Chapter 4
Political Environment
Chapter Outline
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Multiplicity of Political Environments
Types of Government: Political Systems
Types of Government: Economic Systems
Political Risks
Privatization
Chapter Outline
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Indicators of Political Instability
Analysis of Political Risk or Country Risk
Management of Political Risk
Measures to Minimize Political Risk
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Political Insurance
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Preface
The political environment that MNCs face is a
complex one because they must cope with the
politics of more than one nation. That complexity
forces MNCs to consider the three different types
of political environment: foreign, domestic, and
international. Government affects almost every
aspect of business life in a country.
First, national politics affect business
environments directly, through changes in
policies, regulations, and laws. The government
in each country determines which industries will
receive protection in the country and which will
face open competition. The government
determines labor regulations and property laws.
It determines fiscal and monetary policies, which
then affect investment and returns.
Second, the political stability and mood in a
country affect the actions a government will
take—actions that may have an important impact
on the viability of doing business in the country.
A political movement may change prevailing
attitudes toward foreign corporations and result
in new regulations. An economic shift may
influence the government’s willingness to endure
the hardships of an austerity program.
Types of Governments:
Political Systems
Absolutist (closed system)
- dictatorships
- absolute monarchies
- communist countries
 Democracy (open system)
- parliamentary systems
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multiparty systems
Political Systems
One way to classify governments is to consider them
as either parliamentary (open) or absolutist (closed).
Parliamentary governments consult with citizens from time
to time for the purpose of learning about opinions and
preferences. Government policies are thus intended to
reflect the desire of the majority segment of a society. Most
industrialized nations and all democratic nations may be
classified as parliamentary. At the other end of the
spectrum are absolutist governments, which include
monarchies and dictatorships.
Political Systems
Dictatorial systems, monarchies, and oligarchies
may be able to provide great stability for a country,
especially one with a relatively closed society, which
exists in many communist countries and Arab nations. If a
country’s ruler and military are strong, any instability that
may occur can be kept under control. The problem,
however, is that such systems frequently exist in a
divided society where dissident groups are waiting for an
opportunity to challenge the regime. When a ruler dies
suddenly, the risk of widespread
Four types of governments: two-party, multiparty,
single-party, and dominated one-party.
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In a two-party system, there are typically two strong parties
that take turns controlling the government, although other
parties are allowed.
In a multi-party system, there are several political parties, none
of which is strong enough to gain control of the government.
In a single-party system, there may be several parties, but one
party is so dominant that there is little opportunity for others to
elect representatives to govern the country.
In a dominated one-party system, the dominant party does not
allow any opposition, resulting in no alternative for the people.
In contrast, a single party system does allow some opposition
party.
Economic Systems
Economic systems provide another basis for
classification of governments. These systems serve to
explain whether businesses are privately owned or
government owned, or whether there is a combination of
private and government ownership. Basically, three
systems may be identified: communism, socialism, and
capitalism. Based on the degree of government control of
business activity, the various economic systems can be
placed along a continuum, with communism at one end
and capitalism at another.
Types of Governments:
Economic Systems
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government interference vs. market orientation
public ownership vs. private ownership
Communism
Socialism
Capitalism
Managerial Capitalism
Personal Capitalism
Cooperative Capitalism
Frontier Capitalism
Communism, Capitalism, Socialism
A movement toward communism is accompanied
by an increase in government interference and more
control of factors of production.
A movement toward capitalism is accompanied by
an increase in private ownership.
The degree of government control that occurs
under socialism is somewhat less than under
communism. A socialist government owns and operates
the basic, major industries but leaves small businesses to
private ownership.
Capitalism forms
“managerial capitalism” in the USA, where managers with
little ownership ran companies and competed fiercely for
markets and products. In Britain, “personal capitalism”
took place as owners managed their companies. In
Germany, it was “cooperative capitalism”; professional
managers were in charge, and companies were urged to
share markets and profits among themselves.
“frontier capitalism” involves communist or socialist
countries are essentially at a new frontier as they
experiment with capitalism. (e.g. China, Vietnam, CIS,
Cambodia )
A contrast between North Korea and South
Korea is quite striking. While North Korea’s
economy has contracted, South Korea’s
economy has been booming. South Korea’s GDP
of $931 billion dwarfs North Korea’s GDP of $22
billion. North Korea’s exports of $842 million are
no match for South Korea’s exports of $162.6
billion. It should be noted that North Korea is
much better endowed than its southern
counterpart in terms of natural resources.
Political Risks
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Confiscation
Expropriation
Nationalization
Domestication and Privatization
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Terrorism and Kidnapping
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Confiscation is the process of a government’s taking ownership
of a property without compensation.
Expropriation differs somewhat from confiscation in that there is
some compensation, though not necessarily just compensation.
After property has been confiscated or expropriated, it can be
either nationalized or domesticated. Nationalization involves
government ownership, and it is the government that operates
the business being taken over.
domestication, foreign companies relinquish control and
ownership, either completely or partially, to the nationals. The
result is that private entities are allowed to operate the
confiscated or expropriated property.
Measures to Minimize
Political Risks
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Stimulation of the Local Economy
Employment of Nationals
Sharing Ownership
Being Civic Minded
Political Neutrality
Measures to Minimize
Political Risks
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Observation of Political Mood and Reduction of
Exposure
Political Insurance
Other Measures