|Chapter 9: Political & Economic Factors Affecting International Business
9-1 THE POLITICAL PROCESS: GOVERNMENT’S ROLE IN INTERNATIONAL TRADE
All governments play a part in international trade. Canada’s government seeks to promote Canadian business in other countries and to lessen the risk for foreign companies. They:
In most countries Canada has an embassy, high commission or trade consulate and is run by the ambassador or trade commissioner. They promote and encourage safe and friendly trade. They establish and manage relationships, look after our interests and assist Canadians living there. They help coordinate work permits and visas.
All business activity presents risks that must be managed to be successful and make a profit.
Political risk may mean investors lose money. Losses can be financial, time delays, technical breakdowns, loss or reputation, or loss of market share.
Political risk analysis looks for the causes of risk and predicts the effect it would have on investment in that country. Awareness is the first step. Risk management requires assessing potential political situation. The assessment is factored into business decisions for that country.
Political risk occurs when government policies threaten the business environment. Economic risks include policies and controls to affect price and currency rate. Policies may change at anytime.
Businesses may walk away from opportunities because of the risk. They may minimize the risk by taking out insurance, balance it with more secure projects or build in higher prices for products in the country.
Types of Political Systems
Governments are responsible for passing and enforcing the laws of the country.
Most countries have a democratic model. The general population has the right to vote in free elections. Individuals may own property and run businesses and have free press and free speech. Most have a market or capitalist economy.
Totalitarian systems (North Korea, Cuba, Myanmar) centralize power and often use military control. Governments are single party or a dictatorship. Citizens have little say in the governing. Most have a command economy.
In reality most countries have a mixed system of government. Most countries also have a mixed economy, having elements of both market and command economies.
Recent political events have changed Russia (formerly Communist) and China (still communist) and have created more open markets and trade. Even Canada’s trade with Communist Cuba has increased. Doing business with countries in political transition is risky because of the instability of political, economic and social institutions.
Recent greater interdependence caused pressure for countries to change their political, economic and cultural practices. For example, South Africa faced economic isolation from the world because of apartheid, but eventually gave in to international pressure.
Canada prefers to deal with democratic countries, but important opportunities exist in non-democratic countries (China). Sometimes a strong authoritarian government provides stability that a shaky democratic government could not.
When a trade war occurs countries will act aggressively in international markets and other areas to promote their own trading interests. In 2001 Canada banned Brazilian beef officially because of mad cow disease, but it was suspected it was because of the sale and subsidy of Canadian and Brazilian-made aircraft. Grocery stores and transportation companies lost business in the crossfire.
Interdependence also happens because of economic imperialism. A less-developed country can address the needs for a developed country by providing raw materials and markets.
In “Coca-Colonization” powerful multinationals can exert considerable economic and cultural power over local people. Today, pressure groups and populist movements demonstrate against this and protest against the WTO.