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Federalism denotes a system of government in which power is divided by constitutional right between national and local units of government in regions. A state that follows the federal system is known as a federation. Examples of federal systems include the governments of the United States, Canada, Australia, Germany, Switzerland, Malaysia, the former Yugoslavia and the former Soviet Union.

Unlike unitary systems, in which the powers of the local units of government are granted to them and can be varied or taken away by the national legislature, in a federal system the local units of government have their own independent constitutionally guaranteed authority. However they remain sub-units of one overall state, and thus do not have national sovereignty and have no standing under international law. In general, the local units of government cannot undertake an independent foreign policy, nor can they have standing armies.

The distinction between unitary and federal governments is not always clear, as the national government in a formally unitary system of government may make large grants of power to local units resulting in a system that becomes de-facto federal. An example of this is the United Kingdom. In theory, any of the regional devolved authorities created could be abolished, though politically that is exceptionally unlikely to happen once the citizens in each region accept the authority's legitimacy over them. This system of devolution that evolves into a form of de-facto federalism can sometimes occur without formal legislation, as is the case with the People's Republic of China in which largely informal grants of power to the provinces to handle economic affairs and implement national policies has resulted in a system which some have termed "de-facto federalism with Chinese characteristics." In strict constitutional terms, however, regional authorities which have no constitutional right to exist are referred to as devolved assemblies, while those that have a constitutionally guaranteed right to exist are federal authorities (often called 'states').

Often, the division of power between federal and local governments is outlined in the national constitution, as is the case with the United States and Australia. It is also common for the regional governments to have existed longer than the national government and for the national government to have come into being as a result of a union of local governments. This was the case with the United States, Switzerland, Canada, and Australia. Indeed many 'states' within federal systems may themselves have their own constitutions.

The precise division of power varies from system to system. In the case of the United States, the Federal government has powers over areas enumerated in the United States constitution with the remaining powers belonging to the states. (In practice, the enumeration and the "remaining powers" are both fairly broad, and have been interpreted differently at different times.) In the case of Germany, the division is less one of content than of administration: the national government issues directives and the regional governments (Lander) have broad discretion as to how to implement them.

There are a number of issues that are common to federal systems. One is that the exact division of power and responsibility between national and local governments is often a major source of conflict. Often, as is the case with the United States, such conflicts are resolved through the judicial system which delimits the powers of federal and local governments.

Another common issue in federal systems is the conflict between local interests and regional interests. In some cases, such as Canada, these interests become entangled with differences in language or ethnicity. The ability of a federal government to create national institutions that can mediate differences that arise due to language, ethnic, religious, or other regional difference is major challenge, and the inability to meet this challenge has been the cause of the collapse of some federal systems such as Nigeria, the Soviet Union, and the Federation of Rhodesia and Nysaland[?].

Almost all federal systems have mechanisms such as the United States Senate, United States Electoral College[?] or the Australian Senate which give numerically less numerous regions a larger share of power than their numbers suggest. However, in some cases even these mechanisms break down, and in these situations the local governments may become the focus of efforts at secession. Faced with a serious secession movement, the national government may simply dissolve, as was the case with the Soviet Union or may otherwise find it necessary to resort to armed force to preserve the federation as was the case of the United States during the American Civil War.

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