POLITICAL ENVIRONMENT


INTRODUCTION


THE POLITICAL SPECTRUM

A country's political structure is one of the key issues considered by a company or an individual entering a foreign environment for conducting business. Political constructs are integrated bodies of ideas (ranging from simple to very complex) that constitute sociopolitical platforms for different societies. A variety of political ideologies may exist in the same society. It may, therefore, be a good idea to identify the key features of some prevalent political ideologies:

Democracy

Democracy in its purest form hardly exists. Various forms of representative government exist in which citizens vote for individuals to represent them and make collective decisions. The major forms include:

Democratic system can range from being radical to reactionary. Those with liberal to radical approach tend to advocate political reforms to include a large number of social programs among other things and support more federal control. Democrats with shades ranging from conservative to reactionary ideologies advocate a return to past conditions and are more orthodox.

Totalitarianism

Totalitarianism is the other side of the political spectrum. Major features include:

It typically falls on one of the two following categories:

Totalitarianism ranges from communism to fascism. Features of communism include:

Features of fascism include:

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Figure 1. The Political Spectrum


INTERNATIONAL POLITICAL SYSTEM

The international political system is not a rigidly definable system in the sense of well-regulated operations among different nation-states. Tepstra (1991) defines it as a relationship of "accommodation, negotiation, capitulation, deterrence, and threat." (p. 192). The sovereign nation states are not the only members of the system; it also includes international governmental (NGO) as well as non-governmental organizations (INGO). Large labor unions and multinational enterprises also affect global politics. The IGOs (e.g. The World Bank) usually play a more dominant role than the INGOs (e.g. The International Federation of Free Trade Unions) in global politics because of the obvious reason that they derive their importance from the character of their associations with states.


POLITICAL RISK

A major concern for any company or an individual before venturing on an international project is whether the political situation in the host country will change in such way that the operating position will deteriorate. It is very a much subjective business-specific event. Haendel (1979) defines it as the occurrence of events that may change the projections for profitability of a global business venture of a given investment. The political actions that may affect the business or construction operations may include governmental takeover of properties (with or without compensation), changes in import or export regulations, or even political insurrections leading to other drastic changes. Failure to analyze and fully understand these risk exposures may seriously affect one's  objectives for profit, market share, and long-term relations.

"In the broad context of international business, political risk is defined  as the risk or probability of occurrence of some political events that will change the prospects for the profitability of a given investment. Macro-political risk events include sociopolitical disorder, power group transfer, and political corruption as well as government interference. Other major concerns also relate to the change of government policies toward foreign construction firms and the power groupís involvement or interference in the operation of a project. Foreign companies are extremely vulnerable to the risk associated with changes in government policies, laws, or regulations that could directly impact their right to operate and ability to realize the full expected value of their project returns. The involvement and interference of power groups in a project may take the form of more frequent administrative checks and political corruption. The latter is regarded by many foreign companies as an unavoidable fact of life on projects in certain developing countries, especially in China and Vietnam. There is the associated risk either of spending too much money on corrupt officials or spending it at the wrong place or timeóall at the risk of having a government agency subsequently turn against the firm and the project for reasons other than cost or technical considerations." (Chua et al, 2003, pp. 131-141).

Measuring Political Risk

Political Risk Management (Ashley & Bonner, 1987)


POLITICAL STRATEGIES FOR CONDUCTING INTERNATIONAL BUSINESS

Some of the steps that an individual or a company may follow in order to establish political strategies:


References:

Ashley & Bonner (1987). Political risks in international construction. Journal of Construction Engineering & Management, 113(3), pp. 447-465.

Chua, Wang, & Tan (2003). Impacts of obstacles in East Asian cross-border construction. Journal of Construction Engineering & Management, 129(2), pp. 131-141.

Haendel (1979). Foreign investments and management of political risk. Boulder, CO: Westview Press.

Dahl (1976). Modern political analysis. Englewood Cliffs, N.J. : Prentice-Hall.


(See pols101.htm for more definitions{:-)

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