Political environnent

in International-business

Write note on Political environnent.

Ans.  The political environment is an important factor that influences the international business, especially when it is different between the home and host country.  Political setup vary widely between the two extremes :  

(a)   Democracy : A democratic political system involves citizens directly or indirectly, in the policy formulation of a country.

(b)   Totalitarianism :  It is a political system , where political power lies in few hands with virtually no opposition.  Constitutional guarantees are denied to the citizens.  Germany under the rule of Hitlor and Stalin;s Soviet Union were historical examples of totalitarianism regime. Myanmar is the example of totalitarianism Government.

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Political Risk :   Political risk is unexpected changes in political set up in the host country leading to unexpected discontinuities that bring about changes in very business environment.  For example, if a rightist party wins election in the country and the policy towards the foreign investment turns liberal, it would create appositive impact on the operation of MNCs.  On the other hand, if a left party comes in power in the host country, it will have a negative impact on the operation of MNCs.

Types of Political Risk :   Stephen Kobrin  classifies political risk as :

(1)   Macro Risk :   It is also called country specific risk that affects all foreign firms in the country.

 (a) Expropriation :  It means seizure of private property by the Govt.  it involves payment of compensation.  The reason behind expropriation has mainly been political turmoil.  In the post war period, foreign and domestic firms were nationalized in China in 1960.  The Swedish Govt nationalized the ship building industry at a time when this industry was hit by world wide recession. an estimate revels that around 12 % of all foreign investment made in 1967 was nationalised within less than a decade.

(b)   Currency Inconvertibility :   Sometimes the host Govt enacts law  prohibiting foreign companies from taking their money out of the country or exchanging the  host country currency for any other currency.  The reason is both economic and political.  The Govt of Nigeria imposed such restrictions a couple of decades back in order to serve its economic and political objectives.

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(c)   Credit Risk :   Credit risk is refusal to honour a financial contract with a foreign company or foreign debts.  For example when Khomeini came into power in Iran, the Iranian Govt refuse to pay its debts on grounds that loans were taken during Shah’s regime.

 (d) Ethnic, Religious or Civil Strife : Macro political risk arises on account of war and violence and racial, ethnic, religious and civil strife within a country. Recent example of these risks is slaughter in Bosnia and Herzegovina, breakdown of local authority in Somalia and Rwanda, the upsurge of Islamic fundamentalism in Algeria and Egypt.  Such risks become major political risks for MNCs operating in these countries.

(2)   Micro Risk : The micro or firm specific risk affecting a particular industry or firm. The micro risks are :

 (a) Conflict of interest :   The host Govt desires to have a sustainable growth rate, price stability, comfortable balance of payment, and so on, but the policy of MNCs operating there is to maximize corporate wealth.  For example, transfer of funds by MNCs may influence the money supply and may cause inflation or deflation.  MNCS may adopt transfer pricing techniques that may cause loss of tax revenue.  It is not simply economic issues that cause conflicts but also non-economic issues like national security.  The US Govt did not permit the Japanese purchase of Fairchild Industries on the grounds of national security.

(b)   Corruption : It is endemic in many countries, as a result MNCs have to face serious problems.  Foreign firms in Kenya had to sell a part of equity to powerful politician.  Transparency International has surveyed 85 countries and has brought about the corruption perception index. Many countries rank high in the index.  In 1999 34 countries, including OECD members and five other signed a convention to ban bribery of foreign public officials in international business transaction.

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This article was published on 2012/03/24