International Business Analysis: Political Factors

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Questions and Answers

What does ownership risk primarily involve?

Interference from government in company management decisions

Obstruction of company operations by local regulations

Damage or loss of a business's assets and life during civil unrest (correct)

Challenges in transferring profits back to the home country

Which category of political risk is associated with restrictions on transferring funds to the home country?

Market risk

Operating risk

Ownership risk

Transfer risk (correct)

What constitutes operating risk for firms in foreign markets?

Loss of market share due to local competition

Interference with ongoing operations of a company (correct)

Inability to recruit skilled labor

Expropriation of assets by the government

Which event could be considered an example of ownership risk?

A sudden civil war resulting in property damage Signup and view all the answers

Which of the following best describes political risk?

The potential for adverse effects due to political instability Signup and view all the answers

What is a primary reason for assessing the political factor of a country for international firms?

Political considerations form the foundation of the host country. Signup and view all the answers

Which of the following categories is NOT typically a political risk for firms in foreign markets?

Local economic downturns Signup and view all the answers

Why is the political factor referred to as the 'first' alphabet in the PESTEL model?

It precedes the analysis of all other factors. Signup and view all the answers

What aspect does political strength or influence primarily affect?

Operational control and market viability Signup and view all the answers

What could be a consequence of local governmental intervention on international firms?

Requirement to hire local managers Signup and view all the answers

What is a potential risk associated with foreign buyers in terms of payment?

Risk of not receiving payment Signup and view all the answers

Which factor does NOT contribute to the political environment affecting foreign markets?

Government financial incentives Signup and view all the answers

What can frequent changes in government lead to for businesses?

Unpredictable business environment Signup and view all the answers

Which indicator is used to measure political instability?

Political Instability Ranking Signup and view all the answers

What effect do protests and strikes have on business activities?

They can disrupt business operations Signup and view all the answers

How does social stability influence foreign business operations?

Reduces risks associated with unforeseen events Signup and view all the answers

What is an example of a country with significant government stability?

Singapore Signup and view all the answers

Which factor is NOT included in assessing the political environment?

Economic growth rate Signup and view all the answers

What does the Political Stability & Absence of Violence Indicator measure?

Likelihood of violence and instability in governance Signup and view all the answers

How can political-induced riots affect foreign businesses?

They can disrupt normal business operations Signup and view all the answers

Study Notes

International Business Analysis - Country Analysis using PESTEL Model: Political & Legal Factors

Learning Objectives: At the end of this lecture, learners will be able to:
- Explain why assessing the political factor of a country is important for international firms.
- Identify and describe different categories of political risks in foreign markets.
- Evaluate the political factor in a foreign market and analyze its impact through various sub-factors.

Why Assess Political Factors?

Political factors are crucial for analyzing a foreign market before other factors.
Political considerations form the foundation of a foreign country's economic, social, technological, and environmental policies.
Political strength/influence is vital in determining operations and viability in a foreign market.
Political factors are the first element considered in a PESTEL analysis.
The importance of the political factor can vary depending on the company, the product/service offered, and other variables.

Reasons for Assessing Political Factors

Companies often want control over their operations, which may involve considering the political environment.
Local governments may require firms to hire local managers.
Governments might impose restrictions on exported goods.
Labor laws can influence necessary benefits, beyond hourly wages.
Customer perceptions of quality can be impacted by the political environment.
Maintaining relationships with key clients who are expanding overseas is important.
Monitoring competitors for potential opportunities in foreign markets is important.

What is Political Risk?

Political risk is the possibility of unwanted consequences arising from political activities and events within a market.
These events can affect profitability and other business goals of international firms.
Ownership Risk: Risks related to property and life of employees, such as loss or damage in terrorist attacks or war situations.
Operating Risk: Risks in the ongoing operations due to interference, such as disruptions caused by protests or social unrest.
Transfer Risk: Risks in transferring funds back to the home country, like restrictions due to sanctions or political issues.

Ownership Risk Examples

The example of Ms. Lo Hwei Yen, a Singaporean lawyer killed in the 2011 Mumbai terrorist attacks.

Operating Risk Examples

The example of Lotte supermarkets in China facing a 80% closure due to the THAAD missile defense system.
The example of the 2019 Hong Kong protests obstructing traffic and damaging properties.

Transfer Risk Examples

The example of international sanctions and restrictions on payments imposed on some countries (e.g., Iran, North Korea).

Evaluate the State of Political Factors

Evaluate the overall political state of the foreign market.
Analyze the impact by assessing sub-factors like:
- Host government stability.
- Social stability (e.g., protests, strikes, political-induced riots, domestic & international terrorism).
- Relationship between governments (host, home, neighboring, trading partners).
- Legal environment (government intervention in content availability, legal system strength).

Stability of Host Government

Assess the ability of the host government to maintain power and stability over time.
Governments with frequent changes in policies create uncertainty for businesses.
Use indicators, such as political instability rankings (from the Institute for Economics and Peace) and measuring political stability and absence of violence (from the World Bank).

Analyze social expressions (e.g., protests, strikes) that may impact business operations.
Include political-induced riots, labor disputes, and domestic/international terrorism.

Relationship Between Governments

Evaluate the relationship between the host country, the home country, surrounding countries, and important trading partners.
Assess the possibility of foreign invasion/military conflicts or tensions in neighbouring countries.
Consider the impact of illegal immigration and refugee inflows on the stability of the host country.

Legal Environment

Evaluate the legal system in the host country.
Consider factors like the strength of the courts, protection of property rights, clarity and consistency of regulations, and presence of corruption.
Utilize public information on legal systems, such as the Press Freedom Index and Reporters Without Borders' reporting. Also, use data on the strength of judiciary systems, international property rights, and corruption perception index.

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Description

This quiz focuses on analyzing political and legal factors within the PESTEL model for international business. Learners will understand the significance of evaluating political risks and their impact on foreign markets. Test your knowledge on how these factors influence operations and decision-making in international settings.