The external environment can have a significant impact on your business. Managers often examine these aspects in detail.
A firm’s objective is to make the best decisions it can for its advancement. The factors of politics, economics, social issues, and technology contribute to this analysis (PEST analysis).
Businesses also consider environmental, legal, ethical, and demographic factors.
Politics play a major role in business decisions. As a result, government policy can affect businesses in a variety of ways.
Businesses must comply with the law. A manager must assess the impact of pending legislation on their operations.
Political conditions have a variety of effects on commercial enterprises. The risk factor could result in a significant loss.
You should be aware that political forces can influence outcomes. The initiative can also influence government policy at the federal, state, and municipal levels. Businesses should be prepared to deal with the local and global effects of politics.
A change in government policy constitutes a political factor. All types of changes are possible, whether they are economic, legal, or societal. Additionally, these things could all be happening at the same time.
An increase or decrease in taxation could be a political factor. Several businesses may have their taxes increased by your government, while others may have theirs decreased. You will be directly affected by this decision.
So, it is essential to remain informed about such political developments. In addition, companies’ demand patterns can be affected by government actions, such as interest rate changes.
Definition of Political Factors
A political influence is a government regulation that impacts commercial operations positively or negatively. Therefore, managers must keep a close watch on political developments.
A few of these factors can include current and proposed legislation, political stability and change, freedom of expression, protection, and discrimination laws. Businesses operate and conduct their business based on each of these factors.
How Political Factors Affect the Business Environment?
The political climate can influence a business by making it more or less favorable to do business.
Corporations often face little recourse since governments generally have considerable authority.
Various political issues can affect businesses in different ways. External environmental factors can introduce a risk factor into the equation, resulting in a significant loss of business.
Both domestic and international political events can alter the outcome, so businesses must be prepared to deal with both.
Political issues have a direct impact on the business, as well as indirectly, through other factors that may impact the environment.
The following variables contribute to the formation of interconnections in a variety of ways:
- Politicians are also capable of influencing the acceptance of new technologies.
- Politicians can also have an impact on the pace of technological advancement.
- Political decisions impact the socio-cultural climate of a country.
- Political decisions have a direct effect on the economy.
What are the Political Factors affecting the Business Environment?
Politics enter the picture when administration policies shift, which might alter the business environment generally. Economic, legal, and social changes may be made, and they can take the following forms:
Tax and economic policies
Increases or decreases in tax rates are good illustrations of the political component. There are various reasons why the government may increase the tax rate on some enterprises and decrease others.
The business community will feel the impact of this judgment right away. Therefore, the importance of having a plan that can handle such scenarios cannot be overemphasized.
Impact on economy
The political situation of a country affects its economic environment. The economy affects business performance.
There are notable differences in congressional policy between Democrats and Republicans, for instance.
Taxation and government spending is impacted, which in turn has an impact on the economy. The economy is frequently stimulated by increased spending by the government.
Businesses can suffer from substantial impacts from political instability. Global enterprises are particularly affected by this. It is possible to overthrow an entire government through a hostile takeover.
This situation will eventually lead to looting, riots, and general disturbances in the surrounding area. Such events can significantly impact a business’s bottom line and undermine its operations and activities.
Changes in regulation
The government has the authority to amend its laws and regulations. A company could suffer from this.
US Securities and Exchange Commission officials have been scrutinizing company compliance ever since the accounting crisis of the early twenty-first century.
Sarbanes-Oxley compliance rules were enacted in 2002. An outward manifestation of this was a reaction against what was happening in the community. The social environment pushed for more accountability from public enterprises.
Foreign Trade Regulations
Every firm aspires to expand internationally. However, a country’s political history might influence a business’s desire to extend its activities.
Tax rules that are tightly managed by the government can encourage a corporation to expand operations into new locations. Still, other tax policies can hinder the expansion process for specific industries.
A government program to assist local businesses may harm international firms’ competitiveness when operating in a foreign country.
Mitigation of Risk
The purchase of political risk insurance is one way of mitigating political risk. The purpose of this type of insurance is to help reduce the risks faced by international businesses.
Various indices provide information on specific countries’ risk exposures. An excellent example is the index of economic freedom. Politics plays a significant role in the decisions made by businesses in each country.
The purpose of employment laws is to protect employees’ rights and govern both employer and employee interactions. Consequently, the employment law field involves numerous risks and is a highly difficult one.
Businesses who keep up with the latest developments in this law may steer their operations in the right direction; those who make mistakes, however, should be prepared for the consequences.
The performance of employees accounts for 98 percent of the results of modern businesses, so any changes to employment law will undoubtedly have an impact.
Political Factors Affecting Businesses
Here is the list of political factors affecting businesses.
- Government bureaucracy
- Level of corruption
- Press freedom
- Fees and charges
- Regulation of trade
- Law governing education
- The antitrust law
- Employers’ rights
- Anti-discrimination law
- Laws governing data protection
- Law of Environmental Protection
- Laws governing health and safety
- Regulation of competition
- Regulatory and deregulated environments
- Incentives and tax rates (tax policy)
- Stability and change in the government
- Associations and unions: the role of government
- Quality and quantity restrictions on imports
- Patents and copyrights (intellectual property)
- E-commerce and consumer protection
- Environment pollution laws
Importance of Political Environment Observation
Companies should monitor their political environment. Business strategy can change because of changing political factors in the following ways:
- The legislation affects the relationships between companies and their customers, suppliers, and other businesses.
- Governments are responsible for safeguarding the public interest.
- Policies taken by governments have an impact on the economy.
- Almost all goods and services are consumed by the government.
- Political stability can affect the appeal of a specific local market.
- Businesses are seen by governments as essential vehicles for social reform.
Example of Political Factors Affecting Businesses
Political Factors Affecting Nike
A macro environment analysis reveals Nike is an excellent example of how political issues have affected a company. Nike is a world-renowned manufacturer of athletic clothing, footwear, accessories, and equipment.
Nike has been fortunate to benefit from the economic growth rules developed by the United States government. A combination of stable currencies, lower financing rates, and favorable tax treatment enables the company to accelerate its growth.
Nike has also benefited from greater transparency throughout the global value chain thanks to efforts by the US government. Nike, however, is encountering difficulties with its outsourced producers in nations such as Indonesia, Thailand, and Vietnam, where political unrest is on the rise.