Question

Describe the political risk, economic risk, and legal risk in doing business in a foreign country.

Answer 1

The ‘political risk’ of doing international business in a foreign country means the risk associated with political decisions made by foreign country (host country) that can have adverse impact on the business endeavors of foreign firms (firms of other countries operating there).

Political instability or frequent changes in government, military takeover, and sudden policy changes stem political risk. Such risk severely impacts the investment of foreign firms.

In mild form political risk can take form of sudden policy changes that escalates the cost of operation in foreign country and in extreme form it can result in nationalization of foreign firm’s operation in host country by host country’s government.

Political risk can lead to outcome that can diminish the investment returns from international business in a foreign country and in many extreme cases can restrict the ability of foreign firms to withdraw its investment as well.

Firms while investing in a foreign country always factor in political risk. In fact, longer the tenure of an investment, more important is the consideration of political risk becomes. However, quantification of political risk is very difficult.

there are different decisions that effect the business in different ways.in that changes in taxation polcies,currency valuation,trade tariffs and environmental regulations.

legal risk can be arised lack of proper communication channels and undefind institutional objectives unclarified information flow in different personnel.

economic risk arises in case of interst rates and minimum wage ,market prices,taxes,duty rates finally cost of materials.

A multinational or translational company that operates in many countries overseas has to face a lot of complex environemnt then a domestic firm does. IT does not only have to deal with domestic environmental factors but foreign environmental factors that effct different markets differently and also global factors as well.

Two of the important environmental facets that these companies get encountered with are economic risks and political risks.

Economic risks refers to the risk that get arise becuase of different economic situations in different markets and its differnet kinds of effect on the functioning of the business. For example if an MNC headquartered in US opens its subsidiary in some Asian countries like Japan, Singapore and India, then in these different markets because of different economic conditions prevailing the effect will be complex. Economically stable and developed countries like Japan and Singapore will provide opportunities but economic conditions in least and developing countries like India will impose more threats than opportunities. For example low level of GDP growth, Less Per capita income etc will impose threats.

On othe hand political parties and conditions prevailing in international markets also impose risks. Dominiance of a specific political party in a specific state of acounry may create threats as it did in many places in real world. The ideology of parties may influence the consumer behavior and ultimately the market which again is a threat.