INTERNATIONAL BUSINESS

According to Peter Drucker “ Even within transnational economic units,

national politics still overrule economic rationality”

E.g.: A redundant plant in Belgium cannot shift the work to a France plant of the
same company only thirty miles away, but on the other side of the national border.

The political environment and the economic policy environment are

intricately intertwined.

Major economic policy changes often have political underpinnings.

Important economic policies are indeed often political decisions.

They include the following:
 Industrial policy
 Policy towards foreign capitol and technology
 Fiscal policy
 Foreign trade policy
A multinational corporation (MNC) or transnational corporation (TNC), also called
multinational enterprise (MNE), is a corporation or an enterprise that manages
production or delivers services in more than one country. It can also be referred as an
international corporation.
Economic Systems
Economic Systems are distinguished on the basis of the extend of government
participation in the economy.

At the one end, there are the free market economies or the capitalist economies
and at the other are the centrally planed economies or communist countries.
In between these two are the mixed economies.

Many political decisions have serious economic and business implications.

For E.g. Prohibition of alcohol is a political decision- but it affects the alcohol
and related industries.

Similarly, whether to allow foreign investment in an industry or the limit of

foreign equity are often political decisions.

The economic system and policy are very important external constrains
on business.
The rules and regulations created by the politicians, have significant
influence on the cost of running a business and the way it can market
products and services – for example in India there are severe regulations
about advertising for alcohol and tobacco

A free market is a market in which there is no economic intervention and

regulation by the state, except to enforce private contracts and the
ownership of property. E.g.. Japan, Australia, Canada…

Planned economy is an economic system in which the state directs the

economy. It is an economic system in which the central government controls
industry such that it makes major decisions regarding the production and
distribution of goods and services. The consumption pattern here is dictated
by the state. E.g.. China, Czechoslovakia, Hungary, Poland, Soviet Union…

Mixed economy is a economy where both the public and the private sector
co-exists. The extend of state participation various widely between the
mixed economies. E.g.. India, Turkey, Syria…
The freedom of private enterprise is the greatest in the free market
economy, which is characterized by the following assumptions.

• The factor of production are privately owned , and production

occur at the initiative of the private enterprise.

• Income is received from the sales of the services of the factory of

production and from the profits of the private enterprise.

• Members of the free economy have freedom of choice insofar as

consumptions , occupations , savings and investment are
concerned.

• It is not planned, controlled or regulated by the government. The

government satisfies community or collective wants, but does not
compete with private firms.
Trends in political philosophies
Until the political and economic changes ushered in the late 1980s and in
the early 1990s in the Eastern Europe and erstwhile USSR, these countries
were a separate block with common characteristics.

Private enterprises were very limited and state trading, particularly counter
trading, was the rule.

There were lot of restrictions on imports and foreign business.

In the past , the public sector was assigned a very important role in many non-
communist, particularly developing countries too.

For E.g.. in India before the policy changes of 1991, 17 of the most important
industries were exclusively reserved for the public sector. It was also to play a
leading role in another 12 important industries.

Thus the industrial policy of India limited the private enterprises.

Even in areas where foreign capitals were allowed , there was ceiling on the
foreign equity participation. E.g.. Coca-Cola.
Now the situation is not the same in most of the countries.

Privatization has progressed in an amazing speed.

More than 8500 SOEs in over 80 countries are privatized in the 12 Years ending
in 1991 and the trend continues.

The developing countries are in a competition to woo foreign capital and

technology.

Although the direction of government policies across the world appears to be

broadly one of convergence, there are lot of differences in the restriction and
regulation of the business. E.g..Pepsi Co.

Hostilities between some countries affect business of firms in the third

countries. For E.g.. Arab nations, did not do business with firms having
dealings with Israel. Third county firm who wanted to do business with them
has to produce an Israel boycott certificate.

Hostility (also called inimicality) is a form of angry internal rejection or denial in

psychology.
Coalition governments of different political parties are becoming common.
They are usually parties with different economic ideologies, making the
scenario complex.

A coalition government is one in which several political parties must cooperate

in order to run a country or region. These types of governments are often times
considered quite weak because there is no majority party. In such cases, the
only way policy gets approved is by making concessions in order to form a
coalition and
gain power.

Political factors can have a dramatic effect on international marketing. For

E.g.. China has successfully pressured Yahoo! and other internet services into
acquiescing in censorship of Internet access.
The political environment
Checks can be made on the political system as to its ideology, nationalism,
stability and international relations.

Ideology:
 A country's ideological leaning may be capitalism, socialism, a mixture or
other form. In the last years remarkable changes have been taking place in the
ideologies of many countries. The most dramatic example has been the
collapse of the communist USSR and Eastern Europe and its replacement with
market led policies and ideologies. Similarly, many African countries are
abandoning their centrist leanings in favour of market led economies, for
example, Zimbabwe and Tanzania.

