such information. Among the major political ideologies—-liberalism, socialism, communism, all of which are modified by nation— alism——it seems that the least understood is nationalism. It is even more nebulous in the minds of international business executives than the concept of political risk. Nationalism, in our definition, means levels of national aSpiration (national interests, national sovereignty, and national identity) which develop policies more for the benefit of the host country than to the detriment of foreigners. —‘;_,, 230 National interests, adopting an analogy from Maslow's hierarchy of motives to the three levels, include all poli— tical decisions which aim at providing a minimum level of subsistence to the country and which guarantee survival. The over—riding rationale is mainly economic and, to a lesser extent, ideological. From an economic viewpoint, foreign inVestment will be accepted as long as it acceler- ates economic growth; similarly, import restrictions will foster rapid industrialization. Ideologically, as in the case of Red China and Taiwan, the former, for reasons of national interest will try to prevent firms willing to trade with them from engaging in business with Taiwan in order to economically Weaken the latter, her ideological enemy. National sovereignty involves a people's need to feel they belong to an entity which is their own. The need or desire to be maitre chez soi is the basic underlying cause of national sovereignty conflicts. A host gOVernment must prove to its citizens that they are part of a nation they can control and develop. At this national aspiration level, social influences are predominant. The general level of education of the population, the middle class, the bureaucracy, and labor are key variables. National sovereignty is in some ways the ratification by the people Of the nation—building process; it involves controlling soci. nati trie than soci dire soc vi W0 in el CC (D 231 socially important industries and participating in growing national industries. From an economic standpoint, coun- tries will try to insure reinvestment of earnings rather than see them repatriated to another country. From a social vantage, some nationalization of the personnel, directors, skilled personnel, and capital are objectives. National identity reflects the country's need for fulfillment or self—actualization within the concert of nations. Such self—actualization is perceived by the citizens as their national identity among other countries. This aspiration cannot be achieved within one's nation, but must involve the outside world. In the case of Brazil, soccer plays a role in national identity, especially in View of the three world championships the national team has won. In developed countries national identity would be involved, for example, in the development of a national electronic industry at any cost, or in preventing foreign corporations from stepping in by adopting discriminatory purchasing policies. These three levels of national aspiration do not have to be reached in succession. Each is present in any country, but at a particular point in time one prevails over the others; depending on which one, basic trends should be predictable. The Pro evaluat they at objecti of a gt will di or autl econom (for e ments cal Sl plexil exampj count skill bilit requj appea teChi PM the is t indt 232 The Product From a managerial viewpoint, it is necessary to evaluate the importance of product characteristics as they are related to the political, social, or economic objectives of the country. Pressures for local production of a good (or local ownership of the production facilities) will depend on its prestige status (for example, the steel or automotive industry), its integrative impact upon the i economic system by creating backward—forward linkages (for example, the chemical industry), the market require— ments for its economic production (for example, the electri— cal supplies industry), its level of technological com— plexity and its politico-social strategic importance (for example, banking, mining, and public utilities), and the country's factor endownments (natural resources or human skills). The product has varying political and social visi~ bility, and by the nature of its production