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Impact of Political Environment on International Trade in Bangladesh April 30, 2018

1. Introduction
Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries. Almost every kind of
product can be found on the international market: food, clothes, spare parts, oil,
jewelry, stocks, currencies, and water. Services are also traded: tourism, banking,
consulting and transportation. International trade gives rise to a world economy, in
which prices, or supply and demand, affect and are affected by global events.
Political change in Asia, for example, could result in an increase in the cost of
labor, thereby increasing the manufacturing costs for an American sneaker
company based in Malaysia, which would then result in an increase in the price
that you have to pay to buy the tennis shoes at your local mall. A decrease in the
cost of labor, on the other hand, would result in you having to pay less for your
new shoes. The policies made by the government have a significant impact on any
company’s international market.

1.1. Background of the study


No matter how attractive the economic prospects of a particular country or region
are, doing business there might prove to be financially disastrous if the host
government(s) inflicts heavy financial penalties on a company or if unanticipated
events in the political area lead to the loss of income-generating assets. The
political environment in which the firm operates (or plan to operate) will have a
significant impact on a company's international marketing activities. The greater
the level of involvement in a foreign markets, the greater the need to monitor the
political climate of the countries business is conducted. Changes in government

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Impact of Political Environment on International Trade in Bangladesh April 30, 2018

often result in changes in policy and attitudes towards foreign business. Bearing in
mind that a foreign company operates in a host country at the discretion of the
government concerned, the government can either encourage foreign activities by
offering attractive opportunities for investment and trade, or discourage its
activities by imposing restrictions such as import quotas, etc. An exporter that is
continuously aware of shifts in government attitude will be able to adapt export
marketing strategies accordingly.

Nearly all governments today play active roles in their countries' economies.
Although evident to a greater or lesser extent in most countries, government
ownership of economic activities is still prevalent in the former centrally planned
economies, as well as in certain developing countries which lack a sufficiently
well-developed private sector to support a free market system.

That’s why we have conducted such study on the impact of political environment
on international trade in Bangladesh.

1.2. Objectives of the study


 To know the extent of positive and negative impact of political environment
on international trade in Bangladesh.
 To know some theoretical view of international trade and political
environment.
 To identify peoples view by conducting a survey.

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1.3. Scope of the study

Basically the impact of international trade is the main focus of our study. Beside
this, we found related topic and issues with the international trade & political
environment is also involved in the scope of the study. The political environment
on International trade influence the GDP growth , inflation rate of a country,
economic imbalance in the income of poor & rich person , unethical work of
person etc.. All of these issues can build or destroy a country.

So, the negative influence will be the remarkable in our study & how we can
overcome from it, we will discuss about it in our term paper. Recognizing the
limitation we have faced and the need to understand further issues related to
combating politics in international business we designed a detailed paper based on
survey which sought to examine.

1. The type of and extent to which politics practices and activities have been
applied by businesses.

2. The factors and drivers influencing the approaches and attitudes of these
stakeholders to combating politics;

3. How, if at all, social awareness & other related precaution could be applied for
the purpose of combating politics.

4. The levels of awareness and precautions of companies regarding particular


politics instrument.

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1.4. Limitations of the study


At the time of preparing the term paper we have faced some problems which have
affected our study. The limitations we have are---

 Not available access to the journal to get the views of the scholar.
 Survey has been conducted on student where it will be better to conduct the
survey on international businessman.
 The area on this term paper is very big but we had to finish the work within
a very short phase.

 The term paper is made basically based on secondary data.

 Information was not sufficient.

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1. Literature review

a. Political environment
The political environment is the state, government and its institutions and
legislations and the public and private stakeholders who operate and interact with
or influence that system. It is basically the government actions which affect the
operations of a company or business. These actions may be on local, regional,
national or international level. Business owners and managers pay close attention
to the political environment to gauge how government actions will affect their
company.

Political environment includes the laws and regulations passed by element of


government that can affect the viability of the firms operation in the host country.
It 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.

According to LAW DICTIONARY,

“Political environment refers to the actions taken by the government which


potentially affect the daily business activities of any business or company. Such
actions occur on a local or international scale depending on the governmental
institutions authority.”

