Stability of Government Policies

Foreign investment can also be perceived as a threat to sovereignty and thus become a rallying cry by opposing actions. The Chinese national oil company’s proposed purchase of Unocal was opposed on such grounds. Ironically, Americans have criticized Mexico for hindering similar sorts of American investments. That is, Mexico badly needs privately financed electricity generating plants to meet electrical power demands and to upgrade the country’s overloaded transmission network. The Mexican government entered into an agreement with a Belgian company to build a power plant that would bypass the state electricity monopoly and sell electricity directly to large Mexican manufacturers. But the Mexican constitution limits private ownership of utilities and any exception requires a two thirds vote of the legislature. The institutional Revolutionary and blocked the agreement. What all this highlight is that national sovereignty is a critical issue in assessing the environment in which a firm operates.

The ideal political climate for a multinational form is a stable, friendly government. Unfortunately, governments are not always stable and friendly nor do stable friendly governments remain so. Radical shifts in government philosophy when an opposing political party ascends to power, pressure from nationalist and self interest groups, weakened economic conditions bias against foreign investment, or conflicts between governments are all issues that can affect the stability of a government. Because foreign businesses are judged by standards as variable as there are nations, the stability and friendliness of the government in each country must be assessed as an ongoing business practice.

At the top of the list of political issues concerning businesses is the stability or instability of prevailing government policies. Governments might change or new political parties might be elected, but the concern of the multinational corporation is the continuity of the set of rules or codes of behavior and the continuation of the rule of law – regardless of which government is in power. A change in government, whether by election or coup, does not always mean a change in the level of political risk. In Italy, for example more than 50 different governments have been formed since the end of World War II. While the political turmoil in Italy continues business goes on as usual. In contrast, India has had as many different governments since 1945 as Italy with several in the past few years favorable to investment and open markets. However, much government policy remains hostile to foreign investment. Senior civil servants who are not directly accountable to the electorate but who remain in place despite the change of the elected government continue with former policies. Even after elections of parties favoring economic reform, the bureaucracy continues to be staffed by old style central planners in India.

Conversely radical changes in policies toward foreign business can occur in the most stable governments. The same political party, the Institutional Revolutionary Party (PRI), controlled Mexico from 1929 to 2000. During that period, the political risk for foreign investors ranged from expropriation of foreign investments to Mexico’s membership in NAFTA and an open door for foreign investment and trade. In recent years, the PRI created a stable political environment for foreign investment in contrast to earlier expropriations and harassment. Beginning with the elections in 2000, however, a new era in Mexican politics emerged as a result of profound changes within the PRI brought about by then-president Zedillo. Since 1929, the Mexican president has selected his successor, who, without effective challenge was always elected. President Zedillo changed the process by refusing to nominate candidate; instead he let the nomination be decided by an open primary – the first in seven decades. From a field of four candidates the PRI selected Labastida Ochoa and the opposing party PAN selected Vicente Fox, who, although considered a long shot, won the presidency. Although the PAN had gained strength for several years in the congress and among state governments, its presidential candidates never had a wining chance until 2000 election.

Seventy one years of uninterrupted rule by the PRI ended 2000. It was the first time in the country’s long history of ancient kingdoms, colonialism, civil war, dictatorship, and revolution that one regime gave way to another peacefully. Further, this election went on record as the cleanest and tightest in Mexican history.