Political Considerations and Managing Political Risk in an Ever Evolving Global Marketplace - Research Paper Example

Assignment Two E, Quinones St Leo September 9, Political Considerations and Managing Political Risk in an Ever Evolving Global Marketplace Abstract: The following analysis will seek to pinpoint some of the major considerations that multinational firms have to engage with when operating within different locations and seeking out a higher level of profitability. Specifically, issues of political risk, ethics, legal concerns, and recommendations for how the process can be engaged more efficiently. The analysis will also provide specific case analysis of how some firms have achieved success or failures based on the determinants which have briefly been illustrated above. Introduction: The increased rate of globalization throughout the world has created a dynamic in which decision-makers within international business must consider able to factors as a means of continuing to expand the markets in which they operate and generate an even higher level of profitability. Ultimately, even a cursory level of business analysis reveals the fact that a company which does not focus itself on development and expansion will ultimately collapse and become nonviable. As a direct interpretation of this, it is necessary for firms to be international in their scope and to continually attempt to broaden the overall level of consumers that they are able to engage with. Understanding the power that the continual levels expansion and globalization have upon companies, it is easiest to establish an understanding of the many different business decisions that must be made prior to expansion and determinations of global engagement taking place. With this understood, one of the most important decisions that business leaders are tasked with making has to do with the actual physical location of global expansion facilities. Issues relating to climate, proximity to market, labor costs, fuel costs, and a litany of other factors have to be considered prior to a final decision being made. Yet, even though it is not the purpose of this brief analysis to promote any one of these decisions above the other, it must be understood that political climate and the estimation/understanding of political risk factors heavily into such a determination. As such, the following analysis will provide a discussion of political risk, relate an understanding for how it can be managed, and give specific examples of political risk that individuals involved in international business decisions might face on a regular basis. Political Risk and the Arena of International Business: Essentially, recognizing how to manage political risk while conducting international business is an essential element that managers should be able to comprehend and understand. Without this understanding managers will be at a disadvantage and will place themselves at risk and even in harm’s way if they are not careful. Political landscapes shape businesses that operate overseas. These landscapes must be navigated carefully and with ethics in mind. Strong core values will be essential to their success. An effective understanding of “political risk” can be effected through an appreciation of societal organization; specifically the means by which the rules of law, or lack thereof, define the way in which a given region might be represented. Based upon the way in which human society has developed, political systems have come to define different ethnic, linguistic, religious, or cultural boundaries; acting as a means of coalescing disparate groups of individuals under a certain set of laws, regulations, expectations, and cultural norms. The range of political cultures is expansive to say the least. Within the current world, there are examples of countries that have liberal democracies that practice the concept of democracy; as well as nations that are completely authoritarian dictatorships in which the will of the people has little to no relevance to the way in which the political system operates. The differentials and levels of nuance that exist within the current political systems around the globe force companies and decision makers within them not to form concrete understandings of political risk based upon a convenient model (Mitchell, 2011). Instead, political risk must be unique and determinant only to the region in question at any one given time. Types of Political Risk: As has been abundantly illustrated in the conversation above, the range and variety of political risks that exist for a given organization or business entity interested in considering a given region of the world are broad and can range from issues relating to macro risks to issues relating to terrorism, kidnapping, property seizure and confiscation, tax considerations, hostile foreign relations, labor laws, and a variety of other concerns. Within the current paradigm, established international businesses are incessantly looking to cut labor costs and outsource production as a means of promoting their own bottom line. Evidence of this has of course been denoted with respect to a litany of different industries; however, as means of discussion and analysis, this particular research will leverage the textile industry as a case in point. With the majority of the textile industry within the developed world relying upon outsourced labor, apparel manufacturers have been forced to consider alternative means of production in geographically removed regions of the world. Inherently, the fundamental consideration that is driving this outsourcing is the