Political Environment Chapter 4 Political Environment

Chapter Outline Multiplicity of Political Environments Types of Government: Political Systems Types of Government: Economic Systems Political Risks Privatization

Chapter Outline Indicators of Political Instability Analysis of Political Risk or Country Risk Management of Political Risk Measures to Minimize Political Risk Political Insurance

Preface The political environment that MNCs face is a complex one because they must cope with the politics of more than one nation. That complexity forces MNCs to consider the three different types of political environment: foreign, domestic, and international. Government affects almost every aspect of business life in a country.

First, national politics affect business environments directly, through changes in policies, regulations, and laws. The government in each country determines which industries will receive protection in the country and which will face open competition. The government determines labor regulations and property laws. It determines fiscal and monetary policies, which then affect investment and returns.

Second, the political stability and mood in a country affect the actions a government will take—actions that may have an important impact on the viability of doing business in the country. A political movement may change prevailing attitudes toward foreign corporations and result in new regulations. An economic shift may influence the government’s willingness to endure the hardships of an austerity program.

Types of Governments: Political Systems Absolutist (closed system) - dictatorships - absolute monarchies - communist countries Democracy (open system) parliamentary systems multiparty systems

Political Systems One way to classify governments is to consider them as either parliamentary (open) or absolutist (closed). Parliamentary governments consult with citizens from time to time for the purpose of learning about opinions and preferences. Government policies are thus intended to reflect the desire of the majority segment of a society. Most industrialized nations and all democratic nations may be classified as parliamentary. At the other end of the spectrum are absolutist governments, which include monarchies and dictatorships.

Political Systems Dictatorial systems, monarchies, and oligarchies may be able to provide great stability for a country, especially one with a relatively closed society, which exists in many communist countries and Arab nations. If a country’s ruler and military are strong, any instability that may occur can be kept under control. The problem, however, is that such systems frequently exist in a divided society where dissident groups are waiting for an opportunity to challenge the regime. When a ruler dies suddenly, the risk of widespread

Four types of governments: two-party, multiparty, single-party, and dominated one-party. In a two-party system, there are typically two strong parties that take turns controlling the government, although other parties are allowed. In a multi-party system, there are several political parties, none of which is strong enough to gain control of the government. In a single-party system, there may be several parties, but one party is so dominant that there is little opportunity for others to elect representatives to govern the country. In a dominated one-party system, the dominant party does not allow any opposition, resulting in no alternative for the people. In contrast, a single party system does allow some opposition party.

Economic Systems Economic systems provide another basis for classification of governments. These systems serve to explain whether businesses are privately owned or government owned, or whether there is a combination of private and government ownership. Basically, three systems may be identified: communism, socialism, and capitalism. Based on the degree of government control of business activity, the various economic systems can be placed along a continuum, with communism at one end and capitalism at another.

Types of Governments: Economic Systems government interference vs. market orientation public ownership vs. private ownership Communism Socialism Capitalism - Managerial Capitalism - Personal Capitalism - Cooperative Capitalism - Frontier Capitalism

Communism, Capitalism, Socialism - A movement toward communism is accompanied by an increase in government interference and more control of factors of production. - A movement toward capitalism is accompanied by an increase in private ownership. - The degree of government control that occurs under socialism is somewhat less than under communism. A socialist government owns and operates the basic, major industries but leaves small businesses to private ownership.

Capitalism forms “managerial capitalism” in the USA, where managers with little ownership ran companies and competed fiercely for markets and products. In Britain, “personal capitalism” took place as owners managed their companies. In Germany, it was “cooperative capitalism”; professional managers were in charge, and companies were urged to share markets and profits among themselves. “frontier capitalism” involves communist or socialist countries are essentially at a new frontier as they experiment with capitalism. (e.g. China, Vietnam, CIS, Cambodia )

A contrast between North Korea and South Korea is quite striking A contrast between North Korea and South Korea is quite striking. While North Korea’s economy has contracted, South Korea’s economy has been booming. South Korea’s GDP of $931 billion dwarfs North Korea’s GDP of $22 billion. North Korea’s exports of $842 million are no match for South Korea’s exports of $162.6 billion. It should be noted that North Korea is much better endowed than its southern counterpart in terms of natural resources.

Political Risks Confiscation Expropriation Nationalization Domestication and Privatization Terrorism and Kidnapping

Confiscation is the process of a government’s taking ownership of a property without compensation. Expropriation differs somewhat from confiscation in that there is some compensation, though not necessarily just compensation. After property has been confiscated or expropriated, it can be either nationalized or domesticated. Nationalization involves government ownership, and it is the government that operates the business being taken over. domestication, foreign companies relinquish control and ownership, either completely or partially, to the nationals. The result is that private entities are allowed to operate the confiscated or expropriated property.

Measures to Minimize Political Risks Stimulation of the Local Economy Employment of Nationals Sharing Ownership Being Civic Minded Political Neutrality

Measures to Minimize Political Risks Observation of Political Mood and Reduction of Exposure Political Insurance Other Measures