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STUDENT NUMBER: _ 081202111

MR. N Ntambo
MBA 29 – Business Environment



July 2008

Assume that a company is considering moving production to a location in a developing country,
but is concerned about political instability. What particular aspects of the country’s political
structure and processes should it take into account when assessing political risk?


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Assignment Question 1:
Assume that a company is considering moving production to a location in a
developing country, but is concerned about political instability. What particular
aspects of the country’s political structure and processes should it take into account
when assessing political risk?


ASSIGNMENT BRIEF................................................................................................................... 1
Contents.......................................................................................................................................... 3
Section 2......................................................................................................................................... 5
Particular aspects of the country’s political structure and processes that should be taken into
account when assessing political risk .............................................................................................5
REFERENCES................................................................................................................................... 9
Kreps, 2003, A Course In Microeconomic Theory (Paperback)

Section 1
Introduction: Definitions
To start the discussion of the essay topic, it is imperative to define and know what the term business
environment refers to. Business environment refers “to a set of political, economic, social and
technological (PEST) forces that are largely outside the control and influence of a business and that
can potentially have both a positive and a negative impact on the business” (Varian, 1992, p 4 ).
Today's world is a rapidly changing place. Developments across a range of factors will have an impact
on a business or industry. The classic PEST framework (political, economic, social, and
technological) identifies four major categories of external factors that affect the ability of an
organization to survive and prosper. The reason for this framework is that business does not function
in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors
that happen outside the business are known as external factors or influences. These will affect the
main internal functions of the business and possibly the objectives of the business and its strategies.

An important concept to understand before going further into the essay is political risk. Political risk
has been defined “as a type of risk faced by investors, corporations, and governments. It is a risk
that can be understood and managed with proper aforethought and investment” (Barnett, 2003,
Broadly speaking, political risk refers to the complications businesses and governments may face as a
result of what are commonly referred to as political decisions—or “any political change that alters the
expected outcome and value of a given economic action by changing the probability of achieving
business objectives.”[ Middleton, 2002, p2] . Political risk faced by firms can be defined as “the risk of
a strategic, financial, or personnel loss for a firm because of such nonmarket factors as
macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labor,
and developmental), or events related to political instability (terrorism, riots, coups, civil war, and
insurrection.” (Wagner, 2003, p5) Portfolio investors may face similar financial losses. Moreover,
governments may face complications in their ability to execute diplomatic, military or other initiatives
as a result of political risk.

In general, there are two types of political risk, macro risk and micro risk. Macro risk refers to
‘adverse actions that will affect all foreign firms, such as expropriation or insurrection, whereas
micro risk refers to adverse actions that will only affect a certain industrial sector or business, such
as corruption and prejudicial actions against companies from foreign countries’ (Mckendrick, 2005,
p2 ). All in all, regardless of the type of political risk that a multinational corporation faces, companies
usually will end up losing a lot of money if they are unprepared for these adverse situations. For
example, after Fidel Castro's government took control of Cuba in 1959, hundreds of millions of dollars
worth of American-owned assets and companies were expropriated. Unfortunately, most, if not all, of
these American companies had no recourse for getting any of that money back.

For purposes of this essay however, we shall discuss aspects of the country’s political structure and
processes of a developing country that a company should take into account when assessing political
risk in relation to its desire to move in a particular environment and set up its business operations.

