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“When considering whether or not to invest abroad companies need to assess the extent to which political risks could impact on business operations. Identify the main political risks which may be faced by companies and what methods of assessment are available to them to inform the business decision making process. Your analysis should be applied to specific businesses in no more than two countries of your choice.
Today the organizations are working in the competitive era, where they have to ensure their sustainability so they can continue their operations for a longer period of time. To ensure their sustainability every business needs to study the business environment which includes that in what type of environment they are running their operations and what could be the implications of the environment over the business. Business environment analysis is the complete study of internal and external factors which put impact on the business whether it could be positive or negative impact. To face the challenges of external factors the company has to adopt a concept of good corporate culture. Strong corporate culture and disciplines helps the company to fight with the external factors (Craig and Campbell, 2012).
In this study we will discuss the political risk or political environment, which every business has to face in the external environment and this problem becomes more severe when it comes to study the political risks of international market. When a company takes a decision to go abroad there are so many factors which they need to assess but out of all these, political risks are very important to be calculated accurately. This study includes the political risk of countries like USA and India and the strategies which may help in managing those political risks. The political situations of these two countries are different from one another. In this report the case of a company dealing in car manufacturing (automobile sector) has been taken and they have identified huge potential in these countries so they decided to enter in the market of USA and India (Carter, 2007).
India is a democratic country where people have their right but still political parties are on the strong side which takes final decision. Any business organization which is expanding its business in India has to face some challenges which come under the political risks or political environment. India has many political parties so here the study of political environment is quite important because here too much interference by political leaders, regional parties and local leaders any particular region or area can be there. India is a developing economy and the automobile company has identified the potential in the Indian market. But they need to be aware of the political risks in India (Chatterjee and Mir, 2008). So the political risks in India, which are needed to be considered before starting the business operations, are as follows:
Government’s norms on international currency could be considered as first political risk in India. The impact of government’s currency actions and foreign exchange policies also effect the business operations of the multinational companies. If the government of India adopts foreign exchange policies which are not favorable for the multinational companies then it could hamper the operations of business in India. With the higher fluctuations of Indian currency there is slump in the Indian economy so the politicians have to think upon it and they can impose such currency actions which could be helpful for the Indian subcontinent but not digestive for the foreign companies. So the fluctuation in interest rates and inflation rate also put major impact on the foreign companies (Kanagasabapathi, 2007).
Tax and other financial duties can be another political risk in India. Every government imposes number of taxes on the foreign companies and tries to reduce their financial burden through those taxes; Indian government also does the same. But if Indian government starts levying more taxes on the operations and take more taxes then it could hamper the operational efficiency of that company. This can even impact the whole structure of automobile sector and if there is unpredictability in foreign investment, pricing and tax issues then also company should take cautious decision on their investment in India (Singh, 2007).
Apart from tax, other regulation and procedures can also create trouble for the organizations in India. The government can change their rules and regulations according to the demand of economy. If it’s a demand of economy to bring regulatory change in automobile sector then government can take preventive steps immediately and change their rules and regulations which can affect company’s strategies and marketing plans. Being a car manufacturing company they need a proper land where they can start their operations and also need to acquire the machinery. Hence, the land acquisition policy also matters for foreign companies. Rules and regulations can vary from industry to industry so the rules and regulations for automobile sector should always be in favor of foreign companies (Daynes and Sussman, 2010).
Indian government has faced so many issues of scandals and corruption. There are so many scandals and major issues which took place in the Indian economy. It also creates doubt about the sustainability of the government and about the credibility of political system. Too many scandals and corruptions can hamper the economy and foreign companies should avoid entering in that kind of economy. Corruption and bureaucratic inefficiency is also one of the major political risks in India (Eden, 2006).
As the company is dealing in car manufacturing and it comes under the automobile sector so it is also a major issue that how much the government of India is supporting the automobile sector. Their future plans for the expansion of automobile sector also need to be considered. Companies should concern about the seriousness of government about the future of automobile sector and should assess the credit policies formulate by the government for the growth of automobile sector. Government should not impose so many restrictions and barriers for the entry of new companies in automobile sector. So these are the issues which they need to focus on (McDermott, 1998).
