Question

Is the transition from a communist country to a capitalist system (as in Poland) or to a State capitalist system (as in China) contributing to political risk? Argue both sides.

Answer 1

Transition from a communist country to a country of capitalist economic system, does not attract political risk, because during the transition, government forms policies that support market liberalization, promote private property rights and reduces its intervention in the economic activities. It means that a supportive and friendly environment is created for the foreign investments. It reduces the political risk.

Transition from communist country to a state driven country of capitalist economic system, attract political risk, because the newly transformed capitalistic system may facilitate the free economic activities, but there will be restriction related to the repatriation of income, transfer payment to the subsidiaries in other markets as well as issues with the ease of business in the newly capitalistic country. Further, lack of supporting infrastructure, specialized workforce and lack of regulations towards the intellectual property rights, increase the political risk to the next level.