Understanding Political Risk For Companies Considering Establishment In Developing Countries – Example Of Mexico

PGN122 International Business Management

The Impact of Politics and Culture on Modern Business

In the 21^st century, politics and culture, as an intertwined entity, has a significant bearing on the business of any organization, more so when it comes to the expansion of the company beyond national boundaries. The age of globalization has changed the focus of companies to the external impacts of politics and culture on a rapidly changing scheme of market and production, which can be said to be based on a supply chain spanning across a wide global arena (Morrison 2017). Companies have come to realize that local political scenario like corruption and unrest equally impacts the establishment of a particular company in a desired location as much as its internal polices, which goes on to affect its global market share. A company must learn to implement strategicpolicies, which would help it to adapt to the culture of the place where it expects to make a new establishment, by appeasing the local political bodies, at the same time attracting a significant amount of customers, without hampering the company’s profile (Chibba 2015).

Therefore, if ADSD Stores Ltd., one of UK’s leading supermarket chains gives a thoughtabout expanding its business and making a firm establishment on the Mexican soil, the company officials, as well as Walmart which is currently the mother company of ADSD, must delve deep into the nuances of politics and culture in Mexico, which currently stands on precarious grounds (Michalakeas et al. 2015). Unlike the last decade, the loss of Enrique Pena Nieto in the presidential elections to Andrés Manuel López Obrador, as declared on 1^st July2018, has further pushed international business in and with Mexico to the realms of uncertainty (Express.co.uk 2018). Crime and corruption has been rampant in Mexico since a long time, and not gone down instead of widespread infrastructural and economic growth of the country in the recent past. On the contrary, this has given mafias and drug lords a firm foothold in the country, which resulted in dangerous drug wars and widespread mass murder, which also proved to be fatal for the common people (Shirk and Wallman 2015). As such, the idea of traversing the national boundaries and exploring the Mexican waters for business has a diverse range of possibilities for ADSD, including changes pertaining to its Resume.

Mexico is a place that abounds in drug abuse and drug wars and internationally holds a high rank in the index of crime and corruption. High profile mafias are often considered to be at the helm of affairs. Crime and corruption has become adefining factor of Mexico through its influence in the social, political, economic as well as cultural spheres of the country (Rose-Ackerman and Palifka 2018). The rampant drug trafficking and organized crime in Mexico was accelerated during the presidential rule of Felipe Calderon, though it had started long before (Rosen and Zepeda 2016). Corruption starts from the very fundamental level of bribery in the country’s various political or administrative systems, among the police, government and business officials, and even the judiciary. The entente between these official bodies and various criminal groups is so strong that it poses significant threat to any new business ventures that is intended to be performed on a large scale. In spite of the existence of an anti-corruption penal code, the law is hardly ever imposed, thereby allowing organized crime to have a free flow. The judges in Mexican court often being subject to bribery can hardly be trusted by the common man (Kingman-Brundage 2016). Being corrupted, the judicial system can hardly enforce adequate laws to settle disputes. Cases pertaining to torture, kidnapping, extrajudicial execution often go undetected (Beittel 2015). The Mexican National Institute of Statistics and Geography has reported that almost 93% of crimes in the year 2015 were not investigated (Calderón et al. 2015). The rate of homicide is also constantly on the upward curve. Mexican police, instead of protecting the citizens, are often reported to be helping the criminals with kidnappings, smugglings, extortion and even murdering on their behalf (Diaz-Cayeros, Magaloni and Romero 2015). They are one of the most corrupt institutions of the country. A country whose judicial system is corrupted, it is imperative that the various other administrative bodies would be no different. Likewise, the administrative departments of tax, customs and land are also driven by mean mercenary motives and that of political power, which completely drains the revenue system of its wealth. As such, companies working under the public service sector are no different, making the ground beneath the feet of companies slippery. Corruption has become a part of Mexico’s business culture and therefore, proves to be formidable for foreign companies like ASDA, which face delay and lack of proper hospitable facilities to try its luck in the Mexican markets. The chief reason for such an unnaturally high rate of crime and corruption in Mexico may be attributed to the concentration of power only in the hands of a few, the elite to be specific. This advanced rate of hierarchy and in the political system and a number of political parties fighting among each other for power gives the anti-social organizations to take the upper-hand and use government officials as puppets for their own benefits (Pimentel 2017). The geographic location of Mexico is also an important factor behind this heightened crime and corruption. Its location allows Mexico to establish a favourable relationship with the drug markets of USA and Central America. The lack of transparency in the political system allows drug cartels to carry out drug trade across the border without hindrance (Shields 2017). In such a corrupt atmosphere, it is imperative that even the honest would become part of a vicious corrupt cycle, and similar was the case with President Andrés Manuel López Obrador. Thus, extreme poverty and large gap between the rich and the poor, and high rate of illiteracy and self-centredness, alongwith an easy flow of cash in the hands of the powerful gave rise to such high rates of crime and corruption in the country. It has disintegrated the various moral institutions and civic amenities of the country, and enforced a culture of dishonesty and lawlessness (Dawson 2015).

