Political Factors Affecting Business

Political Factors Affecting Business

There are many political factors affecting business in any country. A political factor is an activity that relates to government policy as well as the administrative practices which can affect something. A business is an economic system or an organization where services and goods are exchanged for money or for other services and/or goods. Political factors are usually external environment’s issues that are capable of affecting a business. Most managers are careful while assessing these factors so that they can make better decisions that will enhance the progress of their business. Generally, political factors that affect a business are given more importance than other factors.

What are the political factors affecting business?

Among the major political factors that affect a business include the following:

  • Taxation

Decrease or increase in tax is one example of political factors that can affect business directly. This is because the government, which is a political institution, can increase or decrease tax for some businesses. This move can have a direct impact on business.

  • Monetary circumstances

The exchange rates in a country are mostly set by the government. The exchange rate of the currency of a country is a representative of the value of that particular currency when compared to the currencies of other countries. When a country has a low exchange rate as compared to those of other countries, consumers pay higher prices while importing goods. Exchange rates are always fluctuating and they create risk for businesses that engage in importing and exporting goods.

  • Political stability

When a country is stable politically, business activity thrives and grows more. Although some businesses will continue with their activities even when there is political instability, most businesses will suffer when there is political instability in a country.

  • Agreements and trading blocks

Trading agreements and blocs like the North American Free Trade Agreement can boost the export sales of businesses because they enable them to sell their goods at better prices due to a reduction in tariffs. Regional trade blocs are formed by nations when they come together and agree to trade under reduced barriers. Such agreements and blocs are very important for regional businesses because they make them more profitable.

  • Political legislation

New legislation such as those setting tax rates and minimum wages affect businesses. This is because they compel businesses to spend more money on operational costs especially when they set high minimum wages for employees in a country.

  • Expropriation

This occurs when foreign governments take ownership of assets or plants. These facilities eventually become private instead of government organizations. Due to the expropriation risk, multinational businesses operate on foreign governments’ mercy and sometimes these are unstable leading to changes in the laws that are enforced any time.

  • Tariffs

These are taxes that are placed on the imported goods. Common rates and tariffs are maintained by custom unions for the non-member countries. Harmonious monetary and fiscal policies are provided for by a common market which is not the case in free-trade areas as well as custom unions. A government can establish protective tariffs to protect the domestic manufacturers from competitors affecting businesses that engage in importation and exportation.

How and why political factors affecting business are important

Political factors that affect business are important for various reasons and in different ways. For instance, some of these factors establish inter-linkages in different ways.

Here are examples:

  • The economic environment which influences business operations is affected by some political decisions.
  • The socio-cultural environment of a country is influenced by political decisions.
  • The rate at which new technologies emerge can be influenced by politicians.
  • Acceptance of emerging technologies can be influenced by politicians.

It is important to note that, since political leaders keep changing, political factors that affect business also change in any given country.

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