process and requirements it is subject to government pressures. It appears that the greater the transferability of product technology, the greater will be the pressures for local Production; the less transferable the product technology, the greater the pressures on producing a component which is technologically transferable. Consequently, some industries are more subject to pressure than others. prese trols ducts rest: by t poli worl a Sl str aut cat mac by it OJ 233 All industries have their Achilles‘ heel. At the present time the chemical industry fears product price con- trols, patent regulation (especially of pharmaceutical pro— ducts), remittance of earnings, licensing fees, and import restrictions. The electrical industry is most disturbed by technical standards, governmental economic development policies, and the government as a customer. The metal working industry is apprehensive about the government as a supplier, expropriation, and restrictions on capital structure (especially a limited use of debt), and the automotive industry fears minimum export quotas and local capital participation requirements. Finally, the office machine equipment industry is not particularly bothered by local capital participation pressures, but suffers from government as a customer and indirect discrimination caused by large subsidies. Interestingly enough, developed countries appear to discriminate through technical standards or subsidies at the Production level, while developing countries use cruder methods, such as import restrictions, local capital par- ticipation, or restrictions on remittance of earnings. The Firm The firm regards political risks derived from economic influences as the most important. These include: price controls and inflation; deficit in the balance of with and 234 payments and exchange rate fluctuations; and import restric— tions and minimum export quotas. These economic influences, to a certain degree, are related to the level of a country's economic development. The firm's perception of political risk is involved with three influences: the firm itself, its nationality, and its organizational levels. In fact, the objectives of the firm are themselves becoming constraints: for example, a total refusal to admit local capital participation ultimately will force the firm to stay out of certain markets. The firm's resources influ— ence its methods of entry; limited financial resources will favor ajointventure, for example. Limitedhuman resources alsocreateperceptionoflfigh riwcm .m psoum spammo mz cospmamflmoq HoHHPmDUcH .m c PcoEWOHmflocw mQOHPOHHPmom mpcmcH .H whom ucoEumo>cH moHQmHMc> mcHHSpoomscmZ cacaooo cocoon coflpmxme .e mpcofiwom mo oocmaom coapoamflmoq Hoemq .m moaaom HoGQOmHom Hmooq .m UHEocoom .m woeaom HoQGOmuom cmflouom .H mpcoficuo>om wpflo Hsocoumoupcm moHQMHHo> #coEomocoz moon accosmong oewam .Ho>om , onswoamflmoq Hmooq mesonw HMCOHBHUMHB i GOHpmxme .o paoz mQOHPMNHcmmHO . mcflpcsooom .m mDOHmHHom pcoficoufl>cm .v monsoomousm woflaom pcoEPmo>cH .m mQOHpmspchHEpow mane moaaom oocoppflEom .m unaccomm mQOflcD % oHSpodupm Hopflmov .H cflmpcfloz 2 moaomflum> Hoflococflm HoHOOm .N mhnoe o>flpsooxog pcoficonfl>cm .m pcoecuo>ow Emfiampflmmu coausnflupmflo Housmmcm .e opoasmom Emflamcoflumz cospoaoum .m EmHQDEEOU poopoum .m mhooo o>flpmamflmoag Emflaofloom ooaum .H o>flwmamflmoq moaemauo> mascoxuoz accospoz Hecauflaom .H oocosfiwcH Pcoficoufl>cm Houseflaom AHMEMOMQH tum HmEHomv mmocflmsm mo osHHoccch moocosamcH moHQmHuo> pcotsogoo mosoSHwCH mo meme mcoflpswflumcH HMUHuHHom mo moonsom (ll .mmoooum Hmowuflaom ore mo MHOBoEon Hospmooc00:1.Hm mumme XHszmm< APPENDIX C 284 APPENDIX C Country Classification Although countries can be grouped in a number of ways for international purposes, there are two basic methods of classification. One is to focus on external environmental variables, and the second is to use criteria internal to the firm, specifically for forecasting use, such as the number of telephones, radios, or cans of beer produced. For obvious reasons only the external variables have been taken into account in this study. Classification of countries on such a basis can be done using a single cri— terion, such as income per capita, or a number of indicators related to one major variable, such as the level of