Meaning of Political Environment
The political environment plays an important role in shaping the business environment. The political environment of business includes the laws, policies, regulations, and government actions that impact overall businesses and their operations. Understanding and navigating the political environment is important for multinational companies to thrive and succeed in the International Trading Environment.
The well-established political system in a democratic country ensures that the government is responsible for planning, regulating, and promoting all economic endeavours within the nation. Every organization in a democratic country operates within the political environment, fostering a sense of vigilance and attentiveness among all business professionals. The government’s business choices stem from political considerations that harmonize with the prevailing ideology of the ruling party, both regionally and nationally.
Various political factors are closely related to the management of public affairs which substantially affect the business of a company. If a political system is efficient, objective, sound and effective: guarantees safety to business enterprises and citizens of the country and confirms the political involvement of the public It acts as one of the major determinants of economic development. The political system influences the laws, government rules and regulations that control and govern the functioning of all business organisations in a country. Other than this it also directs, encourages, decides and promotes various business activities of that nation. As per the law of the land, all business enterprises must follow all the provisions enforced by its political system.
What is Political Environment in Business?
The fiscal policy and monetary policy made by governments across the globe provide support to their domestic industries and reinforce their competitiveness. Furthermore, It plays an important role in facilitating the exploration of global markets for various industries. Without the invaluable support provided by market research, industries may face uncertain situations.
Before entering a state or a country to conduct a business activity, an organisation should evaluate the country’s political environment to escape from the failure or cancellation of a project. For example, due to the adverse political environment, TATA Motors made the strategic decision to relocate its car assembly plant from Singur, West Bengal to Gujarat. This resulted in a major loss of crores of rupees and also impacted the original plan for the launch of the TATA Nano car.
Political Factors Affecting Business
Business Every country has a separate legal system and sometimes different states, provinces or cities have their laws. The decisions and activities are largely affected by politico-legal constraints. Laws may demand a company to do things differently and may also prevent them from doing something. In consequence, a labour law may ban the employment of teenage workers in a certain company and the staffing system of the company might need a change or maybe a different staffing solution.
Some of the political factors affecting the business are as follows:
- National Defence Pure
- Foreign Policy
- Political Stability
- Political Organisation
- Government Laws
1) National Defence Posture
Every country has a national defence posture extending from small ceremonial guards to huge military establishments. The pioneer of political economy, Adam Smith, notably asserted that defence is better than opulence which meant, a country having a strong defence system is far more significant than any kind of luxury or grandeur. Nowadays, poor and developing nations spend a large amount of their resources and funds on defence, in comparison with other developed nations who can manage this sector in a far better manner than the poor countries.
However, in the case of a developing country, the allocation of a large part of the national income towards defence may create a major burden on alarmingly scarce resources including capital, materials and manpower For example, many countries in the Indian sub-continent reserve a considerable part of their budgeted expenses for defence readiness due to the persistent political resentment. There are a few cases where the fate of several organisations is attached to the defence policy of a country.
2) Foreign Policy
The foreign policy of a developing country significantly affects the functioning of international business and industrial management. There are various restrictions and uncertainties regarding foreign impact and control but a developing country intensely requires inflows of foreign investment, technology, imports, etc.
3) Political Stability
A high rate of stability in the political system of a country may not ensure a high rate of industrial progress or managerial effectiveness. However, an unstable political system may adversely affect the economic development and managerial performance of a country. Therefore, managers must carefully analyse all the political events and must have factual knowledge about the political situation.
4) Political Organisation
It is the structure or arrangement of the political administration of a country. In general, an industrial undertaking must deal with a range of ministries such as finance, planning, industries and commerce.
5) Government Laws
Almost all governments have very complex laws for conducting business activities, which are increasing in number over time. Some laws are more important than others like criminal law may not affect the company directly but can be crucial when a worker physically attacks another worker. Tax laws are very important and directly impact companies. These laws may constrain a company to alter its operating strategies, shift the business to some other state, etc.
Impact of Political Environment
The political environment has a major influence on the following:
- Government Control and Restrictions
- Cordial Centre-State Relations
- Political Stability in the Country
- Political Ideology of Government
- Policies towards International Business/MNCs
- Relation of Government with Other Countries
- Thinking of Opposition Parties towards Business
- Treatments of Foreign Investors
1) Government Control and Restrictions
A company’s activities can be controlled and restricted by the government. It can motivate and offer support or discourage and ban business activities. Under international laws, a country has the right to allow or restrict the operations of a business activity within its political boundaries and to direct its citizens to operate the business effectively.
2) Cordial Centre-State Relations
There should be cordial relations between the Central and State governments If the government assigns a huge amount for defence then this will critically affect the economy as well as business. This will lead to the imposition of more taxes, less spending on economic infrastructure and the withdrawal of incentives. Therefore, a healthy centre-state relationship helps in the proper allocation of funds.
3) Political Stability in the Country
The most fundamental factor for the economic development of a nation is its political system which should be stable, dynamic, uniform and efficient. It should also ensure political involvement and the safety of the citizens. The most affluent countries of today obligate their success largely to the political system. Sometimes, instability in the political system may become a hurdle in formulating long-term plans.
4) Political Ideology of Government
The political vision, thinking and approach of the government towards various social and economic activities of the country are collectively known as political ideology. This ideology influences the business units, it determines as to what kind of business should the country have what areas should be engaged for public sectors, what areas should be opened for private sectors, what areas are to be entirely retained for small-scale sectors, what areas are to be made approachable for multinational corporations, etc.
5) Policies towards International Business/MNCs
The political environment of a country largely influences every business activity regardless of its size and area of operation. The political situations faced by international business are very complex, as it has to face the politics of more than one country. This forces the MNCs to assume that the environment is of three types, i.e., domestic, foreign, and international.
6) Relation of Government with Other Countries
Business activities are largely influenced by the relations of government with other countries. A country enjoys the benefits of foreign trade if it has cordial and friendly relations with other nations. Other than this, the government having friendly relations with the neighbouring countries helps to minimise the defence budget. As a result, more funds can be used for developmental activities such as infrastructure, which will have a positive impact on business.
7) Thinking of Opposition Parties towards Business
In recent times, coalition governments of various political parties have become common in India. Often, the political parties which combine to form a coalition government have diverse economic ideologies. This situation makes the political environment of the country more complicated for business enterprises.
8) Treatments of Foreign Investors
The political environment of a country has a wide range of implications for organisations and managers. For example, China has conveyed that its political environment facilitates foreign investors to enter and access the market, plan their operations, manage the activities and eventually make a profit.