BSB119 L W 6

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Management and Human Resources
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1 BSB119 – GLOBAL BUSINESS LECTURE 6: THE POLITICAL ENVIRONMENT The Political Environment  Power, conflict, change and risk  Political and economic environments are not independent. o Political economy: political, economic and legal systems and forces that govern the economy and business activity o Systems interact and influence each other – affect the economic well-being of nations, businesses and individuals o Political economy and culture are also not independent.  Key question: What is the appropriate role and level of intervention of the government in business and the economy?  Political system = system of government in a nation  Government = formal institutions and process which are responsible for making and enforcing the collective decisions of society o Governance refers to the policies which are made and the effectiveness which they are carried out.  The features of the political environment o Ideology: set of values and beliefs which justify certain behaviours and guides economic and political actions o Political-economic systems o Regulations  An important part of the political environment is the dominant ideology. o The systematic and integrated body of constructs, theories and aims that constitute a socio- political program. o In western society, there are three main ideological traditions:  Conservatism: support for tradition, country, authority, dutry and hierarchy. Individuals seek security and identity in a stable and orderly society  Liberalism: importance of individual over the group  Socialism: priorities of social equality, the common good above the demands of the self-centred indivudal and the dependence of the individual in the larget society.  Political systems referlect a particular mix of values drawn from one more of these. o In general, MNCs will be more comfortable operating in a political environment similar to that of their home country.  Most modern societies are pluralistic i.e. different ideologies coexist within the society because there is no one ideology accepted by all.  The two extremes in a theoretical sense are democracy and totalitarianism. o Democracy - allows for the involvement of citizens in the decision making process usually through a system of representation.  Political system where government is by the people, exercised either directly or through elected representatives o Totalitarianism - single party, individual or group monopolises political power and neither recognises nor permits opposition  Political system where one person or political party exercises absolute control over all spheres of human life and prohibits opposing political parties. Political Risk 2  Political risk is the likelihood that the foreign investment of a business will be constrained by a host government's policies.  Adverse actions that affect the operating conditions of MNCs include war, insurrection or political violence o They also include more subtle changes: in government attitudes and policies that affect the behaviour, ownership, physical assets, personnel or operations of the firm  Khambata and Ajami (1992, pp. 285-290) group the factors that affect political risk into two categories: inherent risk (constantly present around the world) and circumstantial risk (that arises out of particular events in different countries). You should make sure that you understand the factors considered in each of these categories. o Inherent risk (constantly present around the world) o Circumstantial risk (that arises out of particular events in different countries).  A good understanding of the causes of political risk is necessary. The following points will help you to start thinking about the factors that may be at work in various countries Policy Impacts on International Business and FDI Host country regulations  Imposed for reasons of "national interest, national security and public order” - exercising national sovereignty (e.g. Chinalco) Methods of influence:  Investment restrictions o Entry and establishment, ownership and control, operational restrictions, authorisation and reporting processes  Investment incentives o Competitive bidding among nations  Standards of treatment o National treatment and transparency  Other policies o Intellectual property law, double taxation, exchange control The causes of political risk  Different economic objectives. o The monetary and fiscal policies of the host nation may be at variance with the desires of a MNC. o Industrial and economic development policies can pose a risk for mncs.  Socio-cultural differences  Changes of government
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