Political factors of business success custom essays

Some experts on political risk (Desbordes 2010, Mehanna 2005, Kennedy 1987, Wilkin 2004) identify macro and microrisks, depending on the level of economic entities to which they are applicable. Macro risk is associated with the probability of political events that affect all foreign entities in the host country; microrisks include risks specific to the industry, company or even a separate project. Classification of political risks is based on the separation of events caused by any actions of government agencies during the conduct of certain public policy, or forces outside of government control. In accordance with this principle, Kennedy (1987) proposed the division of political risks at extra-legal and legal-government risks.
Extra-legal risk means any event, the source of which is outside the existing legitimate institutions of the country, like terrorism, sabotage, military coup, or revolution. Legal-government risk is a direct product of the current political process and includes events such as democratic elections, leading to a new government and changes in legislation relating to trade, labor, joint ventures, monetary policy, etc. (e.g. Macrorisk – Revolution – Changing the investment legislation; Microrisk – Terrorism – Trade Regulation changes)
Some researchers (Weaver and Weston 2007, Brink 2004) believe the current definition of the political risk is unsatisfactory due to the fact that it constitutes a political event risk. From their view point, it should focus on the dynamics of political action, from which the event occurs, because one can more accurately predict the nature of the confrontation or understand the actions of political forces than to predict the winners and losers.
Therefore, the exposure to political risks can be reduced to a number of factors: unforeseen circumstances may be caused by the actions of legitimate structures and events, caused by uncontrolled government forces. For example:
The loss of control over the activities of a company may be due to total or partial expropriation, forcible deprivation of rights of management, confiscation of property, or breaking the contract, which was caused by war, revolution, terrorism, or strike. The decrease of the expected profit could be due to the inapplicability of the “national regime”, reduced access to financial, labor and commodity markets, state control over prices, products, activities, exchange restrictions, restrictions on cash remittances, on the one and nationalist sellers and suppliers, threat of hostile factions, externally imposed financial restrictions and imposed from outside restrictions on imports and exports on the other hand (Burnell 2008; Click 2005; Vaaler 2006; Verheyen 2009).
The overall pattern of interaction of political, social and economic determinants of country risk is presented in Table 1 (Kennedy 1987).
Table 1. Correlation of factors. Risk Evaluation

Social heterogeneity refers to the number and size of various ethnic, religious and regional groups. Social stratification occurs when the above-mentioned groups coincide to a large extent with the lower or poor class, which dramatically increases political instability. The distribution of income shows a degree of inequality of economic groups in the society. The higher is the inequality rate, the higher the likelihood of political instability is (Harms 2002).
The presence of civil war or revolution in the recent history of the country is considered a possible precedent for future conflicts. The legitimacy of the ruling elite means respect for the most part the population of government regulations. The appearance of opposing tendencies, as well as the high degree of state violence against citizens (repression), increases the likelihood of political instability. The progressive land reform program is typically needed for sustainable transition from a predominantly agrarian to an industrial society.
In the classification proposed by Moran, West, and Martin (2007), internal and external sources of political and economic risk factors are distinguished. However, this division is rather conditional, because the factors of different groups can influence each other.
Internal factors
Economic:
– Size and structure of the population; economic growth and per capita income; natural increase; distribution of income;
– Size and composition of the labor force, sectoral and territorial structure of employment; productivity; migration; unemployment rate;
– Agricultural production and self-sufficiency; sectoral and territorial structure of industry and its trends; size and dynamics of the public sector; national priorities and strategic industries;
– Natural resources and economic diversification; topography and infrastructure;
– Source and structure of government revenue; sectoral and spatial distribution of costs; size and growth rates of budget deficits; rigidity of expenditure programs; dependence of regions from the central sources of income;
– Price index; level of wages; interest rates, money supply, etc.

Political:
– Ethno-linguistic, religious, or class heterogeneity; level of participation in economic and political power; immigration and emigration;
– Cultural, religious and moral values; openness and intensity of cultural ties;
– Constitutional principles and conflicts; flexibility of national institutions; role and influence of the army, churches, political parties, media, educational institutions, etc.;
– Political leaders; key figures supporting the status quo; role and influence of internal security apparatus; effects and sources of opposition;
– Strike activity; armed uprisings and terrorist acts; quantity and conditions of detention of political prisoners; level of official corruption.

External factors

Economic:
– Current account balance of foreign trade, its constituents; price elasticity of exports and import; stability of essential imports and exports; evolution of terms of trade; geographical orientation of trade;
– External debt, its absolute and relative levels; terms and conditions of repayment; debt service on import and export;
– Magnitude and relative importance of foreign investment; sectoral and geographical distribution of investment; core investors (countries and international organizations);
– Balance of payments; balance reserves; movement of capital;
– Exchange rates (official and unofficial); changes in the international conditions of borrowing;
Political:
– International agreements; state position on international issues, voting in the UN; financial, food aid; military support; preferred economic and trade relations;
– Border conflicts; external military threat; revolution in a neighboring state; refugee;
– National investment legislation; the ratio of foreign investors in the province; jurisprudence;
– Respect for human rights; opposition outside the country; involvement in terrorist acts in third countries, diplomatic and trade conflicts.

To the extent to which it is determined by political factors, the success of business in a foreign country does not depend solely on the risks that may destroy or inflict serious damage to anyone’s expectations. The major achievements in business have been achieved not only due to the ability to anticipate and avoid risks, but also the foresight and the use of political opportunities (e.g., Nathan Rothschild used information about the Battle of Waterloo for a successful operation on the London Stock Exchange).
For investors, deciding whether to make investments in a country or not, the perspective of political stability conducive to economic growth, is of the same importance as the variability of political instability, which can make the investment very unprofitable. A number of experts on political risks share the opinion that a political event does not necessarily bear the risk for business, but it can also mean new opportunities. They suggest that the term “political risk” should be understood as “the uncertainty of the environment in which all non-market forces are functioning” (Mehanna 2005). This means that predicting political risks should include not only negative changes, but also positive ones, presenting additional opportunities for business, with baseline risk being neutral in the financial analysis, implying both positive and negative deviations.