Political Forces in International Business Essay
Most critical concerns in a political environment deal with impact on every business operation and it does not matter what its size, or area of operation. Political environment will still have an impact and it matters little whether the company is international, national, or domestic. All political factors, whether domestic or international will have an impact on business activity. The crucial and unavoidable reality of the international business is that both the host and home governments are integral partners.
A government control’s and restricts activities of a company by offering and encouraging its support or by discouraging and banning or restricting the company’s activities. But as reflected in its policies and attitudes toward businesses are a government idea of how best to promote the national interest, considering its own resources and the political philosophy. The international law recognizes the rights of nations to withhold grant or permission to do any business within the political boundaries. It also strives to control its citizens when it comes to conducting businesses.
The political environments of countries are a critical concern for the international marketer and on thus, it is important to first examine the salient features of political features of global markets they plan to
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The extension of national laws beyond a country’s borders ensues in making it possible for international business conflict to arise. The nations can and usually abridge specific aspects of their sovereign rights in order to coexist with other countries. Just like the North American, Free Trade Agreement (NAFTA), the European Union and the, nations voluntarily agree to give up some of their sovereign rights so as to be able to participate with member nations for common and mutually beneficial goals.
A good example is the so-called pajama game which was discussed in global perspective is not unusual for multinational corporations. This pajama caper was a controversy which arose over a US embargo forbidding US businesses to trade with Cuba. Wal-Mart Canada was selling Cuban made pajamas in the Canadian market. When Wal-Mart officials in the US came to know about this, they ordered all offending Cuban pajamas as it as against the US law. Canada was incensed with the obtrusion of US law on Canadian citizens.
The Canadian citizen’s felt that they should be able to buy Cuban-made pajamas if and when they felt like. But Wal-Mart Canada was breaking US law if it continued to sell pajamas, and was subject to a million-dollar fine and a possible imprisonment. But then the ideal political climate for any multinational firm is to have a stable, friendly environment, but unfortunately, that is never the case. The friendliness and stability of a government in each country must be assessed as an ongoing business practice, since foreign businesses are judged by standards as variable as there are nations.
The instability and stability of the prevailing government policies that concern the international business is very important political condition. The political parties may change in time or get reelected, but the main concern is the continuity of the set rules or code of behavior regardless of the party in power. This is so because the change in the government policies does not always mean change ion the level of political risks taken. The political climate is very dynamic, thus its impacts on business.
In Europe, for example, the political parties in Italy have changed 50 times since the end of World War II, but the business continues to thrive as usual in spite of the political turmoil. As compared with India, its government policies remain hostile to foreign investments. This is to say that radical changes in policies toward foreign businesses can occur in the most stable of the governments. Some African countries are among the most unstable with seemingly unending civil wars, boundary disputes and oppressive military regimes.
One of the regions with the greatest number of questions concerning the long-term stability is Hong Kong since China gained control. But the official message is that nothing will change and thus everything is seemingly going smoothly even though the political analysts say that it is too early to predict how the business climate will change, if it will. When there is a potential for profit and given permission to operate within a country, MNCs can function under any type of government as long as there is some long-term stability and predictability. Italy composers were a great influence.
The knowledge of all philosophies of all major political parties within a country is particularly important to the marketer, since anyone might be dominant and tend to alter the prevailing attitudes. Where in some countries they have two strong political parties, which usually succeed each other, it is important to know the direction each of ten parties is likely to take. The changes in direction a country may take toward trade and other related issues may be caused not only by political parties, but also by politically strong interest groups and factions within the political parties, which cooperate to affect the trade policies.
The economic nationalism that might exist to some degree in all countries is another factor that effects international environment. Nationalism is somehow intense as far as feelings of national pride and unity, an awakening of nation’s people to take pride in their own country’ interests but this pride can take an anti-foreign business bias. The preservation of national economic anatomy is one of the central aims of economic nationalism where national interests and security are more important than international considerations.
This paper discus the possible impacts of political forces on firms, both in the international and domestic arenas. It scrutinizes the available theories on this subject matter, recognizes the gaps in the literature, and posits recommendations on how firms can counteract the political environments, especially by developing a political strategy for their businesses. 2. 0 Literature Review 2. 1 Introduction The impact of political forces on organizational business on the international and domestic arena cannot be ignored in the face of globalization.
Political forecasters have gained increasing interest in the area of political risk and possible problems that could accrue to businesses. In regard to the political climate in business, there are very important things that will guide one to understanding this. These include the influence on the government to act in particular ways as influenced either by domestic or international political forces, the acts and regulations of government owing to political activities, as well as the impact or the possible impacts of these policies and initiatives in relation to business.
