What particular aspects of the country’s political structure and processes should it take into account when assessing political risk? There are quite a number of political structure and processes that should be considered when assessing political risk which include the political condition it self of the particular country. However, I believe that the most important one should be the reliability of the legal infrastructure and regulatory environment of that particular country.
In the context of corporate governance, infrastructure has been defined as “the legal right of corporations and the fiduciary duties of their directors and officers to the share holders” (Rezaee 2007: 458). Given this definition, the reliability of the legal infrastructure and regulatory environment provides a stable atmosphere for any company putting up operation in that country.
Regulatory environment is very important issue towards a stable business climate because as Hill and Bender (1995) pointed out, “government regulations that distort prices and resource allocations, or restrict the ability of price to respond to changes in supply and demand, weaken commodity markets and diminish the incentives for private enterprise” (1995: 1). In most countries, particularly in the United States, legal infrastructure is consists of federal laws and statutes for corporate governance (Rezaee: 459).
In this case, it is important to determine the vitality of law and order to the effectiveness of corporate governance. Hardt and Kaufman (1995) assert that in order to determine the vitality of law and order, the applicable laws and regulations “must be predictable and preferably transparent” (1995: 223). As mentioned above, legal infrastructure is consists of ‘federal laws and statutes,’ Rezaee pointed out that the rule of law and order is vital to the effectiveness of corporate governance (1995: 459).
Kavaler and Spiegel (2003) stated that regulatory environment is “generated by the establishment of standards by legislative acts, by regulations administered by official executive agencies, and by standards of professional organizations” (2003: 29). While this statement refers to the health care industry in the United States, its principles however rightly applies to companies planning to transfer their operation to other country in the sense that the nature of these laws and regulations may not be applicable to the nature of intended operation.
One particular example to this is the nature of legal infrastructure and regulatory environment in Russia. Hardt and Haufman noted that the unsound legal infrastructure and regulatory environment in Russia made the business climate unpredictable. Hardt and Kaufman stated, “The erratic nature of the policy changes exemplifies the difficulties that foreign investors and lenders face in trying to arrange a transaction in such countries as Russia” (1995:223).