Political Factors Affecting Business

There are many external environmental factors that can affect your business. It

is common for managers to assess each of these factors closely. The aim is
always to take better decisions for the firm’s progress. Some common factors
are political, economic, social and technological (known as PEST analysis).
Companies also study environmental, legal, ethical and demographical factors.
The political factors affecting business are often given a lot of importance.
Several aspects of government policy can affect business. All firms must follow
the law. Managers must find how upcoming legislations can affect their
activities.

The political environment can impact business organizations in many ways. It

could add a risk factor and lead to a major loss.  You should understand that
the political factors have the power to change results. It can also affect
government policies at local to federal level. Companies should be ready to deal
with the local and international outcomes of politics.
Changes in the government policy make up the political factors. The change can
be economic, legal or social. It could also be a mix of these factors.

Increase or decrease in tax could be an example of a political element. Your

government might increase taxes for some companies and lower it for others.
The decision will have a direct effect on your businesses. So, you must always
stay up-to-date with such political factors. Government interventions like shifts
in interest rate can have an effect on the demand patterns of company.
Certain factors create Inter-linkages in many ways. Some examples are:

 Political decisions affect the economic environment.

 Political decisions influence the country’s socio-cultural environment.
 Politicians can influence the rate of emergence of new technologies.
 Politicians can influence acceptance of new technologies.
The political environment is perhaps among the least predictable
elements in the business environment. A cyclical political environment
develops; as democratic governments have to pursue re-election every few
years. This external element of business includes the effects of pressure groups.
Pressure groups tend to change government policies.
As political systems in different areas vary, the political impact differs. The
country’s population democratically elects open government system. In
totalitarian systems, government’s power derives from a select group.
Corruption is a barrier to economic development for many countries. Some
firms survive and grow by offering bribes to government officials. The success
and growth of these companies are not based on the value they offer to
consumers.

Below, is a list of political factors affecting business:

 Bureaucracy
 Corruption level
 Freedom of the press
 Tariffs
 Trade control
 Education Law
 Anti-trust law
 Employment law
 Discrimination law
 Data protection law
 Environmental Law
 Health and safety law
 Competition regulation
 Regulation and deregulation
 Tax policy (tax rates and incentives)
 Government stability and related changes
 Government involvement in trade unions and agreements
 Import restrictions on quality and quantity of product
 Intellectual property law (Copyright, patents)
 Consumer protection and e-commerce
 Laws that regulate environment pollution

There are 4 main effects of these political factors on business organizations.
They are:
 Impact on economy
 Changes in regulation
 Political stability
 Mitigation of risk
Ideological forces (Communism, Capitalism, Socialism):
Communism
Communism traces its roots to "The Communist Manifesto," which laid out a
theory of history as a struggle between economic classes, which will inevitably
come to a head through a violent overthrow of capitalist society, just as feudal
society was violently overthrown during the French Revolution, paving the way
for bourgeois hegemony (the bourgeoisie is the class that controls the means of
economic production).

Following the communist revolution, Marx argued, workers (the proletariat)

would take control of the means of production. After a period of transition, the
government would fade away, as workers build a classless society and
an economy based on common ownership. Production and consumption would
reach an equilibrium: "from each according to his ability, to each according to
his need." Religion and the family, institutions of social control that were used
to subjugate the working class, would go the way of the government and private
ownership.

Socialism
Socialism predates the Communist Manifesto by a few decades. Early versions
of socialist thought were articulated by Henri de Saint-Simon (1760–1825), who
was himself an admirer of ur-capitalist Adam Smith, but whose followers
developed utopian socialism; Robert Owen (1771–1858); Charles Fourier
(1772–1837); Pierre Leroux (1797–1871); and Pierre-Joseph Proudhon (1809–
1865), who is famous for declaring that "property is theft."7

These thinkers put forward ideas such as a more egalitarian distribution

of wealth, a sense of solidarity among the working class, better working
conditions, and common ownership of productive resources such as land
and manufacturing equipment. Some called for the state to take a central role in
production and distribution. They were contemporary with early workers'
movements such as the Chartists, who pushed for universal male suffrage in
Britain in the 1830s and 1840s.8

A number of experimental communities were founded based on the early

socialists' utopian ideals; most were short-lived.
Marxism emerged in this milieu. Engels called it "scientific socialism" to
distinguish it from the "feudal," "petty-bourgeois," "German," "conservative,"
and "critical-utopian" strains the Communist Manifesto singled out for
criticism. Socialism was a diffuse bundle of competing ideologies in its early
days, and it stayed that way. Part of the reason is that the first chancellor of
newly unified Germany, Otto von Bismarck, stole the socialists' thunder when
he implemented a number of their policies. Bismarck was no friend to socialist
ideologues, whom he called "enemies of the Reich," but he created the West's
first welfare state and implemented universal male suffrage in order to head off
the left's ideological challenge.