economic development. There is no one framework that is universally acceptable. Three different factors measure the level of economic development: 1. Economic = GNP per capita 2. Socio—economic = Liander-Sherbini-Terpstra—Youngl 3. Social = Donald V. McGranahan2 In the author's opinion, the single criterion chosen, namely the GNP per capita, provides a good approximation and x“ lBertil Liander & al, Comparative Analysis for igternational Marketing (Boston: Allyn and Bacon, Inc., 67 2Donald V. McGranahan, "Analysis of Socio-Economic Development through a system of Indicators," The ANNALS of the American Academy of Political and Social SEiEEEET’EEEUary l§7l, pp. 65-81. 285 IIIIIIIIIIIIlllll::::;________________ 286 a reliable framework, although the level of economic develop- ment reflected by the GNP per capita can appear rudimentary and oversimplified. Before selecting this criterion, dif— ferent methods of grouping were studied, particularly the developmental approach through cluster analysis presented by A. A. Sherbini in his book Comparative Analysis for International Marketing. Sherbini differentiates countries into five progressive levels of resource development. In order to define those levels he used the basis of a previous study by Brian T. L. Berry.3 Through factor analysis, almost 100 countries were compared on 43 indices of economic and technological development. A basic technological pat— tern was revealed which, by synthesizing the composite indices, has been summarized on a single dimension (see Table 1). By utilizing only the GNP per capita in a degressive ranking order, a roughly similar distribution has been obtained (see Table 2). This does not imply that the deficiencies of relying on a single variable in measuring development should be overlooked. The shortcomings of the GNP per capita are known and have been demonstrated, the most important of Which probably is its expression in terms of averages which X 3Brian T. L. Berry, "Patterns of Economic Develop— men?;" In N. Ginsburg's Atlas of Economic Development (Chicago: University of Chicago Press, 1961), p. 110. :“GWEQOH®>®Q UNEOQOOH mafihgmmmz WWUBQQH WWWQH MO COWHWWQEOUIioHU mqqu XHQZMWWN 287 omen memo Hoom oacoflaouco oHoE co>o .opmp mo hpflfiosm Hoom o>flmcomxo one NHDUHMMHU we mcHBMUQD pOOPmuoUQS haaomno>flcs poz onmEoo OOH oHQcHHoHcD new when mo hpflamsv uoom o>flmcomxo one cecoeooeo we assumed: pOOBmHoUQS waammuo>flcs poz onQEoo OOH moflocmgosomflp Hocoflmos .coflpseflupmflp oEoocfl pcsooom OPGH oxcp poo moom oHSmmoE useocooo cm %Hco Hommcflcmofi haflnommoooc Doc .moOHHm woxnmg pHMOB pcoEDHPmcH accepflaom .moflumflpohm oaemflaoucb oummaos .QOHpoommeom HmflUOm onsmooz oca>ea no UHMUQMan QHmemz poms hacoEEoo cum ©00pmuo©cs %Hammuo>flcb WHHoOflUOHon popmme memo canceea>m seeomom HoHUOm xopcfl opHmomEou HMHUOm OHEocooo xopCH opHmOQEOO mpoxuoe ooflnm pHHOB co oomom cospoflsmom \cOHPUSUOHQ mo 85m mommy Ico>pMmHo momocco>pfl coflpoasoamu xoch uowooach HoHOOm .pcofimoHo>oQ anocoom HOPMOflUQH UHEocoomlowoom mnedmo\ozo amendmooz mooflccH ooHSB mo comflHmQEOUII.HU mqmfia XHQmem¢ 288 APPENDIX TABLE C2.—-Comparison of the Three Classification Results. GNP per Capita Socio—Economic Social Group 1 United States Sweden Sweden U.K.* Canada Canada Switzerland U.K.* Sweden Group 2 Australia Switzerland* Switzerland* Denmark Belgium NewZealand France West Germany Australia New Zealand Denmark Norway Norway Netherlands Belgium West Germany Norway Netherlands Belgium France Denmark United Kingdom Finland West Germany Finland Japan France Netherlands Israel Finland Israel Italy Japan Italy Argentina* Italy Japan Argentina* Group 3 Venezuela Uruguay Venezuela Argentina South Africa Spain Trinidad & Tobago Venezuela Greece Libya Chile* Chile* Greece Spain Singapore South Africa Uruguay Cyprus Group 4 Mexico Greece* Portugal Chile Costa Rica Costa Rica Jamaica Portugal China (Rep.of) Portugal Colombia Costa Rica Jamaica Peru Brazil Guatemala Colombia Colombia Peru Malaysia Mexico Dominican Republic HPPI Gro (cc Gr APPENDIX TABLE C2.—-Continued. 289 GNP per Capita Socio-Economic Social Group 4 Turkey Brazil Turkey (cont.) Iran Iran Dominican Republic U.A.R.