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2. International trade

International trade is the exchange of capital, goods, and services across


international borders or territories. It is the exchange of goods and services among
nations of the world. Trading globally gives consumers and countries the
opportunity to be exposed to goods and services not available in their own
countries. Almost every kind of product can be found on the international market:
food, clothes, spare parts, oil, jewelry, stocks, currencies, and water. Services are
also traded: tourism, banking, consulting and transportation. A product that is sold
to the global market is an export, and a product that is bought from the global
market is an import.

According to John D. Doniels and Daniel P. Sullivan,

“International Business consists of all commercial transactions, including- sales,


investments and transportation- that take place between two or more countries”

According to Ricky W Griffin and Michael W. Pustay,

“Any business transaction between parties from more than one country is part of
international business”

According to Penguin Dictionary,

“The exchange of goods and services between one country and another is called
International trade.”

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2.3 Impact of political environment on international trade

Businesses should care about the different political systems around the world.
Despite the globalization of business, firms must abide by the local rules and
regulations of the countries in which they operate. We know how US-based
Google had to deal with the Chinese government’s restrictions on the freedom of
speech in order to do business in China. China’s different set of political and legal
guidelines made Google choose to discontinue its mainland Chinese version of its
site and direct mainland Chinese users to a Hong Kong version. Until recently,
governments were able to directly enforce the rules and regulations based on their
political philosophies. The Internet has started to change this, as sellers and buyers
have easier access to each other. Nevertheless, countries still have the ability to
regulate or strong-arm companies into abiding by their rules and regulations. As a
result, global businesses monitor and evaluate the political climate of countries in
which they currently operate or hope to operate in the future. Governments have
long intervention in international trade through a variety of mechanisms. At first
we discuss some of the reasons behind these interventions.

Why Do Governments Intervene in Trade?


Governments intervene in trade for a combination of political, economic, social,
and cultural reasons. Politically, a country’s government may seek to protect jobs
or specific industries. Some industries may be considered essential for national
security purposes, such as defense, telecommunications, and infrastructure—for
example, a government may be concerned about who owns the ports within its
country. National security issues can impact both the import and exports of a
country, as some governments may not want advanced technological information
to be sold to unfriendly foreign interests. Some governments use trade as a

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retaliatory measure if another country is politically or economically unfair. On the


other hand, governments may influence trade to reward a country for political
support on global matters.

How Do Governments Intervene in Trade?


While the past century has seen a major shift toward free trade, many
governments continue to intervene in trade. Governments have several key
policy areas that can be used to create rules and regulations to control and
manage trade.

1) Tariffs

Tariffs are taxes imposed on imports. Two kinds of tariffs exist—specific


tariffs, which are levied as a fixed charge, and ad valorem tariffs, which
are calculated as a percentage of the value. Many governments still
charge ad valorem tariffs as a way to regulate imports and raise
revenues for their coffers.

2) Subsidies

A subsidy is a form of government payment to a producer. Types of


subsidies include tax breaks or low-interest loans; both of which are
common. Subsidies can also be cash grants and government-equity
participation, which are less common because they require a direct use
of government resources.

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3) Import quotas and VER

Import quotas and voluntary export restraints (VER) are two strategies
to limit the amount of imports into a country. The importing
government directs import quotas, while VER are imposed at the
discretion of the exporting nation in conjunction with the importing
one.

4) Currency controls

Governments may limit the convertibility of one currency (usually its


own) into others, usually in an effort to limit imports. Additionally, some
governments will manage the exchange rate at a high level to create an
import disincentive.

5) Local content requirements. Many countries continue to require that


a certain percentage of a product or an item be manufactured or
“assembled” locally. Some countries specify that a local firm must be
used as the domestic partner to conduct business.

6) Antidumping rules

Dumping occurs when a company sells product below market price


often in order to win market share and weaken a competitor. In that
case government imposes antidumping rules against such activities to
protect the local companies.

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7) Export financing

Governments provide financing to domestic companies to promote


exports.

8) Free-trade zone

Many countries designate certain geographic areas as free-trade zones.


These areas enjoy reduced tariffs, taxes, customs, procedures, or
restrictions in an effort to promote trade with other countries.

