Political environment in

International Trade
Dr. Ajitabh Dash
Introduction
Politics: function of conflict
resolution in society
Political system: system of
governance in an economy, based on
a political ideology.
Political ideology: refers to a set of
integrated belief, theories and
doctrines.
Political ideology
Political ideology of US: Constitutional
right of private property and freedom of
choice.
Refers to individualism ideology where individual
needs are prioritized.
Basis of Capitalism economic system
Political Ideology of China: Believes in
state ownership of property
Refers to collectivism ideology where societies
needs are emphasised.
Basis of socialism/communism economic structure
Political environment and
International Trade
International trade gets affected by
two elements of host countrys
political environment:
Political Stability:
Gets assed by evaluating Risk/Reward Ratio
Here Risk refers to Political Risk
Govt. Orientation and Nationalism:
Based on Political Ideology
Political Risk
Refers to change in political climate leading to a
deterioration of the operating position of the
business.
It may be due to:
Civil Disorder:
sudden change in economic condition or human rights violation
Change in Political leadership:
Cause changes in operating regulations (like taxation), may
lead to breach of existing contract or takeover of investors
property
Deterioration of external relationship:
Bitterness between host country and foreign investors
home country, may lead to work stoppage protest, divestment of
operation, loss of supplies and markets.
Types of political risk:
Ownership risk:
Transfer of control of foreign investment
to national ownership (Nationalisation)
Operational Risk:
Change in Rule of the Game under which
a firm was operating (Like taxation policy)
Transfer Risk:
Restrictions in free movement of factors
of Production (blockage of funds as
happened in Uganda)
Assessment of Political Risk
Country Specific Risks
Country specific risk refers to risk arising out
of doing business with a specific country.
What is the current political system in
existence?
What is the stability and permanency of
government policy?
What are the encouragements the business
firms will receive as a result of political
activity?
 Factors influencing Govt-MNC
relation
The government & MNCs
relationship is positive if the
investment:
Improves the Balance of Payment
Uses Locally produced resources
Transfer of capital, technology & Skills
Job creation
Tax Contribution
Firm Specific Risk
It has been observed that sometimes
firms in the same country receive
differential treatment.
firm specific political risk arises
because of the following:
Size and visibility
Product handled
Attitude of the company
Check list for Product handled
Is the availability of supply of the product ever subject
to important political debates?
Do other industries depend upon the production of
the product?
Is the product considered socially or economically
essential?
Is the product essential to agricultural industries?
Does the product affect national defence
capabilities?
Does the product include important components that
would be available from local sources and that
otherwise would not be used as effectively?
Is there local competition or potential local
competition from manufacturers in the near future?
Is the product potentially dangerous to the user?
 MANAGEMENT OF
POLITICAL RISK
Political risk management process
can be undertaken either before the
investment is made or after the
investment is made.
The former refers to pre-
investment planning
The latter refers to post-
investment planning.
PRE-INVESTMENT
PLANNING
Under the pre-investment planning for political risk
management, four options are available to the international
marketer. They are:
Avoidance
avoiding political risk by not undertaking any foreign investment
Insurance
underwrite the insurance of political risk (eg. ECGC)
Negotiating the Environment
agreements drawn up between the company and the ruling
government (Known as concession agreement)
Structuring the Investment
involves diversification of investment so that it is a not concentrated
in any one country
 POST-INVESTMENT
PLANNING
Planned Divestment
divestment of assets in the foreign country over a
fixed period of time so as to minimise the risk
Short-term Profit Maximisation
firm cuts costs and increases profit margins to
recover the initial investment.
Change of Benefit/Cost Ratio

Develop Local Stockholders

make sure that most of its products were
manufactured within the country for sale