The Global Political Environment facing business
Clarke Ricks School of Business,
Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
May 7, 2022
The Global Political Environment facing business
Political Environment (Domestic or Foreign Political Factors) includes any domestic and
foreign political factors which may affect the organization’s decision making, planning,
implementation and control mechanisms. Marketers have to work within the framework of
each country’s ruling parties in which they operate.
Each nation has a unique political culture that reflects the relative importance of the
government and the legal system. Since, global marketing activities take place within
the political environment of countries, any company doing business globally should not only
carefully monitor the political culture in the domestic market, but also in host markets.
The Great Decoupling: The decision by China and the United States to decouple in the
Technology Sphere
BREXIT
US elections and its testing to democracy
Discontent in Latin America
Politics vs. Economics of Climate Change
What is Political Risk?
Political risk is the possibility of a change in a country’s political environment or government
policy that would adversely affect a company’s ability to operate effectively and profitably
(Keegan and Green, 2020). The presence of political risk means that a foreign firm can lose all
its investment or market earnings in another country as a result of political actions on the part
of the host government, the firm’s home government, or pressure groups. The political climate
of a country is hardly ever static (Gillespie and Hennesey, 2016).
Why Monitor Political Risk?
Politcal risk can deter or encourage a company from investing abroad.
Managers must continually monitor the government, its policies, and its stability to
determine the potential for political change that could adversely affect operations of the firm
and investment decisions.
There is political risk in every nation but the range of risks varies widely from country to
country.
In general political risk is lowest in countries that have a history of stability and consistency.
Its important for managers to understand the different goals and functions of various
political systems, to understand the trends in the emergence and diffusion of political systems,
to understand the political risks and approaches to managing it, and in general to understand
how different political systems affect the conduct of business.
Measuring Political Risk
Crucial factors that firms need to observe as part of assessing Political Risk:
Change in government policy
Stability of government
Quality of host government’s economic management
Host country’s attitude towards foreign investment
Host countries relationship to the rest of the world
Host country’s relationship with the parent company’s home government
Attitude towards the assignment of foreign personal
Closeness between government and people
Fairness and honesty of administrative procedures.
EIU (The Economist Intelligence Unit): War, Social Unrest, Politically Motivated Violence,
International Disputes, Change of Government, Corruption, Crime.
BERI (Business Environment Risk Intelligence): Fractionalization of the Political Spectrum.
Fractionalizations by Language, Ethnicity, Religion. Coercive Measures required to retain Power.
Mentality (Corruption, Nepotism). Social Conditions. Social conflict (demonstration, strikes,
street violence). Dependence on major Hostile Power.
Types of Political Risk
Ownership Risk – refers to property and life
Operating Risk – refers to disruptions of the ongoing operations of a firm
Transfer Risk – occurs when companies want to transfer capital between countries
Ownership Risk:
Expropriation
This is the most drastic form of political risk. Official seizure of a foreign company by a
government. Compensation is generally provided although often not in a prompt, effective, and
adequate manner. If no compensation is provided the action is referred to as confiscation.
International law is generally interpreted as prohibiting any act by a government to take foreign
property without compensation.
Nationalization
Nationalization is typically broader in scope than expropriation. It occurs when the
government takes control of some or all of the enterprises in a particular industry. International
law recognizes nationalizations as a legitimate exercise of government power as long as the act
satisfies a “public purpose” and is accompanied by “adequate payment”.
Domestication
Also called creeping expropriation. It is a process by which controls and restrictions placed
on the foreign firm gradually reduce the control of the owner. These controls include: more
products produced locally; gradual transfer of ownership to nationals; promotion of nationals
to management positions. Domestications provides the host country with enough control to
regulate the activities of the foreign firm carefully. The idea is that negative effects of a firm’s
operations in the country are discovered and prompt corrective action can be taken.
Operating Risk:
Local Content Laws
Countries often require a portion of any product sold within the country to have local
content: that is to contain locally made parts. Local content requirements are not restricted to
less industrialized countries. The European Union has a 45% local content requirement for
foreign-owned assemblers.
