Chapter 3

The political environment

Ian Worthington
Politics is a universal activity which affects the business world in a variety of
ways. Understanding political systems, institutions and processes provides a
greater insight into business decisions and onto the complexities of the business
environment. Given the increasing globalization of markets. This environment
has an international as well as a domestic element and the two are closely
interrelated. Appreciating some of the key aspects of this environment and ots
impact on business organization is vital for students of business and for manager
alike.
Objectives
1. To gain an insight into the political context within which business operates.
2. To appreciate the relevance of political values to the organization of
business activity
3. To examine key political institutions and processes at a variety of spatial
levels
4. To recognize that business organizations can influence, as well as be
influenced by, the political environment
Introduction
In the late 1980s, following a period of difficult negotiations, the british
government entered into a collaborative agreement with the governments of
germany, Italy and spain, to develop and produce a European Fighter Aircraft
(EFA), due to come into service in the later 1990s. this agreement, which
involved the participants jointly funding research and development costs, was
greeted with delight by firms in Britains aerospace industry and by their
suppliers who welcomed the prospects of a large order of aircraft at a time when
defense spending was being restrained. For firms such as GEC Ferranti, BAe,
Lucas Aerospace, Rolls-Royce and Smiths Industries, the opportunity to retain
their technological edge. For the communities in which these firms were based, it
promised to sustain and possibly create employment during a period of growing
economic uncertainty.
Subsequent indications (in 1992) that the German government would pull out of
the venture-on the grounds of escalating costs and a reduced military threat-sent
shock waves through the british aerospace industry and threatened to sour
relations between the participating governments the rest of whom wished to
continue with the projects. In the event a compromise was reached under which
the countries involved agreed to continue with research and development in an
effort to produce a cheaper aircraft, to be known as the Eurofighter 2000. Given
the problems of German reunification, the German government has reserved the
right to make a final decision on production at some time in the future. As a
result, the aircraft is unlikely to enter service-if at all-before the year 2000.

What this simple example illustrates is that business activity takes place both
within and across state boundaries and frequently involves governments,
whether directly or indirectly. Consequently the political and economic
arrangements within the state in which a business is located and/or with which it
is trading can have a fundamental impact on its operations-even to the extent of
determining whether it is willing or, in some cases, able to trade at all. It is this
politico-economic context within which businesses function and the philosophical
foundations on that it is based that are the focus of this and the following
chapter
As a prelude simple example to a detailed analysis of the political environment, it
is necessary to make a number of general observations regarding political
change and uncertainty and its impact on business activity. First, the nature of a
countrys political system-including, its governmental institutions-tends to a
countrys political system-including its governmental institutions-tends to reflect
certain underlying social values and philosophies which help to determine how
decisions are made, including decisions about the allocation of resources. Thus,
whilst governments may come and go, the values on which their decisions are
based tend to be more enduring and as a result disputes normally centre around
means (e.g. sources of revenue), rather than ends (e.g. controlling inflation).
Whilst this gives a certain degree of stability to the business environment, this
stability cannot be taken for granted, as events in eastern Europe have readily
demonstrated. In short, the political environment of business is a dynamic
environment, containing both elements of continuity and change, and students
and practitioners of business alike need to be constantly aware of developments
in this area, if they are to gain a greater insight into the background of business
decision-making.
Secondly, changes in the political environment also emanate from a countrys
institutional arrangements. The tendency in democratic states, for example, to
have regular elections, competing political parties offering alternative policies,
and a system of pressure groups, all help to generate a degree of discontinuity,
which renders prediction about the future uncertain. For a business, such
uncertainty can create not only opportunities but also a degree of risk which will
often be an important influence on its decisions. Moreover, given that
perceptions of such risks (or opportunities) are also normally reflected in the
attitudes and behavior of a countrys financial and other markets, this represents
a further variable which at times can be critical for an organizations future
prospects. For many businesses, taking steps to maximize opportunities (or to
minimize risk) may ultimately make the difference between short-term failure
and long-term survival.
Thirdly, it is important to emphasise that political influences are not restricted to
national boundaries- a point emphasise by the increasing importance of
international and supranational groupings such as the G7 nations, the European
Community and GATT (the general Agreement in Tariffs and Trade) all of which
are discussed below. These external politico-economic influences form part of the
environment in which a countrys government institutions take decisions and