* Algeria Ecuador* Brazil Libya* China (Rep. of) Group 5 Iraq Turkey* Guatemala* S. Rhodesia Peru* Ceylon Ecuador Ecuador Ghana Tunisia Guatema1a* Morocco Ghana Iraq Philippines Angola Bolivia Morocco Algeria* Philippines Philippines Syria Syria Zambia Ghana Bolivia Ceylon Ceylon U.A.R. U.A.R. Thailand Cambodia Group 6 Kenya Indonesia Vietnam Congo Indonesia India Congo (Rep. of) Pakistan Guinea Sudan. India Algeria Pakistan Burma Sudan Morocco* Algeria Iran* Tanzania Burma falls in a different classi— * ' es the country - Indicat n social than on GNP. fication on socio economic or o 290 may conceal wide variations between regions or between economic class. Since its weaknesses are widely known, the GNP per capita may have an important advantage because everyone has a better grasp of its meaning. The classi- fication presented in this appendix is derived from the 1967 data reported by the World Bank, and is divided into six groups. We began by arbitrarily creating a group of countries with GNP per capita of over U.S. $2,000. The lower limit of the next interval was obtained by dividing $2,000 by 2, which also created the upper limit of the following interval, and so forth (see Table 3). Sixty-nine countries have been studied. All com- munist bloc countries have been excluded, as well as all countries with a population less than 2,000,000. Some extreme cases have been eliminated because of their atypicality (such as Hong KOng), but most were excluded because data was unavailable. moflupcsoo mm Q¢BOB mas a care ammo mofluucsoo Ha H> mdouo m omm m mma w moauuaooo me > moose w oom m omm m moflupcsoo ma >H msouw i ooo.am oom w moflupcsoo OH HHH Qsoum ooo.mm ooo.em moeupcsoo ma HH ozone ooo.mw core ouoz moflupccoo e H moouw mumpcsom Home: mumpcsom Mozoq upHmm0\mzw moflupccoo .cOencoeoemmcHo suncooonu.mo mamas xHozmoma APPENDIX D 292 as.e mo.e mw.e mm.m oo.m as.m eo.e me.m aw.m coeuaenoouoxu Nw.e m>.e Hm.e mm.m mo.m om.e HH.e mo.e mm.e someoxop muovmcflfifluomfio ma.m mH.m ma.m mn.a ma.m om.H mm.m em.m mm.m meson monocoxm mo.m mm.m mm.m mm.a me.m om.H ea.m mm.N nw.m moaaom pcoEpmo>cHom mo.m mo.m mh.m mm.H mm.m om.H we.m mo.m mm.N moflpaomou .woow mcfimcooaa meow Pcofiomocmz Nb.m mm.m om.m mo.a mm.a om.H me.m mm.a em.m mpcopfl>fl© .mmcflcumo Mo cofipoflupmmou .Howflmoo wo sowmcmue moocmppflfiom 293 ww.N bw.m om.N ON.N mo.N mN.N NM.N mm.m mm.m QOHPMQHOHPHMQ Hopflmmo Hooog mm.m mn.m Nv.m NH.m om.m an.m Hm.m wm.m mm.m mQOHPOHHpmoH pnoo ounpocupm Hopammo oocmcflm Ham cmflouom .m.D Ham cmflouom .m.D cmflouom .m.D Ham moose Hmcoflpocdm wuoflpflmncm msopuoswpoom Hamuo>o mflmhamcd wo Ho>oq .ncosumo>cH coaches on moeooumno one no muasmom suasssmww.ao mamas xHozuom< Hb.v mm.v Hm.v mm.c om.e me.e me.w ew.e wm.v moflwflfiom ca PcoEo>Ho>cfl muoxuoz momma can m0flPHHom pcoEooH0mco .moflcmmfioo\mofluecdoo myopmcfififiuomflo :%cpamo3: one Pmcflmmo monummoum Mo mcflaoom MmHm o powooawou mofluoflpflmQSm .m.D o.m we posh om>Hmommm oz coflpmamflmoa hMOPmcHEHMomHQ moOfipomum coweoofiom GOHPMHmHmoH Honmq M 2 oo.m oo.m oo.m mw.m om.m om.e mm.e mn.e ne.w mpcflouumcoo Hoflfidz oo.m oo.m oo.m ew.m mo.m me.e mm.e mo.v oe.e mQOHPOHHPwou mopm w wmoood HoCQOmuom cmaouom pcofiommdnz mm.a mm.H wm.a wv.m mo.m mn.m mh.a mm.m mm.a moHOAHom UAEOQOOM em.v mm.v mm.w mo.w ma.e oo.e mm.e mH.v mm.v GOHPQDHHOU mh.e mm.w hm.e mo.e mo.e no.e em.w mm.v ev.e mooH>Hom mcflxcmn U®C3O #GGEGmerOO 295 mo.m mm.N mm.v v®.m mm.v HH< NH.m m@.N mm.v mo.m em.v cmflouom muaeeemocm mm.m wm.m Hm.v ww.m oo.m .m.D mH.m Hw.m mh.m mN.N wm.v Had .uommEfi one oNHEHcHE Op umflxo who3 cmdocuam .mocHH moaw MmHm Hoooflums we deem on mucosoueooou umooxo om>Hmommm oz uoHuonHupmao Hmoammsm mb.N Nv.m mm.m om.N mN.w coflouom hm.m vH.m mm.m mN.N mw.v .m.D muownmsvpmom hm.m SN.m HH.m meaPmasmoH mcHOHHm mm.N ww.m HP.N waonpcou oOHHm ‘ILIIII mcflpoxumz wm.e wm.e mm.e mCHMUGMPm Hecaccoop WHOPmcHEHHOmAQ Ha.m mw.m oo.m mQOHPOHupmoH mwuomfifl .pcoEouflson Pcopcoo Havoc Nh.e mo.e on.e HoHHQQSm mo pcoficuo>oo coapocpoum cmflonom .m.D Had moons HmCOHuocsm Hamuo>o mammaocm mo Ho>oq .UCDQHPGOUII.HQ mgmdB NHQmemfl mm.v em.e Ho.e mo.e o>.e eo.m mw.e om.e em.w pouflcflmnsm mMOPAPoQEOO mm.v wo.v mn.v mm.m mm.m bo.m mm.m om.m mm.m HQEOPmSO o no pcoficuo>ow pcoEcoufl>cm Nw.e mm.e wm.e om.m om.m me.e om.e om.e mm.e coapoOHwflmmoao mmwaudp mumupfleum mm.v He.v hm.v mm.m we.m mN.m mo.v Nh.m om.m HOHDQOO mafia POSCOHm 296 mm.m mm.m mo.m oo.m me.m me.m