The governments formulate frameworks and rules in which business organizations are able to compete with each other. Anticipating the economic conditions, the government has to change the frameworks and rules and force the enterprises to change their strategies. Businesses, thus, strongly suffered from the state policy. The prominent areas of the state policy which influence businesses are mentioned in this article.
PART A. How might a democratic government affect business activities in a nation?
The economic policy of the government plays an important role in development and shaping the nation. Between 1945 and 1979, the government interfered with the economy by initiating state industries which were later converted into state corporations (Alesina). However, from 1975 started an era of privatization in which businesses were disposed to private shareholders for creation of more capital and competitive business environment.
The tax policy influences business costs, such as increase in corporate tax (on enterprise profit) which results in increase of costs. Thus the enterprises transfer a part of these taxes to consumers in form of higher prices, but again the bottom line would be affected. Other taxes levied are value added tax (VAT) and environmental taxes. The VAT is finally passed to the end user, but actually VAT System is included in cost for business.
Other areas of economic policies concern to interest rates. Usually slabs of interest rates are established by the government’s regulatory bodies. An increase in interest rates subsequently raises costs of borrowed capital thereby leading the consumers to reduce their expenses and ultimately it results in decline of business sales. The policy of the state expenditure also influences businesses and this policy can be advantageous or disadvantageous for the firms (Haan).
Changes in Legislation
The government regularly changes its legislation according to the need of time and amends political policies. As such, the enterprises should react to amendments in a legal field constantly.
Examples of changes in the legislation include:
I. Implementation of minimum wages which has been extended to under18.
II. Requirements for companies to serve invalids by creating ramps at workplaces.
III. Implementing more strict rules for fair competition between the domestic enterprises.
IV. Introduction of the consumer protection bill in interests of consumers to avoid unfair practices of overcharging and adhering to strict principles of price and quality
V. Introduction of the corporate tax for MNC’s operating in the host countries
PART B. What are the five main types of political risk? How might each affect international business?
The political risks ranging from the least to the most destructive are given below:
1. Systemic political risk
2. Procedural political risk
3. Distributive political risk
4. Catastrophic political risk
There are five types of political risks and each will be illustrated by way of examples of how they influence businesses while expanding their business at the international level:
1. Conflict and Violence: Conflicts within the country certainly discourage inflow of investments and FDI from the international organizations in the country. Such violent infringement can restrict ability of the company to manufacture and market the production, to employ talented employees and also to receive raw materials and resources in the host country. Not only life of employees and managers are at the risk while operating in this country; physical assets of businesses can be destroyed, i.e. office buildings, industrial equipment. For example, ExxonMobil was compelled to suspend manufacture of LNG (liquefied natural gas) in the province of Aceh in Indonesia as they were constantly attacked by a separatist group of insurgents (Henisz).
2. Terrorism and abductions: Terrorist attacks and abductions of innocent victims are used for political motives. Let’s consider 9/11, for example, on September 11th, 2001, the day when two passenger planes crashed into World Trade Center in NY, and also one additional plane ran into the Pentagon Washington DC; as a result of this barbaric act of terrorism, the financial and commodity markets suffered a loss of an estimated $1.4 trillion in market value over the period of five days (Henisz).
3. Property Confiscations: Property confiscations can occur in one of the three fast actions:
(1) Confiscation: By means of forceful compelling the company to transfer its assets to the government of the country without indemnification of affected business
(2) Expropriation: It is when the affected company is compensated, when the country government allocates business means
(3) Nationalization: One of the most widespread ways to capture the property in the 20th century is when the government overtakes the industry
(4) Policy Changes: Changes in the policies in many respects depend on the ideology of ruling political party which eradicates competition with the goods produced in domestic market, sometimes under the influence of groups of special interests and due to civil and social unrest.
(5) Local Content Requirements: When the law of the host country specifies that the certain quantity of the goods or services should be produced for the home market. The nation employs this policy so that international companies can promote local businesses and helps them to eradicate poverty and unemployment. Local laws drive international firms to price their production higher than local costs and sometimes to lower the quantity of the imported production in the comparison with the domestic produced goods (Haan).
As long as the country is democratic, researches have shown that businesses have progressed rapidly. Sometimes in the interest of nation the government comes out with new amendments and policies but its intention is to help the businesses for growth of economy. All political risks set forth cause serious concerns to those who are looking for international market and deter direct foreign investments which have become a prime tool in growth of the economy. There are mechanisms, which can be used to protect from negative influence of certain political risks. Such mechanisms can be stated in the contingency plan to reduce risk and uncertainty.