3.0 Political Environment and Risk
The political environment is vital to monitor for any company planning to do business, especially in a foreign country. Political risks are associated with government actions which deny or restrict the right of an investor or owner. These actions include war, insurrection and political violence. They are also able to devalue the firm by creating legislation that can increase taxes and tariffs, seize their property or restrict use of his/her assets which would then reduce the value of the firm (Howell, 2014).
3.1 Political Environment and Risk in Japan
Japans political environment is among the most stable in the world based upon the fact that the World Bank has ranked Japan in the top quartile in all areas of governance as can be seen in figure *INSERT FIGURE NUMBER*.
Graph retrieved from Finance for Australian Exporters
Graph retrieved from Finance for Australian ...view middle of the document...
3.2 Political Environment and Risk in South Korea
According to World Bank, South Korea scores in the top 50% in all areas of governance, however it is not quite up to par with other advanced economies (refer to figure 2). The instability in North Korea does, however, pose the most significant circumstantial risk. Paired with the deterioration with South Koreas key allies (USA and Japan) may cause North Korea to assume the risks of engaging have been reduced.
Figure 2 - Governance Indicators in South Korea
Sourced from Finance for Australian Exporters, 2015
Additionally, a family-run corporation in South Korea has significant market power over a number of sectors including manufacturing and banking (Export Credit Agency, 2015). This can make it difficult for competing firms to enter the market. Australia does hold a free trade agreement with South Korea which has made it easier for Australian firms to do business in the country however the family run corporation still exerts serious market power. The World Bank has ranked South Korea as 5th out of 189 economies in ease of doing business which when compared to Japan, is considerably higher.
South Korea’s impressive rankings in ease of doing business along with the free trade agreement, at first glance can give the appearance of a stable political environment with minimal risk. However, the governance indicators shows that there may be some better options considering the deterioration of the relationship between their key military allies and the instability in North Korea indicates some forms of circumstantial risk.
Export Credit Agency. (2015, May). South Korea. Retrieved from Finance for Australian Exporters: http://www.efic.gov.au/education-and-tools/country-profiles/asia/south-korea/
Export Credit Agency. (2015, May). What is the economic and political environment for doing business in Japan? Retrieved from Finance for Australian Exporters: http://www.efic.gov.au/education-and-tools/country-profiles/asia/japan/
Howell, L. D. (2014). Evaluating Political Risk Forecasting Models: What Works? Thunderbird international business review, 305-316.