Quiz 2: Understanding Formal Institutions: Politics, Laws, and Economics


Democracy is the political system in which all the people elect the representatives to govern the country on their behalf. Democracy has broader appeal around the world due to following reasons • It allows people to make their own political choices. • It provides individuals with right to freedom of expression and organization. • It is based on the rule of the people, by the people, for the people. • It protects the interests and demands of minority group and all these groups have access to the political system. • Democracy is also considered as important for controlling Government power. • It protects the interest of the citizens and promotes equality. • It imparts political education to the citizens and promotes changes in the Government. Thus, Democracy is an extremely important part of the political system in this modern age and it gives public the right to participate and to be free.

The United States economic situation in 1980-1990's been strongly a mixed economy and flourished economic growth and prosperity. As soon as the industrial growth started in developing nations, many United States corporations opted for globalization which went uncontrollable for the US economy. This also decreased the foreign direct investment flow to the US economy. With all the after affects, the United States economy tremendously decreased in the product market but still strong in the service industry. The country had faced the recession twice and now, struggling to improve their economic condition. During the last decade, the United States economy has changed its phase from being a mixed economy to a command economy with the situation out of control for many of the US corporations. The phase of shifting has already started with new laws and regulations. The US corporations were given tax rebates and benefits to stop outsourcing services and products to other countries and the main objective is to increase the exports and create a balance of payments.

Risk analysis includes exploration of all the risks related with investment in a foreign country. It includes political risk, exchange rate risk, transfer risk, credit risk, and operational risk. Political risk is the biggest risk associated with a foreign investment. It deals with rules and regulations of the foreign country. Countries having high political risk are listed below: img Hence, it can be concluded that the countries from Middle East and North Africa involves higher political risks due to the following reasons: • Hinders growth and productivity of the economy • Disrupts production of goods and services • Causes loss of assets and business opportunities • Increases the operational cost of a company • Wars, riots and protests create a chaotic environment Thus, political risks hinder the international business practices of a country. Therefore, companies should avoid investment in the countries involving high political risk.