The political environment is one of the most significant component of the macro-environment that directly affects the formation and evaluation of business strategies.
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All governments take office canvassing certain promises and agendas that can build or destroy businesses. Very often the markets pre-empt the effects of probable government policies and may correspondingly send warning or joyous signals to concerned companies.
However, such reactions could be biased and misleading and therefore it becomes crucial for any company to rightly evaluate themselves in correspondence with the nation's political activities than blindly accepting market estimates. Let us have a look at some aspects of political influence on business development.
Political stability is of utmost importance in evaluating the attractiveness of a new market. It also plays a pivotal role in forecasting trade policies, tax issues and directives that directly affects strategy formulations of businesses.
An unstable government can cause immense harm to a nation's economy as it would drive away the current investors and ward off new venture investments by projecting a high risk environment. Political instability may also lead to slow decision making which may keep businesses handicapped for a period of time resulting in losses for the entire nation. Political stability is therefore an imperative factor for sound business development and expansion.
Besides a stable government, businesses hope to have a responsible government that understands the needs of the public and accordingly issues new laws, policies, rules and regulations. The government role as a legislative body not only impacts the social setup of society, it greatly controls business trade and development too.
A drastic shift in foreign policies or labour reforms can completely turn the crystal ball blue. Businesses should hence be comforted by the presence of a sensible and responsible government so that they can forecast such reforms and be appropriately prepared.
All of us have gone through bureaucratic red tapes at some point of time in our lives and have seen how frustrating it can be. Imagine a business that has to deal with it regularly. It is utterly disturbing and detrimental to have operational inefficiencies and corruption in government offices on which business organizations heavily rely.
In today's world of speed and fast advancements, government slowdown can kill a successful business and plunge a country's economy into crisis.
Large businesses often heavily depend upon currency exchange rates which are tied up with a country's inflation and interest rates. Economic theorists have developed relations among the three things as can be seen with Fisher effect, Purchasing Power Parity theory, International Fisher effect and Interest Rate Parity theory.
An understanding of the above theories tells us that it is the primal need of the government to keep country differential inflation rates low to maintain healthy exchange rates and interest rates. This last thought further exemplifies the role of government in creating sound environment for businesses to profit and grow unhindered.
To sum up, governments should work to minimize political risk as it helps businesses secure one side of their strategic understanding and eliminates some of their inherent uncertainty.