What Is the Political Environment in International Business?
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 6, 2021
What Is the Political Environment in International Business?
The political environment in international business consists of a set of political factors
and government activities in a foreign market that can either facilitate or hinder a business'
ability to conduct business activities in the foreign market. There is often a high degree of
uncertainty when conducting business in a foreign country, and this risk is often referred to
as political risk or sovereign risk.
Common Political Factors
Let's look at some common political factors that influence the international business
landscape. The type of economic system a country builds is a political choice. Foreign
countries often will have different economic systems from your domestic market, and
adjustments often need to be made to take these differences into account.
For example, a country may operate in a market economy where private individuals
own most of the property and operate most of the businesses. A market economy is usually
the best economic environment for a foreign business because of the protection of private
property and contract rights.
Some countries lean more towards a socialist economy where many industries and
businesses are owned by the state. Operating businesses in this environment will be more
difficult, but products can still be produced and sold as people still pick their jobs and earn
money.
A few countries operate under a communistic economic system where the state pretty
much controls all aspects of the economy. Conducting business in this environment ranges
from difficult to impossible. Of course, the reality is that all economies are mixed
economies that take parts from two or more of the 'pure' economic systems. For example,
you can conduct business in communist China in Hong Kong and other special areas where a
market economy is allowed to operate.
Businesses also must often contend with different governmental systems. Examples
include democracies, authoritarian governments, and monarchies. Some governments are
easier to work with than others. Democracies, for example, are answerable to their citizens
and the rule of law.
Authoritarian regimes are usually answerable to no one, including the law. It is less
risky to conduct business in democracies and constitutional monarchies, a monarchy with a
constitution that protects the public and subjects the monarch to the rule of law, than in
countries with authoritarian regimes.
The next major factor is trade agreements. Countries often enter into trade agreements
to help facilitate trade between them. If your country has entered into a trade agreement
with another country, conducting business in that country will usually be easier and less
risky because the trade agreement will provide some predictability and protection. One
great advantage, for example, is that your products will be subjected to fewer trade barriers
that serve as obstacles to exporting your products into the country.
A trade barrier is simply anything that makes it harder for a company to export
products to a foreign country. Formal trade barriers are enacted by governments for the
purpose of restricting imports to protect a country's domestic industries. Formal trade
barriers include tariffs, which are taxes on imports that help make domestic products more
competitive, and product quotas that limit the number of products imported into the
country.