Since the 19th century, a hard-left brand of socialism has advocated radical
societal overhaul—if not an outright proletarian revolution—that would
redistribute power and wealth along more equitable lines. Strains
of anarchism have also been present in this more radical wing of the socialist
intellectual tradition. Perhaps as a result of von Bismarck's grand bargain,
however, many socialists have seen the gradual political change as the means of
improving society. Such "reformists," as hardliners call them, were often
aligned with "social gospel" Christian movements in the early 20th century.
They logged a number of policy victories: regulations mandating workplace
safety, minimum wages, pension schemes, social insurance, universal
healthcare, and a range of other public services, which are generally funded by
relatively high taxes.

After the world wars, socialist parties became a dominant political force in
much of Western Europe. Along with communism, various forms of socialism
were heavily influential in the newly decolonized countries of Africa, Asia, and
the Middle East, where leaders and intellectuals recast socialist ideas in a local
mold—or vice-versa. Islamic socialism, for example, centers
on zakat, the requirement that pious Muslims give away a portion of their
accumulated wealth. Meanwhile, socialists across the rich world aligned
themselves with a range of liberation movements. In the U.S., many, though by
no means all, feminist and civil rights leaders have espoused aspects of
socialism.

On the other hand, socialism has acted as an incubator for movements that are
generally labeled far-right. European fascists in the 1920s and 1930s adopted
socialist ideas, though they phrased them in nationalist terms: economic
redistribution to the workers specifically meant Italian or German workers and
then only a certain, narrow type of Italian or German. In today's political
contests, echoes of socialism—or economic populism, to critics—are easily
discernible on both the right and left.

Capitalism:

Capitalism is an economic system in which private individuals or businesses

own capital goods. The production of goods and services is based on supply and
demand in the general market—known as a market economy—rather than
through central planning—known as a planned economy or command economy.

The purest form of capitalism is free market or laissez-faire capitalism. Here,

private individuals are unrestrained. They may determine where to invest, what
to produce or sell, and at which prices to exchange goods and services. The
laissez-faire marketplace operates without checks or controls.

Government ownership of business:

GOVERNMENT OWNERSHIP. According to American economic and

political ideology, government is supposed to keep its distance from the private
sector, and on the whole it does. The government owns much less in the United
States than in Europe, where many countries have taken over airlines, mines,
and telecommunications systems. Nevertheless, the United States has never
been a perfect haven for private interests. Each of the 90,000 American
governments (federal, state, county, city, water district, etc.) owns something,
be it land, buildings, resources, or a business. The government can own entities
that it runs as regular departments (such as local sanitation departments), or it
can own what are known as public enterprises or government corporations,
which are created and wholly or partly owned by the government but are run
essentially as businesses (for example, the New Jersey Turnpike Authority).

Government ownership is as old as the United States. The post office has
existed since the nation's founding, and the first Bank of the United
States (1791) was partially funded by the federal government. On the local
level, Philadelphia built one of the first public waterworks in the country in
1799. In the early nineteenth century, governments chartered many corporations
to build "internal improvements." For example, New York created the Erie
Canal Commission in 1816 to pay for and manage the state's canal system.
In the first half of the nineteenth century, government also came to own a
considerable amount of land as it purchased (Louisiana) or conquered
(California) territory. Congress and the president typically gave away federal
land or sold it cheaply. The Homestead Act (1862) offered 160 acres to any
person willing to live on and work the land for five years. By the 1870s,
however, the fledgling conservation movement had inspired governments to
limit the private acquisition of public land. In 1872 Yellowstone became the
first national park, and forest preserves were set aside starting in 1891. Despite
the psychic importance of property ownership in the United States, the federal
government still owns about a third of all land (much of it in the West), though
private businesses and individuals are permitted to use much of it for various
purposes, including recreation, grazing, and mineral extraction.

