Understanding the political risks of business
One of the first questions that comes up when entering a new country as part of market expansion is whether existing political risks are substantial or not. The political condition in a nation affects business through policy formulation, industry controls, taxation and other factors that could be connected with the management of the state. The danger of political upheavals affecting economy raises or lowers barrier to entry into the market by new players. There are many ways to quantify and analyze these risks from going through historical political development of a country to personal or journalist accounts of events (Johansson, 2001).
Understanding Political Risk Figure 2 shows the political risk analysis levels. If at any level, the risks are not deemed worth it, then entry is called off. Withdrawal because of political risks is more likely to happen when investment targets the acquisition of raw material or low wage costs when market penetration is the objective. The rise of international terrorism has increased the need for security measures and has even institutionalized restriction to air travel and transport.
Right after the September 11 attacks on the Pentagon and the World Trade Center, the Federal Aviation board raised the security requirements for airlines and required the purchase of additional security equipment, posting of security personnel and insurance requirements. The anticipated increased spending by these sectors more than fear of flyers to still fly contributed to the decrease of investor confidence in the industry (Nance, 2001). In 1977, the Indian government decreed that 60 percent of the equity of its Indian subsidiaries be transferred to local nationals and that the formula of the cola is divulged.
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Coca-cola acquiesced to the transfer of equity but refused the release of its formula. The company also insisted that it maintain supervision of production to maintain quality and product image. The Indian government’s pointed that this would mean that Indian companies are still relegated as resellers and denied Coca-Cola’s requests. Coca-Cola instead withdrew from the Indian market to the restrictions. Coca-cola only came back to India when the state implemented trade liberalization and allowed direct capital invest once more in the country (Dubey, 1993).
Coping with the challenges of Political Risk Once the political risk in thoroughly understood, marketing strategies can now be formed. The framework by which all markets function is designed to empower and limit. It is not necessarily designed to inhibit free commerce but rather to regularize activities and establish monitoring systems. Legal systems should give business an idea on the state’s economic agendas. Countries would logically seek to attract by liberalization of certain industries and other policies to decrease the barriers of entry.
Aside from state laws, some Islamic countries also maintain separate Islamic courts. Companies may not be directly subject to laws related to them but there maybe some prescriptions for their employees within these countries whether they are Muslim or not. Policies can be used to influence others commercially or economically. For example, Countries from Arab nations continues to boycott Israel and are trying to influence other countries who want to trade with them to do so. It is illegal for U. S. firms to make this certification and it is generally frowned upon.
Another example creating policies limiting the commerce of another country is the implementation of trade embargos to pressure existing government to change policy or implement reforms. Alon (2004) pointed out that China has been criticized by some businesses because it changed several laws regarding trade regulations after businesses had already established in the country. They said that the change in policy has now limited their competitive capabilities in the local markets. Though there has been a great among of misgivings, very few companies left China.
The reality is that the sheer mass of China’s consumer market is simply too much of a prize to give up. Another concern raised against China is its control of wages that increased its competitive edge significantly. Even with pressures form the International Labour Organization (ILO), China has refused to raise the floor of wages saying that to do so would affect its competitive advantage. US labour rights groups and activists have been called for the boycott on Chinese products but have affected little Chinese manufacturing industries (Alon, 2004).
The reality is that low labour costs are attracting manufacturers to go to China and these include a myriad of products ranging form lingerie to airplanes. In this example, the policy of China is able to withstand external pressure. The reality is that political scenarios will always be volatile and even countries like the US must rely on its allies and supporters to maintain its influence. In the same way, business must be able to work with and not necessarily around policies for it to be able to prosper. When the risk index is high, scenario planning and mitigation becomes a necessity.
When a company is already established, exit from the politically affected industry may not be an option anymore so instead managers have mitigates effects to operations maybe by lobbying for better laws or supporting movements or initiatives. Conclusion In the development of globalization, it can be concluded that several factors are essential to succeed. Among them are: 1. extensive and relevant market research 2. responsive and sensitive marketing strategies 3. focus and creativity to execute plans and strategies 4. attentiveness changes in society and the political environment 5.
Flexibility to cope with critical situation effectively and efficiently. For business to establish themselves in markets they have to be able to understand and accept culture that may not be their own and work with policies that they may not agree with. Globalization allows great opportunities but increase competition just as much. The challenge is not in holding on who you are or what your company is, the challenge will becoming what you can be. References Aaker, D. A. (1990). “How will the Japanese Compete in Retail Services? ” California Management Review 33. pp 54-67 Alon, I. (2003).
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