Following is a quote from the developers:
The government in exile continues to act like an independent country with the condition that it cannot surrender.
You could say that one of the more interesting choices we made in
Hearts of Iron 2 was that in the 1939 scenario we declared Poland to be
a highly interesting and eminently playable country. As illustrated by
our decision to put it as one of the countries you could pick straight
of the bat in the 1939. Now let’s be frank here, unless you are pretty
good player and playing single player you are not going to have that
long a game. However in October 1939 Poland’s war was far from over and
Poland would continue to play a role in the war, not a major one by a
long shot, but at the same time it wasn’t non-existent either. With
this in mind we introduced the concept of government in exile.
First off not every country will form a government in exile, you must
be aligned to a faction to form a government-in-exile, there will be no
Albanian government-exile popping up in April of 1939 looking for a
home. With no faction to take you in your war is over. Next each
country has the choice to simply capitulate instead of fighting on.
However should a country aligned to a faction be forced to surrender
and chooses to fight on then the government exile forms in the faction
leader’s capital. The government in exile will receive a small amount
of manpower and leadership from people who manage to flee the
occupation (somehow) and from members of that country’s Diaspora who
rally to help the country in its time of crisis. It will also receive a
very small amount of IC.
The government in exile continues to act like an independent country
with the condition that it cannot surrender. It will continue to exist
until either the whole faction in annihilated or another faction
chooses to install a puppet in its territory. As it forms an
independent country it can raise it’s own troops and can perform
independent combat operations. Although to be honest here the scope for
these is very limited.
So what will governments in exile do? Well everyone has the ability to
perform a special intelligence action to support the local resistance
movements. This increases the odds of partisan spawn and their
effective tech level. Partisans will have a tech level somewhere
between 0 and the occupier’s tech level (representing the fact the most
of the partisans equipment will be ‘liberated’ from their
‘liberators’). Partisans are of course in game terms rebels, so in
general they are AI controlled units that try to wreak havoc behind
enemy lines. However government in exile will get full control of there
units. This does give the government in exile something to do and also
makes the conquest of human controlled countries in multiplayer just
that little more interesting.
All in all we feel that government in exile make playing those
countries that, well let’s face it, World War II wasn’t kind to
actually possible to play. It also adds a little something to
multiplayer games, where the war never quite seems to end.

