How politics affects global business

Governments can pursue their goals it in a number of ways:

Trade policies and tariffs: Political relations between countries can shape trade policies that directly affect the flow of goods and services. Trade agreements, tariffs, and sanctions often arise from political decisions, impacting costs, supply chains, and market access. Companies must stay informed about changing trade regulations and adjust their pricing or sourcing strategies accordingly.

Regulatory changes: Countries regularly update their business laws, tax codes, and regulatory frameworks in response to political agendas. These shifts can create opportunities (such as tax incentives for green technologies) or challenges (like stricter labor laws) that companies must adapt to. Understanding regulatory trends allows businesses to plan for future compliance and avoid penalties.

Market stability: Political instability—such as regime changes, civil unrest, or corruption—can lead to economic volatility, reducing consumer confidence, impacting currency valuations, and creating investment risks. A country's political environment often dictates its economic health, and businesses operating internationally must assess the stability of the regions they enter.

Global alliances and trade blocs: Political alliances, such as the European Union (EU) or the North American Free Trade Agreement (NAFTA), encourage easier trade between member countries. However, they also impose rules and standards that businesses must follow. For companies with a global presence, aligning with the regulations of such blocs is key to maintaining smooth operations and avoiding market barriers.

“In my own experience in Latin America, I've seen governments that have pursued all of these kinds of policies, with widely different results,” Nelson said. Some politicians have convinced their people to pursue policies that have had highly beneficial results, created excellent opportunities for local and foreign businesses, and lifted millions of people out of poverty. 

“However, I've also witnessed many examples of irresponsible politicians pursuing disastrous economic policies only for short-term political gain that have turned once-prosperous countries into basket cases,” he said.

Also read: A simple corporate strategy for a better political game

Key challenges for global businesses

Nelson says one of the main challenges facing business across the globe is economic nationalism.

“This ideology calls for more government intervention in the economy to promote the interests of a specific nation, even if that might be harmful to the global economy as a whole,” he said. While intended to protect a nation’s own trade, this can provoke retaliatory measures and can affect opportunities for foreign direct investment as governments impose more restrictions or engage in more interventionist actions against companies already invested in a country. 

Other challenges include:

Political uncertainty: One of the biggest risks for global businesses is political instability. Elections, leadership changes, and geopolitical tensions can result in sudden shifts in policies, tariffs, or even nationalization of foreign assets. Businesses need to be able to pivot quickly to minimize disruptions.

Cultural and legal differences: Each country has unique legal, cultural, and political environments, which can complicate operations. Multinational companies must ensure compliance with local laws while also respecting cultural norms that may influence consumer behavior and workplace dynamics.

Economic sanctions: Businesses can be directly affected by political decisions that impose sanctions on certain countries or industries. These sanctions can disrupt trade, limit market access, and lead to financial losses for companies that fail to react swiftly.

Environmental policies: The rise of environmental politics and climate regulations is impacting industries, particularly those reliant on fossil fuels. As governments prioritize climate action, companies must invest in sustainable practices or face regulatory penalties and a loss of consumer trust.

Strategies for managing global political risks

Nelson said the biggest challenge international managers face is the uncertainty involved in international business. “To the extent that managers can reduce that uncertainty, they will be better able to develop an effective strategy for their companies,” he said.

Here are some ways managers can meet the challenges of global politics:

Political risk assessment: Conduct thorough assessments of political environments before entering new markets. This can involve analyzing potential risks such as corruption, policy volatility, and government stability. By understanding these factors, businesses can better anticipate challenges and make informed decisions about expansion.

Diversification: To mitigate the impact of political upheaval in one country, businesses should diversify their markets, supply chains, and investments across different regions. This approach spreads risk and reduces dependence on any single political system.

Building strong local relationships: Partnering with local businesses, governments, and stakeholders can help companies better understand the political landscape and manage regulatory challenges. These relationships can also lead to stronger brand loyalty and trust within the local market.

Compliance and adaptation: Multinational businesses must maintain flexibility in adapting to varying regulations and political climates. This includes investing in local legal teams, compliance officers, and consultants who can offer insights into changing laws and ensure that the company remains compliant.