Business Administration: Factors of Political Risks in Moving Production to Developing Countries

The current stage of development of world economy in general and international trade in particular is characterized by the intensification of processes of integration, liberalization and increased openness of national economies. Many countries currently start to actively participate in the international division of labor. Export-oriented development strategy has become dominant in the overall economic strategy not only in developed countries but also countries with transitional economies, developing and newly industrialized countries.
One of the remarkable phenomena of the modern economic relations is the rapid growth in turnover of enterprises located in offshore zones. These countries usually have no military spending and have a minimum number of public officials, which allows them to reduce taxation. At the same time their income sources are limited – mostly these are the taxes from local businesses, mainly tourism, and insignificant export of agricultural products or natural resources (Ohmae 1999). Therefore, the fees for registration of offshore companies, the annual fixed charges from working organizations, and the annual license fee can make up to 80% of their budget (Hampton 1997).
At the moment, according to experts, there are about 35-40 countries in the world, which are the specialized offshore jurisdictions. Their share in the world GDP is relatively low – 1.22%, and without industrial production and agriculture, which cannot relate to offshore sector, it is reduced to 0.79%. Thus, according to some estimates, up to 50% of the modern world capital flows are served through offshore centers (Financial Stability 2000, ‘The development of new regulations’ 2010). In addition, moving production to such locations means the increased employment for them, increased skills of the workforce, the inflow of foreign capital, improved infrastructure and increased activity in the state and region (Raman & Diwan 2004).
In its most general meaning, an offshore center is all or a part of the country with an increased comfort for the business of non-residents through granting them some benefits, privileges and guarantees, the action of which does not apply to residents. Such benefits, privileges and guarantees include low or zero income tax rates, no “at source” taxes, monetary autonomy, flexible regimes for establishment of organizations and their licensing, the widespread use of trusts and other specialized financial institutions in countries of registration, high level of confidentiality for clients and their business operations (Hampton 1997).
However, countries with emerging markets form a very diverse group in terms of scale, regulation system and transparency of their financial markets. These countries are usually characterized by volatility of the market situation and high dependence on external financial flows. They are at the stage of transition from a relatively closed model (where state regulation deeply penetrates into all spheres of economic mechanism) to an open market economy model (Burnell & Randall 2008).
Therefore, one of the decisive factors in moving production to developing countries is political stability in offshore jurisdictions necessary to strengthen the confidence of foreign investors and get the guarantee of the permanence of preferential treatment for foreign customers. Further work covers the methods of analysis of political risk for investment and political factors affecting the prospects for business development in developing countries.
The essence of political risk

Financial liberalization, as a part of globalization, requires removal of barriers to cross-border capital flows in the form of restrictions on his movements and foreign currency transactions. With rapid liberalization governments attempted to solve the current economic issues, giving insufficient attention or even leaving aside the solution of fundamental problems of stable economic development. The reasons for the difficulties experienced by most countries were associated with the vulnerability of financial and corporate sectors, the weakness of state fiscal policy and the expansion of current account deficit (‘Financial stability’ 2000; Desbordes 2010).
The meaning of “political risk” is quite wide – from forecasting political stability to assessing of all non-commercial risks associated with activities in different socio-political environments. In a narrower sense it refers to the risk of financial loss as a result of the impact of adverse political factors in the country of investment.
Weston and Weaver (2007) define political risk as acts of national government, which hinder business operations, alter the terms of agreements or lead to the confiscation of property of foreign companies. According to Brink (2004), political risk means changes in terms of foreign companies’ operations arising in the political process. By definition of Althaus (2009), political risk is unforeseen circumstances arising in the political environment usually in the form of restrictions on the conduct of operations.
Verheyen, Perera, and Lu (2009) insist on the need to consider not only the internal political events in the country, but also the international political situation. Political risk can be defined as in-country and international, conflict and integration events and processes that may (or may not) lead to changes in government policies, reflected in the adverse conditions, or additional features for the firm.