India is a country of many political parties where a number of regional parties and local parties exist. These parties also play important role in the political system of country. Foreign companies have to focus on managing the local party’s leaders and regional parties as well so that companies can expect supportive behavior and can avoid the trouble for them. Foreign companies have to satisfy the norms and regulations according to the state government and they have to follow the norms of various states as well. There is a slowdown in political decisions due to the political instability (Pick and Dayaram, 2006).
Geopolitics refers to the variation in politics according to the geography and in India there are so many variations in political parties. The major risks that occur for foreign companies are disputes between the local parties and their different views over the foreign investment. The collation between local government and central government can also affect the working of any company (Eden, 2006).
So these are the major challenges of Indian politics which every multinational company have to manage before entering into the Indian Territory. The automobile company can also identify these political risks through different method and techniques. Various methods of assessing the political risks are as following:
The best and basic method of assessing the political risk is to carry out a market research of various political issues. With the help of market research a company can assess the level of marketing risk. They can hire a consulting group to analyze the political environment of India and help them in identifying the various political risks in India. There are so many marketing research firms who can conduct research on the Indian politics and can identify the political risks present in the India. There could be a number of political risks which can occur and can hamper the business operations of any company. Market research will include level of corruption and bureaucracy in politics, inadequate legal system, budgeting, fiscal policy and monetary policy. It could include the stability of government, political environment and the political policies. So, all these factors are helpful in assessing the political risks in India (Pick and Dayaram, 2006).
To assess the political risk organization can study the development and growth analysis of automobile sector in India. Company can identify the trend of development of automobile sector in India. Company can assess the tax policies, other legal formalities and the additional burden imposed by government of India on automobile sector (Morabito, 2008).
The company can study the past experiences of multinational companies that what problems they have faced while expanding in India. The company can study the various responses and reports issued by the other companies about their status in India. Through those reports they can identify the political challenges which other companies, operating in the automobile sector, have faced during their operations in India or while installing their manufacturing units in India (McGregor, 2000).
Business firms can take the help of various political surveys done on Indian politics, whether it could be national agencies or international agencies. These surveys include all the aspects of Indian government and according to their objective they can identify the problems and risks of Indian politics and it could help them in expanding their operations in India. It can help the companies to assess the preventive steps which have been taken by the Indian government to support various automobiles companies (Yaprak and Sheldon, 2000).]Indian politics is always clear about their budget or five year plan which they construct for the benefit of various industries and sectors. The company also needs to focus on budget to identify the level of concentration that has been given to the automobile sector. Is there any development plan for the automobile sector or not. How much tax rebate has been given to the automobile sector? What will be the loan structure on car loan? What will be the interest rate on car loan? These entire set of questions should be well answered. Hence, it will help in identifying the future strategies of Indian government for automobile sector (McGregor, 2000).
So these all will be the methods and techniques through which companies can assess the political risk and inform the decision making process to take investment decision in India.
America is a capitalist economy which focuses on industrialization and globalization. It is a developed country with the proper infrastructure and capital base. But still there are many factors which a company has to study before entering into the American market. Among all business environment factors, political environment affects the business operation highest. Politicians have all the power and authorities in a country to manage the working of different industries. They impose tax and other legal formalities on the business houses and they are the ones who decide the direction of the country. America has become super power and had controlled all the factors of economy both national and global (Palmer and Hartley, 2009). So the major political risks, which can adversely affect the business operations in America, are as follows:
The major risk in USA politics is currency dominance. The USA is a powerful and dominant economy and the currency of USA “dollar” is considered to be an international currency. Each and every transaction on international level takes place in dollar only. If there are too many fluctuations in the currency and there is currency depreciation as compared to dollar then it will cause extra cost to that company and they have to meet that extra cost through extra income. There is question mark on the sustainability of the American economy and in this scenario it will not be beneficial for any multinational company to enter in America (Kew and Stredwick, 2005).
