Question

Explain how your business could be adversely affected by political risk.

Answer 1

Political risk means risk of a change in government policy.It may adversely affects a business ability to operate effectively and profitably.Considering all other things being equal,the political risk is more in a less developed country.Now let us see how your business could be adversely affected by political risk.

Political risk may affect earnings of a business through direct impact such as taxes or fees and indirect impacts such as opportunity cost forgone.This will affect the business adversely as it will not more be attractive for investment due to reduction of its anticipated returns.

Another change in Goverment policy resulting into political risk which will adversely affect business is Nationalisation. This refers to a situation under which a government takes over the ownership of the business.That means the ownership of the business gets transferred to a government agency.The transfer of ownership may be done with or without paying any compensation to the previous business owners.

Another political risk is Domestication.It refers to a situation under which government restricts gradually the freedom of operations of a foreign business with the aim of bringing the activities of a foreign business firm in line with national interest.This will adversely affect business of the foreign firm by making it less attractive.

Even blocking of funds is another type of political risk by which the foreign business firm is not allowed to repatriate it's earnings and investments.This will again adversely affect the business.

Finally it can be said that when the perceived level of political risk is high,business attracts less investment which in turn affects your business adversely.