Literature discusses various aspects that are connected to business. There is need to understand these aspects in depth. While, for example the government could be acting in particular manner so as to check particular issues, some may perceive it as political. Therefore, there is need to differentiate the actions that are as a result of political activity with those that are not. The government may have intentions that it may not expose, and so, real analysis cannot be carried out in regard to the information they give sometimes, while acting in particular manner.
In this literature review, the paper will delve into issues relating to political forces associated with operations of business firms and how companies respond or how they may respond. In addition, it is important to analyze various actions of the government as they may influence the business environment. As will be seen, past research has focused on these areas too. 2. 2 Political Risks in Business Past research has explored the risks that business may be involved in while doing business with the position that there is a possibility for business suffering as a result of political influence.
In particular, literature has defined political risk as that associated with losses that could occur to investors or organizations with operations in an area under particular or given political organization (Howell, 1981; cited in Bauzon, 1997). There has also been an attempt to distinguish between micro and macro political risks. According to Bauzon (1997), historically, colonial administrators have employed tactics aimed at gaining military and economic advantages, maintaining and protecting political hegemony where they had colonies.
Independence resulted to gaining of freedom from direct political controls and manipulation as a means to reducing political risks (Bauzon, 1997). The difficulty with which understanding political risk can happen has been pointed out in past researches. It has been posited that it has become more difficult to control, manage and even access political risk from a Western point of view because of the manner in which “assertiveness of the newly emergent nations of the Third World” has increased and the “demise of old-style colonialism” (Bauzon, 1997).
Loss of interest among political scientists regarding the problems affecting private organizations as they conducted business made understanding of the political risk problem more difficult. There has been attempt to bring in to literature on political risks, the positive aspects of it. Definition by Allan Willet has therefore focused on this perspective (Bauzon, 1997). Allan wanted the definition to focus on the “degree of uncertainty” of occurrence of it and not on the “degree of probability” of occurrence of it.
Thus risk may be taken as the “objective correlative of the subjective uncertainty” (Willet, 1951; cited in Bauzon, 1997). Literature regarding the definition of political risk has revealed the implication and ambiguity of the whole issue (Bauzon, 1997). It touches on a variety of aspects including the restrictions of government on remittance of profits, tax discriminations or through establishment of requirements by companies, property damage, and property expropriation by governments, enacting acts that are against corporate personnel, and contract interference by governments (Bauzon, 1997), among others.
All these must be dealt with in the exploration of the problem regarding political risks and how firms respond to the situations. The gaps relating to the literature and study of political risk in the past have been identified ion research. Bauzon (1997) has noted a time where there was lack of concern for problems affecting the MNCs because of focus on developing solutions to promote nation-building in the parts considered as lesser developed in the world. These solutions included formation of constitutional order among others. Interest for political risks has increased amidst increase in consulting opportunities.
In addition, past research was limited somehow by lack of more resources or access to them by academia. The influence of research towards the area of political risk was due to the political science and social sciences undergoing a “resurgence of the behavioralist”. The study of politics was attempted through formalistic and quantitative approaches and particularly, the study on the war causes and processes dealing with decision-making. Many resources have come up in relation to this debate, including books, journals and monographs.
These contributed to the discussion which was particularly dominated by professors in the areas of business and economics, and this has arisen more issues regarding political impacts of business. The area of forecasting received a boost through the entry of journals in this area. Growing interest on the political risks to business emerged amidst increased complexity and difficulty in the management of economic relations and international political relations. Currently, the formerly colonized countries have entered competition with those countries that colonized them, rather than the latter remaining passive objects.
In addition, Bauzon (1997) brings out the fact that it is no longer the same because Western-dominated financial institutions and governments are no longer necessarily the subjects to the formerly colonized nations. There have been differences as far as the definition of what political risks are, and these have helped in the exploration of various and more issues that the subject touches on. A large amount of literature has focused on the impact Third World countries are also forming blocs and free trading zones to leverage on the way they deal with outsiders.
In addition, this has been done to protect their market from external forces. The importance of political risk to both the governments and corporations cannot be ignored. Bauzon (1997) theorizes that it has been applied in the making of certain types of decisions by the Western government. This is in relation with the tool to intervene under certain conditions and how to intervene. This knowledge, according to him, has aided the corporate world to make decisions relating to whether to invest, how much to, the advantages that could accrue from certain investments as well as what to invest.
Bauzon (1997) is of the opinion that companies could reduce the risks related to political risks by use of this particular knowledge. In addition, they can use this knowledge to control the environment. This was captured in the definitions that bring out issues of impact of political risks as environmental changes that affect all or certain organizations, as well as likelihood of it to cause business loss. Such issues as insurance have been dragged into the issue of political risks through the definition by Willet. Literature does seem to not differentiate between “political forecasting” and “political risk assessment (or analysis)”.
