Political Risk in International Business

by kenshin82 (student)

University Degree Business and Administrative studies

Table of Contents

Introduction 1

Main Content 1

Definition and classification of Political Risks 2

Analyses of the case of Starbucks failure in Israel due to Political Risk 4

Conclusion 5

Introduction

Among variety of factors that face the international business such as Culture, Economic Environment and …, politics is more and more regarded as an important issue that need to be taken into account if a firm wants to do business internationally. The vital position of politics in international business has long been documented but it has just been focused by scholars over the past several years after series of wars such as confliction between Iran and Iraq, the crisis between Argentina and Britain or the Russian conquer over Afghanistan…etc. The political risk as well as any other type of risk in global trade is strong enough to terminate businesses if the entrepreneurs are not adapted to environment and lack of appropriate strategies. Therefore, assessment of political risk is necessary to any firm which does care about the success or failure of its own. Besides, it is also vital for entrepreneurs learn how to face with the problems arising in the more and more complicated world, in particular, the political issues and how to make good decisions and set up plans before entering such troubles.

Main Content

Definition of Political Risk:

There are numerous ways to approach the description of Political Risk, Truitt suggested that “political risks are all ‘non-business’ risks such as creeping expropriation”[1]. The Commission on Foreign Investments defined political risk in terms of loss over ownership or loss of benefits of enterprise by government action. Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such nonmarket factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (, riots, coups, civil war, and insurrection).”[2] Whichever stated, political risk can be grouped as follows:

Domestic Politics [3]

Different countries have various political environments, especially in Asia, Latin America and Africa. The unstable political situation will be affected to any businesses as well as the changes of government from different political party also influence in regulation. For example in Venezuela, President announced new policies to encourage the economic development. There are several controversy regulations about labors, economy and foreign policies. As an oil producer country, Venezuela is a great opportunity for business. But, nationalization policies announced by Chavez government have increased risks of investments by foreign company and even discourage foreign companies to do business ...

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Domestic Politics [3]

The changes of government in a country influences the business safety, because sometimes there are no safety guarantee from a government for any properties, venture or specific assets and if there is unexpected scenario occurs, the companies faced with losses even though there is a compensation but unfair.

International Interfere

Differ with domestics politics, international interferes will affect to domestic stability politically or economically. The interventions of international community drive foreign businessmen to move their business to other countries that having no influences by other countries. For example, Burma's military dictator who arrested Aung San Suu Kyi has stimulated international protests for doing business in Burma. The impacts of human rights violations and drugs trade were embargo in several sectors by international community which meant lower economic development because of inflation. As a rich agricultural country, Burma should be a great opportunity place for agriculture business. Unfortunately, international community interferes discourage foreign companies to do business in Burma.

The newest action by international community is boycott of Olympic 2008 in Beijing, China caused by human right violation in Tibet where killed hundreds people. By having boycott for Olympic 2008 will affect domestic economic and international business. And so, international interfere for a country as one of political risks in international trade

Terrorist Attacks

Terrorism can be occurred because of domestic politics or global causes. No country in this world safe from terrorist's attacks, terrorism can be happened anywhere and anytime. 9/11 tragedy has changed political map in the world and undoubtedly it also affected to international trade. Then international community has figured several countries that agreed as terrorism targets or terrorism places such as South East Asian countries, South Asian countries, and also several countries in Middle East. Let say when Bali bomb occurred on 2003, foreign companies and investors run away from Indonesia which caused domestic economic problems. Bali bomb tragedy was not only affected Indonesian economy but also regional areas such as Singapore and Malaysia. Many businesses moved to India and China which believed safer than South East Asian countries.

Analyses of the case of Starbucks failure in Israel due to Political Risk:

Starbucks Coffee International, Inc., based in Seattle Washington, purchases, roasts, and sells whole bean coffees, brewed coffees, Italian-style espresso beverages, and cold blended beverages salads, hot and cold sandwiches and panini, pastries, snacks, and items such as mugs and tumblers. The firm has more than 17,800 stores including 11,000 in the United States, nearly 1,000 in Canada and more than 800 in Japan and the rest in North America, Europe, the Middle East, and Asia and the Pacific Rim among other regions. Up to now, Starbucks operates in 55 countries. Starbucks Coffee International operates as a subsidiary of Starbucks Coffee Company. Starbucks diversified its business. Starbucks now offfers compact discs, books and other life style products. In addition they have created several strategic alliances with food manufactures both domestic and Abroad. ()[4]

The first Starbucks location outside North America opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of the then 60-outlet, UK-based Seattle Coffee Company, re-branding all the stores as Starbucks.

In April 2003, Starbucks completed the purchase of and from , bringing the total number of Starbucks-operated locations worldwide to more than 6,400. On September 14, 2006, rival announced that it would sell most of its company-owned retail stores to Starbucks. This sale includes the company-owned locations of the Oregon-based chain. Starbucks converted the Diedrich Coffee and Coffee People locations to Starbucks, although the Portland airport Coffee People locations were excluded from the sale.[5]

Logo of Starbucks:

In 2003 Starbucks closed all six of its locations in Israel, citing "on-going operational challenges" and a "difficult business environment."

Foreign trade university

2010

Political Risk in International Business

Identifying and classifying Political Risk within International Business

Le Thuy Linh

mib5, subject: international business,

lecturer: Dr. Do thi hong yen, task: individual essay.

[1] (1974, p.12).

[2] Kennedy, C. (1988): Political Risk Management: A Portfolio Planning Model, Business Horizons, Vol. 31, p.21

[3] http://www.helium.com/items/1011464-political-risks-in-international-trade?page=2

[4] http://www.nytimes.com/2008/07/30/business/worldbusiness/30sbux.htmlStarbucks Says It Will Eliminate 1,000 Jobs and also http://en.wikipedia.org/wiki/Starbucks

[5] Hirsch, Jerry (15 September 2006). . Los Angeles Times. . Retrieved 2009-05-13.