their impact on domestic policy and on business activity can often be

fundamental. No discussion of the business environment would be complete
without an analysis of their role and impact, particularly in shaping international
political and economic relationships.
Fourthly, the precise impact of political factors on a business tends to vary to
some degree according to the type of organization involved. Multinational
corporations-operating on a global scale-will be more concerned with questions
such as the stability of overseas political regimes than the small local firm
operating in a localized market, where the primary concern will be with local
market conditions. That said, there will undoubtedly be occasions when even
locally based enterprises will be affected either directly or indirectly by political
developments in other parts of the globe-as in small business is involved as a
subcontractor. In short, whilst some broad generalizations can be made about
the impact of global (or domestic) poltical space and time, and observers of the
business scene need to be cautious and open-minded in their analysis if they are
to avoid the twin dangers of over-simplication and empiricism.
Finally, lest it should be supposed that businesses are merely reactive to changes
in the political environment, it is essential to recognize that through their
economic and other activities they can help to shape the political context in
which they operate and to influence government decision-makers, often in a way
which is be beneficial to their own perceived needs. One of the hallmarks of
democracy is the right of individuals and collectively-have been active in this
sphere for centuries. It would be a mistake to underestimate their impact in
government policy or on the shaping of values in the established capitalist
nations of Western Europe and elsewhere.
POLITICAL SYSTEMS
The nature of political activity
All social situations at certain times require decisions to be made between
alternative courses of action. Parents may disagree with their offspring about the
kind of clothes they wear or how late they stay out at night or how long they
grow their hair. Students may challenge lecturers about a particular perspective
on an issue or when they should submit a piece of work. The members of the
board of directors of a company may have different views about future
investment or diversification or the location of a new factory. In all these cases,
some solution needs to be found, even if the eventual decision is to do nothing. It
is the processes involved in arriving at a solution to a problem, where a conflict
of opinion occurs, that is the very essence of political activity.
Politics, in short, is concerned with those processes which help to determine how
conflicts are contained, modified, postponed or settled and as such can be seen
as a universal social activity. Hence, individuals often talk of office politics or the
politics of the board room or the mediating role played by a parent in the event
of a family dispute. For most individuals, however, the term politics tends to be
associated with activities at state level, where the resolution of conflicts often

involves large numbers of people and may even involve in other states. Political
activity at this level is clearly qualitatively different from the other social
situations mentioned, and given the scale and complexity of the modern state,
the problems requiring solutions can often be acute and chronic. Solving those
tends to be seen, at least in part, as the function of government.
Government as a process is concerned with the pursuit and exercise of power-the
power to make decisions which affect the lives of substantial numbers of people,
be it at local, regional, national or even international level. Government may also
refer to the institutions through which power tends to be formally and
legitimately exercised, whether they be cabinets, parliaments, councils,
committees or congresses. Whereas the pursuit and exercise of power tends to
be an enduring feature of any society, governments are normally transitory
comprising those individuals and/or groups who, at a particular time, have the
responsibility for controlling the state, including making laws for the good of
society. How governments exercise their power and the ideological foundations
on which this is based, helps to indicate the nature of the political system and its
likely approaches to the resolution of conflicts.

Authoritarian political systems

Broadly speaking, political systems can be seen to range across two extremes,
on the one hand authoritarian and on the other democratic. In an authoritarian
political system the disposition is to settle conflicts through the enforcement of
rules, regulations and orders by an established authority. This authority may be
an individual (e.g. a monarch or other powerful individual) or a group of
individuals (e.g. a political party or military junta) who may have assumed
political power in a variety of ways (e.g. by birth, election, or coup). Once in
power, the individual or group will tend to act so as to limit the degree of
participation by others in the process of decision-making, even to the extent of
monopolizing the process altogether and permitting no opposition to occur.
Where this is the case, a society is often described as being totalitarian and is
perhaps best exemplified by Nazi Germany and Stalinist Russia.
Democratic political systems
In contrast, in a democratic political system, the assumption is that as far as
possible conflicts should be resolved by rational discussions between the various
parties concerned, with the final solution being accepted voluntarily by all
individuals, who have they disagree. At one extreme, such consultation may
involve all individuals, who have-in theory at least-equal influence over the final
outcome (e.g. as in referendum or plesbicites). Given the scale and complexity of
modern states, however, such examples of pure or direct democracy tend to
be rare and it is invariably the case that the democratic solution to conflict
resolution is achieved indirectly through a system of political representation and

responsibility. Under such a system, the wishes and views of individuals are said
to be represented in an established authority (e.g. a government) that has a
normally been chosen by the people and which is accountable (responsible) to
them at regular intervals through a variety of mechanisms, including regular and
free elections (see figure 3.1). implicit in this. Of course, is the requirement that
individuals are able to change this authority and select another individual or
group to represent them. Monopolization of political power by any one individual
or group can only occur, therefore, with the expressed consent of the people.