need to represent lower salaries for apparel manufacturers so that they can turn the profit margin and overall level of profitability that they are able to receive once the product sold. As a direct result of this, textile production has shifted from industrially developed regions towards regions with you, Bangladesh, Thailand, and a number of other relatively poor and underdeveloped Southeast Asian nations. Yet with each and every decision to integrate with a foreign nation as a means of increasing the production potential and boosting the international business footprint of a given firm or organization, consideration for the unique political risks that are represented within these regions must take place. Not surprisingly, one of the fundamental reasons why the regions that have thus far been analyzed and selected have experienced such a runaway level of growth in terms of industrial production over the past several years is contingent upon the fact that the author a favorable environment; both in terms of the overall level of political risk that is involved within their borders and the overall level of wage rates that their citizens might expect in return for their labor. Security of Personnel: One of the most central concerns that any international business will necessarily considered prior to engaging with a foreign region is the overall level of personal security that is exhibited within the given political system. In the eventuality that a nation is involved with an internal conflict, faces a civil war, or is in open hostility with the neighbor, this will rank as a sufficiently high and appropriate political risk to discourage almost any and all types of international business development and investment (Rajwani, 2011). A secondary issue that international investors and individual businesses consider prior to making any type of informed decision is whether or not the stability of the existing government warrants investment. In many situations, nations that exhibit a low wage rates and have a business friendly atmosphere will have these advantages negated by the fact that their political system is so tenuous as to not be trusted. Essentially, as an international investor or businessman seeks to engage with a given region and promote business development within it, the fall of one particular regime and a less than peaceful takeover by another could negate any and all of the benefits that they might otherwise hope to affect. Political Systems and Choices: Yet, it should not only be understood that political risk is contingent only upon what political system or government might be in control of a region at any one given time. Bus far, the analysis has been mainly contingent upon discussing what is known as “macro risks”; specifically as it relates to the way in which a political situation could render a company operating internationally as a viable or otherwise unprofitable. Yet, the reader should consider the fact that the regions that have thus far been discussed are indicative of those in which political stability activists in tandem with the benefits in which producers are seeking to affect. Ultimately, the reason for why regions in India, Bangladesh, and other parts of southeast Asia had been chosen for means of production is that the political situation matches a favorable rating alongside matching the indirect and direct needs that the supplier/producer require. However, before one would assume that due to the fact that low wage rates and the ability of a given to represent a high number of eager workers is the only determinant, one might necessarily consider the case of either Somalia or Afghanistan; to regions that are among the poorest in the entire world and have remained virtually untouched by any of foreign investment; outside of the military interventions that are continually ongoing stop the ultimate rationale behind this is of course the fact that political risk from terrorist kidnappings, and the continual dangers associated with everything and conflict has directly discourage any foreign investment taking place. Whereas it is invariably true that a given producer could in fact open a textile mill within Somalia and paid a laborers their even less as compared to the textile mills that are currently in operation within Thailand, India, Bangladesh, and a litany of other countries, no supplier or investor is interested in this proposition; due to the fact that the overall level of instability and strife within these regions makes such an action foolish to say the least (Lim, 2013). Governmental Differences: Aside from the issues that have been discussed in the analysis above, there is also the political risks that are evident with respect to different types of governments and the by which business is understood as either a beneficial or potentially harmful engagement. The reason behind this being discussed has to do with the fact that certain political systems, namely the more socialist and communist countries of the world oftentimes demonize business interaction as a tool that is used by industrialists and outsiders of weakening the earning potential and economic power of the people that they claim to represent. Regions such as Venezuela, Vietnam, and to some extent Argentina Traditionally viewed outside investment with suspicion and attempted to counter for any negative impacts that such a level of international business might effect on their own populations. Whereas it is true that political instability, the risk of terrorism, and/or the likelihood of kidnappings or an ongoing civil war do not necessarily factor into the