The liability caused by the financial or personnel losses because of wrong political decisions or conflicts are known as political risks. Apart from the market based causes, business is highly influenced by political decisions taken by the governments in different countries. For example, political decisions by a ruling party regarding taxes currency, trade tariffs, investment, labor laws, environmental regulations and development priorities have a major impact on the business conditions and profitability which thereby may affect the national economy.
Similarly, non-economic factors can also alter the status of a business. For example, political conflicts at times give rise to terrorism, civil wars, international wars, and even political elections that may replace a ruling political party with another political party, can also affect international market.
In order to balance the political environment, we should consider the points discussed below −
Ideology − A country undergoes change when the ideology of the ruling party changes. The past years saw changes formulated in a nation due to change in the ideology of the ruling power. For example, many African nations are abandoning their centrist leanings in favor of market led economies like Zimbabwe and Tanzania.
Nationalism − It is primarily a peculiarity of the developing nations. For example,, Yugoslavia does not counter all features of nationalism as they are deprived of holding foreign assets.
Stability − The environment of a country may change due to violence and cultural divisions based on language or other factors causing unstable situations. For example, the violence of Somalia and Yugoslavia increase the exposure and decrease the confidence of doing business in these countries.
International relations − The relationship between countries have improved over the last twenty years. This is mainly due to the development of GATT, NATO and the EU as they have gone a long way to minimize the component of "foreignness".