Impact of political environment on business

 

IMPACT OF POLITICAL ENVIRONMENT ON BUSINESSES

 

 

Many political decisions taken by ruling party have serious economic and business implications. In the past communists and other leftists favored state control and were against private capital, particularly foreign investment and international control over local business and property. On the other hand, USA allows and encourages private ownership. Important economic policies such as industrial policy, policy towards foreign capital and technology, fiscal policy and foreign trade policy are often political decisions. Therefore, a business manager must be familiar with the ideologies and past approaches of key political parties to analyze possible future policies of existing and forthcoming ruling parties. 

The goal of any government is to run the country according to their respective ideology for the attainment of economic prosperity and political stability.

The following are several ways in which political factors are affecting business in today’s world.

1.      Government spending:

The direction of state spending is based on its inherent political ideology. Such as government inclined towards left would spend on public sphere, free health, education for all, services, and welfare of all. On the contrary rightwing state would spend more on defense, international security, alliances, expansion of influence over other states (neo-imperialism) etc. 

2.      Taxation:

 

Tax is the mechanism through which state earns for spending and building resources. Political ideologies may propose different sorts of taxation. Tax policies can have a massive effect on a business’ overheads and profit margins. These policies are often used to promote political ideologies of ruling party. These policies may be used:

•        to reduce income of individuals and companies and thus reduce private expenditures.

•        to provide resources for public expenditures (on roads, highways, public schools, colleges, hospitals or even parks and playgrounds)

•        to exercise control over the private sector investment.

•        to improve country’s business competitive position.  

As an example, the Republican Party in the US and the Conservative Party in the UK are a clear illustration of parties who favor tax cuts as a route to helping businesses grow. A good state is the one which collects tax under its prescribed laws from all taxable individuals and business. Specially for direct taxes that are paid by the citizens of the state directly based on their incomes and wealth, if the state fails to broaden the tax net to all taxable persons and businesses, then it creates disparities and frustration in the hearts of taxpayers and the state is ultimately forced to go for indirect tax which is equal on all. Pakistan is facing this problem for past few decades and consecutive governments are unable to broaden the tax net successfully. 

3.      Economic policies:

 

Different political parties or individuals enact different policies to guide national economy based on their own economic ideologies and agenda. This means that politics can impact different sectors in varying ways. A pro-agriculture political approach may not be able to pay attention to other sectors. An ideology relying on non-agriculture sector for economic growth may manage economy that is not conducive for agriculture sector.

4.      Labor Laws:

 

Political parties are often vocal on their stances regarding minimum wages, insurance requirements, labor related taxes and regulation on the terms of employment. Any change in labor laws can mean a change in expenses for a business, and these expenses can be significant for small businesses. Over regulation may impact ease of doing business. Today local labor laws are also affected by international labor regulations. For example, Western developed economies do not allow imports from such countries who do not ensure labor health and safety policies and child labor. The regulations are so strict that the buyers from such countries send their inspectors on regular basis to exporting partners for inspection and certifications. 

5.      International relationship and policies

 

International relationship and policies are one of the important parts of political mindset. An ideology that supports good international relation and welcomes foreign investments will have direct impact on sustainability of local businesses. On the other hand, a protectionist policy may have different impact. We live in an increasingly interconnected world where even small businesses have global supply chains. 

CONCLUSION:

 

After discussing all these points, you will be able to understand whole concept of the impact of political environment on the businesses. So more the political stability more will be the environment feasible for developing good opportunities for the business development and success and vice versa.