9) Administrative policies

These are the bureaucratic policies and procedures governments may


use to deter imports by making entry or operations more difficult and
time consuming.

2.4. Opinion of some scholars:

Mark Fitzpatrick
He mentioned that the role of politics in international business has long been
implicitly recognized, but it is only in recent years that academic interest has
focused on this interaction. Typically, international business firms' evaluation and
assessment of host country political environments are not formally organized.
Although most firms see political risk as a serious influence on foreign investment
decisions, in general they do not have a structured management function with
which to assess its impact.

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He also mentioned that political impact is a continuous process. Different types of


political movement leads to different situation of the foreign firms.

According to DAHI,
“Political environment is defined as a persistent pattern of human relationship that
involves to a significant extent, control, influence, power or authority.”

Political environment may range from a democratic system to communism with


other variations between these ideological extremes.

In International construction, like in International Business, one has to deal with


government as they are presently structured with all their diversity and even
repressiveness. He mentioned that business strategy is structured considering local
political environment.

Joanne Gowa and Edward D. Mansfield

They argued that free trade is more likely between political alliances. However
their analysis also suggests that the evolutionary prospects of alliances vary: those
that are the products of bipolar systems are more likely to evolve into free trade
coalitions than are their multipolar counterparts.

Less credible exit threats and clearer responsibilities for alliance stability explain
the advantage of bipolar system.

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3. Methodology of the study


For preparing our term paper we have used both primary and secondary data. For
collecting data we found out some important sources and used a specialized
method.

a. Quantitative method

We have used quantitative method because it will be easy for all to understand the
extent to which political environment influence international trade. For the purpose
of this study, the method is used ---

Questionnaire Survey

This survey is intended to gather primary data about impact of political


environment on international trade in Bangladesh with a questionnaire.

b. Sample size
We have conducted our survey on some students who have knowledge about the
impact of political environment on international trade. They helped us through
giving information about the international business circumstance. They also told us
“What are the effects of political environment on international trade”.

3.3 Questionnaire design


1. How political environment impact on the international trade?

a) Directly b) Indirectly c) Both

2. Is there any political risk in international trade?

a) Yes b) No

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3. Which type of political risk affects trade?

a) Ownership risk b) Operational risk c) Transfer risk d) All of this

4. Which political conflict mainly affect to the international trade in Bangladesh?

a) Strike b) Hartal c) Beleaguer d) all of this

5. When political conflict occur, do you think the foreign country buyers are
willingly want to trade with us?

a) Yes b) No

6. What do you think, political environment have any effect on tariff?

a) Yes b) No

7. How political environment effect on the economic environment in international


trade in Bangladesh?

a) Positively b) Negatively c) Both

8. If political environment in Bangladesh affect negatively in the economic


environment in international trade, what will be its result?

a) Decrease national revenue

b) Increase costs of products

c) Both (a & b)

9. Do you think, we are depriving of qualitiful product by the political


environment in International Trade?
a) Yes b)No

Comment……………………………………………………………………
…………………………………………

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………………………………………………………………………………
………………………………

10. How negative impacts of political factors discourage private investment in


developing countries?

a) Directly. b) Indirectly

3.4 Procedure of collection of data


Two types of data were collected:

 Primary data &

 Secondary data.

Primary data:

We have conducted a survey on students to collect data that helps us to prepare the
term paper.

Secondary Data:

The term paper has been completed on the basic of secondary data. The main
sources of secondary data are various books, Internet and so on. After collecting
data from the material, the data was first carefully scrutinized. Then the data was
organized as required. In order to make the study effective and efficient, some
sources including, official websites of commerce ministry as well as concerned
websites of government and its agencies, financial Journalistic have been used.

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4.0 Data analysis and findings

4.1 Analysis the data on the basis of answer given by the


students
1. How political environment impact on the international trade?

Ans: For this question, 5 students say political environment directly impact on
the international trade and 5 students say indirectly and rest of the say both
directly and indirectly.

5 Direct
Non direct
Both
25

2. Is there any political risk in international trade?

Ans: Here, 25 students say in international trade there exist political risk, and
5 students say here no political risk.

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00

Yes
No

25

3. Which type of political risk affects trade?

Ans: For this question 7 students say ownership risk, 3 students say
operational risk, 5 students say transfer risk and rest other says all of this risk
is exist in international trade.

