The Impact of a Political Environment on International Business - Research Paper Example

by Abstract The essay tries to analyse the organisational changes that has taken place in an advertising agency of late. It also discusses the problems faced in the process of managing change and the strategies which were implemented to overcome those problems. Introduction: To analyze macro environment of business PESTLE theory has been used for years. PESTLE is abbreviated from of factors like Political, Economic, Social, Technological, Legal and Environmental. It is clear that the first the theory considered is Political. That Political structure of any country plays a vital role in the countries business scenario. The significance of politics is much more in international business because the political system varies from country to country. Purpose of the study: According to (Batler 1998), a business entity should always take into account political risk because it is directly related to the investment, cost, tax structure and the return from that country. Keillor et al (2005) also have similar opinion. They admitted politics as a threat to international operation. Background of the study: A case study on Bangaladesh, a developing country can be cited here. The World Bank has forecasted the GDP growth of Bangladesh at 5.7 percent for the fiscal year 2014.This is way below the growth forecast 7.2 percent, done by the Bangladesh government itself. According to World Bank, the reasons behind the slower growth are political unrest, remittance crisis and problem in garments sector. Remittance is a political issue and garments is outsourced business, so again a political issue) Different types of political risks: There are different types political risk involved in the process of doing international business. Many times politics is considered as a risk factor. 1. General political uncertainty: Though the normal political instability is not considered as a serious problem but if the uncertainty increases it harms the business growth. Giving the example of Africa Frynas (1998) mentioned that, political instability of Africa is the main barrier for economic development. 2. Ownership risk: If the government takes over a private business or goes for expropriation then the private owners might lose its ownership. These situations are termed as nationalization or protectionism of business. 3. Operational Risk: Government policies of the country where the business is operating matters a lot. The availability of finance, cost structure, tax structure, buying of property, human resource strategy, marketing technique everything is dependent on the government policy. Korrin (1979) expressed his concern in the case of political influence in business decision making process pr planning. In much country government policy is the reflection of political policy. 4. Transfer risk. The currency of different countries and the exchange rates are the key concern of business organisations. The currency appreciation and devaluation have a direct relation with the profitability of the business. Many researchers including Brown (2001) admitted that international businesses are highly exposed to foreign exchange rate risk. However he advised to mitigate it by using financial derivatives. Another important point is that when a company does business in a foreign country or creates wealth in the host country then many times organisation are compelled to pay a significant proportion to the host country’s government. 5. Trade barriers and Trade agreements: there are many barriers in international trade. Two organisations from two different countries cannot get into a business deal. Generally these have to go through government scanner. The government policy and political policy generally determines which deal will get the permission and which deal will not. These are big problem for business houses. The trade barriers can be formal or informal. Duty, Tariff and quota are the example of trade barriers. Hooker (1999) has admitted that to create trade barriers instrument like quota tariffs are used. Factors behind the political change There are many factors such as economical, governmental, and other that shoots up political disturbance. Even if a country looks politically stable, there are many minute political things that affect the business world. Economic: Economic events have direct relationship with politics and vice versa. Many cases are there, when problem in economy is having an adverse impact on the political picture. High inflation and famine are such events which started riot and other problem. Tufte (1980) highlighted that the political theory of economic policy has to be taken care of. It is also seen that many terrorist and extremist groups came from economically deprived areas. Krueger (2007) also established the relationship between poverty and terrorism Governmental: Government policies and activities play a vital role to maintain political stability. It is seen that insurgency, terrorism which harm international business a lot, gets increased due to wrong government policy. The findings of Li’s (2005) research said that democratic participation decreases terrorist incidents in a state, while the government obstacles increase the frequency of such incidents. Not only to terrorists but the governments approach towards the general public and other political parties does matter a lot. Social: issues related to society and social problem increases political problem. Burney (2009) argued that social disparity makes people anti social. It furthers to extreamist movements or wars. Political risk management