East West University

Term Paper

Title: Political and Legal Risks in International Business Operations

Course Title: Introduction of management

Course Code: MGT 101

Semester: Spring2026

Sec: 09

Submitted By:

Ankita Islam

ID: 2024-1-77-033

Department: Genetic Engineering and Biotechnology

Submitted to:

[Link] Nabi

Date Of Submission: 05.04.2026

Abstract
The expansion of international business has grown significantly in the current era of globalization
revealing multinational organization to various political and legal risks. To examine how these risks
influence business decisions and performance is the purpose of this study. It also focuses on identifying
the key political and legal challenges faced by firms operating across borders and how these challenges
affect their operational efficiency and strategic decisions.

A qualitative research methodology has been undertaken for this study based on secondary data
collected from academic journals, books and reliable online sources. Ongoing regional and geopolitical
conflicts especially in the Middle-East, have disrupted global supply chains and created economic
impacts on developing like Bangladesh including fuel supply disruptions and operational losses.

Political instability, regulatory changes, legal differences and weak governance structures significantly
affect international business operations are the key findings from the study. Mismanagement of these
risks leads many companies to experience financial losses.

The study reaches its conclusion by discussing the effective risk management strategies such as legal
compliance, political risk assessment and diversification are essential for sustainable international
business trading.

Keywords

Political Risk, Legal Risk, International Business, Multinational Corporations, Risk Management.

Introduction

A vital component of the global economy is international business which enables companies to expand
beyond domestic markets and access new growth opportunities. Although, having to do operations in
various countries exposes businesses to a variety of risks, particularly political and legal risks that boosts
their performance and long-term sustainability.

Political risks define to the possibility that government actions, political instability or geopolitical events
may negatively affect business operations. Government policies, taxation systems, trade restrictions and
conflicts also add to the political risks. For example, the recent geopolitical tensions in the middle
eastern peninsula have influenced the global oil markets that has led to increased fuel prices worldwide
and shortages in third world countries like Bangladesh. Political events in one region can have global
economic repercussions.

Legal risks also arise from differences in laws and regulations across countries. Compliance with local
legal systems is a must for multinational corporations. Failure to comply with these laws can result in
legal penalties and financial losses.
The principal objective of this study is to analyze the legal risks and impact of political events on
international businesses and to identify strategies to manage risks effectively.

The significance of this study is mention worthy due to its valuable insights for managers, policymakers
and investors. The scope of the study although is limited to secondary data and focuses on general trends
rather than specific case studies.

Literature Review

In international business operations, political and legal risks are widely regarded as major challenges.
Government actions that can negatively affect foreign business operations have been emphasized by
(Kobrin,1979). A stable environment attracts foreign direct investment, highlighting the importance of
political and legal stability, as explained in the eclectic paradigm (OLI framework) (Dunning,1988).
Another critical factor is legal risk; differences in legal systems significantly influence investor
protection and business confidence (La Porta et al., 1998). A strong legal framework reduces uncertainty
and encourages investment.
These risks are further explained by institutional theory. Institutions shape economic performance by
reducing transaction costs (North, 1990), whereas weak institutions increase uncertainty and hinder
business operations. This view is supported by (Henisz,2000), who introduced the political constraints
index. Empirical studies also demonstrate that political risks affect financial markets, with increased
market volatility linked to political uncertainty (Bekaert et al., 2014), while governance infrastructure
plays a crucial role in attracting foreign investment (Globerman & Shapiro, 2003). Furthermore,
democratic institutions can mitigate political risks through greater transparency (Jensen, 2008).
Despite extensive research, there remains a gap in understanding the impact of recent geopolitical
conflicts on developing economies, which this study aims to address.

Research Methodology

A qualitative research design has been adopted in this study to examine the risks in international
business operations. A qualitative approach is ideal for this research as it focuses on understanding
complex concepts, behaviors, and institutional factors rather than relying on numerical data or statistical
analysis. Political and legal risks are multifaceted and often influenced by social, economic and
institutional contexts.

The study has been done through secondary data sources which includes peer reviewed journal articles,
academic books, reports from international organizations such as the World Bank and the IMF and
credible online databases such as Google Scholar.
A purposive sampling technique has been used to select relevant and high-quality sources. Based on the
relevance, credibility, and contribution to the field of international business, nearly 10 key research
articles were chosen. These sources include well cited academic works that discuss political risk and
legal systems, institutional theory and foreign direct investment.
The data collection process used a systematic review of literature. Importance keywords such as
"Political risk", "legal risk", "international business", and "foreign investment" were used to search
academic articles.

