MR. N Ntambo



MBA 29 – Business Environment



June 2009


July 2008

Assume that a company is considering moving production to a location in a developing country, but is concerned about political instability. What particular aspects of the country’s political structure and processes should it take into account when assessing political risk?

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ASSIGNMENT GUIDANCE This assignment is intended to assess the student’s knowledge in all of the following areas. However, greater emphasis should be given to those items marked with a (Tutor: - please tick as applicable) ASSESSABLE SKILLS Please Tick.


Good and adequate interpretation of the questions Knowledge and application of the relevant theories Use of relevant and practical examples to back up theories Ability to transfer and relate subject topics to each other Application or use of appropriate models Evidence of library research Knowledge of theories Written Business English communication skills Use of visual (graphs) communications Self Assessed ‘time management’ Evidence of field research Tutor’s Mark Contribution

MARKS (Administration only*) LECTURERS FEEDBACK: Assignment Question 1: Assume that a company is considering moving production to a location in a developing country, but is concerned about political instability. What particular aspects of the country’s political structure and processes should it take into account when assessing political risk?



ASSIGNMENT BRIEF................................................................................................................... 1 Contents.......................................................................................................................................... 3 Section 2......................................................................................................................................... 5 Particular aspects of the country’s political structure and processes that should be taken into account when assessing political risk .............................................................................................5 REFERENCES................................................................................................................................... 9 Kreps, 2003, A Course In Microeconomic Theory (Paperback) Http://Www.Oup.Com/Uk/Orc/Bin/9780199296378/01student/Additional/Page_12.Htm.................9


Section 1 Introduction: Definitions To start the discussion of the essay topic, it is imperative to define and know what the term business environment refers to. Business environment refers “to a set of political, economic, social and technological (PEST) forces that are largely outside the control and influence of a business and that can potentially have both a positive and a negative impact on the business” (Varian, 1992, p 4 ). Today's world is a rapidly changing place. Developments across a range of factors will have an impact on a business or industry. The classic PEST framework (political, economic, social, and technological) identifies four major categories of external factors that affect the ability of an organization to survive and prosper. The reason for this framework is that business does not function in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. An important concept to understand before going further into the essay is political risk. Political risk has been defined “as a type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with proper aforethought and investment” (Barnett, 2003, p8). Broadly speaking, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisions—or “any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives.”[ Middleton, 2002, p2] . Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labor, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection.” (Wagner, 2003, p5) Portfolio investors may face similar financial losses. Moreover, governments may face complications in their ability to execute diplomatic, military or other initiatives as a result of political risk. In general, there are two types of political risk, macro risk and micro risk. Macro risk refers to ‘adverse actions that will affect all foreign firms, such as expropriation or insurrection, whereas micro risk refers to adverse actions that will only affect a certain industrial sector or business, such as corruption and prejudicial actions against companies from foreign countries’ (Mckendrick, 2005,

p2 ). All in all, regardless of the type of political risk that a multinational corporation faces, companies usually will end up losing a lot of money if they are unprepared for these adverse situations. For example, after Fidel Castro's government took control of Cuba in 1959, hundreds of millions of dollars worth of American-owned assets and companies were expropriated. Unfortunately, most, if not all, of these American companies had no recourse for getting any of that money back. For purposes of this essay however, we shall discuss aspects of the country’s political structure and processes of a developing country that a company should take into account when assessing political risk in relation to its desire to move in a particular environment and set up its business operations. Section 2 Particular aspects of the country’s political structure and processes that should be taken into account when assessing political risk Among the challenges that businesses may face in establishing operations in a developing nation are listed below:

Humdrum uncertainties about emerging-market governments’ attitude to the

rule of law. The rule of law does not have a precise definition, and its meaning can vary between different nations and legal traditions. Generally, however, “it can be understood as a legal-political regime under which the law restrains the government by promoting certain liberties and creating order and predictability regarding how a country functions. In the most basic sense, the rule of law is a system that attempts to protect the rights of citizens from arbitrary and abusive use of government power” (Atiyah, 1979, p8 ) .A business will consider governments’ attitude to rule of law because it does not want to set up business in a lawless situation. 2. Intellectual property: “Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Intellectual property is divided into two categories” (Middleton, 2002, p1 ): Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs. A company will consider whether any possible theft of intellectual property will be punished as a matter of political will?


