What is political risk? Evaluate the importance of political stability for conducting international business.

What is political risk? Evaluate the importance of political stability for conducting international business.

Answer:

 

Political risk

The political risks may include any changes that will impact the economic environment of the country. For example, Taxation rules, Contract Act and so on.

Political Risk may emerge from social unrest due to unevenly distributed income, competing political ideologies or ethnic groups within a nation, rise or fall of individual leaders or from international relations. In the modern world, a country’s economic prospects depend heavily on foreign investment and goodwill of the business community.

There are two types of political risks, namely macro and micro risks as explained below:

· Macro risk affects all foreign firms operating in the country equally and may include the imposition of exchange controls, special taxes, and local-content rules and so on. 

· Micro risk applies to a particular company industry or project. For example, import restrictions on specific products, compulsory breaking up of a firm into smaller parts, cancellation of contracts and so on.
Eg: Government implementing a new law to increase taxation on business establishments.
 
Political stability is important for conducting international business because political instability arises from revolution and insurgency, involvement in foreign wars, changes in government, bad international relations, falling national income, high inflation and rising foreign debt.

 
The economic environment refers to the economic conditions under which a business operates and takes into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on. 

 

Political and economic environments are often inter-related. The political environment affects the economic environments, while economic hardship may trigger political change.

Political instability may arise from revolution and insurgency, involvement in foreign wars, changes in government, bad international relations, falling national income, high inflation and rising foreign debt, resulting in the physical destruction of a firm’s assets, higher taxes, import controls and barriers on money leaving the country.