eH.m mm.m Hm.m mouosw pnogxo EDEHCHS mm.e ne.v mw.e mm.e mo.e om.w mm.e mm.e oe.e moonOHa coflposoosm CH soapocflefluomflo mn.e Nw.e mn.v ve.e oo.e mh.e om.e Sb.e mo.e coapoovoue pcwemm popafiaq poseoum .momcoco ucoacuo>om awesome mcflpcomop mo moflpHDOHmwflc och ouflcmooou MmHm mo>flpsooxo .mflmfluo Hoofluflaom m CH .uo>o30m om>Hmommm oz GOHPOEOHA APPENDIX E 297 APPENDIX E Key to Appendices E, F, G, H, I A. Classification of Industries Industry 1: Automotive Industry Industry 2: Chemical Industry Industry 3: Electrical Industry Industry 4: Metal Working Industry Industry 5: Office Machine Equipment Industry B. Measurement: Based on a five—point scale Questions 1—2 Question 3 Question 5-on l.OO—-Many Advantages l.OO—-Great 1.00-—Very Important 2.00--Few Advantages 2.00——Many 2.00——Important 3.00—-Neutral 3.00——Some 3.00-—Occasionally Important 4.00--Few Disadvantages 4.00—-Infrequently 4.00——Rarely Important -— ' 4.00——None 5.00——Not 5.00 Many Disadvantages Important C. Symbol Representation (A)—— Arithmetic mean of executives' responses. (STD)-- Standard deviation of responses. (—.--)--Extremely small standard deviation. 298 299 Interview Results: By Industries l 2 3 4 5 Question 1 A 2.90 2.60 2.47 2.00 3.36 STD 0.56 0.51 0.91 0.86 0.80 Question 2 A 2.80 3.00 2.80 2.75 3.00 STD 0.78 0.66 0.94 0.70 0.63 Question 3 A 4.90 4.80 4.13 4.89 4.82 STD 0.31 0.63 1.55 0.33 0.40 Question 4 A 2.50 1.80 2.80 3.33 3.09 STD 1.26 1.13 1.32 1.80 1.51 Question 5 A 3.30 2.30 3.33 2.78 3.64 STD 1.15 1.05 1.63 1.48 1.28 Question 6 A 5.00 4.78 4.71 4.11 4.82 STD 0.00 0.66 0.61 1.36 0.40 Question 8 A 5.00 4.50 5.00 5.00 5.00 STD 0.00 0.97 0.00 t 300 l 2 3 4 5 uestion 9 A 5.00 5.00 4.93 4.78 5.00 STD —.-— —.—- —.—— —.—— ____ uestion 10 A 5.00 4.70 4.93 5.00 5.00 STD -.—— -.-— -.—- —.—— _._- )uestion 11 A 4.90 4.80 5.00 5.00 5.00 STD 0.31 -.—- -.—- —,_— _.__ Question 12 A 5.00 4.90 4.80 4.67 4.91 STD —.-- -.—— —.-— —.—— —.—— Question 13 A 5.00 4.89 5.00 5.00 5.00 STD 0.00 0.33 0.00 0.00 0.00 luestion 15 A 5.00 3.70 4.79 4.56 5.00 STD 0.00 1.56 0.42 0.72 0.00 Question 16 A 5.00 3.70 4.62 5.00 4.91 STD —.—— 1.33 0.96 -.—- 0.30 Question 17 A 4.30 3.80 4.57 4.89 4.73 STD 1.15 1.47 0.64 0.33 o 64 301 l 2 3 4 5 pstion 18 A 2.60 2.90 3.21 4.00 3,45 STD 1.50 1.20 1.36 1.51 1.63 pstion 19 A 3.60 3.33 4.23 4.25 4.00 STD 1.83 1.50 1.10 1.48 1.34 estion 29 A 4.50 4.00 4.36 4.44 4.55 STD 0.84 1.73 1.01 0.88 0.68 pstion 21 A 4.40 4.50 3.43 3.50 3.45 STD 1.26 0.97 1.22 1.51 1.69 estion 22 A 4.60 5.00 4.46 4.63 4.09 STD 0.69 -.-- 0.96 0.74 1.13 estion 23 A 4.80 4.90 4.57 5.00 5.00 STD 0.63 0.31 1.08 -.-- -.—- estion 24 A 4.60 4,00 4.50 5.00 4.27 STD 0.84 1.41 0.94 -.-— 1-34 estion zg A 4.60 4.10 4.50 5.00 4.27 STD 0.84 1.44 0.94 —.—— 1.34 302 l 2 3 4 5 gpestion 26 A 5.00 4.50 4.79 5.00 4.45 STD —.-— 1.26 0.57 - —— 1,29 gpestion 27 A 4.80 5.00 4.62 5.00 5.00 STD 0.63 —.—- 0.65 —.—- _,__ Question 28 A 4.90 5.00 4.69 4.89 5.00 STD 0.31 — —- 0.75 0.33 — -— gpestion 29 A. 4.70 4.60 4.85 4.89 4.82 STD 0.48 0.69 0.37 0.33 0.60 gpestion 30 A 4.70 4.40 4.38 4.63 4.73 STD 0.67 1.07 0.86 0.74 0.64 Question 31 A 3.90 3.30 3.29 3.11 3.36 STD 0.87 1.63 1.26 1.45 1.28 Question 32 A 2.00 2.10 2.57 2.89 2.10 STD 0.47 1.28 1.22 1.45 1.32 Qpestion 33 A 2.50 1.60 2.33 2.11 2.55 STD 1.07 0.69 1.04 1.53 1.03 303 l 2 3 4 5 guestion 34 A 2.50 1.60 2.40 2.11 2.55 STD 1.07 0.69 1.05 1.53 1.03 Question 35 A 2.50 1.60 2.40 2.11 2.55 STD 0.70 0.69 1.05 1.53 1.03 gpestion 36 A 3.00 1.40 2.53 1.78 2.55 STD 1.33 0.51 1.24 1.39 1.21 Question 37 A 3.00 1.40 2.47 1.78 2.55 STD 1.33 0.51 1.12 1.39 1.21 gpestion 38 A 3.00 2.30 2.33 1.78 2.55 STD 1.33 1.05 1.23 1.39 1.21 gpestion 39 A 3.10 2.33 3.00 2.75 3.09 STD 0.87 1.32 1.41 1.58 1.57 gpestion 40 A 2.44 2.33 2.64 2.50 2.64 STD 0.52 1.32 1.15 1.64 1.28 Question 41 A 4.70 4.30 4.14 4.63 4.25 STD 0.67 1.49 0.86 1.06 1.19 304 i l 2 3 4 5 estion 42 A 4.20 3.70 3.93 3.50 4.00 STD 1.22 1.05 1.59 2.07 1.48 .estion 43 A 4.20 4.60 4.40 4.13 4.82 STD 1.22 0.96 1.29 1.24 0.40 (estion 44 A 4.10 4.80 3.93 4.13 4.27 STD 0.99 0.42 0.88 1.12 0.90 Lestion 45 A 1.80 2.10 1.73 2.00 2.36 STD 0.63 1.28 1.16 1.06 1.43 lestion 46 A 4.60 4.90 4.69 4.29 4.90 STD 0.69 0.31 0.85 0.95 0.31 [estion 47 A 2.70 2.20 3.50 3.57 3.00 STD 1.25 1.31 1.28 1.51 1.34 restion 48 A 2.50 2.20 