Weak states are good for business, Strong ones are better - Diego Ruiz Brizuela
1. GEORGETOWN GRADUATE INTERNATIONAL MANAGEMENT PROGRAM
OXFORD UNIVERSITY CORPUS CHRISTI COLLEGE
Weak States are Good for Business, but
Strong States are Better
Business-State Relations and International
Political Risk - Group 1
Diego Ruiz Brizuela
Bureaucratic coherence can only be found in states that have a strong political structure and can offer
the political stability that businesses need to grow and achieve their not only their profit maximization
but also their long-term goals. That is why strong states are better for doing businesses than week
2. What is a state?
There are many channels and models through which the state impacts a business performance,
throughout time, the state has played different roles and delimitations influencing on the private sector
working on the delicate balance that determines the risk and opportunities for a business as well as the
revenue that this business brings back to the state through a taxation policy. Probably the best way to
start this essay is by defining what exactly a state is and the difference between weak and
developmental strong states. A state is an organized and self-governed political community (this term
can easily be interchanged with the country). Within a state, there can be different kinds of interactions
among the institutions that hold the power such as the parliament, a president, the courts and any
How do businesses interact with the state?
Businesses have three sources of power over the state: economic, ideological and political.
When the power of businesses derived from their ability to control the rate of capital investment
becomes less important, businesses will need more influence over stable political structures to apply
their influence over the terms of public debate and political activity through hired skilled lobbyist and
lawyers (Vogel, 1996). At the end, the impact of these groups is directly affected by the degree to which
a nation’s political institutions are accessible to interest groups, mainly because in these states decisions
are controlled by those who either own the means of production or who are appointed by those who do
so (Vogel, 1996).
Strong States V.S. Weak States
The defining characteristic of a political system is the power of the state in relation to its own
society. The state’s strength is highly correlated with businesses political power (Vogel, 1996). Strong
states, such as France, Japan, Germany, Korea and Taiwan, are developmental states that are able to
fairly control access to political process and therefore make it much more difficult for nonbusiness
interests to become politically effective. Their internal coherence and corporate identity are supported
on its informal networks and its embedded autonomy, which is a bureaucratic insulation with an intense
connection to the surrounding social structure. These networks are usually formed within a strong
education system, usually within elite universities from which officials are recruited through a strict
selection process. (Evans, 1995). The staff is selected from among the most talented members of the
most prestigious universities. That is how the state is able to attract the best of the brightest minds in
the country. Finally, it is also important to take into consideration that this bureaucracy needs to be well
paid with wages comparable to the ones in the private sector or even a bit higher.
Developmental states play a central role in producing the organized industrial classes they need
as counterparts and require to harness private entrepreneurship and managerial expertise in order to
achieve economic goals. The result is greater political stability and greater power to the business (Vogel,
1996). These states seem like a better option to do business through joint projects because they look for
long-term common goals such as economic growth, fiscal revenue, industry development, labor
3. relations, social welfare, technology transfer, environment protection and employment levels; instead of
just looking for basic profit maximization. Companies will prefer to do business with developmental
states because they will provide the competitive market that private capital requires to accomplish its
goals. Still, it is important to consider that having easy access to the political process does not mean that
the state will lose its sovereignty or their exhaustible resources; states with strong political structures
are not giving their national patrimony to any business.
On the other side weak states, such as the United States and the United Kingdom, can easily be
permeated by interest group pressures and hence, businesses are less able to enjoy or maintain a
privileged political position. Weak states do not have much control over the access to the political
process and it is easy for nonbusiness interests to become politically effective. They have less long-term
perspective to transform their private sector and it is harder for them to attract foreign Direct
In comparing the two structures, is not meant that strong states favor business, while weak
states do not. As a business, risk on investing is important to measure the profitability of a project and
that is why analyzing the strength of the state you are doing business with is important. In measuring
the country’s structure and its political risk, businesses need to get a complete country outlook such as
the specific political situation and threats that they could face. Regimen type is usually independent
from the project, but democratic or authoritarian countries would require different approaches and in
extreme cases, anti-American regimes could become a no-go market. The strength in the structure of
the state can also become affected by specific political situations that could bring instability in the next
coming years and they should also be taken into consideration such as successions, hierarchy or party
relationships that could affect the business – state relations and interactions. For example, Zaire is state
control is vested in a small group of personalistically interconnected individuals, a “president Mobotu’s
clique” that consist of 50 of the president’s most trusted kinsmen. This kind of analysis is hard to do and
involves expertise in country or region. Moreover, when doing business with weak states, there is a
need to do a project vulnerability assessment on the specifics of the project in the specific country to
analyze each specific risk for hostage takeover, hostage effect, nationalization or appropriation,
obsolescence in bargaining and changes in regulation.
Moreover, businesses need to take into consideration different kinds of industries they will be
participating in, such as services, extractive, manufacturing or infrastructure, require a different
approach. The extractive industry is characterized by having fixed cost and barriers to entry while the
manufacturing industry requires innovations and only has temporary barriers to entry and the
infrastructure industry has huge sunk cost, creates a monopolistic position and is usually controlled by
On the other side, working with a weak state could seem like a good opportunity for business to
take advantage over the negotiations initial conditions and maximize their profits in the short run.
However, weak states also have a higher investment risk and require a different approach for assessing
and mitigating these threats. I am no saying that businesses should, by all means, avoid doing businesses
with states that have a weak political structure because any state can bring a one of a kind good
4. business opportunity. If a local or multinational company decides to do business with these kinds of
states, insurances such as political risk insurance come in handy. This kind of insurance helps them share
risk with major local players and brings them as partners to force everyone to work for a common goal.
It is based on an analysis on to what extent can political actions affect the profitability of the project,
external to the industry or the natural actions and it usually protects businesses from currency
fluctuations, profit convertibility, drop in demand, expropriation, nationalization, civil war or
Finally, it is important to consider as well that not all kind of investments are good for the state.
Dangers such as over-exploitation of natural resources should be taken into consideration by
government officials when making a decision. Also, business and government long-term visions and
objectives should be shared and aligned. Every investment should generate a growth in skills and
infrastructure for the state as well as give them better technology, knowledge, income and access to
international markets. Spillovers of the project should also be taken into consideration. The most
common spillover a project can generate is the immediate increase in demand for local suppliers. Still,
the state should look to enhance its learning curve with technology and knowledge transfer as well as a
direct access to foreign markets and economies of scale by increasing its productivity and the skill of
Internal bureaucratic coherence should be seen as an essential precondition for state’s effective
participation in external networks that allows it to address the collective action problems of private
capital, helping capital as a whole to reach solutions. This bureaucratic coherence can only be found in
states that have a strong political structure and can offer the political stability that businesses need to
grow and achieve their long-term goals. That is why strong states are better for doing businesses than
Evans, P. (1995). Embedded Autonomy:States and Industrial Transformation. Princeton, New Jersey:
Princeton University Press.
Vogel, D. (1996). Kindred Strangers: The Uneasy Relationship between Politics and Business in Ameirca.
In The Power of Business in Capitalist Societies: A Comparative Perspective" (p. Chapter 11).