Business in the Global Political Environment
This article will focus on business practices in the global political environment. It discusses globalization and the challenges of political risks for businesses operating in the international economy. This article will provide an analysis of the different types of political risk as well as the strategies most commonly used for identifying, assessing, and managing political risk. Strategies used by companies to mediate political risk, such as political risk insurance and cross-border alliances, will be discussed. In addition, a case study of the political risks facing international e-commerce companies is included as an example of an industry-specific response to political risk.
Keywords Cross-Border Alliance; Globalization; Policy Risk; Political Environment; Political Risk; Political Risk Insurance; Social Risk
Business and Public Policy: Business in the Global Political Environment
Business practices and operations in the international political environment are influenced by the forces and processes of globalization, including political, social, and policy risks. Political risks refer to the potential effects of a change in government on a business. Social risks refer to pressures put on businesses by environmental or other pressure groups. Policy risks refer to the potential effects resulting from change in policy or rights on a business (Frynas, 2002). The process of globalization refers to the increasingly free flow of ideas, people, goods, services, and capital that is leading to the integration of economies and societies. Businesses have adapted to the changing global political environment by identifying political risks prior to investment in foreign business activities and investments. The following sections provide an overview of the current global political environments and political risks.
Global Political Environment
A political environment is characterized by the regulatory environment, local attitudes towards corporate governance, reaction to international competition, and labor laws. Political environments around the world are changing due to the forces of globalization. Globalization is characterized by the permeability of traditional boundaries of nations, cultures, and economic markets. According to Thruow (1995), the fundamental economic forces and events influencing globalization and political turmoil around the world include:
- The end of communism
- The shift from an economy based on natural resources to one based on knowledge industries
- Demographic shifts
- The development of a global economy
- Increased trade liberalization
- Advances in communication technology
- Increased threat of global terrorism
- An era without a dominant economic, political, or military power
Globalization creates a turbulent global socio-political environment characterized by competing political actors, shifting power relations, and politically-driven changes in national economies around the world. Businesses work to find opportunity and profit to be had from these political and economic changes. The political turbulence and upheaval has resulted in a move from centralized economies to a decentralized global economy and has created numerous emerging markets. These emerging markets refer to the capital markets of developing countries that have liberalized their financial systems to promote capital flows with nonresidents and have become broadly accessible to foreign investors.
Business opportunities, including international investments and joint ventures, in the global economy are increasingly tied to trade pacts such as the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, the Mercosur trade pact between Argentina, Uruguay, Brazil, and Paraguay, and the Asia Pacific Economic Cooperation (APEC) trade zone. In addition, business opportunities are resulting from privatization worldwide. Countries are privatizing many state-owned industries and allowing foreign investors to purchase pieces of them through joint ventures or allowing local operations to participate in these projects (Stites, 1995).
Emerging markets, often occurring in countries experiencing political upheaval, will continue to increase in the expanding global market. Businesses, participating in the new global economy, will continue to seek out new manufacturing and sales opportunities in foreign markets and countries. Ultimately, globalization brings businesses new opportunity and new risks. Political risks are one of the major problems and considerations for businesses in the global political environment. Opportunities and liabilities are growing proportionately in the new global economy. The following section describes and analyzes the influence of political risk on business activities and operations.
Multinational corporations conducting global business in emerging markets experience lucrative investment opportunities as well as challenges and turmoil. Multinational corporations conducting business in today's global political environment are challenged by political risk. Political risk refers to the risk of a strategic, financial, or personnel loss for a firm because of events related to political instability such as riots, terrorism, coups, civil war, and insurrection, as well as non-market factors such as macro-economic and social policies (fiscal, monetary, trade, investment, industrial, income, labor, and developmentally) (Morales & Kleiner, 1996).
Political risk arises from factors and events such as governmental change, shifts in national ideology or policy, civil war, social unrest, economic instability, nationalization, and corruption. Political, economic, and religious environments influence business operations for exporters, traders, investors, banks, and other organizations involved in international commerce. In addition, national governments may institute forced shutdowns and relocations of foreign business. Companies entering foreign markets for the first time, either as investors or manufacturers, as well as established multinational corporations expanding into new foreign markets or ventures must address certain questions in order to assess potential political risk (Wade, 2005):
- Is there a tradition of peaceful governmental transition?
- How resilient is the political system?
- How do nongovernmental agencies, such as trade unions, churches, media, and the legal system, influence the society and government?
- Is there demographic stability?
- Are there internal social, ethnic or religious tensions that could lead to a civil war or unrest?
- What is the country's trade credit history?
- What is the level of unemployment among citizens?
Political risk, as a general, global category, is characterized by three factors: catastrophic events, business environment, and public policy (Dugan, 1999).
- Catastrophic events: catastrophic events refer to the political developments that can affect operations of all foreign firms in a country. Theoretical examples include racial and ethnic unrest, civil strife, terrorism, civil war, international conflict, and systemic failure. Real word examples include former Yugoslavia's ethnic unrest, civil war, and international conflict.
- Business environments: business environment risks faced either by all foreign businesses in a region or industry specific risks (related to government corruption, labor strife, and the judicial system). Examples include labor and elections. Labor organizations through much of the world are closely tied to political organizations. This connection between labor and politics brings foreign companies into the midst of political struggles and issues. Foreign elections, which seldom influence foreign business operations directly, do influence public policy. Elections may bring in new officials who alter or shift the business environment to match the new regime. For example, new officials may change the tax code or structure.
- Public policies: public policy risks include political initiatives such as changes in the tax system, regulatory structure, and monetary system. For example, when a foreign government is forced to devalue currency due to economic crisis, interest rates rise and alter domestic spending habits. This change in monetary policy could potentially ruin a foreign business' investment.
The new global political environment is often unpredictable or dangerous. Multinational companies may experience work stoppages, hijackings, physical attacks, and more as...
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