Political Factors That Affect International Business
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 6, 2021
Political Factors That Affect International Business
While Global businesses operate in overseas markets there is often a risk, the risk is
referred to as political environment risk, and these factors can facilitate or hinder business
operation. Some of the political factors that affect international business include” (Justin
Ervin. & Zachary Smith A.2008). One significant political environmental factor that
influences international business operation is trade agreements. Countries frequently enter
into trade treaties to further facilitate trade between themselves.
Global Interest rates disrupts the level of investments and savings in the economy .In
international businesses fiscal policies affects the cost of borrowing. The rise and fall of
interest rates affect business and consequently should be conscious of the rate before
borrowing. Overall low interest rates signifies the existence of cash in the economy, the
result is echoed in the prices of services and goods. Worldwide buying power affects all
aspects of the economy, the value of a countries currency conveyed in term and the
quantity of good and services is that one unit of money. International organizations ought to
be apprehensive of this fiscal policy. The result of inflation and purchasing power cuts the
volume of goods a company can purchase.
When currency purchasing power decrease due to excessive inflation it has serious
undesirable results e.g. escalation in cost of goods and services and the rise in interest rates.
Political environment affect the currency of a country When these international businesses
engage in business deals such as importing, salaries and wages payment and exporting they
affect the currency .Organization must compare the value of currency in the country they
operate in with the standardized dollar currency of trade so as to avoid fluctuation which
affect purchasing power and operating cost.
Foreign exchange rate can lead to heavy losses of competition. Specifically the
environmental factors that affect the trade and cannot be controlled by the companies in
home or host countries are elaborated in detail with supporting real life trade examples.
Can’t organisations grow without international business? The answer would be “no”, the
business in their home market at the thrones of prolonged stagnation or at crisis seek for
new customers and new talents to build their trade. Every business reaches its maturity
stage of life cycle and looks
What is political risk?
Political risk is generally defined as the risk to business interests resulting from political
instability or political change. Political risk exists in every country around the globe and
varies in magnitude and type from country to country. Political risks may arise from policy
changes by governments to change controls imposed on exchange rates and interest
rates.1 Moreover, political risk may be caused by actions of legitimate governments such as
controls on prices, outputs, activities, and currency and remittance restrictions. Political risk
may also result from events outside of government controls such as war, revolution,
terrorism, labor strikes, and extortion.
Political risk can adversely affect all aspects of international business from the right to
export or import goods to the right to own or operate a business. AON (www.aon.com), for
example, categorizes risk based on economic; exchange transfer; strike, riot, or civil
commotion; war; terrorism; sovereign non-payment; legal and regulatory; political
interference; and supply chain vulnerability.
How to evaluate your level of political risk
Forms of investment and risk
For a firm considering a new foreign market, there are three broad categories of
international business: trade, international licensing of technology and intellectual property,
and foreign direct investment. A company developing a business plan may have different
elements of all three categories depending on the type of product or service.
The choice of entry depends on the firm’s experience, the nature of its product or
services, capital resources, and the amount of risk it’s willing to consider.2 The risk between
these three categories of market entry varies significantly with trade ranked the least risky if
the company does not have offices overseas and does not keep inventories there. On the
other side of the spectrum is direct foreign investment, which generally brings the greatest
economic exposure and thus the greatest risk to the company.
Protection from political risk
Companies can reduce their exposure to political risk by careful planning and
monitoring political developments. The company should have a deep understanding of
domestic and international affairs for the country they are considering entering. The
company should know how politically stable the country is, strength of its institutions,
existence of any political or religious conflicts, ethnic composition, and minority rights. The
country’s standing in the international arena should also be part of the consideration; this
includes its relations with neighbors, border disputes, membership in international
organizations, and recognition of international law.
If the company does not have the resources to conduct such research and analysis, it
may find such information at their foreign embassies, international chambers of commerce,
political risk consulting firms, insurance companies, and from international businessmen
familiar with a particular region. In some countries, the governments will establish agencies
to help private businesses grow overseas. Governments may also offer political risk
insurance to promote exports or economic development. Private businesses may also
purchase political risk insurance from insurance companies specialized in international
business. Insurance companies offering political risk insurance will generally provide
coverage against inconvertibility, expropriation and political violence, including civil strife
(US Small Business Administration). Careful planning and vigilance should be part of any
company’s preparation for developing an international presence.
A government makes changes in policies that have an impact on international business.
Many reasons may cause governments to change their policies toward foreign enterprises.
High unemployment, widespread poverty, nationalistic pressure, and political unrest are just
a few of the reasons that can lead to changes in policy. Changes in policies can impose more
restrictions on foreign companies to operate or limit their access to financing and trade. In
some cases, changes in policy may be favorable to foreign businesses as well.
To solve domestic problems, governments often use trade relations. Trade as a political
tool may cause an international business to be caught in a trade war or embargo.3 As a
result, international business can experience frequent change in regulations and policies,
which can add additional costs of doing business overseas.
