Political Environment: Political System (Democracy, Authoritarianism, Communism), Political Risk, Political Instability, Political Intervention
by Political environment is an important ingredient in the international business. The political environment does not remain constant. The changing political environment is uncontrollable in nature. Therefore it is necessary to understand the political risks in the international business.
The multinational companies are to face different political environment and they are also to cope with the politics of different nations. The political environment of different nations may influence product, price, place and promotional factors in the international business.
“The economic interest of multinational companies differs widely from the economic interest of those nations where the MNCs do business. In the absence of mutual interests, political pressures can lead to political decisions, resulting in laws and proclamations that affect business.”
The above decisions lead to the conclusion that political environment of a country affects the international marketing activities. The political environment may have the following types;
(1) Foreign
(2) Domestic
(3) International political environment.
The most of the multinational companies do have little control over the changes in international politics.
It depends upon the positive relationships among the nations that how they are prepared to respond to the changes. The government policies play a vital role in this regard. In India, until 1991 there was closed economy and the foreign investments were discouraged. After 1991 the new Indian government started a reform programme in this context.
The foreign direct investments were encouraged and it transformed India into one of the most dynamic and highly potential economy in the world. This was possible only because of political will. If the government of such kind comes into power, which again discouraged the foreign participation, the whole of the world’s attention can divert once again to any other nation. It is because of the political risks.
Therefore the MNCs are always keen to study the political prospect of a particular nation, where they are willing to do business. To assess the potential of international marketing environment, the study of political risks is very important. The indicators which are responsible for the political risks should be identified and studied.
The following are some factors which are responsible for the political instability:
(a) Social unrest
(b) Attitude of the people
(c) Government policies.
(a) Social Unrest:
The social unrest is a major cause for the political unrest. It includes conflicts among different groups in the society, conflicts based upon different groups of different religious such as Hindu- Muslims and conflicts among trade unions and the government etc. A multinational company or domestic company may not be involved directly in such disputes, but the business of the companies is likely to be disputed severely by such types of the incidents.
In practice human nature is of two types. One type of human nature belongs to those who urge to stand alone and other type of human being urge to stand together. Both of these ways provide different ways for the utilizations of countries resources. The way of utilizing resources in a co-operative manner tends to be a closed economy as it was in the Soviet Union.
China still has a closed economy and the pattern of Chinese economy is still based on the cooperative sector. It is evident that China is having a rich economy but they have also started to shift their attention towards open economy. One group is still in the support of co-operative system, while other group is in favour of the open economy.
This type of situation may cause certain interest in the society. The multinational companies are to study both these situations before deciding about their marketing mix.
The social unrest may be caused by the following types of the conflicts:
(i) Domestic disputes: It is confined within the boundaries of the countries and can escalate into violence. The civil war may be a good example of it.
(ii) International disputes: International disputes can draw the attention of the third party into the conflict. The international problem of Sri Lanka and Nepal can be an example of such types of the disputes. Such types of disputes can also cause the social unrest in a country, which are important to be considered in the international business.
The above mentioned conflicts may lead to a direct confrontation between two countries. Iraq and USA were having deep rooted grievances with each other, which was converted into the direct confrontation. Such types of circumstances and social unrest always should be discouraged from international business point of view.
(b) Attitudes of the People:
An assessment of the government of the host country and analysis of the attitude of people of the host country is very important in the study of practical environment. The perception and attitudes of the citizens towards Multinational Corporation should be evaluated in the international marketing.
What they perceive about the foreign companies? Generally it is thought that foreign companies believe in the exploitation of the resources of the host country. Whether it is natural resources or human resources, such type of attitude of the people may cause unrest among different groups in the society, which is harmful for the international business.
(c) Government Policies:
The government policies play an important role in the formation political environment. The government policies tend to change either with passage of time or change in leadership or change in the government itself. The change in the attitude of the government leads to change in the government policies.
It may be either for betterment or for the worse. The government policies tend to change in the short run or in the long run period. The government policies can affect the business environment internally as well as externally. The internal effect of the government policies regulates the activities of a business firm within the home country, whereas when the business activities are regulated across the national business, it is said to be the external effect of the government policies.
It is pertinent to mention here that a company must pay its special attention towards election time. Some of the parties can negotiate with interest of companies for the vote politics. Such situation can create an unwelcome atmosphere for the multinational companies.
Therefore a company must evaluate whether early threats are just and it need not to take any drastic decision at this moment. The company must determine its future policies by evaluating the political environment deeply as the same situation may be instant and may not be real intention and attitude for the future.