Severally, the two have been used interchangeably. Bauzon (1997) has sought to distinguish the two terms, with the position that political risk assessment means the process seeking an understanding of the factors that may need to be prepared for by the government or the private sector. It is assumed here that the victim will prepare and make necessary decisions as well as manage risks after knowing the factors in the political risk field. It is assumed that the victim will receive a warning or indications or that he or she will be exposed to a climate with rules defining what must be done to survive (Bauzon, 1997).
2. 3 Actions of the Government in Business The government as an influence force in determining the market factors and influencing business has been widely discussed in literature. Porter (1980; cited in Aidan, Daniel, & Bernhard, 2005) put forward his five force analysis that puts government in the line of forces that determine the profitability of business and general flow of business. In addition to the governmental forces, there were others discussed by Porter, and this knowledge can be applied in the analysis of how businesses can develop political business strategies.
However, Porters analysis was not exhaustive regarding how businesses can develop political strategies, because it covers literature only when the government is a buyer or supplier only (Besanko, et al. , 2000; cited in Aidan, Daniel, & Bernhard, 2005). Earlier attempts to exclude government as a potential force that influences business activity was the consideration of it as exogenous, because buyers, suppliers and competitors and their interactions are the ones to be analyzed as competitive forces. In fact, consideration of the competitive forces discussed by Porter certainly leaves out the government as a competitive force.
However, as seen above, there are aspects of the government in touching business, which are automatically impossible to neglect. In fact, opponents may argue that the standard toolkit for business will not respond to the case where a business has gained a competitive advantage in the market as a result of governmental actions. This can only be accepted as far as we are solving the competitive strategy problem. Aidan, Daniel, & Bernhard, 2005 have argued that this cannot apply as far as we are dealing with the development of political strategy.
The possibility of the impact of government on other forces such as those discussed by Porter, and those focused on in research, has been explored in literature. Many have argued that the government force could override other forces. In fact, the government has been introduced as a sixth force in the Porter’s theorization, e. g. by Oster (1994; cited in Aidan, Daniel, & Bernhard, 2005). Those including the government as the sixth force in addition to the Porter’s five, have expanded on the areas through which government actions and decisions could affect business.
They capture that it can influence business and the flow of it through affecting suppliers, buyers as well as substitutes. Literature has posited that the government can act to influence business and the profitability there in as an independent force, through various channels. One analysis on the way they can affect business in this manner is that they are policy farmers and not buyers, suppliers or competitors (Aidan, Daniel, & Bernhard, 2005). In order to understand and capture the impact of business by the government, literature has proposed the inclusion of regulation aspect in defining government policy.
In this respect, taxation policy, industrial and trade policy have been included-they are at times neglected in defining government regulations. There has been an attempt to distinguish the negative impact of profits (or threats) for incumbent firms by the government actions from those actions affecting negatively only some business firms (Aidan, Daniel, & Bernhard, 2005). The differences have been perceived to occur as a result of capabilities and resources of the firms being heterogeneous. For instance, the category affecting only some business firms include industry-specific tax.
These are implemented to achieve certain purposes, e. g increasing access to resources, e. t. c. They achieve certain output taxes as well as “competitive bidding for access to the resources” (cited in Aidan, Daniel, & Bernhard, 2005; e. g. McMillan, 1994). These threaten the profitability of industries. In the exploration of the ways in which the government can affect the business either in the international market or domestic one, there has been focus on how revenues and costs of firms can be affected by certain specific actions imposed by governments.
Direct increase of revenues to firms by the governments may occur when they are given direct money. The government may also alter the relative costs or revenues and as a result alter the degree of rivalry among the firms. Other forces include the altering of the size composition and the number of firms. It may be considered that some businesses will be prone to impact by the government regulations and actions because of the nature of industries they serve. Some industries have certain levels of dangers and safety risks associated with them, and therefore, the government keeps an eye on them.
Others are involved in the generation of products and services that directly affect the environment, and there regulation is important in making sure that the public is taken care of. Those regulations involving the environment are taken to be costing the company and therefore may lower profits (Hopkins, 1996; cited in Aidan, Daniel, & Bernhard, 2005). However, the possibility of such changes leading to firm’s profitability have been explored, with such researchers as Leone and Koch (1979; cited in Aidan, Daniel, & Bernhard, 2005) discussing the possibility of firms getting more profits with such regulations.
