BDO International Business Compass

International Location Index for the Medium-Sized Companies

Column 2: Politico-Legal Conditions

The underlying political conditions reflect the political situation and stability of a particular country. Legal metrics portray the legal characteristics of a foreign market. Favourable political conditions such as an effective, not over-regulated state with a reliable and independent legal system create positive conditions for economic activities and initiatives for example. And they are also crucial for the social conditions in a particular country. 

The political stability variable indicates the political stability and freedom from violence. It reflects the perception of the probability that unconstitutional or violent measures, including politically motivated violence and terrorism, might destabilise or overthrow the government.[1] If the political conditions are stable, there is plenty of scope for planning commercial activities. A stable environment allows for more long-term planning of investment decisions for instance. The regulatory quality indicator measures the enforcement and implementation capacities of the government in respect of the development of the private sector. [2] The variable reflects the perception of the government's ability to formulate and implement sensible policies and regulations that permit and promote the development of the private sector. A high tolerance and active support of the private sector by the government means that there is a more positive climate for commercial activities. Rule of law measures the degree of confidence in and compliance with the law. This indicator reflects the perception how far protagonists appear to trust and obey social rules, with particular attention to the quality of contract fulfilment, property rights, police and the courts, as well as the probability of crime and violence. [3] If this measure is high, operators can rely on the legal framework in general and economic activities in particular. Control of corruption is an indicator of the extent of corruption in public authorities. It reflects the perception of the extent to which public power is used for personal gain and to which the state is monopolised by elites and personal interests.[4] A high level of corruption increases non-transparency of commercial activities and higher additional costs can be expected. Free trade is a measure of the absence of tariff and non-tariff trade barriers.[5] Fewer trade-restricting barriers mean easier export and import of goods and services. Investment freedom measures the extent of restriction on investment capital flows. Here, the treatment of and legislation for foreign direct investment, restriction of land ownership, restriction of investments in certain sectors, expropriation without appropriate compensation, control of foreign exchange trading and capital controls are taken into account.[6] Fewer restrictions on investment capital make it easier to invest and also to withdraw already invested capital. 

1 Cf. Kaufmann et al. (2010), 4.

2 Cf. Kaufmann et al. (2010), 4.

3 Cf. Kaufmann et al. (2010), 4.

4 Cf. Kaufmann et al. (2010), 4.

5 Cf. Miller et al. (2012), 461-463.

6 Cf. Miller et al. (2012), 463-464.