The political environment can change dramatically. For example 2018, President Donald Trump waged a trade war with China. He imposed tariffs and other trade barriers on Chinese products. He blames China’s unfair trade practices and holds it responsible for the growing US trade deficit.
The Trump administration announced tariffs on more than $550 billion in Chinese goods. The Chinese government is not standing still. They later retaliated by imposing tariffs on more than $185 billion of US goods. Finally, international policy shocks have created anxiety in the global economy.
The examples above show how changes in the political environment, in this case, the transition from the Obama administration to Trump, lead to changes in international policy. These changes certainly affect businesses, especially importers buying from the Chinese market and vice versa.
What is the political factor?
Political factors refer to the company’s external environment related to government or public affairs. Government, here, has a broad meaning. It can refer to the central government, local government, government agencies, or independent government agencies such as the Financial Services Authority and the Central Bank. Judicial and legislative institutions are another part.
In some cases, transnational institutions such as the World Trade Organization, IMF, and World Bank also fall into this category. In a broader sense, political factors also refer to those with the authority to issue policies and regulations.
But, in this article, let’s narrow down the definition. Political factors are those related to government systems and or public affairs.
Political factors are not only about regulations or policies. However, it is also about system stability related to leadership transition, bureaucracy, and corruption. For example, elections are the official way to choose a new president. However, an unstable political system may give rise to coups.
Unstable politics can also lead to short government transitions. This condition creates high uncertainty regarding aspects such as law enforcement and policies.
Take another example. When the Central Bank changes chair, it can lead to a change in monetary policy stance. The impact can be significant for businesses as it affects interest rates, credit availability, consumer demand, and economic growth.
How political factors affect business
Changes in the political climate can have a significant impact on business. They can bring either opportunity or risk.
Changes in the political environment can harm a company’s strategy. War, political turmoil, and corruption are examples.
Some others have beneficial effects. For example, privatization allows private businesses to participate in strategic and profitable sectors.
Another example is strict law enforcement to maintain public order and protect everyone from illegal acts.
Examples of political factors
What variables do we need to look at when analyzing political factors? Here are some details:
- Political system stability
- Political program
- Leadership change
- Law enforcement commitment
- Regulations and Policies
- Press freedom
- Privatization or nationalization
The government has an interest in economic activity. On the one hand, the government wants businesses to perform well because they contribute to tax revenues, employment, and household income. The government also encourages businesses to innovate.
On the other hand, the government wants businesses to practice fair and healthy competition. Their operations are supposed to be environmentally friendly. They must also be socially responsible, for example, through consumer protection.
So, the government aims to encourage economic growth to achieve sustainable economic development. It’s not just related to increased output. But, it is also related to prosperity, income distribution, and economic growth for the next generation.
The government launched regulations and policies to achieve several objectives related to:
- Strong economic growth
- Low and stable inflation
- Full employment
- Equilibrium in the balance of payments
- Income distribution
To achieve the above goals, the government enforces and creates a framework for conducting business. The government provides physical and non-physical infrastructure, such as transportation and public facilities, educational facilities, welfare programs, and law enforcement. The government also adopts several policies and regulations governing business.
Changes in government regulations and policies
Policy and regulatory changes have significant exposure to businesses. Let’s go through some examples.
Antitrust or competition laws govern business enterprises. It aims to promote fair and healthy competition and avoid anti-competitive practices such as:
- Price fixing
- Price discrimination
- Predatory pricing
These practices hurt consumers as companies seek to abuse boyfriend power to maximize their profits.
Labor regulations govern worker-employer relations. These regulations relate to minimum wages, discriminatory practices, work requirements, occupational health and safety, and dismissal.
Data protection laws govern personal data. This law aims to protect privacy and consumers from acts to misuse their personal information or data.
Environmental laws govern how businesses must operate in an environmentally friendly manner. It aims to ensure business activities are carried out in an environmentally responsible way to contribute to future sustainability.
Tax policies (tax rates and incentives) regulate the mandatory levy on individuals or entities. It could involve value-added tax, sales tax, or income tax, which directly impact prices or profits.
Trade policies such as tariffs, import quotas, and administrative procedures related to export-import. For example, increasing import tariffs reduces competition from foreign products because they become more expensive in the domestic market.
Intellectual property law governs aspects such as copyrights, patents, and other intellectual property protection. It aims to prevent other parties from taking advantage of misusing the owner’s intellectual property. Its enforcement is vital to stimulate courageous people to innovate.
Subsidy policies, both for businesses and individuals, are another example. For example, export subsidies make domestic products more competitive when sold abroad.
Corporate governance policies ensure the company operates transparently and ethically. It promotes ethical business practices by encouraging companies to implement procedures and policies to keep businesses on track and running efficiently.
How businesses optimize opportunities and minimize threats from the political environment
Companies develop strategies to manage exposure to political factors to reduce risks and optimize opportunities. For example, some large corporations may have their lobbyists.
Several large corporations play the political game and devote enormous resources to politics. For example, they donate to help elect a particular candidate. Their goal is to influence government decisions that are important to their business.
They usually operate in private, through quiet negotiations with politicians, and are not exposed to the public. Or they do it through trade associations. Associations typically have significant legislative and executive advocacy spending on lobbying.
Then, businesses can also engage in indirect lobbying. For example, they gather their employees, stakeholders, or the general public to voice strategic issues to policymakers. In building opinions, businesses can rely on channels such as media campaigns or even demonstrations.