Some firms may comply more quickly and at a lower unit of cost than others. Another aspect of study regarding how the political system may affect business activities regards the effects of changes in the domain of international public accounting. In this respect, there has been a shift from developments in the comparative studies from a focus on descriptive studies. This has happened as far as various nations are concerned. Some of the studies are those by, or focused by such researchers as El-Batanoni and Jone (19961) and Vela and Fuertes (2000; cited in Perez, Antonio & David, 2009).
Perez, Antonio & David (2009) have discussed the effect of changes in the political systems in Argentina, Chile and Paraguay as affecting the accounting system and economic issues. They have noted that a negative economic impact was experienced in Argentina during the military, pre-democratic or dictatorship rule, and leaders were lesser concerned with solving of the economic crisis than in staying in power and resisting efforts to have democracy return. Some changes touching economic changes were adopted during the democratic periods and the financial administration was reformed.
Chile encountered problems in the economic domain, because it got into serious economic problems as a result of adoption of an economic policy brought forward by socialist Allende during the military, pre-democratic or dictatorship period. Further transformations took place in Chile after democratization (Perez, Antonio & David, 2009). The financial literature has explored how the public policies may influence the share prices for industries and companies in various contexts (e. g. Thompson, 1993; cited in Aidan, Daniel, & Bernhard, 2005).
There is no doubt to the fact that business organizations are affected by the political climate. Decisions that are taken by governments affect the competitive advantages of firms, whether in the domestic or international environment. This means that they can affect the profitability of firms. The actions and decisions of the government are never exogenous and therefore are important as far as firms’ generation of strategies is concerned (Boddewyn and Brewer, 1994; cited in Aidan, Daniel, & Bernhard, 2005).
A number of researchers have brought out the position that understanding of the political influence of the government on the firms political strategy will definitely be necessary to aid in the development of a good strategy (called the political strategy) to enhance firms’ profitability. Literature has also dealt with collective political strategies where firms decide to join hand and develop a common goal regarding political strategies. However, it must be considered that a firm will have to develop a specific political strategy for itself without consideration of the collective goals.
There is great proof that firms require developing political strategies to aid in the generation of more profits in this respect. It is not necessary that the government should be the initiator for actions that touches the business in the political scene; the firms can themselves start the debate. Godwin and Seldon, 2002; Baron (1995; cited in Aidan, Daniel, & Bernhard, 2005) have discussed the point that this would involve the convincing of decision-makers in the political scenario to take actions that touch the business individuals.
It must be remembered that the sole focus of firms is to have a business and profit advantage in regard to political scenarios. Academic interest in political strategy and related issues have discussed and dealt with the way a firm can develop a political strategy that is specific to them, including the related issues, as well as the nature of public policies. A lot of literature reveals that there has been a lot of focus on the general firm’s business strategy and this proves that there has been downplaying of the political strategy and the related literature.
In fact, according to Mahon, et al. , (1994; cited in Aidan, Daniel, & Bernhard, 2005), there has been downplaying of this fact, even in strategic management books. There has generally been no explicit presentation of the political strategy in literature. There is a call to research dealing with how firms can organize corporate political activity by Hillman et al. , (2004; cited in Aidan, Daniel, & Bernhard, 2005). There is further proof that political resources are not taken as fast mover resources among firms. These are resources that can give firm an advantage during entry in markets.
A political support can aid in the entry in new markets on an international perspectives (Lieberman and Montgomery, 1988; cited in Frynas, Mellahi & Pigman, 2006). This is so with transitional economies which are recently experiencing free market competition. As such the literature focusing on the fast mover resources has failed to address the non-market effects or factors. The neglect of capturing this may be regarded as surprising because there is already wide range of literature regarding relationship between the government and the business sector.
In specific Frynas, Mellahi and Pigman have noted that shareholder value could be created through political resources. (2006). In the United States, firms have already developed political strategies. The literature has not handled the international perspective of political influence on business according to the aforementioned researcher (Frynas, Mellahi & Pigman, 2006). In comparison with the areas of marketing and technology, it can be said that the literature relating to international political influence on firms has been underdeveloped.
Such exploration may be very important because it may help firms to know how they can be helped regarding using the political process as a political strategy when there is limited support at home in the political perspective. It is important for the firms and the people as a whole to understand how transferable, and the extent of transferability do political resources. In addition, it may help them to exploit other alternatives, for example balancing a political climate at home with that of the international arena, if that of the host government is contradictory.
However, literature has not ignored the fact that firms engage in political activity, and has discussed the reasons for this trend. It has, for example, been observed (Aidan, Daniel, & Bernhard, 2005), and that they do so using many methods. (Aidan, Daniel, & Bernhard, 2005), it is possible that firms can influence actions by the government through establishment of a political strategy, either as larger coalitions or as individual firms. Various strategic taxonomies have been proposed by various proponents of political strategies by firms.
