Ans. Political Risk - 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 govt. 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 Introduction Business to Environment international levels of risk,
government initiated domestication is quite risky and is ranked with
expropriation.
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.
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