Describe country risk and discuss how political and legal systems contribute to country risk. Explain the differences between political systems and legal systems in your answer

What will be an ideal response?

Country risk is exposure to potential loss or adverse effects on company operations and profitability caused by developments in a country's political and/or legal environments. Also referred to as political risk, it is one of four major types of international business risks. While the immediate cause of country risk is a political or legal factor, underlying such factors may be economic, social, or technological developments. Government intervention, protectionism, and barriers to trade and investment are particularly notable in international business. Mismanagement or failure of the national economy can lead to financial crises, recessions, market downturns, currency crises, and inflation. Such events usually arise from business cycles, poor monetary or fiscal policies, a defective regulatory environment, or imbalances in the underlying economic fundamentals of the host country.
Political or legislative actions can inadvertently harm business interests, such as laws that are unexpectedly strict or result in unintended consequences. Many laws favor host-country interests-that is, interests in foreign countries where the firm has direct operations.
A political system is a set of formal institutions that constitute a government. It includes legislative bodies, political parties, lobbying groups, and trade unions. The principal functions of a political system are to provide protection from external threats, establish stability based on laws, and govern the allocation of valued resources among the members of a society. A political system also defines how these groups interact with each other.
Each country's political system is unique, having evolved within a particular historical, economic, and cultural context. Political systems are also constantly evolving in response to constituent demands and the evolution of the national and international environment. Constituents are the people and organizations that support the political system and receive government resources.
A legal system is a system for interpreting and enforcing laws. Laws, regulations, and rules establish norms for conduct. A legal system incorporates institutions and procedures for ensuring order and resolving disputes in commercial activities, as well as taxing economic output and protecting intellectual property and other company assets. Political and legal systems are dynamic and constantly changing. The two systems are interdependent-changes in one affect the other. Adverse developments in political and legal systems give rise to country risk. They can result from installation of a new government, shifting values or priorities in political parties, initiatives developed by special interest groups, and the creation of new laws or regulations. Gradual change is easier for the firm to accommodate, while sudden change is harder to deal with and poses greater risk to the firm.
Unfavorable developments give rise to new conditions that may threaten the firm's products, services, or business activities. For example, a new import tariff may increase the cost of a key component used to manufacture a product. A modification in labor law may alter the hours the firm's employees are allowed to work. The installation of a new political leader may lead to government takeover of corporate assets.
Country risk is always present, but its nature and intensity vary over time and from country to country.