Economic growth and political stability are deeply interconnected as many examples in history suggest. For example an economic crises in the 1920 in Europe and the USA and the resulting political instability in many countries can be seen as one of the factors leading to World War II.

While growth and stability reinforce each other in terms of economic development, stability seems to be a necessary condition for investments from a business point of view. The purpose of this paper is to examine the importance of political stability to international business. Large investments are often made by multinational companies in the process of entering the foreign market. Such investments are usually made with different objectives, which are important to differentiate because of the differing ways that political stability plays into the decision making. This paper will distinguish between three different objectives: 1) the foreign market is of interest to companies for access to consumer markets, which would relate to the sale of products and services in the particular market. 2) the access to the natural capital is of primary interest to extract resources for export. 3) access to human labour might be of interest to firms, as to get cheap labor inputs (labour as factor of production). With the nature of business as outlined above, risk involved with regards to instability differs which will become important for more detailed discussion. Multinational enterprises may well engage in several of these types of investment at the same time.

Of general importance, however, is of course the risk involved with making such investment decisions. Companies engaging in Foreign Direct Investment (FDI), for instance, make overseas investments either by setting up a subsidiary or associate company in the foreign country, through a joint venture or merger, or simply by acquiring shares of an overseas company. To examine the importance of political stability to international business in form of FDI or other cross-border activities, it must first be understood what its absence means: Alesina et. al. (1996) define political instability as ‘the propensity to a government collapse’. In international business, however, the influence of political instability is felt far before a government is about to collapse. In fact, any policy or governmental change can negatively as well as positively affect operations. Political risk is thus intrinsic to international business. Political stability is one factor of risk that affects the the business in different ways.