Modern business requires organizations to plan and strategize their operations to meet the demands of a changing economic climate. Although many external environmental factors influence business, one key factor is the political environment, both locally and internationally.
Changes in government policies and legislation can create complex challenges for businesses as they aim to achieve success in their respective industries, making it essential for managers to understand how these political factors can affect their activities. With careful analysis of the potential risks associated with the political environment, businesses can take the necessary measures to limit the potential damage from any changes or surprises arising from politics.
Political Factors In Business
Here are some common political factors affecting businesses in countries around the world:
- Corruption level
- Freedom of the press
- Trade control
- Education Law
- Antitrust law
- Employment law
- Discrimination law
- Data protection law
- Environmental Law
- Law concerning the health and safety of individuals
- Regulation of competition in the market
- Rules and policies related to controlling and removing regulations
- Taxation policies encompassing tax rates and incentives
- Government stability and related changes
- Involvement of the government in trade unions and agreements
- Limitations on imports based on product quality and quantity
- Legal protection of intellectual property, including copyright and patents
- Consumer Protection and eCommerce
Bureaucracy, which refers to government regulation and bureaucracy’s effects on businesses and industries, is an important political factor impacting the overall success of a business. Bureaucracy can be defined as “a system of management in which decisions are made by multiple layers of officials who are insulated from external influences.” Businesses that operate within countries with large bureaucracies must often contend with long-winded approval processes, slow decision-making, and unclear regulations that can impede progress and make it difficult for companies to achieve their goals.
The bureaucratic environment can also create additional costs for businesses because they must spend extra time and money navigating the red tape associated with bureaucratic systems. This can include paying licensing fees, conforming to specific rules or guidelines that may not apply to other jurisdictions (i.e., those without a large bureaucracy), or hiring additional staff members who specialize in managing the bureaucracy process.
In addition, bureaucratic systems tend to become inefficient over time due to increasing levels of paperwork, miscommunication between departments, conflicting directives from different offices or agencies, and frequent changes in regulations or policies that make it difficult for businesses to keep up.
Governments around the world have used bureaucratic tools for centuries as a means of controlling their economies and ensuring compliance with laws and regulations; however, there has recently been an increased focus on streamlining government processes to reduce paperwork and improve efficiency while still providing regulatory oversight where necessary.
At a macroeconomic level, a high level of corruption creates an environment that hinders economic growth by decreasing foreign direct investment (FDI) because investors are reluctant to invest their resources in corrupt countries where there is no assurance that their assets will be safe or generate a return on their investment.
High levels of corruption also create barriers for businesses operating in those countries, as they face higher taxes due to bribery from officials and have increased difficulty accessing funds due to nepotism and misappropriation. With weak institutions and enforcement, procedures come failed projects as money allocated for them gets diverted away from its intended purpose or goes completely missing altogether.
At a microeconomic level, corrupt governments can hinder competition within local markets by allowing only certain firms favored by officials access or exclusive rights to specific products and services, resulting in oligopolies that reduce market competitiveness, leading to higher prices for consumers. Also, when there is collusion between government officials and companies to manipulate costs through price fixing or over-invoicing goods, it results in unfair profits being made at the expense of taxpayers, who end up footing the bill while suffering reduced quality services/products due to the low incentives provided by these corrupt structures.
Also, when bribes are paid out instead of taxes going into government coffers, this means less revenue is available for social welfare programs such as healthcare systems, which would eventually affect a company’s ability to recruit and retain talent if employees do not have access to these benefits.
To counteract the detrimental effects of high levels of corruption, governments around the world have enacted reforms like the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits American companies from engaging in corrupt activities abroad, as well as Transparency International’s Corruption Perceptions Index (CPI), which evaluates countries based on industry experts’ perceptions about their public sector’s integrity.
Government stability and related changes
Government instability within a nation has a major impact on businesses that operate in the global market. This is because hostile takeovers, coups, and general unrest can disrupt operations and activities, which can result in huge losses for the company. Political instability due to external influences such as foreign intervention or internal factors like national political turmoil can be perilous for business if it happens without warning.
When there is a change of government due to large-scale protests or a revolution, there is usually an inherent risk associated with it. Since the government plays a major role in terms of trade regulations, economic policies, and overall governance, any instability caused by changes in leadership will lead to inconsistencies and turbulence. The cause could either be internal or external; both scenarios have the potential to harm businesses operating within the country’s boundaries.
External sources, such as foreign intervention, can cause political disruptions that are hard for businesses to control or predict. Any type of conflict between two nations could spark a war that leads to regime overthrow, revolutions, and other types of civil disorder. Such disruptions open opportunities for looting, sabotage, and riots, which hamper business operations significantly, leading them to suffer severe losses financially as well as reputationally.
