The political environment can change dramatically. In 2018, President Donald Trump had a trade war with China. He set tariffs and other trade barriers on Chinese products. He is of the view that unfair trade practices by China are responsible for the increase in the US trade deficit, the theft of intellectual property, and the forcible transfer of American technology.
Definition of the political environment
The political environment refers to factors outside the company, relating to the government or public affairs of a country, influencing companies. The government, here, has a broad meaning. It can refer to the central, regional government, government agencies, independent government institutions such as Bank Indonesia and the Financial Services Authority. In some cases, transnational institutions such as the World Trade Organization, IMF, and World Bank also fall into this category. In a broader sense, the term also covers various institutions that have the authority to launch policies and regulations.
Impact of political environment on business and their examples
Changes in the political climate can carry significant risks. They can jeopardize the company’s strategy. War, political turmoil, and corruption are examples. Some others also have beneficial effects such as privatization and strict law enforcement.
Following I list critical variables of the political environment:
- Regulations and policies
- Political system stability, including changes in leadership
- Commitment to enforce rules, such as ownership or contractual rights
- Press freedom
- Privatization or nationalization
Governments have an interest in economic activity. They launch regulations and policies to achieve goals such as:
- Strong economic growth
- Low and stable inflation
- Full employment
- Equilibrium in the balance of payment
- Income distribution
To achieve these goals, the government enforces and creates a framework in which business can be done. They provide infrastructure, both physical and non-physical such as transportation and public facilities, educational facilities, welfare programs, and law enforcement. They also take some policies and regulations that govern business.
Changes in policies and regulations have significant exposure to the business. For examples:
- Antitrust or competition rules govern business enterprises and promote competition for the benefit of consumers.
- Labor regulations govern workers-employers relations. They could consist of minimum wages, discriminatory practices, work requirements, occupational health and safety, and dismissal.
- Data protection laws governing the management of personal information.
- Environmental law covers legal aspects concerning how businesses should operate environmentally friendly.
- Tax policies (tax rates and incentives) regulate mandatory levies on individuals or entities by the government.
- Trade policies such as tariffs, import quotas, and administrative procedures related to export-import.
- Intellectual property laws regulate the protection of copyright, patents, and other intellectual property protection.
- Subsidy policies, both business and individual, such as export subsidies and education subsidies.
- Corporate governance policies to ensure that companies operate transparently and ethically to promote ethical business practices.
How do businesses minimize the threat of the political environment
In some cases, companies develop political strategies to reduce risks and create opportunities. Some large companies may have their own lobbyists, or they do it through trade associations.
They play political games and devote enormous resources to politics to influence government decisions that are vital to their business. They operate in private, through quiet negotiations with politicians.
Businesses can also be involved in indirect lobbying. They gather their own employees, stakeholders, or the general public to voice strategic issues to policymakers. In building opinions, businesses can manage through media campaigns or even demonstrations.