Question

In not more than 350 words Outline the advantages and disadvantages of the US Political factor interms of foreign direct investment.

Answer 1

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Abstract

Political factors are related to how the government intervenes in the economy. Political factors focus on the areas like tax policy, labour law, environmental law, trade restrictions, tariffs, and Stability of Government.

Economic factors include economic growth, exchange rates, inflation rate, and interest rates.

Political factors of United Status are broadly divided into four categories namely Federation, Presidential system ,Liberal democracy and Federal republic.

American politics value is integrated with equality, freedom, and self-government system.

A) Advantages of US Political Factor

The political situation of a country affects its economic setting and the policies in term of Foreign Direct Investments. The economic environment affects the business performance.

A greater level of government spending often stimulates the economy.

Political Factors Affecting Business

Increase or decrease in tax could be an example of a political element. US government might increase taxes for some companies and lower it for others. The decision will have a direct effect on your businesses and inflows of cash in terms of Foreign Direct Investment.

1. Political decisions affect the economic environment. For Example, Capital inflows aid the United States balance of payments and add to the supply of funds available for investment, thereby encouraging lower interest rates.
2. Political decisions influence the country’s socio-cultural environment.
3. For Example, increased competition will result as an important side benefit from foreign investment in the United States.
4. Creation of a new subsidiary or the acquisition of a financially-weak United States enterprise can increase competition and encourage enterprises to operate on the most efficient basis possible.
5. Politicians can influence the rate of emergence of new technologies . For Example,New capital and foreign assistance will be available for troubled United States firms.
6. Politicians can influence acceptance of new technologies.

B) Disadvantages of US Political Factor

1) Risk of Political Stability

Lack of political stability in a country effects business operations and decision of Foreign Direct Investment into US. This is especially true for the companies which operate internationally.

Instability affecting investment returns could seems from a change in government, legislative bodies, other foreign policymakers or military control.

For example, an aggressive takeover could overthrow a government. This could lead to riots, looting and general disorder in the environment. These disrupt business operations. Sri Lanka was in a similar state during a civil war. Egypt and Syria faced disturbances too.

2) Uncertainties of Mitigation of Risk

Though Buying political risk insurance is a way to manage political risk. The decision of Federal Government about the Labor immigration policy and tariff barriers to trade are uncertain factors that affect the decision of Foreign Direct Investment.

Therefore companies that have international operations use such insurance to reduce their risk exposure.

3) Taxation

Nearly all of the federal government’s revenues come from taxes, with total income from federal taxes representing about one-fifth of GDP. The most important source of tax revenue is the personal income tax accounting for roughly half of federal revenue.

Excise duties yield yet another small portion (less than one-tenth) of total federal revenue, however, individual states levy their own excise and sales taxes. So it is need to consider the current tax structure that will affect the decision of Foreign Direct Investment.

4) Trade Restriction

US Governments have several key policy areas in which they can create rules and regulations in order to control and manage trade, including tariffs, subsidies; import quotas and VER, currency controls, local content requirements, anti dumping rules, export financing, free-trade zones, and administrative policies

5) Risk of Acquisition

Economic perspective, foreign direct investment increases the number of acquisitions by foreign investors, which serves to transfer assets to an individual or company that answers to a foreign government.

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