A thematic analysis approach was employed for data analysis. It involves identifying, analyzing and
interpreting patterns or themes within the collected data. Major themes identified includes political
instability, government intervention, legal diversity and risk management strategies.

The credible and peer reviewed sources were used to ensure the reliability and validity of the study.
Although the study does not include primary data collection methods such as surveys or interviews.
However, the methodology has certain limitations. The depth of analysis may have been affected due to
the absence of primary data and the study heavily depends on the existing literature which might not
fully capture all the recent developments. Finally, the methodology gives a structured and effective
approach to analyzing political and legal risks in international business operations.

Analysis and Discussion:

In the shaping of international business operations political and legal events plays a vital role. Among
them government instability is considered as the highest critical factor which often leads to sudden and
unpredictable changes in policies. The changes may occur as increase in taxation, trade regulations or
foreign investment policies which directly impact businesses profitability. For MNC's it creates a
challenging situation for long term decision making and investment planning.

Another primary source of political risk is geopolitical tensions and conflicts. Recent tensions in the
Middle-East have disturbing consequences in the global oil supply chains worldwide but countries like
Bangladesh are suffering the worst from it. Therefore, geopolitical developments are a must for any
business operating internationally as it can affect their supply chains and operations.

Government intervention in domestic and international trade also contributes to political risks.
Restrictions on import and export or price regulatory changes can have significant impact on business
organizations. Such action may result in financial losses for MNC's which could discourage them for
future investment.

Differences in legal systems around the globe is the primary reason for legal risks. Every country has its
own laws and regulations governing business activities which can create challenges for international
business operations. Companies must invest time and resources in understanding and complying with
these laws to avoid legal penalties.

The other aspect of legal risk is the issue of corruption and weak law enforcement. There are countries
where governance structures hardly make a difference and businesses may face challenges such as
bribery, lack of transparency and inefficient legal framework. Furthermore, companies find it difficult to
resolve disputes as weak contract enforcement mechanisms hold tight.
Therefore, companies adopt various risk management strategies to counter these challenges.
Diversification is one of them which allows businesses to operate in multiple states rather than being
dependent on a single market. Additionally, companies build a strong legal compliance system to ensure
adherence with local regulations.

Overall, the analysis highlights how political and legal risks inherent in international business operations
although proper planning and strategic management can effectively minimize these risks.

Findings

The study reveals how political and legal risks contributes to the challenges faced by multinational
corporations operating in international markets. One of the major findings demonstrates political
instability having a direct impact on business organizations. Changes in government policies, regional
conflicts and political unrests creates uncertainty which ultimately leads to discouragement of foreign
investment and long-term sustainability.

Additionally, differences in legal systems across countries significantly influence business performance.
Firms find it harder to maintain consistency in their operations due to contract enforcement mechanisms,
taxation policies and labor laws variation
The study further highlights corruption and weak governance are primary sources to both political and
legal risks. Global political events such as geopolitical tensions have indirect but substantial impacts on
developing economies.

Another finding is companies that implement effective risk management strategies such as
diversification are better equipped to face challenges.
Overall, the findings emphasize political and legal risks cannot be avoided entirely but they can be
mitigating with proper planning and management decisions.

Recommendations

According to the findings of the study several recommendations can be made to strengthen economic
policies for international businesses. Multinational corporations should adopt comprehensive risk
management programs to minimize impact of any global economic crisis. Reducing dependency on
single market and diversification could become a vital component to ensure balance and adherence with
local regulations.

Companies should also invest in local expertise to better understand political and legal risks and plan
accordingly. Governments on the hand should create stable political environment and transparent legal
systems to encourage foreign investment.
International organizations can also play a role by promoting global standards and supporting
developing economies while helping their governance structures. Overall, a collaborative effort between
businesses government and institutions is essential for the safeguard of global economic system.

Conclusion
In closure, factors which are significant influencing international business are political and legal risks. In
the era of expanding globalization, exposure to diverse political environments for businesses is a
common phenomenon which also leads to both opportunities and challenges.