An integrative taxonomy approach was considered by (Aidan, Daniel, & Bernhard, 2005) and discuses the involvement of firms in political behavior. There strategies (political) have been suggested and includes constituency building, financial incentive and information. Another strategy in this respect is lobbying for financial support. There has been a direct target for decision makers in the political scene by firms. This is what has been referred to as the constituency building by the aforementioned authors. This is through involvement of media-directed activities as well as activities sin the grassroots (Baysinger et al.
, 1985; cited in Aidan, Daniel, & Bernhard, 2005). Since fast mover advantages seeks to render firms to have asymmetry in relation to its competitors when used while entering a market, adopters of this strategy can gain. Largely, literature has handled the role of government as being against investors and a barrier to fast mover advantages. The political impacts on fast mover advantages has however been captured by a study by Nakata and Sivakumar (1997; cited in Frynas, Kamel, & Geoffrey, 2006) who notes that for foreign markets, fast mover advantages were reduced as far as such political instability factors were concerned.
On the contrary, privatization and economic liberalization achieved a positive impact on fast mover advantages and have lesser impacts of governments on markets. The authors however left out the fact that fast mover advantages mechanism can arise from intervention of governments. Empirical evidence emanating from studies dealing with political science and business history support the fact that early market entry of business can be assisted by political resources. For instance, examples that have posited this have been discussed.
D’Arcy and Burmah Oil obtained a political support from the British government at different levels so as to “gain an early foothold of Persia” (cited in Frynas, Kamel, & Geoffrey, 2006). That happened in the beginning of the 20th Century (Jones, 1981; cited in Aidan, Daniel, & Bernhard, 2005). A good and clandestine political network and specific skills in Sierra Leone and Angola assisted the entry of market of South Africa firms who reaped benefits from this. There has been no leveraging on this research to aid business research.
Lack of literature regarding the impact of political dimension on fast mover advantages does not allow researchers to have an understanding on how some firms used it to gain international market access. Writers have only mentioned the impact of the government on these domains. However, there has been mention that early movers in China markets have gained as a result of their collaboration with the government (Luo and Peng, 1998; cited in Frynas, Kamel, & Geoffrey, 2006). Such research has focused on such companies as Volkswagen.
These authors call for the attention of government regarding the government policy in transitional economies that favor early entrant and their actions to enter the markets. There were shortcomings for this study, because there lacks inclusion of political resources in the research design and there was no more exploration on the importance of political resources. The researchers could not investigate the political resource because of the limitation posited by the tool of analysis.
The limitation of the classification of fast mover advantages has been exposed by literature, for example with the studies by Luo and Peng (1998) and Nakata and Sivakumar (1997) as posited by cited in Frynas, Kamel, & Geoffrey, 2006. Such classification can have the aspect of politics added, by inclusion of “political” as a fifth mechanism. The shortage of exploration of the political dimension for fast mover advantages does not mean that it has not been exploited in other areas of business.
Remember that in the above, the literature can help understanding only further how businesses can gain by having a specific political strategy, namely, getting into the market as fast movers. That is why there is need for specific concern over fast mover advantages. This literature bring out such issues as asymmetric effects will result on competing firms from regulation (Shaffer, 1995; cited in Frynas, Kamel, & Geoffrey, 2006), and that the performance on a firm will be influenced by the government’s activity on a competitive position.
There is recognition of existence of uneven distribution for the capabilities of the firm to cope with new regulation, as far as the relationship between regulation and firm performance is concerned. This was discussed by such authors as Oster (1982; cited in Frynas, Kamel, & Geoffrey, 2006). There is a possibility that a firm could target on the overall impact of legislation adopted such as giving them a better overall competitive performance, even when it was initially damaging to it.
Such may occur when there is asymmetrical impact of the regulation on individual members such as raising the rivals’ cost disproportionately (e. g. McWilliams, Van Fleet, and Cory, 2002; cited in Frynas, Kamel, & Geoffrey, 2006). This leads to understanding that firms need be vigilant enough and knowledgeable as far as the impacts of political climate on business is concerned-and particularly where there is development of mutual political strategies.
Literature has also come up, in the academia, with terms such as ‘political competences’, ‘political resources’ and ‘political capital’ because of impact of business by government. More than one factor for political resources have bee considered in theory. These are ‘intelligence and cognitive maps about nonmarket environments, better access to decision makers and opinion makers, and better bargaining or non-bargaining skills’ as po