international business and trade

Republic of the Philippines

President Ramon Magsaysay State University
(Formerly Ramon Magsaysay Technological University)
College of Accountancy and Business Administration
Iba, Zambales, Philippines
Tel/Fax No.: (047) 811-1683

College/Department College of Accountancy and Business Administration

Course Code AE 5
Course Title INTERNATIONAL BUSINESS AND TRADE
Semester & Academic
First Semester AY 2021-2022
Year
Author JOHN REY MERCURIO

CHAPTER V
Political and Economic Environment
OBJECTIVES
After studying this unit, you should be able to:
 Define political environment
 Explain the types of political systems
 Describe the government intervention in business
DISCUSSION:
Introduction
The critical concern Political environment has a very important
impact on every business operation no matter what its size, its area of
operation. Whether the company is domestic, national, international,
large or small political factors of the country it is located in will have an
impact on it. And the most crucial and unavoidable realities of
international business are that both host and home governments are
integral partners. Reflected in its policies and attitudes toward business

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are a governments idea of how best to promote the national interest,

considering its own resources and political philosophy.
Political Environment
- A government control’s and restricts a company’s activities by
encouraging and offering support or by discouraging and banning
or restricting its activities depending on the government. Here
steps in international law. International law recognizes the right of
nations to grant or withhold permission to do business within its
political boundaries and control its citizens when it comes to
conducting business. Thus, political environment of countries is a
critical concern for the international marketer and he should
examine the salient features of political features of global markets
they plan to enter.
Sovereignty of Nations
- From the international laws point of view a sovereign state is
independent and free from external control; enjoys full legal
equality; governs its own territory; selects its own political, social,
economic systems; and has the power to enter into agreements with
other nations. It is extension of national laws beyond a country’s
borders that much of the conflict in international business arises.
Nations can and do abridge specific aspects of their sovereign
rights in order to coexist with other countries.
Stability of Government Policies
- The most important of the political conditions that concern an
international business is the stability or instability of the prevailing
government policies. Political parties may change or get reelected
but the main concern for MNCs is the continuity of the set rules or
code of behavior regardless of the party in power. A change in the
government does not always mean change in the level of political

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risks. In Italy the political parties have changed 50 times since the
end of World War II but the business continues to go on as usual in
spite of the political turmoil.
Political Parties
- Particularly important to the marketer is the knowledge of all
philosophies of all major political parties within a country, since
anyone might become dominant and alter prevailing attitudes. In
those countries where there are two strong political parties where
usually one succeeds the other, it is important to know the
direction each of the parties is likely to take. Changes in direction a
country may take toward trade and related issues are caused not
only by political parties but also by politically strong interest
groups and factions within different political parties, which
cooperate to affect trade policies.
Types of Political Systems
The following are the types of political systems:
Democracy
- Democracy is for the people, by the people, and of the people, its
similar to participative management, in this system people are
encouraged to participate in decision making, a people’s
representative can be selected by the people through a process of
election, and the responsibility of leading the nation is kept on the
shoulders of the elected representative e.g., India.
Dictatorship
- It is also called as authoritarianism, which is quite opposite to
democracy, here the hole power is in the hands of the leader, and
people should follow the leader, all the policies related to

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economy, business etc. are governed by the leader e.g., Saudi

Arabia.
Political Risks of Global Business
Some of the political risks of global business are mentioned below:
Confiscation
- The most severe political risk is confiscation, which is seizing of
company’s assets without payment.
Expropriation
- Which requires reimbursement, for the government seized
investment.
Domestication
- Domestication occurs when host country takes steps to transfer
foreign investments to national control and ownership through
series of government decrees. A change in the government’s
attitudes, policies, economic plans and philosophies toward the
role of foreign investment is the reason behind the decision to
confiscate, expropriate or domesticate existing foreign assets.
Assessing Political Vulnerability
- Some products are more politically vulnerable than others, in that
they receive more government attention. This special attention may
result in positive or negative actions towards the company.
Politically Sensitive Products
- There are some generalizations that help to identify the tendency
for products to be politically sensitive. Products that have an effect
upon the environment exchange rates, national and economic
security, and the welfare of the people are more apt to be
politically sensitive. For products judged non-essential the risk

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would be greater, but for those thought to be making an important

contribution, encouragement and special considerations could be
available.
Good Corporate Citizenship
A company can reduce its political vulnerability by being a
corporate citizen and remembering:
1. It is a guest in the country and should act accordingly.
2. The profits are not it’s solely, the local employees and the economy of
the nation should also benefit.
3. It is not wise to try and win over new customers by totally
Americanizing them.
4. A fluency in the local language helps making sales and cementing
good public relationships.
5. It should train its executives to act appropriately in the foreign
environment.
Factors affecting Global Business
Political Risk Analysis
- There are a number of political risks which are to be faced by
international marketers. The risks, which the marketers face from
the host government, are – confiscation, expropriation,
nationalization, domestication and creeping expropriation. Such
actions are more likely to be levied against foreign investments
though local firms are not totally immune. For example, Charles
de Gaulle nationalized France’s three largest banks in 1945 and
more nationalization occurred in 1982 under the French socialists.
Indicators of Political Instability

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- In order to assess a potential marketing environment, a company

should identify and evaluate the relevant indicators of political
difficulty. The sources of political instability include social unrest,
the attitude of nationals and the policies of the host government.
Attitudes of Nationals
- An assessment of the political climate is not complete without an
investigation of the attitudes of the citizens and government of the
host country. The nationals’ attitude towards foreign enterprises
and citizens can be inhospitable. Nationals are often concerned
with foreigners’ intentions with regard to exploitation and
colonialism, and these concerns are often linked to concerns over
foreign governments’ actions that may be seen as improper. Such
attitudes may arise out of local socialist or nationalist philosophies,
which may be in conflict with policy of the company’ home
country government. The governments may come and go, but
citizens’ hostility may remain.
Policies of the Host Government
- Unlike citizens’ inherent hostility, the government’s attitude
towards foreigners is often relatively short-lived. The mood can
change either with time or change in leadership and it can change
for either the better or the worse. The impact of change in mood
can be quite dramatic especially in the short run.
- Government policy formulation can affect business operations
either internally or externally. The effect is internal when the
policy regulates the firm’s operations within the home country.
The effect is external when the policy regulates the firm’s activities
in another country.
Economic Environment

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The international marketer is fortunate in having a substantial body

of data available that charts the nature of the environment on a country-
by-country basis. Each country has national accounts data, indicating
estimates of gross national product, gross domestic product,
consumption, investment, government expenditures and price levels.
Also available on a global basis are demographic data indicating the
number of people, their distribution by age category, and rates of
population growth. National accounts and demographic data do not
exhaust the types of economic data available.
The World Economy — An Overview
- The world economy has changed profoundly since World War II.
Perhaps the most fundamental change is the emergence of
international markets; responding to new opportunities,
international competitors have steadily displaced local ones.
Concurrently, the integration of the world economy has increased
significantly. Economic integration stood at 10 per cent at the
beginning of the 20th century, today it is approximately 50 per
cent. Integration is particularly striking in two regions, the
European Union (formerly the European community) and the
North American Free Trade Area.
Economic System
- There are three types of economic systems: capitalist, socialist
and mixed. This classification is based on the dominant method of
resource allocation: market allocation, command or central plan
allocation, and mixed allocation, respectively.

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