Section 2
Particular aspects of the country’s political structure and processes that should be
taken into account when assessing political risk
Among the challenges that businesses may face in establishing operations in a developing nation are
listed below:
1. Humdrum uncertainties about emerging-market governments’ attitude to the
rule of law. The rule of law does not have a precise definition, and its meaning can vary between
different nations and legal traditions. Generally, however, “it can be understood as a legal-political
regime under which the law restrains the government by promoting certain liberties and creating
order and predictability regarding how a country functions. In the most basic sense, the rule of law
is a system that attempts to protect the rights of citizens from arbitrary and abusive use of
government power” (Atiyah, 1979, p8 ) .A business will consider governments’ attitude to rule of law
because it does not want to set up business in a lawless situation.
2. Intellectual property: “Intellectual property (IP) refers to creations of the mind:
inventions, literary and artistic works, and symbols, names, images, and designs used in
commerce. Intellectual property is divided into two categories” (Middleton, 2002, p1 ):
Industrial property, which includes inventions (patents), trademarks, industrial designs, and
geographic indications of source; and Copyright, which includes literary and artistic works
such as novels, poems and plays, films, musical works, artistic works such as drawings,
paintings, photographs and sculptures, and architectural designs. Rights related to copyright
include those of performing artists in their performances, producers of phonograms in their
recordings, and those of broadcasters in their radio and television programs. A company will
consider whether any possible theft of intellectual property will be punished as a matter of
political will?
3. Regulatory enforcement: Will lax regulatory enforcement by political heads allow a
company’s supply chain to be contaminated? (For example, Whole Foods Market discovered in July
2008 that Chinese powdered ginger it had been selling as organic contained a banned pesticide.) if
politicians do not show will to enforce regulation
4. Common allegations. Typical allegations made against political leaders in office include
inadequate loan or investment underwriting and administration procedures;
5. Manipulating assets for personal gain by paying political ;leaders unearned dividends,
bonuses, or other compensation;
6. Overstating an institution's income, profitability, and net worth;
7. A government’s failure to establish adequate loan loss reserves;
8. Fraud for failing to disclose a personal interest in a loan transaction in both major and minor
government dealings.
9. Desire by political leaders for unjust enrichment due to self-dealing and conflicts of interest;
10. Engaging in speculative investments (especially in high risk ventures based upon
insufficient information and planning);
11. Undisclosed kickbacks, commissions, and fees and other unsafe, unsound, or fraudulent
lending practices; and
12. Generally poor management culture, including hiring incompetent relatives and friends,
concealing conflicts of interest, and failing to operate subsidiaries as separate entities.
13. Of course, there is probably no more serious concern a company may make, both legally and
practically, than failing to take needed corrective action pointed out by critics.
14. Sudden government decrees: Might the Government Issue a decree that alters the
fundamentals of your business, without consultation or recourse, as often happens in China?
15. Will it decide suddenly to break up local monopolies, or alternatively encourage their
16. “Macroeconomics is much and considers economic aggregates i.e. the output for the whole
country and the "general" price level. It involves the study of inflation, unemployment,
growth etc” (Chiang, 1984, p3). In it, there is the traditional game of guessing whether
governments will abandon sound fiscal and monetary policy at the first sign of economic
turbulence. The leading multinationals insist that emerging markets are now so important to
their long-term growth prospects that they have to be in them regardless of short-term
macroeconomic policy risks. Gone forever, they insist, is the shortsighted old habit of rushing
into emerging markets as they get hot, and out again at the first whiff of trouble

17. War and external threats which arise out of political disputes, including conflicts over issues of
sovereignty and border disputes greatly pose a threat to companies wishing to enter new
market. New companies also consider possibilities for civil and labor unrest, including strikes,
protests and demonstrations against the government. These most likely will affect the
operations of the government in a negative manner. Internal violence, as evidenced by
bombings, assassinations, kidnappings, low-intensity guerrilla warfare and crime in most
developing countries should be considered as a determining factor to enter the market.
18. Regime stability, based on the probability of a change in leadership through either a regularly
scheduled election or unanticipated development such as a coup or death is also a political risk
for a company. “Changes in government policy can affect a business e.g. a decision to
subsidize building new houses in an area could be good for a local brick work” (Kreps, 2003,
p5). Government’s introduction of a new legislation e.g. increases minimum wage can pose a
political risk too.

Role of Non Governmental Organizations NGOs, Media and Civil society

On a much lighter and brighter note, ‘NGOs are beginning to spring up throughout the
emerging markets, demanding higher ethical standards of business and political leaders’
(Mishra, 2006, P7). In Africa, for instance, much of the initial pressure for better governance
and less corruption came from the NGOs and civil society such as Transparency International
of Zambia and the media. The role that NGOs, media and civil society play in the running of
political affairs should in a way be one of the factors that a new company can consider. This is
because to a large extent, the NGOs can contribute to the promotion of good governance which
consequently leads to the creation of a conducive business environment.

Political instability is arguably more pervasive and fundamental to who makes or loses money than at
any time since the Second World War. Worse still political risk is most prevalent in emerging markets
such as markets in most African countries and in particular, Zambia too.
Developed-country governments do unexpected things that are every bit as troublesome as emerging-
market governments. For example, “an oil or gas company today will worry more about emerging
markets in the lime manner as it would worry over a windfall-profit tax in the US.”( Satoshi, 2007,
p2) says GE’s John Rice. Another case in point too, too, is the recent heavy-handed interventions in
the financial system by the American government. Yet most business leaders around the world reckon
that political risk is a far greater problem in emerging markets. Ask the boss of Carrefour, a French
retailer, whose shops in China saw violent protests this year after pro-Tibet campaigners disrupted
the progress of the Olympic torch through Paris.

Western oil and mining companies, having started to improve their behavior in Africa under pressure
from NGOs, now face competition from Chinese, Indian and Russian rivals that seem willing to cut
deals with even the most unsavory African politicians. And how do Western firms compete in
countries where bribes are seen as an ordinary cost of doing business?


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2. Chiang, A. C, 1984, Fundamental Methods Of Mathematical Economics; Auckland, Mcgraw-
Hill Http://Www.Wipo.Int/About-Ip/En
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Why". International Risk Management Institute.
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