3.36 3.57 2.91 STD 1.17 1.31 1.21 1.51 1.30 estion 49 A 4.80 4.60 3.93 4.86 4-00 STD 0.42 0.96 1.33 0.37 l 00 —--~q__._—u-n:~_ -f. 4. T_"_ T'W" ~_._ ._. APPENDIX F 305 Interview Results: 306 By Industry Headquarters l 2 3 4 5 !uestion A 2.75 2.80 2.14 1.50 3.67 STD 0.50 0.44 1.21 1.00 1.03 Question A 2.75 3.20 2.71 2.50 3.17 STD 1.25 0.44 1.38 1.00 0.40 Qpestion A 4.75 4.60 3.14 4.75 4.67 STD 0.50 0.89 1.86 0.50 0.51 Qpestion A 2.25 2.20 2.57 4.00 3.17 STD 0.95 1.30 0.97 1.41 1.72 Question A 3.00 2.60 3.14 3.00 4.00 STD 1.63 1.14 0.97 1.82 1.26 Qpestion A 5.00 4.50 5.00 3.75 4.83 STD 0.00 1.00 1.46 1.89 0-40 Qpestion A 5.00 4.00 5.00 5.00 5.00 STD 0.00 1.22 0.00 0.00 0.00 307 l 2 3 4 5 W A 5.00 5.00 4.86 4.50 5.00 STD 0.00 0.00 0.37 1.00 0.00 w A 5.00 4.40 4.86 5.00 5.00 STD 0.00 1.34 0.37 0.00 0.00 Question 11 A 5.00 4.60 5.00 5.00 5.00 STD 0.00 0.54 0.00 0.00 0.00 Question 12 A 5.00 4.80 5.00 4.75 5.00 STD 0.00 0.44 0.00 0.50 0.00 Question 13 A 5.00 4.80 5.00 5.00 5.00 STD 0.00 0.44 0.00 0.00 0.00 Question 15 A 5.00 2.80 4.67 4.75 5.00 STD 0.00 1.78 0.51 0.50 0,00 Question 16 A 5.00 3.40 4.00 5.00 4.83 STD 0.00 1.67 1.41 0.00 0.40 Question 17 A 3.25 4.00 4.67 5.00 4.50 STD 1.25 1.73 0.51 0.00 0.83 308 1 2 3 4 5 Question 18 A 3.00 2.60 3.17 3.50 2.83 STD 2.30 1.34 1.47 1.91 1.83 Question 19 A 2.75 3.25 4.00 3.50 3.17 STD 2.06 1.50 1.00 1.91 1.32 gpestion 20 A 3.75 3.00 3.83 4.75 4.33 STD 0.95 2.30 1.16 0.50 0.81 Question 21 A 3.50 4.00 2.83 3.25 2.67 STD 1.73 1.34 1.16 1.25 1.86 gpestion 22 A 4.00 5.00 3.80 4.50 3.33 STD 0.81 0.00 1.30 1.00 1.03 Question 23 A 4.50 4.80 4.00 5.00 5.00 STD 1.00 0.44 1.54 0.00 0.00 gpestion 24 A 4.00 3.00 3.83 5.00 3.67 STD 1,15 1.41 1.16 0.00 1.63 gpestion 25 A 4.00 3.20 3.83 5.00 3.67 STD 1.15 1.64 1.16 0.00 1.63 309 1 2 3 4 5 Question 26 A 5.00 4.00 4.50 5.00 4.00 STD 0.00 1.73 0.83 0.00 1.67 Question 27 A 4.50 5.00 4.20 5.00 5.00 STD 1.00 0.00 0.83 0.00 0.00 Question 28 A 5.00 5.00 4.60 5.00 5.00 STD 0.00 0.00 0.89 0.00 0.00 Question 29 A 5.00 4.80 4.80 5.00 5.00 STD 0.00 0.44 0.44 0.00 0.00 Question 30 A 4.50 4.00 4.20 4.75 4.50 STD 1.00 1.41 1.09 0.50 0.83 Question 31 A 4.50 3.00 2.33 3.00 3.17 STD 1.00 2.00 0.51 1.82 1.72 Question 22 A 1.75 1.20 2.50 2.50 2.83 STD 0,50 0.44 0.54 1.73 1.47 Question 33 A 2.25 1.40 1.86 1.00 1.83 STD 0.50 0.54 0.69 0.00 0.75 310 r l 2 3 4 5 W A 2.25 1.40 2.00 1.00 1.83 STD 0.50 0.54 0.81 0.00 0,75 Question 35 A 2.25 1.40 2.00 1.00 1.83 STD 0.50 0.54 0.81 0.00 0.75 Question 36 A 2.25 1.40 2.43 1.00 1.83 STD 0.50 0.54 1.39 0.00 0.75 Question 37 A 2.25 1.40 2.29 1.00 1.83 STD 0.50 0.54 1.11 0.00 0.75 Question 38 A 2.25 1.40 2.14 1.00 1.83 STD 0.50 0.54 1.21 0.00 0.75 Question 39 A 2.50 1.40 2.43 1.00 1.83 STD 0.57 0.54 1.39 0.00 0.75 Question 40 A 2.33 1.25 2.00 1.00 1.83 STD 0.57 0.50 0.89 0.00 0.75 Question 41 A 4.25 3.60 3.67 4.25 3 83 STD 0.95 1,94 1.03 1.50 1.47 311 1 2 3 4 5 Question 42 A 3.25 3.00 3.17 1.00 3.17 STD 1.50 1.00 1.60 0.00 1.60 Question 43 A 4.00 4.20 3.71 3.33 4.83 STD 1.41 1.30 1.70 1.52 0.40 Question 44 A 3.50 4.80 4.00 3.67 4.17 STD 1.00 0.44 1.00 1.52 0.98 Question 45 A 1.75 3.00 2.29 2.67 2.67 STD 0.50 1.22 1.49 1.52 1.21 Question 46 A 4.25 4.80 4.20 3.33 4.80 STD 0.95 0.44 1.30 1.57 0.44 Question 47 A 1.75 1.40 2.83 3.00 2.33 STD 0.50 0.54 1.16 0.00 1.03 Question 48 A 1.75 1.40 2.50 3.00 2.17 STD 0.50 0.54 0.54 0.00 0.75 Question 49 A 4.50 4.40 3.00 4.67 3.17 STD 0.57 1.34 1.41 0.57 0.40 APPENDIX G 312 313 Interview Results: By Industry Subsidiaries 1 2 3 4 5 Question 1 A 3.00 2.40 2.75 2.60 3.00 STD 0.63 0.54 0.46 0.54 0.00 Question 2 A 2.83 2.80 2.88 3.00 2.80 STD 0.40 0.83 0.35 0.00 0.83 Question 3 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 4 A 2.67 1.40 3.00 2.80 3.00 STD 1.50 0.89 1.60 2.04 1.41 Question 5 A 3.50 2.00 3.50 2.60 3.20 STD 0.83 1.00 1.85 1.34 1.30 Question 6 A 5.00 5.00 ’ 4 50 4 40 4.80 STD 0.00 O 00 0.75 0.89 0.44 Question 8 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0 00 314 l 2 3 4 5 Question 9 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 10 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 22 A 4.83 5.00 5.00 5.00 5.00 STD 0.40 0.00 0.00 0.00 0.00 Question 12 A 5.00 5.00 4.63 4.60 4.80 STD 0.00 0.00 0.51 0.89 0.44 Question 23_ A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 