decisions that companies make with regard to these nations, the overall business friendliness that they represent is another determinant that businesses must necessarily consider prior to seeking to engage within the given regions (Saint Leo University, 2013). Essentially, issues relating to tax, property rights, or the difficulty of opening new business operations play a tertiary level of importance that is considered after the primary and secondary determinants that have thus far been explicated within the analysis. In the eventuality that permits, business operation, or labor laws are extraordinarily difficult to navigate, the likelihood of a given firm investing within such a nation is limited to say the least. Similarly, if the tax structure represents the complicated maze that has to be navigated by a team of international lawyers, the likelihood of international firms seeking to choose such a nation as a base of operation is equally low. Whereas these factors are not oftentimes considered in terms of “political risks”, the fact of the matter is that the determinants of the tax structure, the determinants of labor laws, the determinants of the availability and access to requisite permits, and the determinants of labor laws are all concentric upon the existing political structure. Within this understanding, it does not come as a surprise that firms necessarily consider these factors as political risks prior to making their final determination or not they will expand within a given region or not. In tandem with the aforementioned factors, considerations also have to be made with respect to different legal systems and the way in which a given company is able to operate effectively or ineffectively within such systems. For instance, whereas a company’s products or services might be relatively uniform throughout the global system, the way that different legal systems operate places a necessary strain on the way that these companies operate in different political and legal systems. In addition to being mindful of these nuances, it is still fundamentally necessary for such firms to represent a uniform attempt at presenting similar products throughout the regions and markets in question. Ethical Considerations: A noted difficulty that is further represented is with respect to the fact that ethics and the need to represent high ethical standards remains unchanged; regardless of the political climate that the company may be operating within. This issue has been the point of contention with many companies that have sought to cut corners be representing unsafe or unethical products/services to consumers within certain regions of the globe (Culp, 2012). Coca Cola has learned firsthand of the long lasting and negative image that could be affected as a result of poor ethical standards; with regard to the environmental damage that was affected within India at several of their production facilities. The negative impact of this lapse in ethical and environmental concern has created a situation in which Coca Cola still struggles to reclaim the lost market share and presence within one of the fastest growing and most lucrative markets in the developing world. Even though ethical standards within a given nation might be easily cut or ignored, the ramifications of behaving in such a manner should never be forgotten; as the long lasting impacts of such a choice can stay with the company for years or even decades. Regardless of the legal environment or what might be considered as permissible according to the law within a host country, maintaining the same high ethical standards that are represented in nations that have a strong legal structure to enforce adherence is always an exceptional way of avoiding conflicts of ethics that might otherwise harm the image or representation that the company reflects. Conclusion: From the information that has thus far been represented, it is clear and apparent that a litany of concerns are represented with regard to political risk and the way in which multinational companies consider choices relating to specific geographies or people groups. Whereas it is doubtless the case that these decisions are predicated upon the desire to gain market share, make wise business decisions, and ultimately engage with higher profitability, the underlying concern that has to be focused upon is the level and extent to which the firm is cooperating with local authorities, regional/local/and international laws, and/or robust ethical standards. This rubric would therefore certify that a firm has priorities aligned in a correct and efficient manner; as a means of engaging with a larger number of consumers in a profitable way. References Culp, S. (2012, August 27). Political Risk Cant Be Avoided, But It Can Be Managed - Forbes. Retrieved from http://www.forbes.com/sites/steveculp/2012/08/27/political-risk-cant-be-avoided-but-it-can-be-managed/ Lim, P. (2013, February 23). Investors Rediscover Risk-Taking Abroad - NYTimes.com. Retrieved from http://www.nytimes.com/2013/02/24/your-money/investors-rediscover-risk-taking-abroad.html?_r=0 Mitchell, T. (2011, September 1). Five Ways to Manage Overseas Business Risks - Businessweek. Retrieved from http://www.businessweek.com/management/five-ways-to-manage-overseas-business-risks-09012011.html Rajwani, T. (2011, May 1). How Firms Should Deal With Political Risk. Retrieved from http://www.som.cranfield.ac.uk/som/p16495/Think-Cranfield/2011/May-2011/How-Should-Firms-Deal-with-Political-Risk Saint Leo University. (2013). International business (Custom 2nd ed.). Upper Saddle River, NJ: Pearson Read More