POLITICAL ENVIRONMENT

It is rightly said that a foreign business firm operates only as a guest and at the convenience of the host country government. The government reserves the right of allowing a foreign firm to operate in the country as well as laying down the manner in which a foreign firm can conduct business. To gain  an  insight into a foreign  country's political environment, one needs to  analyze factors such as current form of government and political party system, role of government in  the economy, political encouragement to foreign firms, political stability, and  political risks to  business.

Form of Government and Political Party System: Government in a foreign country can be either parliamentary or absolutist. While the parliamentary type of government is run by people's representatives selected from time to time, the absolutist government assumes the form of absolute monarchies or dictatorships, and only a select few make policies. In the case of parliamentary government, one needs to know whether it is a single party system or multiparty government system. Single party government is considered to be more stable than the multiparty government.

Political Ideology and Role of Government:  Besides political party system, one must have knowledge about the political ideology and government attitudes toward foreign business and investment. In addition to regulatory role, government itself can be directly involved in business. In such cases, government enterprises emerge as dominant players in the market and pose tough competition to the foreign firms. Even supplying goods and services to the government agencies is not hassle free. Because of monopsonic power of the government organizations, it becomes quite arduous to negotiate prices and other terms with them.

Political Stability:  Stability of the government and government policies are a major concern for the international firm. Since business decisions, these days involve huge investments and are irreversible, what the foreign firms look in for is politically 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 the government policies without change in the government or shifts in political parties.

Political Risk: Political risk which is defined as the vulnerability of a project to the political acts of a sovereign government is a big threat to foreign business. The political acts leading to political risks can range from confiscation, expropriation, nationalization, domestication to restrictions on transfer of finds. Confiscation occurs when a foreign investment is taken over by a government without any compensation. Expropriation takes place when the, government takes over foreign investment but some compensation is paid. The compensation may or may not equate with the market value of a firm. Nationalization affects the entire industry rather than a single company, and involves transferring ownership of the confiscated or expropriated business to a national firm or government entity.

Domestication is a mild form of intervention and involves transfer of control of foreign investment to national ownership to bring the firm's activities in line with national interest. It differs from expropriation in the sense that it is gradual encroachment of the freedom of operation of a foreign operator. Domestication can be either firm initiated, government initiated or predetermined. Whereas firm initiated and predetermined domestication entail low levels of risk, government initiated domestication is quite risky and is ranked with expropriation.

Another type of risk relates to a temporary or permanent blocking of finds.  Unlike other kinds of risks, a business firm under blockage of funds owns the funds and property rights but it cannot remit the funds or earnings back to home country. This was a common problem faced by Indians during Amin’s rule in Uganda, although the government did not formally make any announcements regarding takeover of property, it became almost impossible for the firms to repatriate their earnings in any form. No doubt black money market operations may exist in any country; it is difficult for such operations to handle large scale of funds involved.

International firms need a proactive approach to deal with political risks.  An effective management of risks calls for recognizing the existence of various kinds of political types of risks and their consequences, and developing appropriate plans and policies to deal with such risks.