THE POLITICAL AND ECONOMIC ENVIRONMENT

- bribery and corruption – what are the reasonable ways of doing business internationally?
- programmes by governmental organizations to promote exporting – export subsidies? Export subsidies are to the export industries what tariffs are to domestic industries
- financial activities – export credit agencies (e.g.
FINNVERA) offer exporters the opportunity of transferring some of the risk to governmental organizations
- information services
- export-facilitating activities
- promotion by private organizations
- state trading (e.g. Cuba, China)

Host country environment
- Political risks
1) Ownership risk, which exposes property and life
2) Operating risk, which refers to interference with the ongoing operations of a firm
3) transfer risk, which is mainly encountered when companies want to transfer capital between countries

- political risk can be the result of government action or it can be outside the control of the government: import restrictions (on raw materials, machines, spare parts), local-content laws ( e.g. the EU has a 45 per cent local-content requirement for foreign-owned assemblers), exchange controls, market control (US government threatened to boycott foreign firms trading with Cuba), price controls (can be used by a government during inflationary period; pharmaceuticals, food, petrol, cars), tax controls (a political risk when used as a means of controlling foreign investments) , labor restrictions (strong labor unions) , change of government party, nationalization/ expropriation

Trade barriers from home country to host country
Why do countries impose trade barriers to exports/imports?
- tariffs and non-tariff barriers (quotas, embargoes, administrative delays, local-content requirements)
Political risk-analysis procedure
Step 1: Issues of relevance to the firm
Determine critical economic/business issues to the firm. Assess the relative importance of these issues.

Step 2: Potential political events
Determine the relevant political events
Determine their probability of occurring
Determine the cause and effect relationships
Determine the government’s ability and willingness to respond
Step 3: Probable impacts and responses
Determine the initial impact of probable scenarios
Determine possible responses to initial impacts
Determine initial and ultimate political risk

THE ECONOMIC ENVIRONMENT
Exchange rates
weak currency (valued low relative to other currencies) strong currency (valued high relative to other currencies)
What is the impact on exports/imports?
devaluation/revaluation
depreciation/appreciation
stable exchange rates improve the accuracy of financial planning
methods for insuring against adverse exchange rate movements are often too expensive for SMEs

Regional economic integration
Countries have wanted to engage in economic cooperation and to provide large markets for member-country producers
Free trade area – all barriers to trade among member countries removed, each member country has own trade policy towards non-members
Customs union - all barriers to trade among member countries removed, common trade policy towards non-members
Common market – same as above + factors of production move freely among members; Single European Act 1987
Economic union – same as above + integration of economic policies; members harmonize monetary policies, taxation and government spending, common currency