Similarly, economic recession due to unstable foreign exchange rate fluctuations within a nation can reduce sales figures drastically, which may lead firms toward bankruptcy if not handled properly during their occurrence.
Internal sources, as is the case with companies operating within countries with elections that aren’t usually free and fair, face significant risk due to the uncertainty surrounding laws and regulations.
Freedom of the press
Freedom of the press is a political factor that has a direct impact on business. It is an important part of a well-functioning democratic society, as it allows people to make well-informed decisions based on reliable information. Freedom of the press also plays an important role in business because it allows businesses to operate in a transparent and open environment.
The freedom of the press guarantees media outlets can accurately report news and provide accurate information about current events, including those occurring within the business world. This level of access provides people with insights into what’s going on behind closed doors at corporations and other organizations, which affects public perception both positively and negatively, depending on how honest the reports are.
The ability for journalists to ask questions, even those that are uncomfortable for businesses, helps increase accountability in all aspects related to financial dealings, customer service practices, and labor relations.
When there is no freedom of the press, it can lead to a lack of transparency that can hurt business operations due to inaccurate reporting or biased interpretations of facts/information by governments or corporations that want certain stories suppressed or twisted in their favor.
In some cases, governments with restrictions on print media will circulate state propaganda instead; this gives them unchecked control over what citizens learn about their country’s politics and policies, which further undermines trust in government operations as well as private companies attempting to conduct business within these countries.
The degree to which governments enact trade control policies can have a major impact on businesses operating within their countries. Trade controls are government policies and regulations that restrict, regulate, or redirect the flow of goods and services across international borders. These measures can take many forms, including tariffs and import quotas, export taxes, product bans, and currency restrictions. Trade control policies are typically implemented to protect domestic industries from foreign competition or divert resources towards certain economic objectives, such as investment in strategic industries.
Tariffs are one of the most common types of trade control measures employed by governments around the world. Tariffs involve taxes placed on imported goods and services based on their country of origin. This makes imports more expensive than domestic equivalents and thus reduces their competitiveness in local markets. Tariffs may also be imposed as a means to raise revenue for governments or to protect certain domestic industries that cannot survive without protection from foreign competitors (or both).
Governments may use export taxes to restrict international trade and ensure that adequate quantities of goods and services are kept domestically or to prevent capital from leaving the country, both of which support local production and economic development. In addition, these taxes can be used to collect revenue directly or indirectly through systems such as value-added taxation when exported items are sold at border points-of-sale outlets (ePOS).
Government-led product bans are enacted primarily for political reasons, such as environmental conservation or security concerns. They can target certain nations rather than specific items to create trade barriers between two countries that do not want to interact, primarily due to national defense considerations. These bans not only negatively impact the economy, but also impede upon the basic freedoms — including the freedom of enterprise — protected in many documents essential to democracies.
3 main effects of these political factors
Impact on economy
The political situation of a country can have a major impact on its economic setting. This is due to the different policies set by parties in government, as well as their approaches to fiscal and monetary policy. For example, democratic and republican governments often have different approaches when it comes to taxes and government spending, which ultimately affect the overall performance of the economy.
A higher level of government spending often has a stimulative effect on the economy. These spending levels are essential for aiding businesses with short-term struggles or long-term economic progress. This can result in increased public services, infrastructure improvements, or job creation, which may ultimately spur consumer confidence and enhance economic performance as people feel more comfortable about their prospects. Additionally, lower levels of taxation can also give businesses more money to invest in research and development projects that, if successful, could potentially increase their growth potential over time.
Political parties may adopt austerity measures, focusing on reducing spending rather than increasing it, which could harm businesses by putting a strain on their finances and decreasing consumer confidence due to a lack of state-funded investment. This can lead to fewer job opportunities and slower improvements in infrastructure that would otherwise help individuals achieve financial stability.
On the other hand, political events like protests, wars, and conflicts might cause an enlarged military expenditure, taking away from resources intended for providing jobs or improving local communities. Businesses should be mindful of the political ideologies of the countries they operate in and prepare for any changes that could adversely affect their operations.
Changes in regulation
Regulation changes can have a significant impact on businesses, particularly if the regulation is coming from a governing body such as the federal government. Government regulations can be used to set standards for businesses’ operations and activities, and when those regulations change, it affects how businesses must operate.
