International Business

Environment
Political Environment

Prepared by: Miraj Alam

 Topic

 Introduction
 Political system
 Political stability
 Political risk
 Common political factors
 Political strategies
 Conclusion
 Introduction
 The political environment in international business is 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.
  The political environment of the company includes national and
international political factors which can affect its operations.
These factors are called political as they principally emanate
from the actions of governments which can be at a local or
foreign level. This category also includes the methods of
thinking and beliefs of all natures which can influence the
behavior of government and citizens opposing the company
without them emanating directly from a government (ex:
Nationalism) 
 Political System
  A political system is basically the system of politics and
government in a country. It governs a complete set of rules,
regulations, institutions, and attitudes. A main differentiator of
political systems is each system’s philosophy on the rights of the
individual and the group as well as the role of government. Each
political system’s philosophy impacts the policies that govern the
local economy and business environment.

 The political system of a country comprise various stakeholders,

such as the government, political parties with different ideologies,
labour unions, religious organizations, environmental activists, and
various NGOs.
Political Stability

Stability of the government and government policies are a major

concern for the international firms. Since business decision,
these days involve huge investments and are irreversible, what
the foreign firms look in for is political stable countries. Political
instability can result from either change in the type of
government, a shift in political parties that form the government
or change in government policies without change in the
government or shifts in political parties.
 Political Risk
 The risk inwhich political decisions or events in a country
negatively affect the profitability or sustainability of an
investment.
 In the broad context of international business, political risk is
defined  as the risk or probability of occurrence of some
political events that will change the prospects for the
profitability of a given investment.

Measuring Political Risk

 Instability
 Past patterns
 Opinion analysis
 The political acts leading to political
risks can range from
 Confiscation (without compensation)
 Expropriation (some reimbursement)
 Nationalization (local government takes over)
 Domestication ( transfer to local enterprises).

Political Risk Management

 Avoidance
 Premium for risk
 Adaptation
 Transfer
 Common Political Factors
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.
 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.
 Political Strategies for conducting
International Business

 These are some of the steps that an individual or a company

may follow in order to establish political strategies:
 • Identifying the issue (e.g. protectionism, environmental standards, human rights,
1. workers rights, etc.)

• Defining the nature of the political issue

2.

• Assessing the potential political action of other firms and of special interest groups
3.

• Identifying important institutions and key individuals

4.

• Formulation of strategies (objectives, alternatives)

5.

• Determining the impact of implementation (both in home and host countries)

6.

• Selection of the most appropriate strategy and implementation.

7.
 Conclusion

 The political environment is both complex and dynamic

 Individuals and organisations have different views as to the ‘correct’
role of governments and institutions – and interpret these
relationships in different ways
 Government and institutional attitudes change over time, sometimes
amazingly quickly
 Decisions at the four different geo-political levels are all interlinked
 International aspects are increasingly important
THANK YOU!