Effects of Politics on Internationalbusiness

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Effects of Politics on

International business.....


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Introduction

The political environment of countries is a criticalconcern for the international marketer.

International law recognizes the sovereign right of a

nation to allow or deny foreign firms to conduct.


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Political Factors Affecting IB

Political and Legal differences

Political and Legal forces

Trade and investment restriction

Restraining forces Government Policies and regulation

Political Environment


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Political and Legal differences

The political and legal environment of foreignmarket is different from that of domestic market.

The complexity generally increases as the number of

countries in which a company does businessincreases.


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Political and Legal forces

The most important considerations for globalbusiness firms are the political and legal forcesoperative in the countries in which they plan toconduct business. Some foreign governments areunstable, that is, there maybe frequent, dramatic andunpredictable regime changes. When this occursindustries may be nationalized; private property may

be seized or destroyed; normal business operationsmay be suspended, the workforce may go on strike.


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Trade and investment restrictions

A government imposed restriction onthe free international exchange of goods or services.

Trade barriers are generally classified as:

Import policies reflected in tariffs and other import

charges, quotas, import licensing, customs practices. Standards, testing, labeling, and various types of

certification.

lack of copyright protection.

Restrictions on franchising, licensing, technologytransfer.

restrictions on foreign direct investment, etc.


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Restraining forces

The factors which hamper globalization.

External: It includes government policies, & controlswhich restrain cross-boarder business, social and

political opposition against foreign business etc. Internal: Organizations internal factors


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Government Policies and regulation

Government policies & regulation may also motivateinternationalization.

Many governments offer number of incentives 7

other positive support to domestic companies toexport and to invest in foreign countries.

Several countries give a lot of importance to importdevelopment & foreign investment.


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Government Policies and regulation

Some companies also move to foreign countriesbecause of certain regulations like the environmentallaws in advanced countries.

Government policies which limit the scope ofbusiness in the home country may also provokecompanies to move to other countries.


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Political Environment

The political environment including thecharacteristics & policies of the political parties, thenature of the constitution and government system &environment encompassing the economic & businesspolicies. The most important policies are:

Industrial policy

Policy towards foreign capital and technology

Fiscal policy

Foreign trade policy


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A Government that is big enough to giveyou all you want is big enough to take it

away from you.......


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The Political Environment


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The Political Environment


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System

Includes structure, processes and activities by whicha nation governs itself.

Totalitarian State

Democratic State


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System

Totalitarian State Democratic State

Imposed authorityRestricted Participation

FreedomRights

Companies might paybriberies to government. The business law is vague

Stable business environmentFreedom and no censorship


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Policies

Taxation:Countries always have some sort ofsystem for tax collection purposes. Governments levytaxes for various reasons. For instance, a tax can belevied on imported products to make the products

more expensive than similar products manufacturedlocally, this is referred to as an import tax. Taxes arealso a great source of revenue for governments to paytheir employees and to finance and maintain specific

projects.


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Taxation


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Political Stability

A subjective authority indicator aggregated from avariety of sources and measuring perceptions of thelikelihood of decline.

A stable government is one that is able to maintainitself in power , have predictable political policieswhich are not subject to radical and sudden changes.


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Political Stability

In totalitarian nations, government instability notonly threatens but also ruins international businessoperations Instability in some of these authoritariangovernments can be caused by internal turmoil ,military coups , or even war.

Democratic nations have stable governments even asthe heads of state keep on changing every few years,

both the economic and political policies will remainand no impact no matter how adverse will interfere

with the international business operations.


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Political Risks of Global Business

The risk to business interests resulting from politicalinstability or political change.

It exits in every country around the globe and varies

in magnitude and type from country to country.


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It may arise from policy changes by govt. to changecontrols imposed on exchange rates and interestrates.

Political risk may be caused by actions of legitimategovt. such as control on prices, outputs, activities,and currency.


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Political risks may also result from events outside ofgovernment controls such as war, revolution,terrorism, labor strikes.


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Types of Political Risk

Confiscation: The more severe political risk, is theseizing of companys assets without payment.

Expropriation: is where the govt. seizes an

investment, but some reimbursement for the assetsis made.

Domestication: occurs when the govt. mandates

local ownership and greater national involvement ina foreign companys management.


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Types of Political Risk

Economic Risks: International firms face a varietyof economic risks. Govt. can impose restraints on

business activity to:

protect national securityProtect an infant industry

Raise revenue


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MNCs & Govt.

Relation between governments and MNCs aregenerally positive if the investment:

Improves the balance of payments by increasingexports or reducing imports.

Uses locally produced resourcesTransfer capital, technology & skill

Creates jobs


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Effects of Politics on Internationalbusiness