Political Environment of International Business

Political factors constitute an important environment factor in International Business. Actually politics and economics are inter-related as one influences the other. That was the reason for early writers of Economics preferred to caption their work as Political Economy. Political system, political parties in power, political parties in the opposition, political maturity of the parties, number of political parties, political awareness of people, political stability and the like have great impact on the business environment in a country. The economic policies pursued by a Government are to a great extent the by-product of political environment that impacts businesses very often.

Basic Political Ideologies

Political ideology refers to, ‘the body of ideas, theories, aims and means to execute the ideas, adapt the theories and fulfill the aims that constitute a sociopolitical programme for action’. Depending on the mix of different ‘ideas, theories, aims and means’, there exists Pluralism, Democracy and Totalitarianism as alternative ideologies.

  1. Pluralism: It involves coexistence of different ‘ideas, theories, aims and means’. Pluralism may be existing due to lack of convergence because the polity is made of different interest groups based on ethnicity, language, religion, race and so on and no one group is dominant enough to overrule the rest. Contrary to popular belief that existence of too many ideologies of different ethnic groups might break the polity into disarray and lead to eventual disintegration, such disintegration hadn’t happened. Western nations with capitalistic orientations have this style. The best example is the USA. Individuals have civil liberties and political rights. Civil liberties are measured in terms of freedom of press, equality of all individuals in the eye of law, personal social freedoms and freedom from extreme forms government indifference or interference. Political rights enjoyed depend on the degree of fair and competitive elections, the ability of people to endow their elected representative with real power, the ability of people to float political parties or competitive and competent political groupings to voice their ideologies and existence of safeguards on the rights of minorities.
  2. Totalitarianism: It involves, ‘only one idea, theory, aim and means’. No alternative ideology is allowed to co-exist. There is lack of tolerance. The best example is China. Former USSR was an example. But there used to be the tendency to break away. And that happened with the USSR breaking up into present Russia and over dozen countries. Of course, countries do unite even under totalitarian system do as it happened with Taiwan, Singapore and Hong Kong getting attached to mainland China late 1990s. China could ensure economic growth, but USSR couldn’t. people want development ultimately. As long as this core aim is fulfilled, they stand up together. Individuals have no civil and political freedom. There could be fascism or communist regimes. About 25% of countries are still totalitarian.
  3. Democracy: It involves, a mix of pluralism and totalitarianism. There used to be individual freedom with checks and balances. The degree of political rights and civil liberties enjoyed however vary. Certain rights allowed, certain restricted and certain denied too. India falls in this category. It is the largest democracy in the world in theory. 75% of countries have democracies of some order. Of them, 1/3rd are more pluralistic, 1/3rd are some 50:50 type and remaining 1/3rd are more totalitarian.

Politico- economic System

Political system refers to the set of factors relating to political institutions, the political parties and their ideologies, the form of state governance and the role of the state and its functionaries vis-a-vis, the role of individuals and their organizations. Every country has a political system of its own. There are different forms of political system. A brief summary of each of the forms is presented below.