Minimize Political Risks
It is impossible to eliminate the total political risks but these can be minimized up to certain extent. The multinational companies should take all these measures as to reduce the political risks in the international business.
The following are some of the measurers to reduce the political risks in the international business:
(1) To Encourage Local Economy:
A company can stimulate local economy in a number of ways. It may encourage local purchase for its raw material and other products used for its production and other operations. It can boost local partners, who can give opportunities by providing valuable political links.
Sometime local sourcing may be compulsory. The local contents boost the economy in two ways- (i) By encouraging demand for the domestic products (ii) By investing in local production facilities by the company can boost the local economy. Finally, the international company should make an attempt to artist the host country by being expert oriented.
(2) By Providing Employment Opportunities to the Nationals:
Sometime a big mistake of such kind is done by the multinational companies that the people of less developed nations are poor by their choice. They do not have any vision, they are lazy and are not intelligent. They are mostly illiterate and are not self-motivated towards their job. They generally believe that the local persons can be fit for the lower level jobs only and they would like to appoint their own persons on the higher level jobs.
“Therefore the multinational companies have to change their attitude in this regard and should weigh the impact of automation carefully in a cheap labour and highly unemployment area. The process of automation does not work well in the countries like India, where job creation on the national policy. An inability to automate production completely does not necessarily constitute a negative for multinational companies. Multinational companies may gain more in less developed companies by using international technology instead of the most advanced equipment. International technology accompanied by additional labour is less expensive and it promotes good will by increasing employment.”
(3) Sharing of Ownership:
It is always advisable that a company should try to share the ownership of the company with others. It may be by converting a Private Ltd. Company into Public Ltd. Company or by converting a foreign company into a local company. The ownership can also be shared by way of joint venture.
Sometime an international business the local firms may not be a partner of the foreign based firms. Instead of this the company from other country start joint venture with that company. It is helpful to reduce the political risks because the host country will not be willing to destroy its relations with more than one nation in a single time. By this way it makes difficult for the host country to take over business venture without offending a number of nations at once.
(4) Not to Involve in the Political and other Disputes:
It is always advisable to the company not to involve in any kind of disputes, whether they are local disputes or disputes within two or more countries. The company must state it clearly that it is none of their business. There only motive is economic in nature. If company’s involvement is there in all these matters, it is always harmful for the company.
(5) Sensitive to Changes in Political Mood:
A business firms should always be sensitive to the changes in political mood. The marketers must make a contingency plan in advance. As the changes take place in the political climate the marketer should also reduce the exposure in the market. A defensive approach is always advisable in case the political mood is serious in a country.
In addition to all these measures companies can also reduce their business risks by employing the strategy of risk shifting. The companies can get insurance coverage from number of sources.
Some of the sources can be explained as under:
(i) Insurance through Private Parties:
The business companies can transfer their political risks to the third parties by purchasing political insurance. The companies will be compensated in case of such losses which are caused due to political risks. The comprehensive policy is advised to be taken which should include coverage for kidnapping, terrorism and creeping expropriation etc.
(ii) Government Insurance:
The multinational corporations should not rely on the private insurance only. They should also search for other alternatives. There are so many non-profit organizations and public agencies which provides the same type of coverage. OPIC is United States based government agency and provide several types of assistances and having political risk insurance as its primary business.
It provides the protection to cover following types of risks (a) Inconvertibility of the currency (b) Expropriation which includes creeping expropriation and (c) Loss or damage caused by war, revolution or insurrection. A typical insurance contract runs up to twenty years at combined annual premium of 1.5 percent for all three coverage considering that private insurance companies issue a 3 year policy. Overseas Private Investment Corporation’s coverage is a positive feature.
(iii) Multinational Investment Guarantee Agency:
It was established in year 1988, with the objective to create an attractive investment climate to its member states. The main objective of the MIGA is to promote private sector investment in the developing nations through insuring investments against political risks.
It offers following types of coverage against political risks:
(a) Transfer of currency
(b) Wars
(c) Other domestic problems
(d) Expropriation
(e) Breach of contract: The annual premium for every coverage depends upon the type of the project coverages and other terms and conditions. Its rates are bit on the higher side in comparison to others.
Political Perspectives of a Nation:
A multinational company should evaluate the political environment of a country before operating its business activities there. The analysis of the political risk is very essential before going for international business. It is evident in the history that nationalistic approach of a nation is always damaging to the international business.
It is mostly prevailing in the third world countries. As for as the US economy is concerned, it cannot ignore the importance of third world countries for its economic, political and national interests. The world’s nation are the major suppliers of raw materials to the U.S. market.
