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International Management. Phatak, Bhagat, and Kashlak. Chapter 3. The Political Environment and Political Risk. Learning Objectives.

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International management

International Management

Phatak, Bhagat, and Kashlak

Chapter 3

Chapter 3

The Political Environment and Political Risk

Learning objectives

Learning Objectives

  • Describe the components, relationships, and interactions involved in the political systems model, and explain how the one-nation model can be extended into a global business context.

  • Explain the reciprocal nature of the dynamics between political and economic systems, policies, and relations.

  • Define and differentiate among the various types of political risk, and discuss their implications for the multinational firm.

  • Discuss comprehensive frameworks for assessing political risk, from a global as well as a single-country perspective.

  • Understand alternative methods used to hedge against risk from political and politically-imposed economic changes in a host country.

  • Understand practical implications of political risk for the manager working overseas.

Chapter topics

Chapter Topics

  • Macro-level Environments and Uncertainties

  • The Political System

  • The Global Political System

  • The Interaction Between International Politics and International Economics

  • Political Risk and the International Firm

  • A Global Framework for Assessing Political Risk

  • Managing International Political Risk

Table 3 1 macro environmental uncertainties types

Political Uncertainties

Government Policy Uncertainties



coup d'état

Democratic changes in government

Fiscal and monetary reforms

Price controls

Trade restrictions


Government regulation

Barriers to earnings repatriation

Inadequate provision to public service

Table 3-1: Macro-Environmental Uncertainties(Types)

Table 3 1 contd

Macroeconomic Uncertainties

Social Uncertainties


Changes in relative price

Foreign exchange rates

Interest rates

Terms of trade

Changing social concerns

Social unrest



Small-scale terrorist movements

Table 3-1 (contd.)

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Fig 3-1: The Political System













Consensus and legitimacy

Consensus and Legitimacy


  • Is the widespread acceptance of the decision-making process in the political system by the individuals and groups in the system. It is the instrument by which a government itself becomes legitimized


  • Is the use of power of the state by officials in accordance with prearranged and agreed upon rules. A legitimate act is also legal, but a lawful command is not always legitimate

Fig 3 2 political and economic systems

Fig 3-2: Political and Economic Systems



Central Planning










Market Economy



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Fig 3-3: Political and Economic Change (1982 - 2002)





European Union

Countries 1982

European Union

Countries 2002

Malaysia 2002

Malaysia 1982

Russia 2002

Chile 2002

Nigeria 1982

Nigeria 2002

Russia 1982

China 2002

China 1982

Chile 1982

Viet Nam 2002

Viet Nam 1982

Central Planning Market Economy

Economic Change

Political risk

Political Risk

Political risk is the likelihood that political forces will cause unexpected and drastic changes in a country’s environment that significantly affects the opportunities and operations of a business enterprise

Types of political risk

Types of Political Risk


  • Is manifested in the mutual hostility between Israel and Syria. One would expect that Israeli companies would find little support in Syria, and the same would apply for Syrian companies in Israel


  • Invokes either a favorable or unfavorable response aimed at a particular company


  • Involves special treatment bestowed on a certain type of project

Types of political risk contd

Types of Political Risk (contd.)

Transfer Risk

  • Is the change in the degree of ease or difficulty experienced in making transfers of capital, goods, technology, and people in and out of a country

    Operational Risk

  • Is the impact on the operations of a firm caused by changes in the government’s policies

    Ownership Risk

  • Involves a change in the proportion of equity owned by a company in a foreign subsidiary

Fig 3 4 classification of types of risk for company a in country xyz

Fig 3-4: Classification of Types of Risk for Company A in Country XYZ

Legend **** = High * = Low

The political process

The Political Process

An exhaustive study of the political process would involve the following:

  • Study the relative power of the dominant groups in the society, and become familiar with their ideologies

  • Study the decision-making process in the government

  • Evaluate the relative strength and bargaining power of the political parties in the legislative branch

  • Study who are the key decision-makers in both the legislative and executive branches of government

  • Study the path traveled by the government in power over the past several years in terms of its economic, social, and foreign policies

  • Evaluate the impacts on the industry and your company of the anticipated political decisions of the government, i.e. the political risk facing the industry and company in the host country

Civil strife in host country mediating factors

Civil Strife in Host Country :Mediating Factors

  • Coercive potential

  • Institutionalization

  • Facilitation

  • Legitimacy of the regime

Fig 3 5 framework for assessing civil strife

Fig 3-5: Framework for Assessing Civil Strife

Ex 3 1 staying safe while working overseas

Ex. 3-1: Staying Safe While Working Overseas

  • Always remain aware of your surroundings and avoid unusual circumstances

  • Walk with authority and purpose while in public areas

  • Call ahead to notify others of your travel plans or appointments

  • Alternate your routes to work on a regular basis

  • Alternate your timing to and from your work location

  • Avoid wearing American or British flag pins or other insignia in public

  • Speak in the native language where you’re working

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Fig 3-6: The Environments of Political Risk

Host Country




and Groups


Home Country


International Events

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Fig 3-7: Managing Political, Legal and Economic Risk

Direct Indirect

> Legal Action

> Host Operations

Dependent on Home

> Control Makeup of


> Risk Insurance

> Contingency Planning

> Home Country Govt.

Pressure on Host Govt.





  • > Joint Ventures

    > Licensing Agreements

    > Other Host Partners

  • > Promote Host Goals

> Lobbying Home and

Host Governments

> Corporate Citizenship

in Host Country

Key terms and concepts

Key Terms and Concepts

  • Political system

  • Political forces

  • Level of perceived deprivation

  • Coercive potential

  • Institutionalization and civil strife

  • Facilitation and civil strife

  • Regime legitimacy and civil strife

  • Civil strife

  • Macro and micro risk

  • Proactive and reactive hedges

  • OPIC

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