Political Environment in International Business: Definition, Factors & Impact

culled from:portal.com

Governments and politics play a large role in international business. In this lesson, you'll learn about the political environment in international business, some of its key factors and its impact. A short quiz follows.

We also recommend watching What Is Business Environment? - Definition, Factors & Quiz and What Is IPAT? - Factors of the Human Impact on the Environment

Definition

The political environment in international business consists of a set of political factors and government activities in a foreign market that can either facilitate or hinder a business' ability to conduct business activities in the foreign market. There is often a high degree of uncertainty when conducting business in a foreign country and this risk is often referred to as political risk or sovereign risk.

Factors

Let's look at some common political factors that influence the international business landscape.

Economic System

The type of economic system a country builds is a political choice. Foreign countries often will have different economic systems from your domestic market and adjustments often need to be made to take these differences into account.

• A country may operate in a market economy where private individuals own most of the property and operate most of the businesses. A market economy is usually the best economic environment for a foreign business because of the protection of private property and contract rights.
• Some countries lean more towards a socialist economy where many industries and businesses are owned by the state. Operating businesses in this environment will be more difficult, but products can still be produced and sold as people still pick their jobs and earn money.
• A few countries operate under a communistic economic system where the state pretty much controls all aspects of the economy. Conducting business in this environment ranges for difficult to impossible.
• The reality is that all economies are mixed economies that take parts from two or more of the 'pure' economic systems. For example, you can conduct business in communist China in Hong Kong and other special areas where a market economy is allowed to operate.

Government System

Businesses must often contend with different governmental systems. Examples include democracies, authoritarian governments, and monarchies. Some governments are easier to work with than others. Democracies, for example, are answerable to their citizens and the rule of law. Authoritarian regimes are usually answerable to no one, including the law. It is less risky to conduct business in democracies and constitutional monarchies (a monarch with a constitution that protects the public and subjects the monarch to the rule of law) than in countries with authoritarian regimes.

Trade Agreements

Countries often enter into trade agreements to help facilitate trade between them. If your country has entered into a trade agreement with another country, conducting business in that country will usually be easier and less risky because the trade agreement will provide some predictability and protection. One great advantage, for example, is that your products will be subjected to fewer trade barriers that serve as obstacles to exporting your products into the country.

Formal Trade Barriers

A trade barrier is simply anything that makes it harder for a company to export products to a foreign country. Formal trade barriers are enacted by governments for the purpose of restricting imports to protect a country's domestic industries. Formal trade barriers include tariffs, which are taxes on imports that helps make domestic products more competitive, and product quotas that limits the number of products imported into the country.

Informal Trade Barriers

Governments may impose regulations that aren't primarily promulgated as barriers to trade but have the same effect. Examples can include specific product standards and health and safety standards that businesses will be required to meet before the products can be sold.