Global Business Environment
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Chapter 4 : Political Environment
Types of Political Systems
Political
Risk
Foreign Politics
Domestic Politics
International Politics
Nature of Political Risk
Factors that Contribute to Political Risk
Social Unrest
Attitude of Nationals
Policies of the Host
Government
Analysis of Political Risk
Management of Political Risk
Techniques.
Chapter Summary
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Political systems can be classified based on the party
system in the society, and mode in which governments attain power. Based on the
way governments come into power, they can be classified into parliamentary type
or absolutist type. The citizens elect parliamentary governments. Absolutist
governments are not elected. They come into power by force.
Based on the number of parties active in a country, the political establishment
can be classified into four types: single-party, two-party, multiparty, and
one-party dominated systems. In a single-party system there is only party. This
party has absolute power. In a two-party system two major groups with differing
political philosophies compete for control of the government. In a multiparty
system no single party may have the strength to form the government. |
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As a result, parties enter into coalitions with many small parties to form
the government. In a system dominated by a single-party, although there are
many parties, only one party is strong enough to form the government. India,
for example, had such a single-party dominated system for nearly 50 years
after Independence.
To understand and assess the political environment of a company it is
necessary to identify and evaluate factors that can cause political
instability. Social unrest, attitudes of nationals, and policies of the host
government are some factors that can cause social instability. Political
risk refers to political actions that have a negative impact on a firm's
value. Companies operating internationally have to deal with foreign
politics, domestic politics, and international politics.
The political environment in the host country is referred to as foreign
politics. A company may face problems due to a political crisis in its
parent country also. This crisis is confined to domestic politics. Political
relations between two or more countries also affect business relations
between the countries. A company can face problems if the relations between
the country in which the firm operates and the country from which it hails
are not good.
The process of establishing a cause-and-effect relationship between
political factors and business income is called political risk analysis.
Some government policies that adversely affect the business environment
include non-convertibility of currency, preventing the repatriation of
profits, nationalization and inadequacy of compensation, and domestic
political violence. Political risk analysis is an ongoing function and is
not restricted to the initial investment decision. Publications of political
analysts, international rating agencies and the views of employees of the
foreign subsidiaries, are some of the sources of information on political
risk.
Companies operating internationally employ different strategies to reduce
their political risk. The strategic techniques are: Integrative technique,
Protective/Defensive techniques. A company adopting the Integrative
Technique tries to blend with the host country’s ethos. Companies can
minimize the political risk they face by adopting Protective Techniques. A
company can locate its key operations beyond the control of the host country
government.
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