Regulatory enforcement: Will lax regulatory enforcement by political heads allow a

company’s supply chain to be contaminated? (For example, Whole Foods Market discovered in July 2008 that Chinese powdered ginger it had been selling as organic contained a banned pesticide.) if politicians do not show will to enforce regulation

Common allegations. Typical allegations made against political leaders in office include
5. Manipulating assets for personal gain by paying political ;leaders unearned dividends,

inadequate loan or investment underwriting and administration procedures; bonuses, or other compensation; 6. Overstating an institution's income, profitability, and net worth;
7. A government’s failure to establish adequate loan loss reserves; 8. Fraud for failing to disclose a personal interest in a loan transaction in both major and minor

government dealings.
9. Desire by political leaders for unjust enrichment due to self-dealing and conflicts of interest; 10. Engaging in speculative investments (especially in high risk ventures based upon

insufficient information and planning); 11. Undisclosed kickbacks, commissions, and fees and other unsafe, unsound, or fraudulent lending practices; and
12. Generally poor management culture, including hiring incompetent relatives and friends,

concealing conflicts of interest, and failing to operate subsidiaries as separate entities.
13. Of course, there is probably no more serious concern a company may make, both legally and

practically, than failing to take needed corrective action pointed out by critics.
14. Sudden government decrees: Might the Government Issue a decree that alters the

fundamentals of your business, without consultation or recourse, as often happens in China? 15. Will it decide suddenly to break up local monopolies, or alternatively encourage their formation?
16. “Macroeconomics is much and considers economic aggregates i.e. the output for the whole

country and the "general" price level. It involves the study of inflation, unemployment, growth etc” (Chiang, 1984, p3). In it, there is the traditional game of guessing whether governments will abandon sound fiscal and monetary policy at the first sign of economic turbulence. The leading multinationals insist that emerging markets are now so important to their long-term growth prospects that they have to be in them regardless of short-term macroeconomic policy risks. Gone forever, they insist, is the shortsighted old habit of rushing into emerging markets as they get hot, and out again at the first whiff of trouble

17. War and external threats which arise out of political disputes, including conflicts over issues of sovereignty and border disputes greatly pose a threat to companies wishing to enter new market. New companies also consider possibilities for civil and labor unrest, including strikes, protests and demonstrations against the government. These most likely will affect the operations of the government in a negative manner. Internal violence, as evidenced by bombings, assassinations, kidnappings, low-intensity guerrilla warfare and crime in most developing countries should be considered as a determining factor to enter the market.
18. Regime stability, based on the probability of a change in leadership through either a regularly

scheduled election or unanticipated development such as a coup or death is also a political risk for a company. “Changes in government policy can affect a business e.g. a decision to subsidize building new houses in an area could be good for a local brick work” (Kreps, 2003, p5). Government’s introduction of a new legislation e.g. increases minimum wage can pose a political risk too. Role of Non Governmental Organizations NGOs, Media and Civil society On a much lighter and brighter note, ‘NGOs are beginning to spring up throughout the emerging markets, demanding higher ethical standards of business and political leaders’ (Mishra, 2006, P7). In Africa, for instance, much of the initial pressure for better governance and less corruption came from the NGOs and civil society such as Transparency International of Zambia and the media. The role that NGOs, media and civil society play in the running of political affairs should in a way be one of the factors that a new company can consider. This is because to a large extent, the NGOs can contribute to the promotion of good governance which consequently leads to the creation of a conducive business environment. Conclusion Political instability is arguably more pervasive and fundamental to who makes or loses money than at any time since the Second World War. Worse still political risk is most prevalent in emerging markets such as markets in most African countries and in particular, Zambia too. Developed-country governments do unexpected things that are every bit as troublesome as emergingmarket governments. For example, “an oil or gas company today will worry more about emerging markets in the lime manner as it would worry over a windfall-profit tax in the US.”( Satoshi, 2007, p2) says GE’s John Rice. Another case in point too, too, is the recent heavy-handed interventions in the financial system by the American government. Yet most business leaders around the world reckon that political risk is a far greater problem in emerging markets. Ask the boss of Carrefour, a French

retailer, whose shops in China saw violent protests this year after pro-Tibet campaigners disrupted the progress of the Olympic torch through Paris. Western oil and mining companies, having started to improve their behavior in Africa under pressure from NGOs, now face competition from Chinese, Indian and Russian rivals that seem willing to cut deals with even the most unsavory African politicians. And how do Western firms compete in countries where bribes are seen as an ordinary cost of doing business?


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Are Fully Insured.". The Economist. Http://Www.Economist.Com/Finance/Displaystory.Cfm? Story_Id=8967224. Retrieved On 2007-04-08 2. Chiang, A. C, 1984, Fundamental Methods Of Mathematical Economics; Auckland, McgrawHill Http://Www.Wipo.Int/About-Ip/En
3. Daniel Wagner (July 2002). "Political Risk Insurance In Asia: Who Purchases It, Where, And


International Analysis Of




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10. Varian,












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