Ownership risk
Operational risk
15
Transfer risk
3
Allof this

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4. Which political conflict mainly affect to the international trade in


Bangladesh?

Ans: 6 students say strike, 4 says Harte, 3 students says beleaguer and 17 students
says all of this conflicts affected to the trade.

6
Strike
Hartal
4 Beleaguer
17
All of this
3

5. When political conflict occur, do you think the foreign country buyers
are willingly wanted to trade with us?

Ans: Most of the students, like 25 say yes and 5 are says no.

00

Yes

No

25

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6. What do you think, political environment have any effect on tariff?

Ans: For this question, 27 say yes and 3 students say no.

00
3

Yes
No

27

7. How political environment effect on the economic environment in


international trade in Bangladesh?

Ans: Here, Some like 5 students says positively political environment effect on
the economic environment in international trade in Bangladesh then 10
students says negatively and 15 says both negative and positive

Positively
Negatively
15
Both
10

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8. If political environment in Bangladesh affect negatively in the


economic environment in international trade, what will be its result?

Ans: 7 students say decrease national income than 8 students says increase
costs of products and 15 students says both (a & b) will be the result if
political environment in Bangladesh affect negatively in the economic
environment in international trade.

8
Increase costs of products
15 Dcrease national income
Both

9. Then we have asked whether people are deprived of qualitiful product


by the political environment in International Trade?

Ans: 25 people have said yes and 5 said no

yes
no

25

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10. Our last question was how negative impacts of political factors
discourage private investment in developing countries.
Ans: 20 students said that political factors directly discourage private
investment in developing countries and 10 students said that political
factors indirectly discourage private investment in developing countries.

Directly
Indirectly

4.2 Findings
1) The political environment in which the firms operate (or plan to operate)
will have a significant impact on a company's international marketing
activities.
2) Changes in government often result in changes in policy and attitudes
towards foreign business.
3) A foreign company operates in a host country at the discretion of the
government concerned, the government can either encourage foreign
activities by offering attractive opportunities for investment and trade, or
discourage its activities by imposing restrictions such as imports quotas, etc.
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4) The primary concern to an exporter should be the stability of the target


country's political environment.
5) The political environment is connected to the international business
environment through the concept of political risk.
6) International trade need to recognize that their success or failure could
depend on how well they cope with political decisions, and how well they
anticipate changes in political attitudes and policies.

5.0. Conclusion and Recommendation


5.1. Conclusion
Many firms identify such influence of political environment as a major risk
determinant. International firms pay great attention to the changing political
circumstances as they either positively or negatively can affect the firms’
operations. The successful strategic management of political risk in international
business, which is premised by its consistently accurate assessment, requires that
the challenge be met. In case of Bangladesh we have seen that political decisions
frequently changes which leads to unsuccessful international trade. Here decisions
changes when political party in government changes. In most cases such changes
bring up negative results for the economy.

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5.2. Recommendation

1) It is recommended that consideration must be given to the redefinition of


political risk in terms of continuous process change variables, rather than
remain constrained by the current event oriented analysis.
2) Before going to international trade one should study the respective country’s
political environment.
3) Every firm should take effective measure to face any type of adverse
political situation.
4) Politics should be conducted on behalf of the public interest.
5) In case of Bangladesh special attention must be given in destructive political
movement to avoid losses in such situation.

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References

Articles:

1. Joanne Gowa and Edward D. Mansfield (Jun 1993),Power politics and


international trade, The American Political Science Review, vol. 87, No.
2 (June), pp 408-420
2. Mark Fitzpatrick (1983), The Definition and Assessment of Political
Riskin International Business, Academy of Management Review, Vol. 8,
No. 2, page no. (249-254).

Websites:
1. http//www.ukessays.com/essays/marketing/the impact of political-
legal-environment-on-business marketing-essay.php (23 March,2015)
2. https://fee.org/articles/politics-and-foreign-trade/
3. https://www.cato.org/publications/commentary/politics-trade
4. http://2012books.lardbucket.org/books/challenges-and-
opportunities-in-international-business/s06-02-political-and-legal-
factors-th.html[Accessed: 15thjuly 2016]

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