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• Country risk

  Exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments
• Government intervention, protectionism, and barriers to trade and investment are particularly notable in international business. Mismanagement or failure of the national economy can lead to financial crises, recessions, market downturns, currency crises, and inflation. Such events usually arise from business cycles, poor monetary or fiscal policies, a defective regulatory environment, or imbalances in the underlying economic fundamentals of the host country.
• Venezuela, Zimbabwe, Afghanistan


  • Suffer from unstable governments, underdeveloped legal systems, or biased law enforcement
• Canada, Japan, Singapore


  • Characterized by stable, transparent, and well-founded political and legal systems
• Political system


  A set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions.
• Principal functions of a political system

  • Provide protection from external threats
  • Ensure stability based on laws
  • Govern the allocation of valued resources among the members of a society
  • Define how a society's members interact with each other
• Legal system


  A system for interpreting and enforcing laws. Laws, regulations, and rules establish norms for conduct.
• Functions of a legal system

  • Ensure order
  • Resolve disputes in civil and commercial activities
  • Tax economic output
  • Provide protections for private property, including intellectual property and other company assets
• Political and legal systems are dynamic and constantly changing. The two systems are interdependent, changes in one affect the other.
• Adverse developments in political and legal systems give rise to country risk. They can result from installation of a new government, shifting values or priorities in political parties, initiatives special interest groups develop, and the creation of new laws or regulations.
• Gradual change is easier for the firm to accommodate; sudden change is harder to deal with and poses greater risk to the firm.
• Country risk is always present, but its nature and intensity vary over time and from country to country.
• In China, the government is currently overhauling the national legal system, making it more harmonious with Western systems. Some new regulations have been poorly formulated or are confusing or contradictory.
• Three major types of political systems

  • Totalitarianism
  • Socialism
  • Democracy
• Totalitarianism


  The state attempts to regulate most aspects of public and private behavior. A totalitarian government seeks to control not only all economic and political matters but also the attitudes, values, and beliefs of the citizenry.
• Well-known totalitarian states from the past

  • Nazi Germany (1933–1945)
  • Spain (1939– 1975)
  • China (1949–1980s)
  • The Soviet Union (1918–1991)
• Today, numerous states exhibit elements of totalitarianism, particularly in Africa, Asia, and the Middle East.
• Socialism


  Fundamental principle is that capital and wealth should be vested in the state and used primarily as a means of production rather than for profit. Socialism is based on a collectivist ideology. Collective welfare of people is seen to outweigh the welfare of the individual.
• Democracy


  Characterized by two major features: 1) Private Property Rights, 2) Limited Government
• Virtually all democracies include elements of socialism, such as government intervention in the affairs of individuals and firms. Socialism emerges because of abuses or negative externalities that occur in purely democratic or capitalistic systems.
• Many countries, including Australia, Canada, the United States, and those in Europe, are best described as having a mixed political system—characterized by a strong private sector and a strong public sector, with considerable government regulation and control.
• Economic freedom


  Flourishes when governments support the institutions necessary for that freedom, such as freely operating markets and the rule of law.
• Characteristics of political freedom

  • Free and fair elections
  • The right to form political parties
  • Fair electoral laws
  • Existence of a parliament or other legislative body
  • Freedom from domination by the military, foreign powers, or religious hierarchies
  • Self-determination for cultural, ethnic, and religious minorities
• Types of economic systems

  • Command Economy
  • Market Economy
  • Mixed Economy
• Command Economy


  The state is a dominant force in the production and distribution of goods and services. Central planners make resource allocation decisions, and the state owns major sectors of the economy.
• Market Economy


  Forces the interaction of supply and demand, and prices. Government intervention in the marketplace is limited, and economic decisions are left to individuals and firms.
• Mixed Economy


  Exhibits the features of both a market economy and a command economy. It combines state intervention and market mechanisms for organizing production and distribution.
• Legal systems provide a framework of rules and norms of conduct that mandate, limit, or permit specified relationships among people and organizations and provide punishments for those who violate these rules and norms.
• In countries with well-developed legal systems, such as Australia, Canada, Japan, the United States, and most European countries, laws are widely known and understood. In such countries, laws are effective and legitimate because they are: 1) applied to all citizens equally, 2) issued through formal procedures by authorities, and 3) enforced systematically and fairly by police forces and formally organized judicial bodies.
• Rule of law


  A legal system in which rules are clear, publicly disclosed, equally enforced, and independently adjudicated.
• Laws


  Rules that govern relationships among people and organizations and provide punishments for those who violate these rules and norms
• Legal systems


  Dynamic, evolving over time to represent each nation's changing social values and the evolution of their social, political, economic, and technological environments
• Characteristics of effective and legitimate laws in countries with well-developed legal systems

  • Applied to all citizens equally
  • Issued through formal procedures by authorities
  • Enforced systematically and fairly by police forces and formally organized judicial bodies
• Rule of law


  A legal system in which rules are clear, publicly disclosed, fairly enforced, and widely respected by individuals, organizations, and the government
• International business flourishes in societies where the rule of law prevails
• Common law


  A legal system that originated in England and spread to Australia, Canada, the United States, and former members of the British Commonwealth, based on tradition, previous cases, and legal precedents set by the nation's courts
• Civil law


  A legal system found in France, Germany, Italy, Japan, Turkey, and Latin America, based on an all-inclusive system of laws that have been codified
• Common law systems generally contain elements of civil law and vice versa, the two systems complement each other
• Religious law


  A legal system strongly influenced by religious beliefs, ethical codes, and moral values viewed as mandated by a supreme being
• Islamic law (shariah)


  Based on the Qur'an and the teachings of the Prophet Mohammed, governing relationships among people, between people and the state, and between people and a supreme being