No organization can avoid political risk and business organizations are the bearers of the business risk. But certainly it can be managed. Business organizations should not underestimate the threat generated from political risk. Culp 2012 mentioned that, according to large scale risk management survey, most of that many organizations do the mistake that they neither measure political risk nor manage it properly. Business managers are more concerned about operational risk and rather than political risk. However the characteristics of political risk are different compared to other risks. Culp advised that political risk can be introduced to the current enterprise risk management (ERM) systems and advised to follow three step processes. Identify measure and manage. First the managers have to identify which are the objects or event getting affected by politics. Risk managers can maintain a data or list of different types of evidence based political risks. To measure the risk, managers must know the potential of the risk to affect business. Discounted cash flow system can be applied for it. It must be measured in money terms. To manage the risk the managers must make priority list. Through consultation, negotiation, reporting and review the risk can be addressed. To follow the local norm, codes the local training system can also be arranged. Creating bargaining power is important to solve any problem. Bargaining and negotiation is the effective tool to address political problem. Smith (1980) stressed that through effective dialogue process any disputes can be handled. As many times the political party remains more powerful and takes upper hand in the discussion the business managers have to be more careful. Framing the argument should be very strong. The communicators should remember the fact that political person or the government representative might just turn down the manager’s argument because they have the monopoly power in the respective country. Historically it is seen that, business houses have good relationship with government and political parties. The government and political groups is also stakeholder of the organization. If the political parties are convinced properly then chances are there that the job will be done in the favor of business organization. To address problem of formal and informal trade barriers, such as tariff and quota, free trade agreement and free trade agreements and business treaties are formed. For international business these are the effective tool to bypass existing political problem. In these agreements the organization follow its own rule rather than the rule of the respective countries .According to Bergstein (1996), fifteen European countries have created a single internal market for free trade. Another free trade agreement is these called ASEAN with eight Asian countries. Free Trade Area of the Americas (FTAA) and The European Union and the Mediterranean countries (EUROMED) are also the example of such initiative. Conclusion From the above discussion it was clear that political environment has a huge impact on business. In case of international business the impact is more because it deals with multiple governments and several political parties. Many time politics is considered as the risk or threat to the business. The risk exists in terms of political uncertainty, ownership risk, and operational risk or trade barriers. There are many socioeconomic reasons which influence political problems and ultimately the problem to the business. Though political problems cannot be avoided but managed. Through negotiation and discussion problem can be solved. Free trade agreements and business treaties are also the solution. Reference List Batler Kirt (1998), A Note on Political Risk and the Required Return on Foreign Direct Investment, available at, http://www.palgrave-journals.com/jibs/journal/v29/n3/abs/8490009a.html,(Retrived on April 4, 2014) Korbin Stephen J((2009), Political risk :A review of recommendation available at http://dx.doi.org/10.1057/palgrave.jibs.849063, [retrieved April 05,2014] Jedrzej George Frynas (1998)Political instability and business: Focus on Shell in Nigeria, http://www.tandfonline.com/doi/abs/10.1080/01436599814343#.Uz-jV6iSxmw Brown Gregory W (2001)Managing foreign exchange risk with derivatives, http://www.sciencedirect.com/science/article/pii/S0304405X01000496 Tufte Edward R. (1980), Political Control of the Economy, available at http://books.google.co.in/books?hl=en&lr=&id=XApc8GX0F4MC&oi=fnd&pg=PR9&dq=economic+system+affecting+political+revolutiion&ots=DplpOdtMjw&sig=WhQ9xUSfYrM9X6PJbxhmAAmPLXA#v=onepage&q&f=false Li Quan Does Democracy Promote or Reduce Translational Terrorist Incidents?, http://jcr.sagepub.com/content/49/2/278.short Bergsten Fred C, Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century, available at, http://p.181.www.iie.com/publications/wp/print.cfm?researchid=171&doc=pub Krueger Alan(2007)What Makes a Terrorist, available at, http://freedomsadvocate.com/files/ref/Krueger-AEI-WhatMakesATerrorist-2007.pdf Steve Culp, 2012, Political Risk Cant Be Avoided, But It Can Be Managed http://www.forbes.com/sites/steveculp/2012/08/27/political-risk-cant-be-avoided-but-it-can-be-managed/ Burney Elizabeth (2009) Making People Behave: Anti-social Behaviour, Politics and Policy, available http://books.google.co.in/books?hl=en&lr=&id=iQw4Hwb_1z8C&oi=fnd&pg=PR1&dq=social+cause+behind+political+disturbance&ots=eFNnYMzVxU&sig=IvwDYz294z9hq5MQL7e8AcTposs#v=onepage&q=social%20cause%20behind%20political%20disturbance&f=false SMITH REID G(1980). 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