Political Risk Factors for Companies in Mexico

As mentioned earlier, political unrest walks hand in hand with criminality on Mexico, a country whose socio-political atmosphere involve layers of corruption. Mexico has been going through a varied scope of political instability since a long time chiefly due to tensions among three major political parties – the National Action Party (PAN), the Party of the Democratic Revolution (PRD) and the Institutional Revolutionary Party (PRI) – and heightened corruption which has posed significant threat to the democratic structure of the country (Otero 2018). In 2018, this instability was further aggravated by the presidential election, which saw a shift in power in the hands of a person who had been otherwise good, except for being involved in a bribery scandal in the 2006 presidential elections (Juárez 2015). After being elected President he had declared that he would undo some of the reforms enforced by the previous President, and this triggered protests against some of the Mexican people. This political and economic transition further unsettled the country’s stability. Whenever there has been a shift in power, continuance of old political elements, instead of posing a healthy challenge to the existing one, created an atmosphere of conflict, especially due to a difference in their economic policies (Haggard and Kaufman 2018). In the recent past, Mexico had seen a severe unrest, protest marches and highway blockades under Enrique Pena Nieto when there was hike in the price of gas (Romero, 2017). Similar instances have occurred for time to time, without any aim for a reasonable solution. Recent disagreements in trade policies with USA, especially through the ‘North American Free Trade Agreement’ (NAFTA) has created a situation vulnerable to political upheavals within the country (Villareal and Fergusson 2017). Such volatility paves the way for anti-social leaders to make an influence on the social, political and economic structure of the country. Thus, actions and laws passed by the federal government, besides having a direct impact on business organizations, also threatens its establishments through unabashed political upheavals. Besides tax laws and changes in economic policies, the local governments also affect the business of a company significantly. While some are willing to cooperate with a foreign business organization, some others may see it as a threat to their own culture. It is therefore important to keep in mind these probable risks which might be faced by a company like ASDA if they are to establish markets for the Mexican mass. Also, the political economy of the country is hugely responsible for abject poverty in Mexico. In spite of the implementation of various economic policies, associated protests have never allowed them to bear fruit. Commercial projects intended on a large scale basis continue to violate the law. These projects often take place without proper consent of the people whose lives may be affected by them. Discrimination and inequality has created doubts in the minds of the Mexican people regarding the quality and intention of these projects. This also poses a significant threat to the business intentions of ASDA in Mexico.

This fundamental cultural and moral difference between Britain and Mexico would provide a major hindrance in the path of ASDA to establish and successfully run business in the country, and it may have to resort to bribery and appease the corrupt administrative body to do so, at the same time attracting the common mass with cheap foreign goods as well. However, Mexico’s National Anti-Corruption System has been severely in action for the last few years and has implemented strict laws against bribery which quite resembles the UK Bribery Act of 2010 (Meyer and Hinojosa 2018). These new laws allow the Superior Auditor’s Office to perform audits based on reality and thereby monitor the transfer of resources across the federal government and the state governments. In spite of a low GDP as compared to other business giants like USA, UK, or Spain, Mexico is said to have a high potential for business growth, chiefly due to its huge young workforce, a privileged geographical location that is suitable for trade and possibility of a steady infrastructural and macroeconomic growth (Capistrán and López-Moctezuma 2014). This prepares the grounds for ASDA to establish close business relations with the state. Although state permits are mandatory, however it is the common people which constitutes the main customer base for this supermarket chain. Given the poverty of the country, ASDA has to largely promote its slogan ‘Save Money, Live Better’ and has to offer products accordingly with a unique mixture of native Mexican as well as British and other foreign tastes, products ranging from everyday goods to cheap luxury items. More than providing something to like and admire ASDA should focus on giving the Mexican people something to miss for in its absence, something which would not be easily available otherwise. Besides developing supermarkets, with the facility of a wide range of goods, cheap financial services and mobile phone services of ASDA is also expected to go well with the Mexican public. The company should develop policies and offer facilities which can be diplomatically pitched in as binder or unifier of groups of people having different ideological beliefs. This idea of unification should be projected from its very inception, the company can be launched, after much promotion, with a considerably large event involving music and other cultural programmes, parts of which may be derived from traditional Mexican roots, nonetheless promoting global and national peace for Mexico. Terrorism, both from internal and external sources, being low in Mexico, would make such an event free of any such risks. The financial backup of Walmart would further enhance this project. However, the impact of probable collaboration between ASDA and Sainsbury’s on this project is an area of major concern. How much the new authorities and business partners would agree regarding the development of big stores in Mexico is subject to much speculation. The fact that Mexico receives more British tourists every year than any other Latin American country is also likely to provide a significant impetus to this company’s entry into the Mexican market where such establishments are quite lacking (Mowforth and Munt 2015). So far, ASDA has been using plenty of indigenous Mexican items for sale in the British markets. Letting the Mexican public know how well the British received their items, especially the groceries and condiments, can provide a significant push in the establishing a good relation with the Mexican people (Maxwell and De Soucey 2016). Praise for their native culture is expected to be well received by them, irrespective of political colours.The company would need to tap the local labour market for an efficient and ethical labour force. The revenue structures and intercontinental trade laws and schemes of both the countries need to be taken into consideration. In spite of considerable risks, these policies may help ASDA to brave the negativities in Mexico, thereby confirming a collaboration of both the markets with new establishments.

