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Prior to Azure, there was also the matter that the 2 political factions in Crossbell's diet were tied to the empire and the republic, and served the interests of their sponsor country over that of the people of Crossbell, but the events of Zero largely ended all that.
The general idea is that Crossbell, due to it's geographical position and it's Septium Mines, is too valuable for either the empire or the republic to be controlled by the other. In the past, they waged many wars over it, but eventually they realized they were slaughtering the goose with the golden eggs, and came to this arrangement instead.
Of course, that isn't stopping either of them from trying to wrest control over it by more subtle means, and since people, including secret agents, criminals and whatnot, from either country can't be meaningfully punished, they are used in a 'spy-vs-spy' tug of war that tends to result in 'accidents' where a bus or an airship just happens to crash with an agent from either faction is aboard, and too bad for the civilian collateral damage.
Falcom, that is, Kondo, has stated that they were inspired by Hong Hong mostly, but of course it doesn't correspond 1-to-1 to that situation, just like Erebonia isn't identical to Germany and Liberl isn't to Thailand (which did inspire it, again by Kondo's own words).