15 A 5.00 4.60 4.88 4.40 5.00 STD 0.00 0.54 0.35 0.89 0.00 Question 16 A 5.00 4.00 5.00 5.00 5.00 STD 0.00 1.00 0.00 0.00 0.00 Question 17 A 5.00 3.60 4.50 4.80 5.00 STD 0,00 1.34 0.75 0.44 0.00 315 1 2 3 4 5 Question 18 A 2.33 3.20 3.25 4.50 4.20 STD 0.81 1.09 1.38 1.00 1.09 Question 19 A 4.17 3.40 4.38 5.00 5.00 STD 1.60 1.67 1.18 0.00 0.00 Question 20 A 5.00 4.80 4.75 4.20 4.80 STD 0.00 0.44 0.70 1.09 0.44 Question 22_ A 5.00 4.60 3.88 3.75 4.40 STD 0.00 0.54 1.12 1.89 0.89 Question 22 A 5.00 5.00 4.88 4.75 5.00 STD 0.00 0.00 0.35 0.50 0.00 Question 23 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 24 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 25 A 5.00 5.00 5.00 5.00 5.00 STD 0,00 0.00 0.00 0.00 0.00 316 1 2 3 4 5 Question 26 A 5.00 5.00 5.00 5.00 5.00 STD 0.00 0.00 0.00 0.00 0.00 Question 27 A 5.00 5.00 4.75 5.00 5.00 STD 0.00 0.00 0.35 0.00 0.00 Question 28 A 4.83 5.00 4.75 4.80 5.00 STD 0.40 0.00 0.70 0.44 0.00 Question 23 A 4.50 4.40 4.88 4.80 4.60 STD 0.54 0.89 0.35 0.44 0.89 Question 30 A 4.83 4.80 4.50 4.50 5.00 STD 0.40 0.44 0.75 1.00 0.00 Question 31 A 3.50 4.60 4.00 3.20 3.60 STD 0.54 1.34 1.19 1.30 0.54 Question 32 A 2.17 3.00 2.63 3.20 1.40 STD 0.40 1.22 1.59 1.30 0.54 Question 33 A 2.67 1.80 2.75 3.00 3.40 STD 0.81 0.83 1.16 1.58 0.54 317 1 2 3 4 5 Question 34 A 2.67 1.80 2.75 3.00 3.40 STD 0.81 0.83 1.16 1.58 0.54 Question 35 A 2.67 1.80 2.75 3.00 3.40 STD 0.81 0.83 1.16 1.58 0.54 Question 36 A 3.50 1.40 2.63 2.40 3.40 STD 1.51 0.54 1.18 1.67 1.14 Question 37 A 3.50 1.40 2.63 2.40 3.40 STD 1.51 0.54 1.18 1.67 1.14 Questiony33 A 3.50 1.40 2.50 2.40 3.40 STD 1.51 0.54 1.30 1.67 1.14 Question 39 A 3.50 3.20 3.50 3.80 4.60 STD 0.83 0.44 1.30 0.83 0.54 Question 40 A 2.50 3.20 3.13 4.00 3.60 STD 0.54 1.09 1.12 0.00 1.14 Question 41 A 5.00 5.00 4.50 5.00 4.80 STD 0.00 0.00 0.53 0.00 0.44 318 1 2 3 4 5 Question 42 A 4.83 4.40 4.50 5.00 5.00 STD 0.40 0.54 1.41 0.00 0.00 Question 43 A 4.33 5.00 5.00 4.60 4.80 STD 1.21 0.00 0.00 0.89 0.44 Question 44 A 4.50 4.80 3.88 4.40 4.40 STD 0.83 0.44 0.83 0.89 0.89 Question 45 A 1.83 1.20 1.25 1.60 2.00 STD 0.75 0.44 0.46 0.54 1.73 Question 46 A 4.83 5.00 5.00 5.00 5.00 STD 0.40 0.00 0.00 0.00 0.00 Question 47 A 3.33 3.00 4.00 4.00 3.80 STD 1.21 1.41 1.19 2.00 1.30 Question 48 A 3.00 3.00 4.00 4.00 3.80 STD 1.26 1.41 1.19 2.00 1.30 Question 43 A 5.00 4.80 4.75 5.00 5.00 STD 0.00 0.44 0.46 0.00 0.00 APPENDIX H 319 320 Interview Results: By Nationality, Headquarters, and Subsidiaries Question U.S. U.S. Sub- Foreign Foreign Headquarters sidiaries Headquarters Subsidiaries A 2.86 2.83 2.33 2.65 l STD 1.16 0.57 1.07 0.49 A 3.14 2.92 2.58 2.81 2 STD 0.36 0.51 1.31 0.54 A 4.79 5.00 3.67 5.00 3 STD 0.57 0.00 1.55 0.00 A 3.14 2.58 2.42 2.65 4 STD 1.40 1.56 1.24 1.57 A 3.57 2.92 2.75 3.12 5 STD 1.39 1.24 1.35 1.53 A 4.93 4.82 4.30 4.65 6 STD 0.26 0.40 1.33 0.70 A 4.93 5.00 4.67 5.00 8 STD 0.26 0.00 0.88 0.00 A 5.00 5.00 4.75 5.00 9 STD 0.00 0.00 0.62 0.00 A 5.00 5.00 4.67 5.00 10 STD 0.00 0.00 0.88 0.00 A 5.00 4.92 4.83 5.00 ll STD 0.00 0.28 0.38 0.00 321 Question U.S. U.S. Sub- Foreign Foreign Headquarters sidiaries Headquarters Subsidiaries A 4.93 4.83 4.92 4.76 12 STD 0.26 0.38 0.28 0,56 A 5.00 5.00 4.90 5,00 13 STD 0.00 0.00 0.31 0,00 A 4.79 4.75 4.00 4.82 15 STD 0.42 0.62 1.61 0.39 A 4.57 4.73 4.20 4.88 16 STD 0.93 0.64 1.39 0.48 A 4.50 4.75 4.09 4.47 17 STD 0.85 0.62 1.37 0.94 A 3.43 3.09 2.45 3.59 18 STD 1.60 1.13 1.57 1.37 A 3.29 4.27 3.44 4.41 19 STD 1.32 1.61 1.74 1.00 A 4.43 4.58 3.30 4.82 20 STD 0.75 0.79 1.56 0.52 A 3.07 4.73 3.55 4.06 21 STD 1.68 0.46 1.29 1.24 A 3.64 4.91 4.70 4.94 22 STD 1.08 0.00 0.67 0.00 A 4.64 5.00 4.64 5.00 23 . STD 1.08 0.00 0.67 O 00 322 Question U.S. U.S. Sub— Foreign Foreign Headquarters sidiaries Headquarters Subsidiaries A 4.43 5.00 3.09 5,00 24 STD 0.85 0.00 1.44 0,00 A 4.50 5 00 2 90 5.00 25 STD 0.85 0.00 1.37 0.00 A 4.79 5 00 3 90 5.00 26 STD 0.57 0.00 1.66 0.00 A 4.93 5 00 4.50 4.94 27 STD 0.26 0.00 0.84 0.24 A 5.00 4 83 4 80 4 88 28 STD 0.00 0.38 0.63 0.48 A 4.93 4.42 4.90 4.82 29 STD 0.26 0.66 0.31 0.52 A 4.43 4.91 4.30 4.59 30 STD 0.85 0.30 1.15 0.71 A 3.71 3.42 2.36 3 76 31 STD 1.32 0.79 1.50 1.14 A 2 29 2.50 2.09 2 47 32 STD 1.13 1.44 1.22 1.12 A 1.50 2.50 1.92 2.88 33 STD 0.65 1.00 0.66 1.16 323 Question U.S. U:S: SUb- Foreign Foreign Headquarters Sidiaries Headquarters Subsidiaries A 1.50 2.50 2.00 2.88 34 STD 0.65 1.00 0.73 1.16 A 1.50 2.50 2.00 2.88 35 STD 0.65 1.00 0.73 1.16 A 1.50 2.75 2.25 2.65 36 STD 0.65 1.35 1.13 1.45 A 1.50 2.75 2.17 2.65 37 STD 0.65 1.35 0.93 1.45 A 1.50 2.75 2.08 2.59 38 STD 0.65 1.35 0.99 1.50 A 1.50 3.83 2.45 3.59 39 STD 0.65 0.93 1.12 1.00 A 1.50 3.18 2.13 3.19 40 STD 0.65 0.98 0.83 1.04 A 4.50 4.91 3.09 4.76 41 STD 0.94 0.30 1.37 0.43 A 2.79 4.83 3.00 4.65 42 STD 1.67 0.38 1.15 0.99 A 4.07 4.67 4.09 4-82 43 STD 1.26 0.65 1.44 0.72 324 Question U.S. U.S. Sub— Foreign Foreign Headquarters sidiaries Headquarters Subsidiaries A 4.00 4.33 4 18 4.35 44 STD 0.96 0.77 1.07 0.86 A 2.79 1 58 2 09 1.53 45 STD 1.18 0.66 1.22 1.00 A 4.43 5 00 4 25 4 94 46 STD 0.85 0.00 1.03 0.24 A 2 29 3.64 2 20 3 65 47 STD 0.82 1.43 1.22 1.32 i i A 2.21 3 45 2.00 3 65 48 STD 0.69 1.50 0.81 1.32 A 3.93 4 91 3.55 4 88 49 STD 0.99 0.30 1.43 0.33 APPENDIX I 325 326 Interview Results: For All Industries, All Headquarters, All Subsidiaries, and by Nationality Question All All Head- All Sub- All All Industries quarters sidiaries U.S. Foreign A 2.67 2.62 2.72 2.85 2.52 l STD 0.86 1.13 0.52 0.92 0.78 A 2.87 2.88 2.86 3.04 2.71 2 STD 0.75 0.95 0.52 0.44 0.93 A 4.67 4.27 5.00 4.88 4.45 3 STD 0.92 1.25 0.00 0.43 1.18 A 2.71 2.81 2.62 2.88 2.55 4 STD 1.44 1.35 1.54 1.47 1.42 A 3.11 3.19 3.03 3.27 2.97 5 STD 1.39 1.41 1.40 1.34 1.45 A 4.69 4.67 4.71 4.88 4.52 6 STD 0.75 0.91 0.59 0.33 0.97 A 4.91 4.81 5.00 4.96 4.86 8 STD 0.44 0.63 0.00 0.19 0.58 A 4.95 4.88 5.00 5.00 4.90 9 STD 0.29 0.43 0.00 0.00 0.40 A 4.93 4.85 5.00 5.00 4.86 10 STD 0.42 0.61 0.00 0.00 0.58 A 4.95 4.92 4.97 4.96 4.93 11 STD 0.22 0.27 0.18 0.19 0.25 327 Question All All Head— All Sub- A11 All Industries quarters sidiaries U.S. Foreign A 4.85 4.92 4.79 4.88 4.83 12 STD 0.40 0.27 0.49 0.32 0.46 A 4.98 4.96 5.00 5.00 4.96 13 STD 0.13 0.20 0.00 0.00 0.19 A 4.63 4.44 4.79 4.77 4.50 15 STD 0.87 1.15 0.49 0.51 1.10 A 4.63 4.42 4.82 4.64 4.63 16 STD 0.88 1.13 0.54 0.81 0.96 A 4.46 4.32 4.59 4.62 4.32 17 STD 0.96 1.10 0.82 0.75 1.12 A 3.21 3.00 3.39 3.28 3.14 18 STD 1.45 1.63 1.28 1.40 1.53 A 3.90 3.35 4.36 3.72 4.08 19 STD 1.43 1.46 1.25 1.51 1.35 A 4.38 3.96 4.72 4.50 4.26 20 STD 1.04 1.26 0.64 0.76 1.25 A 3.83 3.28 4.32 3.80 3.88 21 STD 1.38 1.51 1.05 1.52 1.25 A 4.54 4.08 4.93 4.20 4.85 22 STD 0.85 1.05 0.26 1.04 0.45 A 4.83 4.64 5.00 4.80 4.86 23 STD 0.64 0.90 0.00 0.81 0.44 328 Question All All Head- All Sub- All All Industries quarters sidiaries U.S. Foreign 24 A 4.46 3.84 5.00 4.69 4.25 STD 1.05 1.31 0.00 0.67 1.29 A 4.47 3.83 5.00 4.73 4.22 25 STD 1.06 1.34 0.00 0.66 1.31 A 4.74 4.42 5.00 4.88 4.59 26 STD 0.85 1.21 0.00 0.43 1.11 A 4.87 4.75 4.97 4.96 4.78 27 STD 0.44 0.60 0.18 0.18 0.57 A 4.89 4.92 4.86 4.92 4.85 28 STD 0.42 0.40 0.44 0.27 0.53 A 4.77 4.92 4.66 4.69 4.85 29 STD 0.50 0.28 0.61 0.54 0.45 A 4.56 4.38 4.71 4.64 4.48 30 STD 0.80 0.96 0.59 0.70 0.89 A 3.39 3.12 3.62 3.58 3.21 31 STD 1.29 1.53 1.01 1.10 1.44 A 2.35 2.20 2.48 2.38 2.32 32 STD 1.19 1.15 1.24 1.26 1.15 A 2.24 1.69 2.72 1.96 2.48 33 STD 1.05 0.67 1.09 0.95 1.08 A 2,25 1.73 2.72 1.96 2.52 34 STD 1,05 0.72 1.09 0.95 1.08 329 Question All All Head— All Sub- All All Industries quarters sidiaries U.S. Foreign A 2.25 1.73 2.72 1.96 2.52 35 STD 1.05 0.72 1.09 0.95 1.08 A 2.29 1.85 2.69 2.08 2.48 36 STD 1.27 0.96 1.39 1.19 1.32 A 2.27 1.81 2.69 2.08 2.45 37 STD 1.23 0.84 1.39 1.19 1.27 A 2.24 1.77 2.66 2.08 2.38 38 STD 1.26 0.86 1.42 1.19 1.32 A 2.87 1.92 3.69 2.58 3.14 39 STD 1.31 0.99 0.96 1.41 1.17 A 2.53 1.73 3.19 2.24 2.83 40 STD 1.15 0.76 1.00 1.16 1.09 A 4.38 3.88 4.82 4.68 4.11 41 STD 1.06 1.33 0.39 0.74 1.22 A 3.89 2.88 4.72 3.73 4.04 42 STD 1.46 1.45 0.79 1.61 1.31 A 4.44 4.08 4.76 4.35 4.54 43 STD 1,07 1.32 0.68 1.05 1.10 A 4,22 4.08 4.34 4.15 4.29 44 STD 0,90 0.99 0.81 0.88 0.93 330 Question All All Head- All Sub- All All Industries quarters sidiaries U.S. Foreign A 1.98 2.48 1.55 2.23 1.75 45 STD 1.14 1.22 0.86 1.14 1.10 A 4.70 4.36 4.96 4.68 4.72 46 STD 0.67 0.90 0.18 0.69 0.67 A 3.00 2.25 3.64 2.88 3.11 47 STD 1.37 0.98 1.33 1.30 1.45 A 2.90 2.13 3.57 2.76 3.04 48 STD 1.33 0.74 1.37 1.26 1.40 A 4.36 3.76 4.89 4.36 4.36 49 STD 1.02 1.20 0.31 0.90 1.12 TEU hwwhhhlhhhhhlhl“ wilmlsililili 3 12 93