USA is one of the dominant economies in the whole world. Its nuclear power and number of military persons makes USA a super power. The increasing interference of USA in other countries is also a very big political risk in USA. It has tensed relations with Russia and with other countries as well. So threat of war and other activities could be a problem for multinational companies. So many wars have given birth to a tensed environment within the America. The public of America is not supporting the autocratic decisions of American government and they all are dissatisfied with working of current American government and this can lead to the political instability. So the company has to focus on this factor as well (Worthington and Britton, 2006).
Due to the illogical interference of USA in other countries, many countries have become enemy of USA especially gulf countries and it can lead to increased terrorst activities in the country. Country’s security system is fairly tight but still high level of interference in other countries causes terrorism in USA. International relations of America are also not very good with many countries so they have to focus more on the security of common people (Chang and Lee, 2008).
USA is facing the challenge of financial crisis within its economy. The country has a huge amount of debt on them and their capacity to repay is also very low. The financial stability is not in strong position. So many companies are bankrupt and do not have sufficient funds. People are unemployed and their spending capacity has become low. Unemployment has become major political issue and government has much pressure on themselves to provide employment to younger generations of America. Therefore multinational companies have to focus on this factor and it could also be considered as political risks in the country. The amount of debt on America is very high and internal weakness of economy has also become a big political issue rather than an economical issue for America. The government of America is in pressure to create a sustainable environment of economy (Cunningham, 2005).
As USA is a powerful economy, so companies have to follow many restrictions and barriers imposed by the government. Thus, they have to follow several legal formalities which is really a big task. USA government is strict on legal formalities and without completing the legal formalities no company can enter in to the USA.
So, these are the major political risks present in the current scenario of America which the automobile company has to take care of. Otherwise it can cost a lot to them and it will end up with loss only. But before entering in to the American market, company can apply some methods and techniques through which they can assess the risk and inform the decision making process so that on the basis of their study they can take their decisions (Stern, 2004). These methods and techniques are as follows:
It is a complete analysis of political environment on different parameters. The company can conduct political feasibility analysis and study the whole structure of America’s political environment. With feasibility analysis company can identify the enitre political structure of US and easily assess the political risk present in America. This analysis will include all the aspects of politics such as decision making process, thought process, legal structure of America’s government and it will help the company to assess the political risk (Business and industry, 2013).
This analysis comes under the PEST analysis. In this company can study the political environment and find out the conclusion about the negative aspects of political environment of America. Out of the drawn conclusions company can take their investment decision in American market. Political environment includes level of corruption and bureaucracy in politics, fiscal policy and monetary policy, tax policy, labour law, trade restrictions and even environmental law and it includes the stability of government. These issues come under the study of political environment. It is one of the best ways to inform the decision making process about the political risks in America (Wong, 2009).
There are so many agencies, international and national, which conduct surveys about the political environment of different countries and display their reports about the political status of the country. Thus, the company can also refer the reports of those agencies and accordingly take their decisions. Industry subsidies, investment incentives, trade agreements, local content manufacturing requirements, regulatory framework these all are the major political realities and also a key consideration which will be covered in survey and reports. The survey or report on US politics will wrap the current scenario and past decisions of US government about the automobile sector. It is also another method to assess the political risks present in America, particularly for manufacturing units (Williams, 2008).
Hence these are the major sources from where company can gather the information about the political risk and can warn itself to enter in the US market. These all methods and sources are very much useful for any company for avoiding future problems related to political aspects and helpful to handle political challenges and issues in the competitive era.
Through this study it is concluded that study of business environment has become highly necessary for every business organization. There are many uncertainties and unpredictability’s all around the world. To manage the business operations is very much easy for any company but to go overseas and managing the business there is quite a hard task for any organization. Detailed study of international business environment can provide a vast scope of success to companies and ensure their sustainability in that country or region. Political environment plays an important role for any organization as we discussed about the political risks in both the aspects. India is a developing country and US is totally developed country. Only difference is the level of risk. The companies have to learn that how they can manage these risks and how they can fight these challenges. So the political environment of any country decides the future of any organization (Tokuoka, 2013).
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