From time immemorial, politics and business have been inextricably linked. In case of international business it is truer than domestic business. In theory, it is possible to draw line between business and politics, but in practice, it has little meaning.
Exploring the role of political activities and forces in shaping economic behavior is known as political economy. The basic purpose of business is always economic. But economics without politics is barren and politics without economics is futile. It means economics and political forces are inextricably linked.
Why should a student of international business need to study political (or geo-political) environment? This question can be answered as under:
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First, there is hardly any activity, what to talk of business, being not affected by politics. Whether economic, law and order, natural environment, welfare, immigration, food, national security or any other matter be, the business is affected by political decisions.
Politics, as described by Aristotle, is the ‘master science’. It is because politics is the key to do everything that human beings do. Literally everything that happens in society is the result of political decision. Politics, therefore, is the making of decisions in society.
Second, like culture, the political systems (ideologies) are different in different nation-states. The differences do affect decisions of international business to decide location of business, entry mode and subsequent success/failure. Even economic integration efforts have not been very successful in harmonizing these differences because every nation has its own national attitude in different areas. “Standards that are acceptable for one nation may be morally offensive to another.” Even after thirty years of its formation the EU still struggles in socio-political based issues such as the Euro and even “jam vs. marmalade.”
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Third, international business is influenced by the political decisions not only made by home country government and other domestic actors but also by the policies of the host country and the third country players. It is necessary for the students to know about all these players and the systems in force before formulating any strategy.
Fourth, governments and business often have competing goals, interests and “perspectives (business concerned for its shareholders, government concerned for the welfare of its national public and having national perspective) leading to uncertain relationship between the two.”The government sets the limits and business firms test the limits’.
The student must understand differences and working of firms within these limitations. The political processes faced by international business firms, whether compliance, evasion, negotiation, cooperation, coalition building, and cooperation, are more complex and pragmatic than for the domestic operations.
Fifth, political decisions affect not only economic activities but also corporate strategies and behavior. Entry of Greece into EU provided Greek firms market access and financial assistance. It also led to a change in the political regime of dictatorship to liberal democracy.
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Sixth, a political decision at home may create global opportunities or obstacles for the firms. India’s nuclear testing in 1998 was globally condemned and many restrictions were imposed by different nations, resulting in depreciation of rupee and delay in FDI inflow.
Seventh, not only government decisions, but political activities pursued by other actors- political parties, unions, and public opinion also influence business decisions. Political unrest or disturbances like civil wars, border disputes, and religious fundamentalism vitiate the economic environment which in turn leads to disruption of normal business activities.
Pakistan would have been the net beneficiary if the gas pipeline between India and Iran passed through its borders. But India decided to delay it as the relations between the two were not normal. A secure and stable political environment is the most conducive to international business.
Eighth, it is not always the international business getting influenced by political decision. In this century, it is the international business activity influencing the political constraints and political agenda.
Remember that 50 of the world’s 100 biggest economic units are firms, not nations. President Bush did not revoke the most favoured nation status against China even when the massacre of students occurred in Tiananmen Square, because it could have threatened expatriates living in China and have adversely affected their businesses.
Last, but not the least, study of political environment of a country will enable the students to understand the phenomenon of ethnicity. It is a driving force behind the political instability around the world – the cause of many uprisings, conflicts and prejudices (Punjabi and Sindhi in Pakistan, Shia and Sunni in Iraq). Through study of ethnic and religious composition of the host country, it would be easier to anticipate as to how they will affect your workforce, production, access to inputs and the market.