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What Is Business Environment? - Definition, Factors & Quiz andWhat Is IPAT?

Factors of the Human Impact on the Environment

Definition
The political environment in international business consists of a set of political
factors and government activities in a foreign market that can either facilitate or hinder a
business' ability to conduct business activities in the foreign market. There is often a high
degree of uncertainty when conducting business in a foreign country and this risk is often
referred to as political risk orsovereign risk.

Factors
Let's look at some common political factors that influence the international business
landscape.
Economic System
The type of economic system a country builds is a political choice. Foreign countries often
will have different economic systems from your domestic market and adjustments often
need to be made to take these differences into account.

A country may operate in a market economy where private individuals own most of
the property and operate most of the businesses. A market economy is usually the best
economic environment for a foreign business because of the protection of private
property and contract rights.

Some countries lean more towards a socialist economy where many industries and
businesses are owned by the state. Operating businesses in this environment will be
more difficult, but products can still be produced and sold as people still pick their jobs
and earn money.

A few countries operate under a communistic economic system where the state
pretty much controls all aspects of the economy. Conducting business in this
environment ranges for difficult to impossible.

The reality is that all economies are mixed economies that take parts from two or
more of the 'pure' economic systems. For example, you can conduct business in
communist China in Hong Kong and other special areas where a market economy is
allowed to operate.

Government System
Businesses must often contend with different governmental systems. Examples include
democracies, authoritarian governments, and monarchies. Some governments are easier
to work with than others. Democracies, for example, are answerable to their citizens and
the rule of law. Authoritarian regimes are usually answerable to no one, including the law. It
is less risky to conduct business in democracies and constitutional monarchies (a monarch
with a constitution that protects the public and subjects the monarch to the rule of law)
than in countries with authoritarian regimes.
Trade Agreements
Countries often enter into trade agreements to help facilitate trade between them. If your
country has entered into a trade agreement with another country, conducting business in

that country will usually be easier and less risky because the trade agreement will provide
some predictability and protection. One great advantage, for example, is that your
products will be subjected to fewer trade barriers that serve as obstacles to exporting your
products into the country.
Formal Trade Barriers
A trade barrier is simply anything that makes it harder for a company to export products
to a foreign country. Formal trade barriers are enacted by governments for the purpose of
restricting imports to protect a country's domestic industries. Formal trade barriers
include tariffs, which are taxes on imports that helps make domestic products more
competitive, and product quotas that limits the number of products imported into the
country.
Informal Trade Barriers
Governments may impose regulations that aren't primarily promulgated as barriers to
trade but have the same effect. Examples can include specific product standards and
health and safety standards that businesses will be required to meet before the products
can be sold.