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Importance Of Understanding Political Risk Of Host Countries – Essay

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Published: Wed, 12 Apr 2017

The term international business is defined as any organization sells or buys services or products outside of its national boundary. The success of international business is depend on many aspects like balanced globalization, organization strategies etc. Any organization which is going to operate its business globally or outside of its national boundary needs to evaluate or focus on countries legal systems, exchange markets, political risks, competiton and cultural differences. For the success of any international business the organizations have to keep an eye on the requirements of today’s international business environment. Any organization which operates its business in overseas or global market, considers the processes, political risks and political structure of market.

Any organization which is looking to invest in any other country or to operate its business, political structure of target market is very important. “Political factor is the third factor that is influencing the foreign investments”.( Ricky W. Griffin, International business, 2005, page 459). The decisions and business strategies of investor is majorly affected by the political structure of any host country. The success of any organization which is operating its business globally is depends on how well it adopts the political structure of its host country. There can be many types of risks like financial, competitive, operational, economic and political risks which an organization has to face while doing international business. The development of the international business is highly influenced by the national political systems on countries (wall, Minocha, Rees, 2010). The national political systems of stable countries need to be considered by the overseas countries to operate their business. The definition of a stable country is” the country which is honest and efficient for ensuring the participation of the international environment and economic development is its primary factor” (awathappa,2008). The political power is combined in stable countries, so the overseas countries have to face risk of political issues. The investing organizations are always happy to make their investments in stable countries because they provide stability to them which is beneficial for effective investments. The instable countries may create many risks for the investors and may lead to failure of investments of any organization. So political stability of a host country is very important in to the success of any business expansion or investments.

Political risks assessment is very important for any foreign organization who wants to make investments internationally. Political risks are the problems which can be faced by the foreign investors due to the changes than can be happen in the host country’s government policies, rules, laws and regulations. These risks can lead to lose of investment which are made by foreign organizations is political risks are not been assessed properly. (Barnett, 2008). There are two types of political risks micro and macro. Macro risks are faced by foreign organizations of any host country and on the other hand micro risks are faced by internal organizations of host country.

There can be many types of internal risks which can be faced by the organizations. These risks include the change in government. In the democratic type of government the government can be changed by election process so this current government could be removed from the charge which can affect the organizations in this host country. The rules and laws made by the previous government can be erased or changed by the other party so this can affect the foreign organizations. Corruption can be another type of internal risks. Corruption refers to the improper use of powers by the government or government parties and members. The corrupt government use public money or funds for their personal use rather than for the countries progress. So foreign organizations have to make plans for how to survive in these conditions. Coalition type of government is also a risk for foreign companies for investments. This type of situation is happened in a country when any party does not get enough seats to make government then two parties make combined government on the basis of some agreements. For instance India has coalition government system. The problem which can be faced by foreign organizations in this type of government is there are not sure policies mentioned for long term. So it can affect their long term plans and objectives. Some countries have weak elements in society. These elements play an important role in the political structure and progress. The elements of society show how much powerful political structure a country has. So foreign organization has to be conscious about these elements and, to be evaluated properly before investments. Foreign organizations can do survey in the host country to monitor the nature of society. For instance, India has many problems in society like religious fights and social issues which can affect the business negatively. (Morrison, 2009). Another political risk in any host country is contradictory problems in the government. This problem happens in any country when one party does not comply with other party. This problem can affect the policies and working process of government. It makes difficult for the government to make decisions. So organizations have to keep in mind this problem before any investments. Dedicated government is an important feature of any country. The dedication of government is very necessary. If any government does not show any dedication on the policies and laws then the government cannot be strong. The government should be strong with their policies to make a strong political structure of any country. So any country’s success in business is depends on its strong dedication and political structure. Weak or low dedication can make difficult for the foreign organization to make investments in these countries. Exchange availability is a political risk which comes in front of foreign organizations while developing business in host country. It is also known as transfer risk. This problem occurs when the government of host country fails to transfer the buyer’s local currency into U.S dollars.(Steven E. Hendrix,1991)

