The political environment is one of the external environmental factors which affect the business. It can impact positively or negatively depending on the situation, business, and many other factors. Companies must address the risk of political factors by making decisions that will reduce the external impact on the environment of business.
The political factors of any country can impact the business. The political factor can also introduce a risk factor in the industry, which can suffer losses, or it can reduce profitability. There could be many reasons due to which political environment may change, and it depends on country to country.
The political structure of a country is one of the important considerations that a business should give before entering the country. There could be many political ideologies that could be present in their society. Therefore, It is suggested that before entering the country for business, the business should understand the country.
Types of Political Environment
The political environment is usually classified into the following types of political ideologies which are most prevalent in many countries
It involves full participation by citizens in the crucial decision-making processes.
There are voting rights granted to citizens for the selection of representatives, and freedom of speech is considered as the primary or fundamental right of the citizens.
The judiciary is independent of political parties, as is the defense.
The elected officials are elected only for a limited time, and empowerment is given to the citizens.
Fair and competitive elections are indicated as the political right of the citizens, and limited power is given to the elected representatives, which can safeguard the minorities of that society.
Freedom of the press and equal rights for everyone is what indicates civil liberty. The government also grants personal social freedom.
The purest democracy never exists, but it exists in the form of representative government that the citizens of that country have voted for. They believe in the government and give them the power to make decisions on their behalf. The primary forms of these types include:
- Presidential in which the direct election of a president is made who has power for a limited time
- Parliamentary in which elected representatives form a government and the leader with majority party becomes the head of the country, which is the Prime Minister and forms and runs a cabinet of ministers.
While democracy exists on one side of the spectrum, totalitarianism exists on the far another side.
Unlike democracy, in the case of totalitarianism, a single party or an individual holds power and monopolizes it.
The party in the power hardly recognizes the opposition, and select individuals have the right to make significant decisions for the country.
The government monopolizes most of the resources.
Theocratic and Secular on two types in which totalitarianism falls:
In the case of theocratic the entire political control is given to the religious leaders of the fraternity
In the case of secularism, the principal states that the affairs of this world are more important than ethics as well as human life. It is concluded that secular totalitarianism is based on political concepts and not on religious ideas. The existence of totalitarianism may range from fascism to communism.
The political and economic systems are entirely integrated, and the social revolution is always the precursor of political revolution.
The working class usually guides the social revolution.
The long-term transformation of society is based entirely on the removal of economic differences and inequalities.
The military is what controls the politics in case of fascism
The state is considered as totalitarian, and the individual is expected to be subordinate to that.
Nationalism and corporate state are the ways by which the class struggle is eliminated.
How is a business affected by Political factors?
The political factors can directly affect the market, which will, in turn, affect the ability of an organization to conduct the business in the market. The political inference can make a market, less friendly for businesses. The government has a lot of power over businesses, and there is not much that companies can do about it.
There are many ways in which political factors can influence business. The political factor is an external environmental factor that adds risk and can also lead to a significant loss in business. This also can change the entire result, which is why companies should be better while dealing with politics locally as well as internationally. Many companies have a specially appointed person who deals with such politicians and political agendas.
Political factors also impact other factors that are related to business and can have a significant indirect impact on the business. Following are a few examples of the factors that can be affected because of political considerations:
The sociocultural environment of the country can be affected by political decisions
The economic environment is directly affected because of political decisions
Politicians are also able to influence the development of new technology in the country.
4 Political Factors which affect the business environment
As the administration changes, the policies change along with them. These political factors can affect and possibly change the entire scenario of business. They can be as follows:
1. Taxation policies and economics
Change in tax rate is one of the best examples of how a political environment can affect the business. The government may increase or decrease the tax of a particular industry or change the percentage of taxes on all businesses for many reasons. The decision is expected to directly impact many companies, which is why companies should have a strategy that can deal with such situations on priority.
The annual budget is the time when most of the factors of businesses may change because of the change in tax laws, financial laws, etc.
Climate change is prevalent everywhere around the globe, and to combat it, many governments have come up with alternatives to conventional fuels. Solar energy and Electric energy are two which have gained popularity in many countries because of such government policies. Many government vehicles now run on solar power, and for companies involved in the solar business, it’s a boon. Thus this is an example of how government policies can impact enterprises to positively.
2. Political stability
Businesses can be affected a lot because of a lack of political stability. This could be troublesome for businesses operating on a global scale. Such situations will lead to riots and looting, which can severely affect businesses. The operations and regular activities of the business are directly impacted because of such conditions, and it is difficult for companies to run. Communal riots are one such example in which companies suffer a lot.
For example, the recent communal riots which took place in New Delhi, which started during President Donald Trump’s India Visit. Although both had no connection, India and the US signed many trade deals, and ironically, businesses were affected because of these riots.
Similarly, almost entire Cairo came up on the streets for the removal of Egyptian President Mubarak Hosni. After the revolution of 18 days in 2011, the President had to step down. During this time, many businesses were impacted negatively. This is why political stability is crucial for businesses.
3. Foreign Trade Regulations
Every business expects to expand its own company to another country. The political background of that country could impact this. The government controls almost everything right from tax policies to prices of the products. It is up to the government to expand particular business operations in their area or not.
Implementing complicated tax policies can affect the business expansion for many industries. The local government initiatives are designed in such a way that they help local businesses. The businesses should keep this in mind while entering a foreign country.
The policies of the company should be in such a way that it not only helps the company is to earn profits but also supports local businesses and helps them to improve their earnings.
4. Employment Laws
The employment laws are made and implemented by the government so that the rights of employees are protected. It includes every aspect of employer and employee business relations. And employment law is considered to be very complicated, which has many Pitfalls. When the businesses employ the latest technologies and developments and implement this with the latest law, then they can take the company forward in the right way. There are many countries in which the employment of locals is mandatory when opening a foreign business.
For example, when Starbucks arrived in India, it was mandatory to open a Starbucks outlet in the joint-venture ship with Tata. Following the employment laws of the land is compulsory for businesses. However, making those laws complicated will not help the government or corporations.