Corruption as a Political Risk in Business
The global economy has shown good signs of recovery from the previous recessions that have been witnessed by leading global economies of America, Russia, China and Japan. Despite this strong and healthy economy, there are emerging issues of vulnerability of the economy risks associated with foreign exchange transfer, political interference, legal and regulatory risks, supply chain disruption, political violence, sovereign non-payment, financial sector susceptibility, and the inability of local governments to provide stimulus. While the economic sector for both product and services continues to enjoy steady growth fueled by high levels of employment and consumption, the industries have been significantly affected by volatility of both political and financial market. This has weighed down on the confidence of business people operating in these countries as they are always uncertain of the future when carrying out business decisions. Particularly, the political risks seem to be driving the confidence of corporate executives southwards as they affect the business environment they operate in. Political risks such as corruption over time significantly affects business growth strategies as the business executives are faced with tough decisions on how to treat expenses and costs that they incur due to corruption and other political risks. In particular, business executives are always torn between treating such costs as personal expenses or costs to be charged within the business income statement given that they have been incurred in the course of business activities. In this paper, the motivation will be to review the current political risk of corruption considering the recent political risk score of countries from all over the world. By doing this ranking, the paper will also attempt to answer the question of whether an anticipated costs from corruption activities should be charged on business income statements and if they are tax deductible.
It is true that globalization offers business enterprises new opportunities in their expansion strategies. This also exposes them to new threats as political risks such as corruption. The bottom line through which business exercises need to evaluate corruption money is the economic value it leads the business to. Of most importance to note is that the businesses do not exist to only make money through profits but they also exist to ensure that as they make profits they do so in a manner that they are within the legal, moral and ethical framework of the society and the state they are in. Businesses do no operate in a vacuum but within environments which has people who have primary moral obligations that they need to fulfill. When business executives are making decisions they must consider these moral obligations and duties. This will actually be reflected in the case of a marketing officer whose passport has been confiscated by the immigration officer and they are demanding some money as they claim that it has been misplaced. While this scenario represents a common typical issue that may cost the business financial costs, delay clearance and eventually business engagement, the manager though seeking the economic value of the action must also think and consider the ethical implication of his action. The moral duty here is to remain within the law and do business with integrity. Given this argument, the marketing officer should not give any money to be served by the immigration officer. If any money is given for corruption, it should be charged as a business expense and not a personal expense as it shall be discussed later in this paper.
Political risks do significantly affect the purchasing power of consumers, exchange transfer and payment of goods and services. This in turn affects the business growth rates of varied businesses in the long run. They threaten the business environment by adding pressure on the executives’ decision making process despite the economic characteristics of where business organizations operates being favorable with zero inflationary pressure, high internal demand, volatile financial markets and ultra-expansionist monetary policies (Coface, 2016). Meanwhile, when companies continue to face threats from the political risks, the executives fear that their investments in countries with relatively higher levels of political risks will end up being affected in terms of profit opportunities. The political context in which a business operates often has a major impact on the investment decision that business managers make as this creates either an opportunity or threat in the operation of a country.
Political risks are broadly defined as the political activities that have impact on the business markets. These risks are influenced by legislations, rise of popular movements and the political leadership of the economy. These factors have the ability to stabilize or destabilize any given country. The significance of these risks affects investment and business operation decisions of business leaders in a way depending on the context in which they are making their decisions. In emerging markets, politics and economics matter and are mutually dependent on each other. The planning scenario and business strategy in such a market means that the business manager needs to be vigilant in their view of what needs to be done in the market set up by factoring in risks that may arise in doing business in such a business environment ("Aon's Political Risk Map", 2016). The globalization of world economies has brought in new opportunities for business leaders to expand their primary markets. The business leaders are now required to have political analysis of these markets, yet the analysis is meant to be subjective meaning that the elements of concerns relate to personality traits of the citizens and global leaders that are tied to the historical and regional contexts of the economy. The political risk analysis and in particular corruption is hard to quantify unless sophisticated research methods are employed.