The organization’s foreign operations are generally affected by the different types of political structures of the different host countries. There are two types of political systems according to Morrison (2009), which are democratic government system and authoritarian government system. In democratic government every person has their own equal rights. In this system people are free to choose the government and effective policies according to their thinking. For example in United Kingdom people choose the government. On the other hand in authoritarian system only one person or a selective group of people comes into action other people cannot make their decisions independently. In democratic system all people of a country are involved they have all the rights to vote for anyone. So political structure of a country contains policies of government, laws, entrance groups and trade unions. Investors or organizations are influenced by these political structures to make their investments or international business. International business is highly affected by political structure. India has a democratic structure and it is supported by its government so any investor organization can easily set up its business in India because they can get support by the government laws and policies. For example now a day’s media, advertisement or commercialization are the main sources for introduce any new product in the market or to increase sales of the organization so if host country gives the permission to do these things then investors feel happy to make their investments. Laws of any country affect the international business. Political structure of the country supports the international business. The most effective part of the international business is stable political structure. Stability of political structure is very important for international business. The investors or the foreign organizations prefer investments in countries which provide stability in political system, which helps them to achieve their future objectives. Any organization has to analyze political risks before investments in stable country as well for the effective investment decisions. For example, Tesco is a British organization and suppose it wants to develop its business in India. Tesco is a well established name in supermarkets in United Kingdom. India has many supermarkets like Apna bazaar, reliance fresh, Spencer, style plus etc. So Tesco has to make plans and strategies to develop its business in new market. It would be a challenge for Tesco to develop its business in India because Indian government is not fully stable; it has instable government in some parts so Tesco has to deal with many political risks. Tesco has to evaluate the economic environment and political structure of India. To enter into the Indian market Tesco needs to evaluate the GDP (gross direct profit) of India whether it is strong or not. Then Tesco will be able to develop business in Indian market effectively. Tesco can face the risk of low profitability if they do not evaluate GDP properly. India is a centralized government. In India a single party cannot hold the majority of election so more than one party make a combine government (Morrison, 2009). In these circumstances organization can make own decisions about any particular situation so in these situations foreign organizations have to adopt different principles for different business situations. Sometimes in India opposition parties do not agree with each other’s rule and principles and do not support each other. For instance some parties do not agree with new technology and techniques so it can affect foreign organization’s profits. In contrast some parties want to get new techniques in the country so investing companies have to make their strategies and plans according to the host country’s political situations.

Tesco is a British organization so it should be aware about the contradictory issues of Indian government. Because India is a combined economy so main power is used by prime minister of India. The opposition party and ruling party relates the political structure into the terms of international business. Every opposition party has its own principle and the Indian government got to deal with it. So the government can affect the prices according to parties.

Before starting business development in India Tesco needs to keep in mind India’s relations with other countries. India does not have good relations with countries like Pakistan and they have faced terrorist attack in December 2001 at parliament. So Tesco has to be conscious about the security issues of India. The situation of terrorism or war can shut the business or can done damages to the business of the foreign organization so Tesco needs insurance policy from India because of the security risk. So Tesco can use safe areas of India initially for its business establishment. So Tesco needs security agreements from Indian government. Foreign policies of any host country are very important for developing any kind of business in that country. How a host country is managing its force towards its enemy country’s actions. So Tesco has to look at the approach taken by India to deal countries like Pakistan.

All different countries has different labour laws and policies like laws for minimum wages, minimum age to work, age of retirement, benefits while working or after retirement. Any foreign organization has to consider these laws before developing any business into host country otherwise it can lead to shutting down of its business. So tesco needs to consider labour acts of india like The Payment of Wages Act, 1936, The Payment of Bonus Act, 1965 (http://labour.nic.in/act/welcome.html) etc before developing its business.

Repatriation is another aspect of political risk. Any foreign organization needs major attention before making investments in host country. Repatriation means the profit gain by the foreign organization by doing the business in host country and then sends this gained profit to the home country. In many countries, governments apply much high rate of interest on repatriated profits than general profits. So the foreign organizations can suffer from the reduction in profits. (Rugman and Collinson, 2006). So tesco has to look at these interest rates and make their strategies according to these policies of government.

