Sovereign states and multinational corporations:
is independent and free from all external control
the powers exercised by a state in relation to other countries, as well as the
powers of a state as exercised over its own inhabitants
Nations can and do abridge specific aspects of their sovereign rights in order to coexist with other nations. The EU, NAFTA,
NATO, and WTO represent examples of nations voluntarily agreeing to give up some of their sovereign rights in order to participate
nations for a common, mutually beneficial goal.
The United States involvement in international political affiliations is surprisingly low (i.e., it is largely sovereign).
Countries that agree to relinquish some of their sovereignty often are subject to a nagging
fear that too much has been
given away. For example, the WTO is considered by some as the
biggest threat so far to national sovereignty.
Stability of government policies:
The ideal political climate for a multinational firm is a stable, friendly government. Unfortunately, governments are not always stable
and friendly, nor do stable, friendly governments remain so. Radical shifts in government philosophy when an opposing political party
ascends to power, pressure from nationalist and self-interest groups, weakened economic conditions, bias against foreign investment,
or conflicts between governments are all issues that can affect the stability of a government.
There are five main political causes of instability in international markets: some forms of government seem to be inherently unstable;
changes in political parties during elections can have major effects on trade conditions; nationalism; animosity targeted toward
specific countries; and trade disputes themselves.
(examples: India and Italy)
Political risks of global business:
Issues of sovereignty, differing political philosophies, and nationalism are manifest in a host of governmental actions that enhance the
risks of global business.
The most severe political risk is confiscation, that is, the seizing of a company's assets without payment.
Less drastic, but still severe, is expropriation, where the government seizes an investment but some reimbursement for the assets is
A third type of risk is domestication. This occurs when host countries gradually cause the transfer of foreign investments to national
control and ownership through a series of government decrees by mandating local ownership and greater national involvement in a
Assessing and reducing political vulnerability:
Products that have or are perceived to have an effect on the environment, exchange rates, national and economic security, and the
welfare of people and that are publicly visible or subject to public debate, are more likely to be politically sensitive.
Health is often the subject of public debate, and products that affect or are affected by health issues can be sensitive to political