What is Political Environment of business?

Political Environment

Political environment has direct economic impact on business firms. Economic and political environments are closely interrelated. Whenever there is a change of Government in a democratic country through elections, it will herald a change in economic policies.

Political environment is an important element particularly in a mixed economy like ours and affects directly the working of business organizations.

This performs two roles of:

(i) Promoting and

(ii) Restraining.

In the promotional role of a political environment we include the stimulation of business through the provisions of various facilities and incentives, protecting the markets, taking direct roles in the development of the business and purchasing from business organizations. The government through various legislations has provided various incentives for the development of business in backward areas, giving special incentives to small scale sector and similar other incentives and protection to industries. The government is responsible for providing the ‘rule of game’ which make the business system function smoothly and which help to maintain competition or if monopolies develop, to regulate them by government operation.

Regulations to protect the purity of the environment and preserve the ecological balance have assumed great importance in all the countries. The governments specify certain standards for the products (including packaging) to be marketed in the country. In our country, commercial advertising of liquor is banned. All cigarette pickings must carry the statutory warning ‘cigarette smoking is injurious to health’: Similarly packing of baby food products contains the message “baby food must not be promoted as substitutes for breast feeding.”

The political Environment of business depends on:

1. Ideology of the Government:

   The ideology of the government as determined by ruling classes also shapes political environment in a country. For Example, The British government under Margret Thatcher and the US government under Ronald Reagan had deregulated the British and the American economics respectively. Under those governments the working class and suffered a major setback while the business got larger space for its activity.

In India, till recently ideology of the party in power at the centre for a long time i.e., the Indian National Congress was not entirely having pro business bias. Therefore, the country has legislations like the Monopolies and Restrictive Trade Practices Act (MRTP Act) and the Foreign Exchange Regulation Act (FERA). Moreover, because of the experiences of the colonial are the foreign capital and the multinational corporations had become suspects.

2. Political Establishment:

   Based on the number of parties active in a country, the political establishment can be classified into four types: (i) Single-party, (ii) Two party, (iii) Multiparty and (iv) One-party dominated system. In a single-party with differing political philosophies compete for control of the government. In a multiparty system no single party may have the strength to from the government.

As a result National parties enter into coalitions with many small regional parties to from the government. India for example, had such single party dominated system for nearly 50 years after Independence.

3. Political Stability in the Country:

   To understand and asses the political environment of a country it is necessary to identify and evaluate factors that can cause political instability. Social unrest, attitudes of nationals, and policies of the host government are some factors that can cause social instability. A political system which is stable, honest, efficient, dynamic and which ensures political participation of the people and assures personal security to the citizens, is a prime factor for economic development.

4. Political Relations:

   Political and diplomatic relations between two or more countries also affect business relations between the countries. A company can face problems if the relations between the country in which the firm operates and the country from which it hails are not good.

Example: The Government of India discontinued bolting and sale of Coca-Cola in India in the late seventies following policy of restricting the growth of multinationals on India markets. But, its entry was allowed under the New Industrial policy of 1991. Under this new policy, Government allowed liberalized licensing, imports and export, exports, inflow of foreign capital and technology on more liberal terms. The trend towards globalization and signing of GATT in 1993 have posed new challenges before Indian business.

It should be noted, market friendly strategies became popular in the 1980s and everywhere in the developing world, and State’s role was drastically curtailed. This explains why irrespective of party in power at the centre or in states, the Indian economy is increasingly being liberalized and the business is getting larger and larger spaced for its activity.

5. Others Factors

• Regulating results of entrepreneurial activities.
• Regulating relationship among various segments of economy.
• Regulation of entrepreneurial behaviour.
• Quality of leadership.
• Centre-state relationship.
• Approach of opposition parties towards business.

While analyzing political and legal factors, the organizations intending to enter a particular business may ask the following questions

1. What are the procedural formalities required in setting a business?
2. What are the approaches of the government towards business? Are they restrictive or facilitating?
3. What are the facilities and incentives offered by the government?
4. What are legal restrictions in importing technology, capital goods and raw materials?
5. What are the restrictions in importing technology, capital goods and raw materials?
6. What are the restrictions in exporting produces and services? What are the export obligations?
7. Is the government involved in making trade agreements such as EU, NAFTA, ASEAN, or others?

Important links

• Economic Environment- Economic, Financial System & Policies
• Price-Discrimination- Degree & Essential Conditions
• Price determination under Oligopoly
• Kinked Demand Curve
• Monopolistic competition- Price & Output Determination
• Wages- Meaning, Causes, Marginal theory etc.
• Theory of Profit- Modern, Uncertainty Bearing & Rent Theory
• Business Environment – Definition, Micro & Macro Components
• Kinds of business environment
• Significance of business environment

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