MODULE 5: The Legal and Political Environment of Global Business

 POLITICAL ENVIRONMENT – refers to factors outside the company, relating to the

government or public affairs of a country, influencing companies. In some cases, transnational
institutions such as the World Trade Organization, IMF, and World Bank also fall into this
category. In a broader sense, the term also covers various institutions that have the authority to
launch policies and regulations.

Impact on Business:
Changes in the political climate can carry significant risks. They can jeopardize the company’s
strategy. War, political turmoil, and corruption are examples. Some others also have beneficial
effects such as privatization and strict law enforcement.

5 Main Political Causes of Instability that Affect the International Markets:

- Some forms of government seem to be inherently unstable
- Changes in ruling political parties
- Extreme nationalism
- Animosity targeted toward specific countries
- Trade disputes

 POLITICAL RISKS – is the risk an investment's returns could suffer as a result of political
changes or instability in a country. Instability affecting investment returns could stem from a
change in government, legislative bodies, other foreign policymakers or military control.
Political risks are the risks that political forces or problems in a country will have a meaningfully
negative impact upon the conduct of business in that country.

The outcome of political risk could drag down investment returns or even go so far as to remove the
ability to withdraw capital from an investment.