Democratic institutions and processes

The spread of democracy to many of the former authoritarian regimes in eastern
Europe, and its implications for the organization of business activity, makes it
important to understand the key features of a democratic system of government.
From the outset, it is vital to emphasise that democracy is far more than just
popular government or a system of a regular elections. The democratic approach
to government implies the existence of a complex array of institutions and
processes through which the wishes of the people are articulated and carried
out. Foremost amongst these would normally be:

A system of competing political parties.

A system of regular and free elections based on universal adult suffrage.
An independent judiciary.
Mechanism for the articulation of sectional interest (e.g. pressure groups).
A powerful and elaborate system of political communications, independent
of government control.
Habitual processes of consultation, bargaining, explanation, education,
compromise, and so on.

Freedom of opinion, expression, organization, movement, and so on.

Respect for minority views.

Needles to say, no state is consistently and entirely democratic in the terms

outlined above and all democratic societies at certain time tend to exhibit
authoritarian characteristics- as when governments make and enforce decisions
against the wishes of people. Nor for that matter are all authoritarian societies
totally devoid of democratic processes. These imperfections, however, should
not be allowed to mask the essential point: authoritarian governments tend to
limit the element of consultation and consent to the minimum they can get away
with, whereas democratic governments generally try to maximize the element of
consent and uphold the existence of certain basic individual freedoms, including
the freedom to engage in entrepreneurial activity with a view to personal gain.
Political institutions in democratic states
In a democratic political system, then, one would expect to find institutional
arrangements which not only reflected this ideal of government by consent, but
which were also linked to the people by systems of representation and
responsibility. Typically such arrangements would include:

An electoral system which provided for the popular election of part, if not
all, the government.
Competing political parties seeking to win power in government by
providing candidates for election by the people.
A representative legislative assembly, responsible for making laws and for
exercising some control over the executive branch of government.
An executive, usually with one person at the head, responsible for the
formulation and Implementation of government policies and laws.
An independent judicial system to interpret the law and to adjudicate in
the event of dispute.
Groups and individuals organized to bring pressure to bear on
governments or parties or the people in pursuit of particular ideas or
interests.

An illustration of how some of these elements an combine to provide a

democratic approach to government is shown by the simplified model of the UK
political system in Figure 3.2. every few years, the people vote at a general
election for candidates of competing political parties who are seeking to form the
national government. Successful candidates are elected to the legislature
(Parliament) and the majority part in the legislature forms the government, with
individuals in government being allocated specific responsibilities for particular
areas of work. The work of government is scrutinized by the parliament which
acts as the peoples representative and which is responsible for accepting,
rejecting or amending proposals for laws made to it by the executive. Should the
electorate wish to change the government, this is within its power at the next
general election. Equally, between elections individuals are free to seek to
influence government by joining pressure groups or other types of organization

(e.g. political parties) and by making their views known to their representatives
or to the media.
Other democratic countries have similar institutional arrangements, usually
dictated by history, custom, and constitutional developments. Japans legislature,
the Diet, comprises representatives from the countrys various political parties,
the majority of whom are directly elected by the people at four-yearly intervals.
Like Parliament, the Diet consists of two houses, the houses of Representatives
and the houses of Councillors, and legislation must pass through both houses
prior to becoming law. Similarly, in France, Germany, and the United States,
direct elections of party candidates to the key part (or parts) of the legislature
forms the basis of the democratic system and provides the link with the
executive branch of government. The head of which is either directly elected by
the people (e.g. in the US and France) or selected in some other way (e.g. in
Germany and Japan)
What these examples clearly illustrate is how representation basically flows from
people to government, whilst responsibility flows from government to people.
Moreover they indicate the importance of the electoral system as a primary
means of achieving representative government; indeed, in some countriesincluding the United States-the executive is elected separately from the
legislative branch of government and is not-as in the United Kingdoms casepredominantly part of it. Implicit in the model, too, is the idea that democracy
tends to incorporate a system of checks and balances which prevent an elected
government from exercising complete authority over every aspect of daily life.
Such limits in government action are seen in a wide variety of institutional
arrangements (e.g. the electoral system, a bicameral legislature, government,
opposition, and so on) and are invariably mirrored in the pluralistic economic
system which exists in democratic states. This system, with its elements of both
private and state enterprise, is discussed more fully in chapter 4.

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