Strategic

PESTEL: Political Factors, Sources of Political Risks, and Managing Political Risks

PESTEL analysis and underlying assumptions
PESTEL is a handy checklist of business environmental factors. The factors are
Political
Economic
Social/cultural
Technological
Ecological/environmental
Legal

Political Factors in PESTEL Analysis

Political factors relate to the distribution of power locally, nationally and internationally.
Political risk is the possibility that political factors will have an impact on the business’s environment or prospects. The impact could be positive or negative, the issue is the uncertainty created.

Types of risk include the following.

 Ownership risk: A company or its assets might be expropriated (or nationalized) by the state, normally with compensation. Confiscation is, effectively, expropriation without compensation.
Operating risk: Indigenization/domestication. The firm may be required to take local partners. There may be a guaranteed minimum shareholding for local investors.
Transfer risk may affect the company’s ability to transfer funds or repatriate profits.
Political risk: The government of the host country may change taxes or seek a stake in the business to increase its power or to satisfy local public opinion.

Sources of Political Risk in Organizations

The country This covers government stability, international relations, the ideology of the government in power, the need for contacts, favoritism for local suppliers, political violence, governments’ ability to change the law and operating conditions, governments’ need to appease powerful stakeholders.

The product Consumer/basic products. High-tech components may have national security or armaments implications. Oil extraction in some countries places the oil companies near regions of ethnic or political conflict. The company Size, connections, reputation, influence on the environment.

Managing political risk in Organizations

Companies, especially transnational corporations, might take measures to reduce political risk. These include:
Detailed risks assessments prior to investing in the country
Seeking protection from legal agreements with the host country or from bi-lateral trade agreements between nations
Partnering with a local business to increase acceptance of the project and to lobby for political support
Raising finance for projects from host country to put local pressure on politicians to help safeguard investment
Operate under the auspices of international bodies e.g. World Health Organization, UNICEF etc.
Share project with other firms to spread the risks between them
Avoid total reliance on one country e.g. oil companies extract oil from many countries to offset risks of interrupted supplies or spiraling costs
Lobbying for political support from home government for projects and to resolve issues
Support for political groups in host country that are favorable to the project

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