Effects of politics on international business

Effects of Politics on International business.....

Introduction

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

International law recognizes the sovereign right of a nation to allow or deny foreign firms to conduct.

Political Factors Affecting IB

Political and Legal differencesPolitical and Legal forcesTrade and investment restrictionRestraining forcesGovernment Policies and regulationPolitical Environment

Political and Legal differences

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

The complexity generally increases as the number of countries in which a company does business increases.

Political and Legal forces

The most important considerations for global business firms are the political and legal forces operative in the countries in which they plan to conduct business.  Some foreign governments are unstable, that is, there maybe frequent, dramatic and unpredictable regime changes. When this occurs industries may be nationalized; private property may be seized or destroyed; normal business operations may be suspended, the workforce may go on strike.

Trade and investment restrictions

A government imposed restriction on the 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, technology

transfer. restrictions on foreign direct investment, etc.

Restraining forces

The factors which hamper globalization.External: It includes government policies, &

controls which restrain cross-boarder business, social and political opposition against foreign business etc.

Internal: Organizations‘ internal factors

Government Policies and regulation

Government policies & regulation may also motivate internationalization.

Many governments offer number of incentives 7 other positive support to domestic companies to export and to invest in foreign countries.

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

Government Policies and regulation

Some companies also move to foreign countries because of certain regulations like the environmental laws in advanced countries.

Government policies which limit the scope of business in the home country may also provoke companies to move to other countries.

Political Environment

The political environment including the characteristics & policies of the political parties, the nature of the constitution and government system & environment encompassing the economic & business policies. The most important policies are:

Industrial policyPolicy towards foreign capital and technologyFiscal policyForeign trade policy

A Government that is big enough to give you all you want is big enough to

take it away from you.......

The Political Environment

External Environment

Legal and Political

environment

Technological

environment

Socio-Cultural

Environment

Economic Environmen

t

The Political Environment

Political and legal environment

SystemStability

Policies

System

Includes structure, processes and activities by which a nation governs itself.

Totalitarian State Democratic State

Political system

System

Totalitarian State Democratic State

• Imposed authority• Restricted Participation

• Freedom• Rights

• Companies might pay briberies to government.• The business law is vague

• Stable business environment• Freedom and no censorship

Doing business seems to be a risky proposition....

Doing business in a democratic state seems to be safer than in a totalitarian state.....

Policies

Taxation: Countries always have some sort of system for tax collection purposes. Governments levy taxes for various reasons. For instance, a tax can be levied on imported products to make the products more expensive than similar products manufactured locally, this is referred to as an import tax.   Taxes are also a great source of revenue for governments to pay their employees and to finance and maintain specific projects.

Taxation

Political Stability

A subjective authority indicator aggregated from a variety of sources and measuring perceptions of the likelihood of decline.

A stable government is one that is able to maintain itself in power , have predictable political policies which are not subject to radical and sudden changes.

Political Stability

In totalitarian nations, government instability not only threatens but also ruins international business operations Instability in some of these authoritarian governments can be caused by internal turmoil , military coups , or even war.

Democratic nations have stable governments even as the heads of state keep on changing every few years, both the economic and political policies will remain and no impact no matter how adverse will interfere with the international business operations.

Political Risks of Global Business

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

It exits in every country around the globe and varies in magnitude and type from country to country.

Political Risks of Global Business

It may arise from policy changes by govt. to change controls imposed on exchange rates and interest rates.

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

Political Risks of Global Business

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

Types of Political Risk

Confiscation: The more severe political risk, is the seizing of company’s assets without payment.

Expropriation: is where the govt. seizes an investment, but some reimbursement for the assets is made.

Domestication: occurs when the govt. mandates local ownership and greater national involvement in a foreign company’s management.

Types of Political Risk

Economic Risks: International firms face a variety of economic risks. Govt. can impose restraints on business activity to:

protect national securityProtect an infant industryRaise revenue

MNCs’ & Govt.

Relation between governments and MNCs’ are generally positive if the investment:

Improves the balance of payments by increasing exports or reducing imports.

Uses locally produced resourcesTransfer capital, technology & skillCreates jobs

Thanks....