The influence of political factors on business operations

The influence of political factors on business operations

The influence of political factors on business operations is one of the few business factors that keep developing over time. In the late 19th century and 20th century, the primary political determinant of business stagnancy was the interference of business operations by political dictators. One such instance is Hugo Veraz, a Venezuelan dictator who rose to power in the late 20th century. With his dictatorship system of governance, the Venezuelan leader scared away foreign and local investors who showed interest in the country’s oil industries. As a result, the oil industry collapsed as the nation recorded the lowest oil prices in a century leading to multiple losses. Today, anti-democratic governance is uncommon, which makes dictatorship a non-issue for investors. This paper aims to analyze various political factors affecting investors and relate them with a recent case.

In the 21st century, the probability that a business will collapse or suffer immense losses due to political influences is higher than other factors (Rice & Zeegard, 2018). Nations face new geopolitical issues day by day, such as the threat from terrorism, sanctions from international agencies, elections unrests, and civil wars. Thus investors need to generate risk management strategies that will help object the intensity of the effects created by political issues. However, it is easy to undermine the power of political issues as political risks are cumulative.

New forces have motivated the new political risks landscape in businesses. First, today’s world’s diverse supply chains increase the probability of an investor suffering significant losses due to political risks. Obtaining supplies from different nations implies that in case of political unrest in one of the supply countries, the business would experience disruption. The more the overseas suppliers, the higher the political risk. Moreover, the nature of today’s politics is responsible for the advancement in political risks. Initially, two political powers, the socialist Soviet Union and the capitalist United States, controlled the world market (Rice & Zeegard, 2018). The evolvement of new global agencies and other world superpowers poses a threat to economies.

The development of technology is another major factor that poses a political threat to significant investors. Social media has created a platform where individuals can integrate and criticize an organization’s activities, generating intense elements. Today, most investors have ventured into digital marketing, including social media advertising, making social activism more critical. For instance, a clip of customers facing harassment due to racial differences has caused massive boycott from customers in the USA and Asia (Rice & Zeegard, 2018). Another perfect instance is the bad rating in amazon, which resulted from claims of workers’ exploitation in the industry. Most activists revolutionized and activism online, leading to multiple losses.

Rain industries

Overview

Rain industries are one of the mega producers of cement, advanced materials, and carbon in the world (YouTube, n.d.). The company is a mother company to two subsidiary companies; Rain Cement limited and the rain carbon Inc which specializes in the production of cement and necessary raw materials for aluminum, respectively. The raw materials include coal tar pitch(CTP), carbon black, graphite, titanium dioxide, and calcined petroleum coke (CPC). The company has distributed its sub-industries in 8 significant economies such as Germany and the USA, which increases the likelihood of political risk occurrence.

One of the significant factors that have intensely crippled Rain industries’ operations is its battle with the supreme court of India. The green petroleum coke(GPC) is necessary for the production of calcined petroleum production, which in turn, is a raw material in aluminum production. Recently, India’s supreme court enforced an import limit of 1.4 tons of GPC annually on all India’s calcining industries. After the supreme court’s decision, the director of foreign trade affairs released the licensing regulations, which required calcining industries to import 253339 tonnes of GPC for a half year. Unhappy with the regulations, RAIN industries filed a petition that would see it increase its imports to 352145 tonnes for six months (Parthasarathy et al., 2017). However, the SC dismissed the applications. The supreme court reinstating its decision meant that the operations of the industries were at stake. RAIN Industries was forced to utilize low-grade pet coke to manufacture calcined petroleum coke(CPC), which compromised its quality.

Moreover, by the time the supreme case arrived at its decision, rain industries focused on a future expansion program. However, the expansion project required an additional 0.7 tonnes of green petroleum coke (YouTube, n.d.)). the reinstating of the GPC import limit even after Rain appealing for developments meant that it had to postpone or cancel its future expansion project.

The supreme court imposed a total ban on the importation of Calcined petroleum coke for multiple calcine industries in India in 2019. Rain industries imported CPC before the ban to blend it with locally manufactured CPC to improve quality and margin. The total ban has forced Rain industries to employ an entirely different strategy that would improve local CPC quality. Sudden organizational change is not only costly but time-wasting.

