Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
What Political Factors Affect Business Environment Political stability: Lack of political stability within a country can significantly impact. Foreign Trade Regulations: Every business has a need to expand business operation. Employment Laws: Employment laws are made to protect the rights of.
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Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
The political environment in a country affects business organizations and could introduce a risk factor that could cause them to suffer a loss. The political environment could change as a result of the actions and policies of governments at all levels, from the local level to the federal level. Businesses must plan for the variability of government policy and regulations.
Impact on the Economy
The political environment in a country affects its economic environment. The economic environment, in turn, affects the performance of a business organization. In the United States, for instance, there are significant differences in Democratic and Republican policies. This has implications for factors such as taxes and government spending, which in turn affect the country’s economy. A higher level of government spending tends to stimulate the economy, for instance.
Changes in Regulation
Governments could change their rules and regulations, which could have an effect on a business. For instance, after the accounting scandals of the early twenty-first century, the United States Securities and Exchange Commission became more focused on corporate compliance and the government introduced the Sarbanes-Oxley compliance regulations of 2002. This was a response to the social environment that called for such change to make public companies more accountable.
Political Stability
Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on operations. A hostile takeover could overthrow a government, for instance. This could lead to rioting and looting and general disorder, which disrupts the operations of a business. Such disruptions have occurred in Sri Lanka, which went through a protracted civil war, and in Egypt and Syria, which have been subject to disturbances as people agitate for greater rights.
Mitigation of Risk
One way to manage political risk is to buy political risk insurance. Organizations that have international operations use this type of insurance to mitigate their risk exposure as a result of political instability. There are indices that provide an idea of the risk exposure an organization has in certain countries. For instance, an index of economic freedom ranks countries based on how political interference impacts business decisions in each country.
Analysis Tools
It is possible to analyse and forecast the impact of government policies on doing business. There's an established model called PEST analysis, which evaluates political, economic, social and technological factors that could affect the cost and difficulty of doing business. The political and economic sides of the analysis are directly government-related, while government policies indirectly affect the social and technological environment. An expanded form of PEST analysis, called PESTEL or PESTLE, adds legal and environmental factors to the equation. These, too, are strongly influenced by government policy.
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Political trends can impact any level of society, whether individuals, families or organizations such as small businesses. Trends in policies set by government agencies and leaders can affect the legal framework within which small businesses operate, the market conditions that affect consumer behavior and the amount of assistance offered to small businesses by the government. Being aware of political trends at the national and local level is an essential part of planning and strategy development for your small business.
Economic Trends
Different political parties or individuals enact different policies to guide national and local economies to prosperity, based on their own economic ideologies. This means that political trends can have an impact on taxes levied on businesses and individuals, leaving your customers and yourself with more or less money to spend in the marketplace. Economic policies can also influence interest rates throughout the economy, including rates for small business loans. The sentiment of all economic actors in society can be affected by the government's ability to control economic conditions. For example, in a struggling economy, consumers may spend less in the marketplace, causing banks to offer fewer and smaller loans to businesses.
National Security
National-security concerns can have an impact on consumers' buying and saving habits throughout the economy, and trends in politics can do much to heighten or calm security fears. The people and parties in power at any time have a direct influence over the relationships of a nation with its neighbors in the global community, including hostile rivals. A nation at peace can encourage people not only to spend more overall, but to invest more in long-term assets such as homes and businesses.
Labor Laws
Changes in labor laws can be anticipated by keeping an eye on political trends. Political candidates 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 without large cash reserves. A change in the minimum wage, for example, can cut directly into a small company's profitability.
Small Business Assistance
Small businesses in the United States can take advantage of a wide range of free or low-cost services from federal and state agencies, including grant funds, insured loans, advisory services and even tax breaks. Trends in legislative politics can serve to increase or decrease the number and amount of these services, which can impact the opportunities that small business owners have to build a sustainable and profitable enterprise.
References (2)
About the Author
David Ingram has written for multiple publications since 2009, including 'The Houston Chronicle' and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.
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Ingram, David. 'How Does a Political Trend Affect a Small Business?' Small Business - Chron.com, http://smallbusiness.chron.com/political-trend-affect-small-business-64909.html. Accessed 25 June 2019.
Ingram, David. (n.d.). How Does a Political Trend Affect a Small Business? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/political-trend-affect-small-business-64909.html
Ingram, David. 'How Does a Political Trend Affect a Small Business?' accessed June 25, 2019. http://smallbusiness.chron.com/political-trend-affect-small-business-64909.html
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