Legal Political Environment

A company’s risk of loss of assets, earning power, or managerial control due to politically based events or actions by host governments.

Businesses must deal with unfamiliar political systems when they go international as well as with more government supervision and regulation. Government officials and the general public often view foreign companies as outsiders even intruders and are suspicious of their impact on economic independence an political sovereignty. Some of the major legal, political concerns affecting international business are political risk, political instability and laws and regulations.

Political risks and Instability:

A company’s political risk is defined as its risk of loss of assets, earning power, or managerial control due to politically based events or actions by host governments. Political risk includes government takeovers of property and acts of violence directed against a firm’s properties or employees. In Mexico, business executives and their families are a prime target for gangs of kidnappers many of which are reportedly led by state or local police. The daughter of the local head of a Japanese tier company for example, was kidnapped in 2000 and the company paid $1 million ransom. Estimates are that big companies in Mexico typically spend between 5 to 15 percent of their annual budgets on security . Companies operating in other countries also formulate special plans and programs to guard against unexpected losses. Executives at Tricon, which owns KFC and Pizza Hut restaurants monitor events through an international security service to stay on top of potential hot spots . Some companies buy political risk insurance and political risk analysis has emerged as a critical component of environmental assessment for multinational organizations. To reduce uncertainty organizations sometimes also rely on the Index of Economic Freedom, which ranks countries according to the impact political intervention has on business decisions, and the Corruption Perception Index, which assesses 91 countries according to the level of perceived corruption in government and public administration.

Political instability:

Events such as riots, revolutions or government upheavals that affect the operations of an international company.

Another frequently cited problem for international companies is political instability, which includes riots, revolutions, civil disorders, and frequent changes in government. In recent decades, civil wars, and large scale violence have occurred in Haiti, Indonesia, Malaysia, Thailand, Sri Lanka (Ceylon), and Myanmar (Burma). Companies moving into former Soviet republics face continued instability because of changing government personnel and political philosophies . The Middle East in early 2004 is an area of extreme instability as the United States pursues a difficult and protracted reconstruction following the Iraqi war. US firms or companies linked to the United States often are subject to major threats in countries characterized by political instability. For example on the first Muslim holy day after US began bombings in Afghanistan thousands of demonstrators in Pakistan set fire to KFC restaurants as it is a symbol of America.

Although most companies would prefer to do business in stable countries some of the greatest growth opportunities lie in the areas characterized by instability. The greatest threat of violence is in countries experiencing political, ethnic or religious upheaval. In China, for example political winds have shifted rapidly and often dangerously yet it is the largest potential market in the world for the goods and services of developed countries.

Laws and regulations:

Government laws and regulations differ from country to country and make doing business a true challenge for international firms. Host governments have myriad laws concerning libel statures, consumer protection information labeling employment and safety and wages. International companies must learn these rules and regulations and abide by them. In addition, the Internet has increase the impact o foreign laws on US companies because it expands the potential for doing business on a global basis. Land’s End the Dodgeville Wisconsin mail order retailer, ran afoul of Germany’s laws banning lifetime guarantees, rebates and other forms of sales promotion. First Net Card started in 1999 to provide credit or online transactions to anyone in the world found the complication of dealing with international credit and banking laws mind boggling. After two years and a mountain of legal research the company was licensed to provide credit only in the United States, Canada and Britain.

Source: New Era of Management