Political factors influencing success in i

Vocabulary

Communism

Capitalist economy

Planned economy

Popular republic

Risk management

Political risk analysis

Free market

Laisses faire

Government intervention

Government

Political risk

Embassy

High commission

Consulate

Representative democracy

Monarchy

Constitutional monarchy

Dictatorship

LEARNING GOALS

✔

Identify and describe common
mistakes made by businesses in
international markets;

✔

Identify, drawing on information from a
variety of sources, including the
Internet, common mistakes made by
companies when entering foreign
markets

✔

Identify and describe the problems
that some companies have
experienced when exporting goods
and services

Political Risk

All governments play a part in international trade. What are some

examples you can think of?

The Role of
Government In
International Trade

•Establish import and export policies

•Develop trade policies and regulations

•Assist Canadian exporters succeed

•Match potential Canadian exports with

international clients

•Maintain and improve relations with other nations

•Assist Canadian companies adjust the changing

international market

•Foster innovation and human resource

development

Canadian Government’s
International Presence

In most countries Canada has an embassy, high
commission or trade consulate and is run by the
ambassador or trade commissioner.

They promote and encourage safe and friendly
trade. They establish and manage
relationships, look after our interests and assist
Canadians living there. They help coordinate
work permits and visas.

Canadian Embassy, Beijing

Political Risk

All business activity

presents risks that must be
managed to be successful

and make a profit.

Political risk may mean

investors lose out.

(Losses can be financial,

time delays, technical
breakdowns, loss or

reputation, or loss of market

share.)

Political

Risk

Occurs when government policies
threaten the business environment and
include things like policies and controls to
affect price and currency rate. Policies
may change at anytime.

Businesses may walk away from
opportunities because of the risk.

They may also choose to minimize the
risk by taking out insurance, balance it
with more secure projects or build in
higher prices for products in the country.

Types of Political Systems

Governments are responsible for passing and enforcing

the laws of the country therefore the type of political

system will impact the country’s international business

practices to a great extent.

What different types of political or government systems can

you think of?

Types of Political Systems

Some countries have a democratic model:
The general population has the right to vote
in free elections. Individuals may own
property and run businesses and have free
press and free speech. Most have a market
or capitalist economy.

Totalitarian systems (North Korea,
Cuba, Myanmar) centralize power and often
use military control. Governments are
single party or a dictatorship. Citizens have
little say in the governing. Most have a
command economy.

In reality most countries have a mixed
system of government. Most countries also
have a mixed economy, having elements of
both market and command economies.

Types of Political Systems

Recent political events have changed international
business relations with Russia (formerly
Communist) and China (still communist) and have
created more open markets and trade. Even
Canada’s trade with Communist Cuba has
increased.

Businesses in Canada are conflicted because they
understand the value of doing business
internationally, but they also fear sometimes that
doing business with countries in political
transition is risky because of the instability of
political, economic and social institutions.

t is a difficult choice to make, but a choice that
must be made nonetheless

*

How can companies navigate

political risk?

https://www.youtube.com/watch?v=xeSFxXlLnZg

How Can

Companies

Navigate

Political Risk?

What Businesses Must Focus On Is How A
Country’s Political System Impacts The
Economy As Well As The Particular Firm
And Industry.

Firms need to assess the balance to
determine how local policies, rules, and
regulations will affect their business.
Depending on how long a company
expects to operate in a country and how
easy it is for it to enter and exit, a firm
may also assess the country’s political risk
and stability.

Political Risk
Analysis

A Political Risk Analysis is a study
of the various external factors in
an investment project. These are
usually political or social
problems that could happen
when one invests in another
country.

A political risk analysis is a
review of the various factors
affecting your project. A political
assessment helps you
understand how changes in
government, environmental or
social conditions may affect your
business.

How Can

Companies

Navigate

Political Risk?

1.How stable is the government?

2.Is it a democracy or a dictatorship?

3.If a new party comes into power, will the rules of business change

dramatically?

4.Is power concentrated in the hands of a few, or is it clearly

outlined in a constitution or similar national legal document?

5.How involved is the government in the private sector?

6.Is there a well-established legal environment both to enforce

policies and rules as well as to challenge them?

7.How transparent is the government’s political, legal, and

economic decision-making process?

A company may ask several questions

regarding a prospective country’s

government to assess possible risks:

Benefits of Doing a Political Risk
Analysis

•You can see what the country’s economic and political climate is like

•You can find out how much investment is available in a specific country

•It lets you know if any natural disasters might happen soon, such as earthquakes or tsunamis

•You can find out about regional conflicts and wars that may be happening shortly

•Determines the likelihood of a foreign investment succeeding

•Identifies opportunities and threats to an organization’s goals

•Help identify risks that may not be apparent otherwise

•Understand the possible consequences of an event

•Identify potential opportunities and threats that may arise from a political development.

•Assess risk levels and prepare for crises or developments that could impact your business

•Identify the political risks that your company is exposed to

•Assess the severity of those risks and how likely they are to occur

•Determine what can be done to mitigate those risks, such as through insurance or protective contracts

•Create a plan for responding if those risks do happen

Drawbacks of Doing a Political Risk Analysis

•Political risk is unpredictable

•It can be costly to do a complete analysis, so you might need to narrow your focus

•You have to be objective when looking at the data, even if it’s something you disagree with or don’t want to believe in

•many different types of political risks could affect your company and its stakeholders

•Political risk is difficult to predict

•The analysis can be expensive and time-consuming

•There are many different types of political risks, which makes it hard to narrow down the focus.

•It is difficult to predict the future.

•Political risk can be hard to measure because it is subjective

•The cost of doing a political risk analysis may outweigh the benefits for some companies

•A political risk analysis is a complex task, meaning it will take time

•It can be challenging to get difficult data on some countries due to the government controlling the media so tightly

•The cost of doing an international political risk analysis varies depending on what you need and where you are looking

How Can Companies
Navigate Political
Risk?

While any country can, in theory,
pose a risk in all these factors, some
countries offer a more stable business
environment than others.

In fact, political stability is a key part
of government efforts to attract
foreign investment to their country.

Businesses need to assess if a country
believes in free markets, government
control, or heavy intervention (often
to the benefit of a few) in industry.

Free market vs government
intervention

https://www.youtube.com/watch?v=Xem0BPe3MNU

The country’s view on capitalism is also a factor for business consideration.

In the broadest sense, capitalism is an economic system in which the means of production are owned and controlled privately.

In contrast, a planned economy is one in which the government or state directs and controls the economy, including the means
and decision making for production. Historically, democratic governments have supported capitalism and authoritarian regimes

have tended to utilize a state-controlled approach to managing the economy.

Recap

What is the role of government in trade
What is political risk
Types of political systems
Managing political risk
Political risk analysis
Benefits and drawbacks of political risk analysis

ASSIGNMENT