International Business Analysis: Political Factors

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).

Social Stability

• 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.

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.