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
The features of the political environment
o Ideology: set of values and beliefs which justify certain behaviours and guides economic and
o Political-economic systems
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-
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
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
Adverse actions that affect the operating conditions of MNCs include war, insurrection or political
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:
o Entry and establishment, ownership and control, operational restrictions, authorisation and
o Competitive bidding among nations
Standards of treatment
o National treatment and transparency
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
o Industrial and economic development policies can pose a risk for mncs.
Changes of government