POLITICAL ENVIRONMENT

INTRODUCTION

• A political system has been defined by Dahl (1976) as a "persistent pattern of human relationship that involves, to a significant extent, control, influence, power, or authority." (p. 4).
• Political environments may range from a democratic system to communism with other variations between these ideological extremes. In international construction, like in international business, one has to deal with governments as they are presently structured with all their diversity, and even regressiveness.

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

• Involves wide participation by citizens in the decision-making process
• Freedom of expression
• Voting rights for selection of representatives
• Independence of judiciary
• Nonpolitical and nonpartisan bureaucracy and defense infrastructure
• Limited terms of elected officials
• Empowerment of the citizens
• Assurance of political rights of citizens as indicated by:
  • Fair and competitive elections
  • Power for elected representatives
  • Safeguards on rights of minorities

• Assurance of civil liberties as indicated by:
  • Freedom of press
  • Equal rights of everyone under the law
  • Personal social freedom
  • The degree of freedom from governmental indifference or corruption

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:

• Parliamentary: Party with a majority of elected representatives forms a government. The leader of the majority party becomes the prime minister and selects a cabinet.
• Presidential: Direct election of a president who is in power for a limited period of time.

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:

• An individual, a single party, or a select group of individuals monopolizes political power
• Non-recognition of any opposition
• Decision making is restricted to an individual or a select group of individuals
• All societal resources are monopolized by the state

It typically falls on one of the two following categories:

• Theocratic: Political control is vested on religious leaders.
• Secular: Secularism is based on the principle that affairs of this world should be the most important concerns for ethics and human life. Secular totalitarianism, therefore, is based on worldly rather than religious concepts.

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

• Complete integration of political and economic systems
• Political revolution is preceded by social revolution
• Long-term transformation of the society based largely on removal of economic inequalities
• Social revolution guided by the working class
• Dictatorship by the proletariat during the transformation stage

Features of fascism include:

• Subordination of the individual to a "totalitarian" state that controls all aspects of national life
• Elimination of class struggle through nationalism and the corporate state
• Political control rests mostly with military oligarchy

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 group’s 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 time—all 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

• Instability: The probability of encountering political risk in a host country is considered to be directly related to the relative stability the country's political system. This instability may have its roots in different economic, political, and social factors. Some specific causal factors may include communal unrest, strained international relations with neighboring countries, social unrest, newly-acquired independence, vested interests of home country industrial groups, proximity to armed conflict, etc. The political instability can thus be measured as qualitative or quantitative accounting of these correlates. An index of political instability is often produced using these factors and marketed as political risk analysis (Ashley & Bonner, 1987). This approach of measuring political risk, however, may not be ideal for all situations. Political instability may not always effect all international businesses in a country. In some situations, political instability may lead to changes that may not be at all critical to most construction ventures. Rather than political stability, the direction in changes in government may be more important in certain situations.
• Past patterns: Past patterns of political behavior is at times analyzed to determine political risk involved. However, predicting political risk on the basis of historical records has its own drawbacks. Political situations under which risks were encountered by companies or individuals in the past might have changed altogether; the changed circumstances may provide a better environment for foreign investment (e.g. Vietnam).
• Opinion analysis: Political risk may also be measured qualitatively by examining the views of people engaged in governmental decision making and people who may influence future political events affecting business. It involves the analysis of statements of such people to determine their views on business in general, foreign capital investment, the means of effecting economic changes, and their feeling toward the host country in question. Such statements, however, should be analyzed to determine their "inner meanings." (Sometimes statements are made for making emotional appeals or  merely to appease a particular interest group or social class.)

Political Risk Management (Ashley & Bonner, 1987)

• Avoidance: Selecting only safe environments for business and rejecting regions that are perceived to have greater than average degree of political risk.
• Premium for risk: Increasing the ROI (return on investment) or requiring shorter period of payback.
• Adaptation: Responding to the particular political environment of the host country and structuring the international operations accordingly (e.g. adapting to the local methods, utilization of host country professional expertise, joint venture, etc.).
• Transfer: Sharing of risks with other individuals or companies or reducing the risks through transfer to other agencies.

POLITICAL STRATEGIES FOR CONDUCTING INTERNATIONAL BUSINESS

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

• Identifying the issue (e.g. protectionism, environmental standards, human rights, workers rights, etc.)
• Defining the nature of the political issue
• Assessing the potential political action of other firms and of special interest groups
• Identifying important institutions and key individuals
• Formulation of strategies (objectives, alternatives)
• Determining the impact of implementation (both in home and host countries)
• Selection of the most appropriate strategy and implementation.

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{:-)