The multinational company must emphasize on the following political perspectives before taking its entry into foreign business:
(1) The Form of Government:
The government of a nation plays a major role in the foreign business. The policies of the government depend upon the form of the government governing that particular nation.
The following are some forms of the governments:
(i) Democratic Governments:
These types of governments are formed through regular elections. The different party systems are prevailing in these nations. In some countries two party system is prevailing, i.e. USA and UK. In some countries it is multiparty system i.e. Italy and France and somewhere in the world multiparty system with one or two party dominance is prevailing. This system is prevailing in India.
The each party do have their own agenda and working system. With the change in government the programmes, agenda, and policies etc. also changes. It is also decided whether the private sector investments or foreign direct investments will be encouraged or discouraged. Whether the import of the goods will be restricted as to promote domestic industries or vice versa. It plays an important role in the international business.
(ii) Communist Government:
This type of system do have complete control over the business activities. They are very rigid towards regulations. Such types of governments are governing in the People Republic of China, North Korea, Vietnam and Yugoslavia etc. The working of these governments is concentrated around their national interests only. Therefore the multinational companies are to evaluate the system very carefully by keeping in mind its interests of doing business in that particular country.
(iii) Dictatorships:
These forms of governments are authoritarian regions. These are run either by the civilian dictator or by military dictators. These types of governments are prevailing in Pakistan and South Korea etc. These types of dictators also hold elections as to adopt a civilian posters.
(iv) Inherit Monarchy:
The government in this type of culture is run by the monarch as its head. The Sandi Arabia and Jordan do have its monarchies. A monarch may be having its inclination to either the leftists or the rightist.
A view of a country’s political system and its impact on foreign business must remain free of stereo typed nations. The political philosophy of a nation changes over a time and with a change in the political system. Therefore it is essential for the multinational companies to analyze, review and understand the current and emerging political perspectives, before taking any decision regarding the international business.
(2) Stability of the Government:
The stability of the government is considered very important in the international business. If the sitting government with whom the agreement was made is different from the government such changes in the government may create certain problems in implementing the agreements. It may be because of policies of the new government.
Therefore a multinational company must assess the stability of the present government and the political structure of the particular country. If the present government has not any scope to come in the power again, the policies of the probable government should be examined carefully.
The following are the reasons which are responsible for the instability of the government:
(a) Public unrests like riots, strikes etc.
(b) Crises in the government like majority and opposition by the rival group.
(c) Armed attack by another country.
(d) Other causalities at top levels etc.
(3) Changes in the Government Policies:
Sometimes the government policies tend to change frequently. In case such type of environment exists, it makes the things uncertain for the foreign business. The multinational companies always dislike such types of frequent changes in the government policies. Therefore it is important for the multinational companies to assess and evaluate carefully the various changes in the government policies and the frequency of these changes. They should take any kind of decision about foreign business only after reaching until certain concrete conclusions.
(4) The Attitude of the Government towards Foreign Direct Investment:
It is important to mention here that the attitude of the government towards foreign direct investment matters very much in the international business. Whether it is the case of developed nations or the case of developing nations. The developing nations may discourage foreign direct investments for its nationalistic approach.
In developed nations it is again difficult for the multinational companies to enter in the joint venture until they don’t win the faith of the concerned government. It is therefore the appropriate to analyze the regulations of the host country and to identify underlying attitudes and motivations.
(5) Administrative Setup of the Country:
Every nation does have its own administrative setup. It depends upon the experience, culture, availability of qualified and experienced administrators and style of functioning of the government. The business firms tend to complain about the bureaucracy of United States for its functioning. They are much efficient in comparison to the bureaucracy of some other countries.
The business firm is to study the administrative setup of a country in depth and then to decide its line of action. How to get work done in the different perspectives is the major challenge. In some countries they may find it easy to get their objectives fulfilled whereas in some countries it may be difficult. The administrative setup of a nation largely depends upon the ruling culture of government and experience to govern the state. Therefore the multinational companies are to cop up accordingly in that system.
(6) Political Model:
A country can be divided on the basis of one of the following political models.
(a) State Centric Political Model:
It is assumed in the state centric model of international politics that national government seek more power in the content of its international objectives. The national government tends to utilize its internal political resources for the fulfillment of its international objectives. Any action of the national government is assumed to be a desire for the international power.
(b) Bureaucratic Model of Politics:
In such type of model, the government functioning is carried out through bureaucratic setup. Thus, the government policies tend to change slowly.
