Chapter 9: Political & Economic Factors Affecting International Business
9-1 THE POLITICAL PROCESS: GOVERNMENT’S ROLE IN
INTERNATIONAL TRADE
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All governments play a part in international trade. Canada’s government seeks
to promote Canadian business in other countries and to lessen the risk for
foreign companies. They:
 Establish import and export policies
 Develop trade policies and regulations
 Assist Canadian exporters succeed
 Match potential Canadian exports with international clients
 Maintain and improve relations with other nations
 Assist Canadian companies adjust the changing international market
 Foster innovation and human resource development
In most countries Canada has an embassy, high commission or trade consulate
and is run by the ambassador or trade commissioner. They promote and
encourage safe and friendly trade. They establish and manage relationships,
look after our interests and assist Canadians living there. They help coordinate
work permits and visas.
Political Risk
All business activity presents risks that must be managed to be successful and
make a profit.
Political risk may mean investors lose money. Losses can be financial, time
delays, technical breakdowns, loss or reputation, or loss of market share.
Political risk analysis looks for the causes of risk and predicts the effect it would
have on investment in that country. Awareness is the first step. Risk
management requires assessing potential political situation. The assessment is
factored into business decisions for that country.
Political risk occurs when government policies threaten the business
environment. Economic risks include policies and controls to affect price and
currency rate. Policies may change at anytime.
Businesses may walk away from opportunities because of the risk. They may
minimize the risk by taking out insurance, balance it with more secure projects or
build in higher prices for products in the country.
Types of Political Systems
Governments are responsible for passing and enforcing the laws of the country.
Most countries have a democratic model. The general population has the right to
vote in free elections. Individuals may own property and run businesses and
have free press and free speech. Most have a market or capitalist economy.
Totalitarian systems (North Korea, Cuba, Myanmar) centralize power and often
use military control. Governments are single party or a dictatorship. Citizens
have little say in the governing. Most have a command economy.
In reality most countries have a mixed system of government. Most countries
also have a mixed economy, having elements of both market and command
economies.
Recent political events have changed Russia (formerly Communist) and China
(still communist) and have created more open markets and trade. Even
Canada’s trade with Communist Cuba has increased. Doing business with
countries in political transition is risky because of the instability of political,
economic and social institutions.
Political Interdependence
Recent greater interdependence caused pressure for countries to change their
political, economic and cultural practices. For example, South Africa faced
economic isolation from the world because of apartheid, but eventually gave in to
international pressure.
Canada prefers to deal with democratic countries, but important opportunities
exist in non-democratic countries (China). Sometimes a strong authoritarian
government provides stability that a shaky democratic government could not.
When a trade war occurs countries will act aggressively in international markets
and other areas to promote their own trading interests. In 2001 Canada banned
Brazilian beef officially because of mad cow disease, but it was suspected it was
because of the sale and subsidy of Canadian and Brazilian-made aircraft.
Grocery stores and transportation companies lost business in the crossfire.
Interdependence also happens because of economic imperialism. A lessdeveloped country can address the needs for a developed country by providing
raw materials and markets.
In “Coca-Colonization” powerful multinationals can exert considerable economic
and cultural power over local people. Today, pressure groups and populist
movements demonstrate against this and protest against the WTO.