Corruption and Crime in Mexico

Preference of home-grown industry and its amalgamation with a taste of the British market would cause significant change in the company profile of ASDA. The resume of the company has already been experiencing notable changes over the years, the first big one being its purchase by Walmart after going through a phase of bankruptcy, its acquisition of Smart Price products in 2001, which was replaced in 2016 by different sub-brands (Liu 2014). In 2018, the company is already undergoing a resume change due to its collaboration with another heavyweight supermarket chain Sainsbury’s (Citywire.co.uk 2018). In the event of such occurrences, the development of new stores in Mexico, with all its nuances of cultural, socio-political and economic would heavily influence the structure and function of the company. The major challenges faced by most company officials today are the change of market strategies due to globalization. Although monetary policies are efficient in Mexico, the country experienced severe inflation in 2017, chiefly due to a large difference between the Mexican peso and the US dollar, which resulted in a sudden price hike of petrol, diesel and many of the traded goods (Baharumshah, Sirag and Soon 2017). Lack of proper intermediary regulatory systems often result in certain forcible and reluctant changes in a company’s profile in such situations as is intended to be undertaken by ASDA. Therefore ASDA must implement novel strategies across the value chains of both the country’s market setup. These emerging market strategies would lead to a change in the range of products, which in turn, would require a different set of raw materials, all of which would have a direct bearing on the profitability of the company, and a change in its global economic setup (Hill 2015). Besides being a fully commercial organization, ASDA’s resume would also change, making it a socially responsible organization as well, working towards enhancement of societal standards by attempting to unify different ideological groups and thereby reducing chances of conflict. There are other supermarket chains in Mexico as well, some of which are owned by Walmart (Atkin, Faber and Gonzalez-Navarro 2018). Thus, given the competition in the market share, the location of a new store or a business endeavour of ASDA in Mexico, along with its line of action, is integral to the business and reputation of Walmart as well. Another possibility can be the coming together of ASDA and other Walmart-owned supermarkets or stores, which would help both, along with their mother company. It would help ASDA to understand the Mexican market better, and take an upper hand over other local competitors. Needless to say, it would have a major impact on the company profiles of all three. Loss of sales and weakening of brand equity of both Mexican as well as international companies have been reported due to the launch of counterfeit products (Okabe and Gómez 2018) . Although the Mexican government has taken up this issue and enforced laws against such actions, this poses a significant threat to the trademark products of ASDA, especially those made exclusively for the Mexican public. The local labourers need to be carefully chosen as any extremist political or social affiliations of these people may tarnish the reputation of the company, in the event of conflicts. In this regard, it also needs to be ensured that they are not related to any drug-lords or narcotic associations who has entered the company for the illegal purpose of import and export of drugs. Such a situation would be catastrophic to the reputation of the company. Conversely, if a big event is organized to launch the company, as mentioned earlier, it would sufficiently enhance the company’s profile by making it global presence felt.

Political Instability and Democratic Challenges

It may be concluded by saying that the advantages and disadvantages of ASDA for business in Mexico are multi-faceted. The increasing rate of homicide, kidnaps and extortions,along with militarized drug waris challenging for the security and well-being of the company. However, the adoption of private security has reduced security risks for many British businesses. Besides the conflicts are mostly between Mexicans themselves, especially those involved in criminal activities. External bodies are rarely harmed by these internal conflicts. The Mexican government is actively working along the lines of the UN Guiding Principles on Business and Human Rights and drafting a composite National Action Plan and engaging consulting communities so that foreign investment projects are properly guided to do good business in the country (De Felice and Graf 2015). ASDA must keep in mind that it is good policy to maintain close business relations with potential clients, especially when the client base is in Mexico, yet it should not resort to corruption as revelation of this may hamper the reputation of the company to a large extent. A significant amount of the Mexican economy is dependent on trades, both internal and external. The trade laws are favourable. ASDA should make the best use of this. The Mexican government is trying its best to reduce the rate of corruption and bribery. Some of the high rank political persons have been put behind the bars for large-scale bribery. There are many British business which are reported to flourish successfully in Mexico, without engaging in corrupt practices. Changing environments in international trade and business standards, along with changes in the valuation of currency across borders should be evaluated by ASDA. Currently, both the company profile of ASDA, as well as the administration of Mexico is going through a period of change. In such a situation, the prospects of a fresh market entry of an existing foreign company which is backed by a marketing giant like Walmart, can is likely to have extreme consequences, either for good or for the worse.

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