Import Restrictions
Restrictions on the import of raw materials, machines and other parts are common
strategies to force foreign companies to purchase more supplies within the host country and
thereby creating markets for the local industry. Although this is done in an attempt to support
the local industry, the result is often interruption of the operations of established firms.
Price Controls
Essential products such as food, petrol, and cars are often subjected to price controls. A
government during inflationary periods to control the environmental behavior of consumers or
the cost of living can use these controls.
Tax Controls
Taxes must be classified as a political risk when used as a means of controlling foreign
investment. In many cases they are raised without warning and in violation of a formal
agreements. In less developed countries where the economy is constantly threatened with a
shortage of funds, unreasonable taxation of successful foreign investments appeals to some
governments as a convenient and quick way of finding operating funds.
Labor restrictions
In many nations, labour unions are very strong and have great political influence. Using its
strength, labour unions may be able to persuade the government to pass very restrictive laws
that support labour at costs to business. In Latin America for example, unions are very strong.
In Europe, many nations require labour representation on board of directors.
Transfer Risk
Exchange Control: Exchange controls stem from shortages of foreign exchange held by a
country. When a nation faces shortages of foreign exchange, controls may be set into place
over all movements of capital to conserve the supply of foreign exchange for the most essential
uses. A problem for the foreign investor is getting profits and investments into the currency of
the home market.
Political System
A Political system is the complete set of institutions, political organizations, and interest
groups, the relationships amongst those institutions, and the political norms and rules that
govern their functions. The ultimate test of any political system is its ability to hold a society
together.
Ways to Assess Political Systems
Individualistic: People accept the primacy of an individual’s freedom in the political,
economic, and cultural realms. The people believe in minimal government intervention.
Collectivist: People reason that the needs of society take precedence over the needs of the
individual people believe that it is the government’s role to define the needs and priorities of
the country. Collectivist paradigms may be either democratic (as in Japan) or authoritarian (as
in China) in nature.
The political ideology refers to the body of constructs, theories, and aims that constitute a
sociopolitical program. Pluralism indicates the coexistence of a variety of ideologies within a
particular society. Shared ideologies create bonds within and between countries whereas
differing ideologies split societies apart.
Types of Political Ideologies
Democracy: widespread citizen participation in the decision-making and governance
processes, either directly or through elected representatives
Totalitarianism: the monopolization of power by a single agent; opposition is neither
recognized nor tolerated. In theocratic totalitarianism, religious leaders are also the political
leaders; in secular totalitarianism, the government imposes order via military power.
Features of Contemporary Democratic Systems
In a Democracy, there is freedom of opinion, expression, and the press; there is freedom to
organize; there are free elections; there are limited terms for elected officials; there is an
independent and fair court system; there is a nonpolitical bureaucracy and defense
infrastructure, and the citizens have access to the decision-making process.
Trends in Political Systems
Totalitarian regimes continue to fail as citizens challenge the right of the state to govern.
Many who champion democracy truly believe that greater political freedom also leads to
economic freedom and higher standards of living. Differentialism, i.e., the clash of civilizations,
refers to the arguments that apparently innate and irreconcilable difference amongst cultures
can trigger a backlash against Western ideas regarding political rights and civil liberties.
Understanding Political Risk
Political risk refers to the likelihood that the political climate in a country will change in such
a way that a firm is operating position or investment value will deteriorate. MNEs do their best
to effectively deal with the threat of political risk through active and/or passive approaches.
Various types of Political Risks (from least to the most destructive)
Systemic [a change in public policy]
Procedural [bureaucratic delays, labor disputes, etc.]
Distributive [tax and regulatory revisions]
Catastrophic [random political events]
Leading Sources of Political Risk include Expropriation or nationalization, International war
or civil strife, Unilateral breaches of contract, Destructive governmental actions. Harmful
actions against people. Restrictions on the repatriation of profits, Differing points of view,
Discriminatory taxation policies.
To sum it up, many countries are in a state of political transition. Presently, there is a shift
away from totalitarian governments toward more democratic political ideals and freer market
principles.