Government actions, policy changes and geopolitical events can disrupt business activities. While legal
risks vary from country to country. Both types of risks are connected and may have a substantial impact
for long-term sustainable business activities.

The study also brings light upon that political instability, legal differences, and weak governance
structures are major challenges faced by international businesses. Global geopolitical conflicts further
amplify these risks by affecting supply chains and economic stability in various regions.
Despite these challenges, the study also emphasizes that political and legal risks can be effectively
managed through appropriate strategies. Businesses can adopt measures such as diversification, legal
compliance, and political risk assessment to reduce their exposure to risks. Building strong relationships
with local stakeholders and investing in local knowledge can also enhance a company’s ability to
navigate complex environments.
Moreover, the role of governments and institutions is crucial in minimizing risks. Stable political
systems, transparent legal frameworks, and strong governance structures create a favorable environment
for international business. Policymakers should focus on improving institutional quality and reducing
corruption to attract foreign investment and promote economic growth.
The findings of this study contribute to a better understanding of political and legal risks in international
business operations. They provide valuable insights for managers, investors, and policymakers, helping
them make informed decisions in a rapidly changing global environment.
While political and legal risks are unavoidable in international business, they can be effectively
managed through strategic planning and proactive measures. Businesses that understand and adapt to
these risks are more likely to achieve long-term success and sustainability in the global market.

Limitations of the Study

Despite providing valuable insights into political and legal risks in international business operations, this
study has several limitations. The research is based entirely on secondary data sources such as journal
articles, books, and online reports. The absence of primary data, such as surveys or interviews, may limit
the depth and originality of the findings.
The study relies on a limited number of research papers, which may not fully represent all perspectives
on political and legal risks. Although efforts were made to include credible and relevant sources, some
recent developments or region-specific issues might not have been fully captured.
Another limitation is the time constraint. Due to limited time, the research could not include a broader
range of case studies or comparative analysis across multiple countries. This may affect the
generalizability of the findings.
Additionally, political and legal environments are constantly changing. Therefore, some of the
information used in this study may become outdated over time, especially in the context of rapidly
evolving global political situations.
Finally, the study mainly focuses on general international business environments and does not deeply
analyze specific industries. Different industries may experience political and legal risks in different
ways, which is not fully explored in this research.

Future Research Directions

Future research can expand on this study in several important ways. Firstly, researchers can incorporate
primary data collection methods such as surveys, interviews, or case studies to gain more practical and
real-world insights into political and legal risks. This would enhance the depth and reliability of the
findings.
Secondly, studies can focus on specific industries such as energy, pharmaceuticals, or technology to
understand how political and legal risks affect different sectors differently. Industry-specific analysis
would provide more targeted and practical recommendations.
Another important direction is conducting country-specific or regional studies. For example, researchers
can examine how political and legal risks impact developing countries like Bangladesh compared to
developed economies. This would help identify unique challenges and opportunities in different
contexts.
Furthermore, future research can explore the impact of emerging global issues such as geopolitical
conflicts, climate policies, and digital regulations on international business operations. These factors are
becoming increasingly important in today’s globalized world.

Finally, researchers can develop advanced models and frameworks to measure and predict political and
legal risks more accurately. This would help businesses make better strategic decisions and improve
their risk management practices.
References:

Kobrin, S. J. (1979). Political risk: A review and reconsideration.

[Link]

Dunning, J. H. (1988). The eclectic paradigm of international production.

[Link]
q=The+eclectic+paradigm+of+international+production+Dunning+1988

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance.
[Link]

North, D. C. (1990). Institutions, Institutional Change and Economic Performance.

[Link]
q=Institutions+Institutional+Change+and+Economic+Performance+North+1990

Henisz, W. J. (2000). The institutional environment for multinational investment.

[Link]
q=Henisz+2000+institutional+environment+multinational+investment

Bekaert, G., Harvey, C. R., Lundblad, C., & Siegel, S. (2014). Political risk and international valuation.
[Link]

Globerman, S., & Shapiro, D. (2003). Governance infrastructure and US foreign direct investment.
[Link]

Jensen, N. M. (2008). Political risk, democratic institutions, and foreign direct investment.
[Link]

Meyer, K. E. (2001). Institutions, transaction costs, and entry mode choice.

[Link]

Busse, M., & Hefeker, C. (2007). Political risk, institutions, and foreign direct investment.
[Link]