Companies have to be concerned not only with the political environment in their

Question

Companies have to be concerned not only with the political environment in their home country, but the uncertainty that exists with political environments in other countries in which they expand. What are factors or criteria that make up the political environment, and what risks do companies face? In addition, when we hear about the political or governmental environment, it often has a negative connotation. Is it always negative – are there things from the political environment that might benefit a company - especially a smaller company trying to compete?

Explanation / Answer

There are numerous factors or criteria that make up a country's political environment and businesses may either take advantage of such criteria or face risks. Some of these factors include:

Type of government and stability: Stability indeed is one of the most important criteria a company looks when it plans to expand. If a company is planning to expand to country A, which has an unstable government and conflicts in the political environment due to different political views, then the company faces a risk of its own stability in that country.

Laws, Corruption, and freedom of Press: if a country has a weak law and order system and is ranked top in corruption, then the company may face legal risks and may also incur huge costs in corruption. Freedom of Press also plays a crucial role in a country's political environment as it provides "free information" to the public about what is happening in the country. Lack of free Press would further risk the existence of the company in a new market.

Taxes: Perhaps, this is one of the first things a company looks at before expanding its business. It makes more sense for a company to expand its business to a country where it can leverage tax benefits. Other regulations such as trades and tariffs also play a major role. A country that is more closed would imply a risk in trading the company's products within and outside the country.

The political or governmental environment is not always negative. In fact, many companies expand overseas to avail the benefits of the country's political environment. There are certainly things from the political environment that might benefit a company (especially a smaller company trying to compete). For example, countries that are developing and are looking for foreign investments may have flexible regulations for setting up foreign business in the country. The government may allow up to 50% or more equity for the foreign company. It may also provide favorable labor regulations. Such scenarios do provide a positive political environment for companies wanting to expand their business.

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