(c) Transnational Political Model:
It emphasizes that dominant role in the international politics is played by the different organizational groups other than the national governments. Such organizational groups do have greater impact in the international politics. Thus the above model must be studied from critical point of view while taking any decision in the international business. How the business activities may be carried out in such political setup and what different risk factors may be there should be evaluated before taking any decision of such kind.
The government can impose following restrictions from time to time by changing its policies:
(1) Exchange Control:
When the countries do have a problem of balance of trade then it may impose restrictions on the free use of foreign exchange. It may be an effort by the government to change domestic industry. It is mostly used by the governments of the developing nations to regulate their hard currency balances. The governments can restrict the import of luxurious items from outside the countries.
(2) Import Restrictions:
The import restrictions are generally imposed as to protect domestic trade industries. By doing this the local supply of the product is encouraged. The firms can face two types of problems by this (i) The local supply of raw materials or other articles may be inferior in quality. (ii) The local supply may be short. It is the will and attitude of the government, which tends to change from time to time. If government want to encourage domestic industry it always make changes in its policy and impose impart restrictions on the products.
(3) Market Restrictions:
Sometimes the governments of the countries may impose certain restrictions to enter in the market. By this way it prevents the foreign companies to compete in the certain areas. An interesting example of this type of restriction is The Arab. “The Arab boycott of companies doing business with Israel is an interesting example of it. The Arabs were hoping the collapse of the state of Israel. But the U.S. government has adopted strict laws to prevent companies from becoming susceptible to the Arab blackmail.”
(4) Tax Restrictions:
The government may impose excessive taxes on the companies operating in the international business. Such taxes may be imposed for the following reasons (i) To discourage the operations or working of the foreign companies in the country. (ii) To generate more and more revenues and (iii) It may be retaliatory action by the government.
(5) Price Restrictions:
The government may impose price control restriction .as a measure to improve the economies of their countries. Such types of the restrictions are imposed on the finished product of the company. The raw material used to make that product is left on the market forces. This price control weapon is used for the public interest in the different economic items.
(6) Labour Restrictions:
The foreign firms have their own interest in doing business in a particular country. In many nations the labour unions are very Strong. The unions may be able to convince government into passing certain restrictive laws, which are supportive to the labour but putting heavy cost to the business.
These unions are working and forcing the government on the basis of their strength. In these kinds of circumstances foreign firms find it difficult to accommodate with these forced laws. If they don’t comply with it even if there is no labour laws, the company is to face big problems. Sometimes the problems become so difficult that the foreign firms are left with no option except to leave the business.
(7) Legal Incentives:
The legal incentives in terms of investment incentives are enforced to attract foreign investment in the country. This type of strategy is prevailing mostly in the developing countries. The investment incentives are rarely exclusive for the foreign companies. But in some countries the foreign private investment is the only beneficiary in getting such incentives.
It is because of inability of the local enterprises to undertake such types of incentives encouraged by the various incentives. In some countries the incentives are restricted to the local enterprises or with a minor foreign participation. The incentives to encourage foreign investments in the country are given generally the tax holiday of certain years.
Some other incentives can also be obtained generally in the developing countries such as waiving of import duties on raw materials and other industrial equipments necessary for the further production of the goods and other tax concessions can also be granted in that locality where the business enterprises has been located.
(8) Regulations Relating to Trading Restriction:
In some countries regulations relating to trading restrictions are enforced as to restrict import of the goods artificially stimulation of export.
The following are the measures in terms of non-tariff barriers to international trade:
(a) Participation of the government in the international trade – The government can enforce certain measures through subsidies, procurements and state trading.
(b) Duties on import and export procedure: It includes valuations, classification and documentations etc. for the above purpose.
(c) International standards: The government can enforce certain international standards in the foreign business. It includes product standards, packaging and product labeling etc.
(d) Legal Environment: A multinational company must cope up with different legal systems of different countries. They not only have to consider the legal aspects prevailing in their home country, but also must be responsive to the legal environment of the host country. The legal environment of different nations do have complexity and different dimensions.
In some nations legal system provides a broad guideline, whereas the interpretation is left to the courts. In international business an enterprises must ensure that it fully abides by the local laws and other regulations. Any multinational company primarily must consider the legal requirements pertaining to that competition, prices, place factor and product promotion.
Therefore, the legal system pertaining to the home country as well as the legal environment prevailing in the host country should be studied, understood and complied with certain international legal requirements and conventions that can affect international decision making process in the global perspectives. The marketer must understand the use of arbitration as an alternative of the legal requirements.