Understanding Political Risk & Globalization in International Business

Posted on Oct 16, 2024 in Economy

What is Political Risk?

Political risk is a risk faced by investors, corporations, and governments. It can be understood and managed with foresight and investment.

Classifications of Political Risk

Political risk is classified based on:

  • The actor responsible
  • The nature of the effect
  • Breadth (micro vs. macro)

Political risk for multinationals involves the potential for adverse political decisions in a host country to negatively impact profits and/or goals. These actions can range from extreme events like revolutions to financial measures such as capital movement restrictions.

Hierarchy of Needs in Multinational Corporations

Abraham Maslow’s hierarchy of needs theory explains human needs and preferences based on five factors:

  1. Physiological Needs: Basic survival requirements like air, food, water, shelter, warmth, sleep, and sex.
  2. Safety Needs: Once physiological needs are met, these include protection, security, order, law, limits, and stability.
  3. Love/Belonging Needs: The feeling of connection to others, including family, relationships, and work groups.
  4. Esteem Needs: The need for respect, recognition, and status.
  5. Self-Actualization Needs: The drive for personal growth, development, and fulfillment.

This theory is relevant for multinational corporations with worldwide operations because understanding these needs helps tailor management and marketing strategies to diverse workforces and consumer bases.

International Business: The New Bottom Line

This section examines the importance of international business for firms and the factors shaping this landscape. Multinational corporations increasingly influence international policies rather than simply following them. This is largely due to their dominance in global trade and production.

Key aspects to consider include:

  • Reasons for investing in another country
  • Requirements for becoming a multinational corporation
  • Recognizing competitive advantages
  • Technology and its life cycle
  • The division of labor

How Import Quotas Work

Import quotas are non-tariff trade barriers that limit imports of specific products. They stabilize domestic prices above world prices for protected products, benefiting US suppliers.

Import quotas reduce the elasticity of supply. When a quota is imposed, the total supply becomes the domestic supply plus the quota amount.

Quotas benefit domestic producers at the expense of consumers. For example, the 1981 voluntary restraint agreement limited Japanese car exports to the US to 1.68 million annually, protecting the American auto industry.

Factors Contributing to Globalization

Several factors have contributed to the growth of globalization:

  • Developed Transport and Lower Transport Costs: Improved transport, particularly air travel, facilitates the movement of people and goods.
  • Development of Trading Blocs and Reduction of Trade Barriers: Trading blocs like the European Union, NAFTA, and ASEAN have reduced national barriers.
  • Growth of the Internet and Global Media: Increased communication and information sharing promote global interconnectedness.
  • Rise of Multinational Corporations: These corporations play a significant role in global trade and investment.
  • Global Trade Cycle: Economic growth is increasingly global, meaning events in one country impact others.