For example, as a result of the accounting scandals at the turn of the 21st century, the U.S. Securities and Exchange Commission (SEC) heightened its focus on corporate compliance. This heightened inspection led to the passage of the Sarbanes-Oxley Act of 2002, which enforced stricter rules and regulations on publicly traded companies. This was done to both rein in bad actors that may have been engaged in fraudulent or unethical business practices and to reassure public investors that their investments were safe with these companies.
These sorts of changes can have an immediate effect on businesses due to the higher costs associated with complying with new rules and regulations. Companies may need to hire new personnel or purchase additional software solutions just to comply with the new laws, which adds overhead costs as well as further squeezes profit margins.
In addition, these legislative changes could eliminate certain types of competitive advantages held by individual firms, meaning companies now must compete solely based on their performance rather than taking advantage of any particular loophole or exemption provided by law before its alteration.
Outside direct impacts from changing legislation, there are also indirect effects from societal reactions, which will ultimately create pressure for legislators to act accordingly regardless of whether they agree or not with said proposed legislation; this is similar to what happened when people reacted negatively towards Wall Street’s ulterior motives leading up to the 2008 financial crisis.
This doesn’t necessarily mean good things happen out of it, since those changes could favor some industries over others. Still, it highlights how important it is for individuals and corporations alike to pay attention to governmental movements, since anything related to the social environment would lead governments to implement legislation affecting different market players positively or negatively depending on each situation/context.
Mitigation of risk
The mitigation of risk has become an increasingly important part of political risk management for companies operating internationally. Political Risk Insurance (PRI) is a way to manage political risk and can enable businesses to expand their operations in foreign markets despite the risks associated with the area. Insurance policies generally cover items such as expropriation, war, and civil unrest, as well as broader economic or financial issues related to ongoing developments in a particular country.
The Heritage Foundation and the Wall Street Journal’s Index of Economic Freedom is a reliable tool for businesses to evaluate the political risks associated with international investments. It scores countries based on the transparency and stringency of their economic regulations, such as property rights and anti-corruption measures, which provides insight regarding whether purchasing Political Risk Insurance (PRI) is more profitable than alternative strategies like hedging or diversification.
Companies can take proactive measures to reduce the risk associated with foreign investments by conducting thorough research on the market environment before investing. This involves examining macroeconomic developments within a region as well as understanding cultural practices relevant to business operations; simply being aware of geographic-based government regulations is not enough to gain insight into local dynamics that may have a negative or positive impact on future investments.
To further safeguard their investments, firms should also be cognizant of any modifications in the legal realm and factor in known elements that could compromise prior agreements when doing business abroad; such changes could include variations in regional political associations or changes in leadership within an influential state actor who had taken part in investment negotiations.
Examples of political factors affecting business
Political Factors Affecting Tesla
Political factors have a major impact on the success of Tesla, Inc., as evidenced by recent examples such as tariffs, incentive programs, and regulatory considerations.
Tariffs can influence the cost of Tesla’s imported parts and components, making production more expensive. In addition, political incentives such as tax credits or financial assistance can help further Tesla’s business models and attract investors.
Regulatory considerations are also essential to analyze when analyzing political factors affecting Tesla. Different countries have different environmental regulations, which must be taken into account when assessing any potential market for Tesla’s products. Whether it is emissions standards or safety concerns that differ from country to country, understanding these nuances is important to ensure compliance with laws and regulations in each place where Tesla does business.
Political Factors Affecting Apple
In many countries, governments regulate certain aspects of the business to protect consumers and ensure fair competition between companies. These regulations can include taxes, trade restrictions and agreements, environmental laws, antitrust laws, employment laws, and intellectual property rights, among other things.
Apple has been subject to political pressures outside the U.S. market as well, such as in China, where it was accused of tax evasion for several years until an agreement with the Chinese government was reached in 2017, which then allowed it to open new stores in the country. In addition, Apple had to adjust its app store policies in response to pressure from Chinese authorities regarding censorship issues. The company’s new policy does not allow apps that are critical of the ruling regime or promote pro-democracy movements within China.
In Europe, Apple is regularly subject to the same antitrust investigations regarding exclusivity agreements with carriers related to iPhone sales and also accusations of tax evasion by setting up subsidiaries in low-tax countries like Ireland. In addition, recent data privacy concerns raised by EU regulators have led Apple to make changes like offering more granular control over how users’ data may be used by apps installed on their devices.
Political factors play a crucial role in shaping the business environment, and conducting a PESTLE analysis can help organizations anticipate and respond to changes in the political landscape. Businesses need to be aware of political instability, government regulations, tax policies, trade agreements, and other political factors that could affect their operations. By staying informed and proactive, they can adapt to political changes and leverage opportunities while mitigating potential risks. Understanding political factors is an essential component of strategic planning and decision-making for any organization.