  1. Capitalism: Capitalism is a politico-economic system wherein, private ownership and initiative, individual freedom to produce, exchange, consume and distribute, market mechanism and consumer sovereignty and limited role of government are found. In short capitalism may be called as ‘free enterprise economy’ where state control on businesses is not existing or minimum. The capitalist political system is pro-private businesses. Competitive efficiency is rewarded in the market. Businesses flourish through efficiency, innovation and serving the consumers. Businesses are directed by market mechanism, least influenced by governmental factors. Whatever influence from Government is pro-domestic business. The western economies like the USA, Canada, Western Europe, etc. have capitalist political system. Since efficiency is rewarded, higher levels of performance are achieved. These economies generally do very well, they attract foreign investment, they introduce latest technologies, patent protection is of high order and so on. Crony capitalism is a pejorative term describing an allegedly capitalist economy in which success in business depends on close relationships between businessmen and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.
  2. Crony capitalism: Crony capitalism is evidenced by politician oriented/owned/controlled business world. Self-serving friendships and family ties between businessmen and the government influences the economy and society. This type of capitalism benefits the political owners and not the consumers. A variant of this form involves ‘collusion among market players’. While perhaps lightly competing against each other, they will present a unified front to the government in requesting subsidies or aid (sometime called a trade association or industry trade group). This is marked by entry walls for new comers, preventing competition. Another variant of crony capitalism encourages businesses to stay in the good graces of political officials. Connections with political bigwigs and lobbyists are more important than actual competition as such in this form of capitalism. Corrupt governments may favor one set of business owners who have close ties to the government over others, based on racial, religious, or ethnic favoritism. In smaller countries this is more popular. Anti-capitalists call it a natural consequence of collusion between those managing power and trade, either by common control or through ‘deals’. Since businesses make money and money leads to political power, business will inevitably use their power to influence governments.
  3. Welfare Capitalism: Capitalism has certain limitations such as neglect of certain business not yielding good profits or those involving greater risk. Individual ‘good’ may not aggregate to collective ‘good’. So, some state role is needed. Herein the government intervenes and fills up the gaps to ensure maximum social advantage. Government supplements and does not substitute private entrepreneurship. The characters of capitalism are applicable to this system in total subject to the above referred to variation. Government relationship with the business takes the same pattern as in the case of capitalism, except that government intervenes in a small way to ensure social welfare of people at large.
  4. Socialism: Socialistic political system is characterized by state ownership of production, exchange and distribution. The main features of this system are: i) Government ownership and/or control of factors of production, ii) Government direction of production, exchange and distribution, iii) Central Planning of resource mobilization, allocation, pricing etc. iv) Restriction private businesses, v) restriction on individual freedom and initiative, vi) government interference in income distribution, vii) government direction on physical distribution and pricing of products, viii) consumer is not the king, only the state is all powerful and so on. In a socialist political system businesses are run and/ or closely controlled by the state. Businesses are run by bureaucrats and not by people with business acumen. Businesses are distanced from profit goal. State policy determines which industry to be developed and which is not to be developed. Private initiative is not nurtured, sometimes is even curbed. Business is dominated by the government bodies.
  5. Communism: A communist political system is nothing but 100% state control of all human activities. It is also known as state capitalism. Production, exchange, consumption and distribution are all state controlled. The difference between socialism and communism is that in communism, consumption is also state controlled. Businesses are run almost like government departments. The dominant environment of business is, truly, the government factor.
  6. Mixed Economy: Mixed economy is said to be the ‘golden mean’ of capitalism and socialism. Side by side public and private ownership exist. This system is in vogue in India. The features of capitalism and socialism are jointly present in this system. Private initiative, freedom of enterprise, consumer sovereignty, individual saving and investment, profit orientation and market mechanism are all there. But it is not entirely free of government control. State initiative, state enterprise, state investment, social objectives like equal distribution, balanced development of all regions, concessions and privileges for the less privileged, reservations for the benefit of weaker sections, etc are found.

Functioning of Political Parties

The political parties in power influence the business environment to a great extent, irrespective of political system. The influence can be pro-business or anti-business. A pro business political party in power can vest the business community an environment of growth, competition and concern. Anti-business party in power would wield a threat of intimidation. The integrity of the political leaders and their kith and kin is a great factor to reckon with. Besides, the real power within the political party in power counts. Now businesses themselves identify with one or other party and who gets rewards depend whose person are in power. When there happens a coalition government, not just one single political party dictates terms for the businesses. There are multiple concerns. Businesses struggle to please too many political leaders. Parties in opposition and their leaders have the role to question government’s decisions in the parliament/legislature. Now-a-days, they exhibit their power in organizing strikes and stalling conduct of business in the parliament or legislature on smaller issues. In a multiparty system, with coalition governments running the government involves lot of compromises despite their common minimum programme. The leaves the business community disillusioned.

Political maturity of the parties and people and Political Stability

Political maturity of parties involves respecting the verdict; the ruling party must not be vindictive; the opposition parties must not be spiteful. Of late these values are given up in the air. Incident free political rallies, absence of hooliganism, terminological pleasance in referring to individual members, issue based expression of view points, freedom to elected members to express their views irrespective of party affiliation, etc are the hallmarks of political maturity. Impartiality of police system and political non-intervention in its action are real test of political maturity. These are far to expect. An air of uneasiness prevails which suffocates businesses. Opportunistic ideologies are followed for short-term electoral gains. That is no maturity. The lesser the number of parties, more the political maturity of people and the better the governance would be. The developed world nations have fewer political parties, while less developed countries have too many political outfits. Businesses suffer more uncertainty with more number of political parties, because the policy environment becomes shaky.

Political stability is a crucial factor. The political system, the number of parties, ideologies of parties, animosities amongst different parties, leadership characters of political parties, the commitment of parties taking power to honor commitments made by previous governments, etc influence political stability. Political stability also means consistency in political decisions, much needed for inspiring confidence in the minds of business community, both national and international. Lack of political stability is an indication of excessive risk businesses suffer.

Relationship between the State and the Businesses

There could be political instability and yet it may not transform into political risk for businesses. This is so when the State respects the business enterprises concerned. Barring a few cases in most countries, today businesses have good relationship with the Government due to LPG policy pursued widely. Multilateral Investment Guarantee Agency (MIGA), bilateral agreements to protect mutual investment interests, etc ensure that good relationship prevails between the State and the MNCs.

The world is becoming a less-polarized. Countries choose businesses across the globe for business relationship based on merits of efficiency rather than political system followed. The USA, sees India as an economic opportunity. So, political and strategic alliances are on the rise. India is also in good relationship with Japan, the European Union, Russia, Republic of China and so on. So, business interests develop across the globe.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

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