Corporations with heavy investments in countries that are considered as generally opaque such as Zimbabwe, Vietnam and Myanmar understands the how political risks, in the long run affect their bottom lines. This has been demonstrated by the fact that the most current political analysis studies have originated from multinationals such as Aon and Shell Group which have an entire department that specializes in this subject. Companies that are run their business on the foreign markets need accurate information on the political analysis of the markets they operate in mainly because, global markets are now more interconnected than they were years ago. Any market activities that affect any part of the economy have a rippling effect on another market such as a shock in Argentina will eventually be felt in Venezuela or Market. On the other hand, political decisions in china will have a dramatic long term effects on Russian, America and India.
The second reason why awareness of political environment in which the business operates is important is that the State of the American economy due to security concerns is raising international interests in a manner that the nations are now more than ever required to respond to the potential threats of the terrorism (Bremmer, 2005). Foreign affairs departments now have an increased duty to censor the visitors including the money and the kind of activities these visitors are carrying out in these countries. Immigration officers are now stricter than before and while this is important, critics argue that this has brought in more vulnerability to the business environment than ever. This is because the immigration officers now are exposed to business executives’ travel document during inspection and the dishonest ones are capable of making illegal extortions of money. The militarization of entry points to world economies have fueled corruption with the officers demanding that for persons entering foreign countries must make certain amounts of money before they are allowed even if they have appropriate documents. This cost in the end exposes the business people to unplanned cost upsurges.
The offshoring trend that has been growing especially in countries where labor costs are cheap and is unregulated including in countries like India which is an established offering destination and the emerging ones like Kenya presents new risks to business people. While these destinations offer cheap labor and have the possibility of making the middle classes to prosper, the challenge that business people are faced with is answer the question of whether the proceeds are tax deductible. While some economists argue that it is only fair that such proceeds are tax deductible in the offshoring destinations, others argue that such should be tax free. But the bottom line is that, the business policy makers’ needs to incorporate ethics in their business operations. This in fact is at the heart of this discussion. While most companies shift their manufacturing units to the offshoring destinations, some of them end up not paying substantial taxes to the governments of the of the offshoring destinations making the governments to loose huge amounts of national income. This calls for consensus in which countries need to streamline the tax collection system through tight fiscal policies instead of employing unconventional means such as holding business executives’ passports and demand bribes which will be taxed (Bremmer, 2005). The countries need a coherent monetary policy to increase efficiency and discipline in tax collection procedures.
External shocks such as internal demonstrations in Egypt and Cuba and refugees flowing from one country such as those fleeing North Korea into China do not cause foreseeable instability status on the short term but in the long run exposes the political and ultimately the business environment of the countries since the faulty political lines may change the countries’ view of foreigners and affect how business activities are carried out. The political and controlling elites in Africa and Middle East countries expose the business people to losses with their greed for money. Business people will, therefore, be required to use their money to cater for costs that will arise from corruption deals to have entry into foreign countries.
In conclusion, the case of a marketing officer whose passport has been confiscated by the immigration officer, the most prudent thing to do is not to pay the requested money but demand politely to be served fairly and without delay even though this may cost the business. This is because the marketing officer will have fulfilled their moral obligation of acting in honest and having integrity in doing business. It also saves the company substantial legal costs to have lengthy legal battles that may ensure out of this evil act of engaging in corruption. The cost of corruption that is incurred in the cause of business activities should be charged on income statement of the business as business should assume that financial liability. Even though governments need to streamline the immigration departments, the money from the corruption deals should be tax deductible at the end of financial year to the extent that the business affected makes effort to declare full financial statements in foreign markets.
References
Aon's Political Risk Map. (2016). Riskmaps.aon.co.uk. Retrieved 16 May 2016, from https://www.riskmaps.aon.co.uk/site/map.aspx
Bremmer, I. (2005). Managing Risk in an Unstable World. Harvard Business Review. Retrieved 16 May 2016, from https://hbr.org/2005/06/managing-risk-in-an-unstable-world
Country risk assessment Map - 1st Quarter 2016 / Publications / News & Publications - Coface. (2016). Coface.com. Retrieved 16 May 2016, from http://www.coface.com/News-Publications/Publications/Country-risk-assessment-Map-2nd-Quarter-2016