In the late nineteenth century, cities (and counties) started creating public
companies to deliver important services such as education, water, fire
protection, sanitation, electricity, and mass transit, all of which had once been
private. The transition was piecemeal. New York, for example, offered public
water and sewers in the 1830s and 1840s, took over street cleaning in 1881, and
bought out two private subway companies in 1940, but it never owned utilities.
Since the 1980s, a movement to reprivatize government-owned services has
borne fruit with the rise of charter schools and private prisons.

Government corporations, which are created by government but run as

businesses, took off during the New Deal. The pioneering Tennessee Valley
Authority (1933), which still provides electric power, forced energy companies
to lower costs. In the late 1990s, there were more than 6,000 government
corporations in existence, including the Federal National Mortgage
Association (Fannie Mae), Amtrak, the Legal Services Corporation, the Empire
State Development Corporation, and the United States Postal Service (converted
from government department to corporation in 1971). These public enterprises
compete with private lenders, transit companies (such as Greyhound), lawyers,
real estate developers, and shipping companies (for example, United Parcel
Service, FedEx).
Privatization'
The transfer of ownership, property or business from the government to the
private sector is termed privatization. The government ceases to be the owner of
the entity or business. The process in which a publicly-traded company is taken
over by a few people is also called privatization. The stock of the company is no
longer traded in the stock market and the general public is barred from holding
stake in such a company. The company gives up the name 'limited' and starts
using 'private limited' in its last name. Privatization is considered to bring more
efficiency and objectivity to the company, something that a government
company is not concerned about. India went for privatization in the historic
reforms budget of 1991, also known as 'New Economic Policy or LPG policy'.

Political stability and instability:

Even in countries perceived as politically stable, political change can have a

significant impact on business. This may simply be because government
changes the legal framework, which as we have seen in the previous section is
wide-ranging, but it could also be that a change of government changes the
political attitudes towards business. This may result in less 'business-friendly'
policies, changes in business taxation and regulations or, perhaps, political
changes that affect the firm's marketing.

Governments can also change the social agenda and this may impact on firms.
For example, a government may introduce, or modify, a minimum wage. Many
businesses oppose a minimum wage as they believe it:

 increases costs
 damages flexibility
 reduces international competitiveness, especially against those countries
which do not have minimum wage levels.

Governments may also sign up to additional agreements. For example, the

European Union governments agreed to improve the terms and conditions of
employees in the Social Chapter of the 1992 Maastricht treaty, which sets out
broad social policy objectives concerning working conditions, consultation of
workers, employment rights, and social security. This gave employees many
additional rights including:
  Paternity rights on the birth of a child
 Additional employment protection
 Equal employment status for part-time workers
 Maximum working hours
 Free movement of EU nationals
 Free association in trade unions and collective bargaining
 A minimum working age of 16
 Protection for disabled workers

Changes of this nature will affect firms significantly and may increase their
costs. However, additional rights could also result in improved motivation and
this may help compensate for higher costs. Businesses will look carefully at all
political changes to assess the impact that they will have on them and their
competitors.

Political instability:

Political instability can have an even greater impact on business and it may
make them reluctant to invest in new capital or enter new markets. It may even
encourage relocation of activities to a more stable and predictable area as
business owners hate risk! Political instability in an area where a firm operates
will mean that the firm has to be very flexible and adaptable; ready to change
their operations at very short notice to reflect changes in the political
environment.

Country-asset:
National net wealth, also known as national net worth, is the total sum of the
value of a nation's assets minus its liabilities. It refers to the total value of
net wealth possessed by the citizens of a nation at a set point in time. [1] This
figure is an important indicator of a nation's ability to take on debt and
sustain spending and is influenced not only by real estate prices, equity market
prices, exchange rates, liabilities and incidence in a country of the adult
population, but also human resources, natural resources and capital and
technological advancements, which may create new assets or render others
worthless in the future. The most significant component by far among most
developed nations is commonly reported as household net wealth or worth and
reflects infrastructure investment. National wealth can fluctuate, as evidenced in
the United States data following the 2008 financial crisis and subsequent
economic recovery. During periods when equity markets experienced strong
growth, the relative national and per capita wealth of the countries where people
are more exposed on those markets, such as the United States and United
Kingdom, tend to rise. On the other hand, when equity markets are depressed,
the relative wealth the countries where people invest more in real estate or
bonds, such as France and Italy, tend to rise instead.[