Government is a system to regulate and control a country. It includes government agencies, organizations, and their people. They run a country and make decisions at both the national and regional levels.
Equivalent organizations such as central banks and supreme courts are also part of the government in a broad definition. Although not under the executive branch (politically independent), they play an important role in influencing the economy and the business environment.
The government runs the country for the public interest. They seek to make the population more prosperous through goals such as:
- Sustainable economic growth
- Low and stable inflation
- Low unemployment rate
- Equilibrium balance of payments
- A supportive competitive and investment climate
- Environmentally and socially friendly business practices
- Equal access to education and health
- Reducing income inequality and poverty
The government influences business through the laws or regulations it makes. They also collect taxes from companies, from their profits or products. In addition, they also affect business through policies taken, such as changes in interest rates, tax rates, infrastructure spending, or trade policies.
Why is the government a stakeholder in business?
The business has several external stakeholders. They include customers, suppliers, investors, shareholders, local communities, the general public, and governments.
Government is a significant stakeholder in any business organization. They create legal frameworks for businesses and areas such as business licensing, employment, competition, environment, privacy, and consumer protection. In addition, governments also collect taxes and influence the economy through their economic policies, which in turn affect business.
Then, the government also often encourages businesses to invest and create more jobs. They introduced laws to do this.
But, sometimes, some rules or policies may not be business-friendly. An example is the minimum wage. This is because the government does not only have to pay attention to business interests. Instead, they work in the public interest.
What are the government’s interests as stakeholders?
The government is interested in business to promote economic prosperity and social welfare. They want companies to do well and consider their operations’ social and environmental aspects.
What is the government’s interest in business? Here are examples:
- Pay taxes, such as corporate profit taxes
- Creating jobs and income for the community
- Providing goods and services to society
- Investing and increasing output
In addition to the above aspects, the government is interested in business to create long-term prosperity. They want companies to:
- Promote fair competition practices
- Innovate to improve output quality
- Encourage social and environmental responsibility
- Implement good employment practices
- Protect consumers and their privacy
How does the government affect business?
The government influences business through the laws or regulations it makes. In addition, they also introduced policies such as fiscal, monetary, capital flows, and international trade policies.
Then, the government also regulates aspects such as competition and employment practices, which directly impact business.
Political factors also shape the external environment for businesses. It involves decisions and laws made by the government. The political system and government also impact political stability, affecting business. Political instability creates high uncertainty for businesses because it has an impact on uncertainty about laws, regulations, and policies formulated by the government.
Laws and regulations
The government issued several regulations and laws to regulate several areas, such as:
- Labor and Employment
- Environment
- Consumer privacy and protection
- Occupational Health and Safety
- Business competition
- Marketing and advertising
Such regulations aim to protect business stakeholders such as employees and consumers. Moreover, they also become the framework for socially and environmentally responsible businesses. Thus, they do not arbitrarily pursue maximum profit at the expense of the public.
An example is related to competition. The government launched anti-monopoly regulations to promote fair competition in the market. Fair competition is important to protect consumers and encourage businesses to produce quality goods and services at reasonable prices.
Preferably, unfair competition can harm the public. For example, a company has a monopoly on a product. As the sole producer, the firm can abuse its market power to charge high prices and lower quality to maximize profits.
In other cases, unfair competition may involve collusion. Several companies form a cartel and act as monopolists to generate maximum profits for members.
Finally, healthy competition is also needed to encourage innovation. A competitive environment forces companies to innovate to beat competitors and attract customers.
Economic policy
Government policies can involve economic policies and international policies. However, we will discuss the latter in the following subheading.
Economic policies include:
- Supply-side policy
- Demand side policy
Supply-side policies aim to increase market competitiveness and efficiency and to overcome market failures. It may involve:
- Privatization
- Deregulation
- Reduction in union power
- Increasing education budgets
- Public sector investments such as infrastructure
- Increased spending on health
Meanwhile, demand-side policies include fiscal and monetary policies. Both are important for influencing the economy and avoiding negative situations, such as recessions and hyperinflation.
The government implements fiscal policy by influencing its budget posture. It can involve changes in:
- Government spending
- Tax
Meanwhile, monetary policy aims to influence the money supply, which affects interest rates and credit availability. It can be through:
- Changes in interest rates
- Open market operations
- Changes in the reserve requirement ratio
For example, businesses face reduced product demand when the economy is sluggish or in a recession. This situation forced them to cut production and reduce labor. As a result, the unemployment rate increased.
In addition, the recession also worsened household income. The increase in unemployment is causing many people to lose their income. As a result, they reduce the demand for goods and services. And this situation requires government intervention to encourage employment and income improvement through demand-side economic policies.
The government then intervened in the economy by introducing loose economic policies. How to do it can be by choosing one or combining two or more alternatives:
- Increase in government spending
- Tax cuts
- Lowering interest rates
- Purchasing government debt securities
- Lowering the reserve requirement ratio
These alternatives will drive an increase in demand for goods and services. Take tax cuts as an example. Lower taxes give households more money to spend, encouraging them to increase the demand for goods and services.
Likewise, when interest rates are lowered, borrowing costs become cheaper. That encourages households and businesses to apply for loans. Households can use it to spend on durable goods – which they use loans to buy. Meanwhile, companies can use it for capital investment.
International policy
International policies are important for businesses, especially those involved in exports and imports because they can be directly affected. Meanwhile, other companies may be indirectly affected.
What are some examples of these international policies? The following is a list:
- Bilateral agreement
- Tariffs and import quotas
- Export subsidies
- Trade integration ranging from free trade areas to economic unions
- Foreign direct investment policy
- Control over capital and foreign portfolio investment
- Exchange rate intervention
Take the increase in import tariffs as an example. This policy will make imported goods more expensive. If imposed on raw materials and capital goods, it will increase production costs.
Meanwhile, if imposed on consumer goods, it makes them less competitive. Thus, we expect consumers to switch to cheaper domestic products.
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