Nationalism: 
Much was said about nationalism in the previous section. Whilst, primarily a
phenomenon of the developing countries, Yugoslavia has shown it is not
entirely so. Nationalism can lead to expropriation of foreign held assets.
Stability: 
Changes in regime, violence and cultural divisions based on language or other
factors can lead to a very uncertain environment in which to conduct business.
The current uncertainty in Liberia and Rwanda, the violence of Somalia and
Yugoslavia increase the risk and diminish the confidence of doing business in
these countries.International relations: In general international relations
have improved over thelast twenty years. The development of GATT, NATO and
the EU have gone a long way to reduce the element of "foreigness".

Expropriation:
Expropriation is an extreme form of political action. It may occur for a number
of reasons, including the desire to retain national assets, as a "hostage"
situation in international disputes, for example the seizure of Union Carbide's
assets after the Bhopal disaster in India. Other government activity, which
affects capital investment includes joint venturing insistence and repatriation
of funds. "Partnering" remains widespread (inward investment in tandem with
a domestic company) as does restrictions on repatriation of funds. In
Zimbabwe, for example, HJ Heinz, the multinational food agent,
has entered into partnership with Olivine industries. Over time, even if
initially the investment is not favourable, the Government may relax its
conditions as it sees the benefits.
Nepal’s business environment: Stained by political uncertainties
• In the past couple of years, whole world has hailed an improvement in Nepal ’s
political performance. But sustained political development is impossible without
greater economic stability.

•Political environment has a direct impact on any county’s business environment

and when it comes to underdeveloped nations such as Nepal , whose economy has
been seriously affected by the political conflict in recent years; its impact on
business has been very lethal.

•Nepal’s business environment has been seriously affected by the series of

political conflicts following one after another in the last ten years or so.

•Rationally speaking, for the business to flourish in Nepal the political change
needs to be institutionalized at the earliest possible but looking at the current
political chaos in Nepal, it seems we will remain in doldrums till the next election
of the parliament under the new constitution. Time has come for the political
parties to unite for a common minimum economic program but that looks just a
forlorn reverie judging by the ongoing political battle amongst the Nepalese
political parties.

•Finally, if peace and political stability is established in Nepal , then its business
sector too, would blossom. 
Incentives
Many countries try to reduce perceived risk by promoting inward investment
through the provision of tax breaks, free ports, enterprise zones etc., which are
not tied as in partnering. The key is to look at what the disadvantages are. If the
government mainly wishes to attract the mobile investor, or overcome say poor
local skills, one has to assess what would happen if the scheme was withdrawn
once the capital had been committed. Similarly if viability depends on incentives
rather than real return on investment, the question is, is the venture really worth it?

Assessing political vulnerability

Political vulnerability should be assessed by using a systematic checklist. Such a
checklist should include the following:
· The firm's own country's relations with other countries
· Sensitivity of the product or industry
· Size and location of operation - the bigger the more vulnerable
· Visibility of firm - is it high profile say via advertising?
· Host country's political situation
· Company behaviour - is it a good corporate citizen?
· Contribution to host country, for example, employment
· Localisation of operations
· Subsidiary dependence.Depending on the answers to these checkpoints, the
amount of risk, real or perceived, can be assessed and fed into the investment
discussion.
Political systems can be classified based on the party system in the society, and
mode in which governments attain power. Based on the way governments
come into power, they can be classified into parliamentary type or absolutist
type. The citizens elect parliamentary governments. Absolutist governments
are not elected. They come into
power by force. 

Based on the number of parties active in a country, the political

establishment can be classified into four types: single-party, two-party,
multiparty, and one-party dominated systems. In a single-party system there is
only party. This party has absolute power. In a two-party system two major
groups with differing political philosophies compete for control of the
government. In a multiparty system no single party may have the strength to
form the government.

To understand and assess the political environment of a company it is

necessary to identify and evaluate factors that can cause political instability.
Social unrest, attitudes of nationals, and policies of the host government are
some factors that can cause social instability. Political risk refers to political
actions that have a negative impact on a firm's value. Companies operating
internationally have to deal with foreign politics, domestic politics, and
international politics.
The political environment in the host country is referred to as foreign politics. A
company may face problems due to a political crisis in its parent country also. This
crisis is confined to domestic politics. Political relations between two or more
countries also affect business relations between the countries. A company can face
problems if the relations between the country in which the firm operates and the
country from which it hails are not good.

The process of establishing a cause-and-effect relationship between political factors

and business income is called political risk analysis. Some government policies that
adversely affect the business environment include non-convertibility of currency,
preventing the repatriation of profits, nationalization and inadequacy of
compensation, and domestic political violence. Political risk analysis is an ongoing
function and is not restricted to the initial investment decision. Publications of
political analysts, international rating agencies and the views of employees of the
foreign subsidiaries, are some of the sources of information on political risk.

Companies operating internationally employ different strategies to reduce their

political risk. The strategic techniques are: Integrative technique, Protective/Defensive
techniques. A company adopting the Integrative Technique tries to blend with the host
country's ethos. Companies can minimize the political risk they face by adopting
Protective Techniques. A company can locate its key operations beyond the control of
the host country government.
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