Some countries depend on other countries for getting natural resources. So they have to maintain good relations with these countries. So the prices of these natural resources depend on the costs which the countries have to pay for getting natural resources. So it depends on the government policies that how well they maintain these costs by making appropriate policies and ways. So Tesco needs to evaluate these factors of the host country. For instance India get diesel and petrol from other countries so the prices of petrol and diesel depends on the countries from where India importing these resources and how well India manage it.

Inflation is another type of political risk which has to be keeping in mind by any organization to set its business in India. India is still suffering from high prices which have climbed the rate of eight since last march. Analysts are expecting the raise in price rates up to nine in the coming time. (http://ibnlive.in.com/news/key-political-risks-to-watch-in-india/147715-37-64.html). So Tesco has to watch the responses by central banks and officials, industrial outputs, government data, protests against high prices by public etc.

India has regulatory risks as well. Foreign organizations and domestic organizations are facing many problems in India at present time. The government of India is not reliable with its policies. For instance the cancellation of many telecom licences and all the telecom organizations are defending their licenses which is a critical issue in India. So Tesco must watch these issues before the business development in India. Tesco has to keep an eye on statement and licence agreement by telecom organization and decisions and proceeding by the court on this problem which can help them to make strategies and organization policies to deal with these kind of problems in future.(http://tribune.com.pk/story/125735/key-political-risks-to-watch-in-india-2/). Another political risk which Tesco can face in India is authoritarian system of India. Sometimes the host counties do not give freedom or allow the foreign organizations to perform their operations due to the economic freedom. The host countries can make the laws or policies which are not suitable for the foreign organization’s operations. For instance, in India the government cancelled the telecom organizations licences so Tesco has the fear of these kind of issues like cancellation of licence and seize of the property.

India has some corruption issues. The people who has power can misuse it for their personal growth.(morison,2009). In India to gain the favour of parties who has power in their hands organizations use money. So Tesco has to be conscious about this issue. Tesco needs to make their policies according to this situation because sometimes they have to use money to gain the favour from the government for some tasks. These extra expenses can affect their productivity, profitability, stability of the organization and it can be lead to failure of future plans if it is not been considered initially by the company. In India sometimes organizations give preference to money rather than skills so they can employ people for money which does not happen in British companies so Tesco needs to think about employment procedures and policies of India.” Prime Minister Manmohan Singh’s administration has been weakened by a series of alleged corruption scandals and soaring food and fuel prices are also undermining popular support for his Congress party. Decision making has been paralysed for months. The opposition party is demanding a cross-party investigation of the corruption allegations before it will let India’s parliament start work again. So in India state elections are coming up and if congress party got beaten by other party then laws will be declared according to the new party and it can cause problems for the foreign investors.

In India the foreign companies got to deal with transformation of funds. The funds can be affected by the changes in political laws or policies which can affect the efficiency of the foreign organization. So Tesco can only manage its funds according to the government of India. So Tesco got to consider initial aids against changing political environment of India. India has authorities which can be changed by government parties. For instance, “India’s tax authorities have ordered Vodafone to pay $2.6bn in capital gains taxes (CGT) on its purchase of a stake in local phone company Hutchison Essar in 2007. Vodafone has said it should not pay tax in India on the deal, but a local judge ruled in September that the mobile phone giant should have paid CGT because the transfer of Indian assets was involved.” So Tesco should need to plan according to these authorities.

From the all above it can be concluded that the political structure of any host country is very important for any foreign organization to operate or develop any business. So it is very necessary to evaluate all the political risks of any host country to make effective and successful investments. Political risks cannot be avoided because any host country can make any decision at any time. Stability of any host country is also very important for making effective investments. The foreign organizations can easily be attracted by the host country that has stable political structure. So the assessment of political risks plays very vital role in the success of any business investments made by foreign organizations. All the political risks are very critical to evaluate so foreign organizations have to make strategies after accessing the political structure and risks of host country to survive in the future and to make their objectives possible. The foreign organizations have to evaluate the past political risks, present political risks and how these risks can affect their business effectiveness in the future. This evaluation can be done by the foreign organizations by doing deep research on the host country’s political structure. I have used the Tesco organization as an example to understand how much importance the evaluation of political risks has in international business. So from the above discussion it can be said without accessing the political risks of host country any foreign organization cannot survive in this country and cannot achieve its future objectives.


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