In January 2019, Minnetonka and six other cities sued Rain industries and other energy industries in the area for environmental pollution. The activists leading the lawsuits confronted the company for disposing of its sealant products carelessly. Besides, the cities complained about the disposal of carcinogenic chemicals in water bodies. The activists urged the industry to employ proper waste management programs to reduce the burden of waste disposal on taxpayers. Environmental concerns have been the main challenge facing Rain industries. Waste management consumes a better part of the industry’s finances, primarily because the country operates in 3 continents. Rain industries have employed different waste management policies, such as the reduction of sulfide by 98% (“Political risk insurance). However, the remaining 2% still pose a threat to human life and the global climate.

Venezuela is one of the major importers of Rain’s products. Since the country underwent general elections in 2019, civil unrest and political standoffs between the main parties have significantly affected its peace (Christiansen, 2014). The South American nation has enjoyed massive peace and stability for decades until last year. Till then, Rains supplies to the nation were smooth and consistent, consequently creating big profits. Besides the significant standoffs between the ruling and the opposition party, significant corruption in the country has profoundly crippled its ability to import calcined petroleum coke from Rain industries in India. To prevent Venezuela’s political risks from affecting its operations, rain company has generated allowances for doubtful receivables as it may suffer receivable delays.

The existence of supply chains explains why Rains company is suffering from multiple political risks. As the company comes to terms with Venezuela’s political situation, its cement production operations in the southern region are trying to resume after nearly collapsing in 2014. The southern part of India has a history of political instability for years, mainly motivated by government incompetence. In 2014, the company experienced a sharp fall in demand in the region by nearly 25%. However, the government is trying to solve its mess by generating new investment projects and building a new capital city. Today, 98% of the Rains cement in India is being directed to the southern region. This will have a considerable profit on the company’s profit after facing a near collapse.

Rain industries have distributed their coal plants among the united states and Russia. Recently, governments have expressed concern over environmental pollution and climate change. As a result, governments are contemplating on setting up regulations that will control environmental pollution and release of carbon into the atmosphere9 Parthasarathy et al., 2017). This puts the future of rains coal plants at stake if governments succeed in eliminating coal plants or banning energy industries. The united states, through the environmental protection agency regulation has already succeeded in declining coal reduction in the region. Imposing strict government regulations is the first step in fighting global warming and other forms of environmental pollution.

Steps in mitigating political risks

The rains industries adapt a complex and practical framework that reduces the risks of political interference. One of the measures is embracing the Corporate social responsibility framework that guides the company’s actions towards the communities affected by its operations (“Insurance against political risks 2020). Environmental management is a critical concern in Rains CSR. Apart from fulfilling Rain’s role to the community, environmental management also prevents strict government regulations that interfere with its operations. Through its Rain carbon Inc business, rain industries conduct a wide range of environment-related activities in North America and Europe.

The company has also ventured into local and foreign initiatives that improve the wellbeing of individuals. In India, Rains industries have cooperated with local investors to promote government operations in the region with an aim to promote local development. These activities include improving local infrastructures in India’s low developed regions, donating cement and other building materials for the construction of government offices, and building hostels for local schools. Partnering with the government ensures lenient government regulations that increase political risks and more government support. Moreover, expressing support to the local communities reduces the risk of boycott or reduced demand due to social activism.

References

Christiansen, B. (2014). Handbook of research on global business opportunities. IGI Global.

Insurance against political risks. (2020). Rules and Practices of International Investment Law and Arbitration, 231-242. https://doi.org/10.1017/9781316182383.010

Parthasarathy, S., Momaya, K. S., & Jha, S. K. (2017). EMNEs venturing into advanced economies: Findings from comparative cases of two Indian MNEs. Thunderbird International Business Review, 59(3), 437-454. https://doi.org/10.1002/tie.21890

Political risk insurance. (2012). Managing Country Risk, 96-138. https://doi.org/10.1201/b11601-6

Rice, C., & Zeegard, A. (2018). MANAGING 21ST-CENTURY POLITICAL RISK. HARVARD BUSINESS REVIEW, 96(3), 130-138.

(n.d.). YouTube. https://www.youtube.com/watch?v=NaCmWv4TY7k