The political environment in a country affects business organizations and could introduce a risk factor that could cause them to suffer a loss. The political environment could change as a result of the actions and policies of governments at all levels, from the local level to the federal level. Businesses need to be prepared to deal with the fallouts of government politics. Impact on the Economy
The political environment in a country affects its economic environment. The economic environment, in turn, affects the performance of a business organization. In the United States, for instance, there are significant differences in Democratic and Republican policies. This has implications for factors such as taxes and government spending, which in turn affect the country’s economy. A higher level of government spending tends to stimulate the economy, for instance. Political Stability
Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on its operations. A hostile takeover could overthrow a government, for instance. This could lead to rioting and looting and general disorder in the environment. All this disrupts the operations of a business. Such disruptions have occurred in Sri Lanka, which went through a protracted civil war, and in Egypt and Syria, which have been subject to disturbances as people agitate for certain rights. Mitigation of Risk
One way to manage political risk is to buy political risk insurance. Organizations that have international operations use this type of insurance to mitigate their risk exposure as a result of political instability. There are indices that provide an idea of the risk exposure an organization has in certain countries. For instance, an index of economic freedom ranks countries based on how political interference impacts business decisions in each country.
The political environment can affect a business either positively, or negatively, depending on the prevailing situation in a country. It mainly forms the external factors – which are part of the macro-environment, control of which is beyond the ability of human beings.
These factors touch on the way politics are conducted in a country, which directly reflects on what is happening within the government itself.
This means that a democratic country will accord freedom to its people to vote for a government which has their interests at heart, and thus business will thrive – owing to the good policies the government implements.
On the other hand, a dictatorial government will not earn the respect of its citizens – leading to economic as well as political instability and uncertainty.
Even though such a government will eventually go, businesses suffer a lot during the government’s tenure, since they are not sure of their future. This underlines the importance of a democratic government to a country and to business.
Needless to say, once a country is stable, more investment opportunities will be realised, thus attracting more and more investors. This will reflect positively and directly on local businesses, as citizens will be able to have full confidence in them.
Business success depends on politics to a high degree, and in many ways. Politicians are usually the people controlling the operations of a government, and will decide which countries to trade with, as well as on setting the trading conditions.
This means that, if a certain business or its owners are not on good terms with the politicians, then they will suffer.
Furthermore, the rules that govern and regulate the manner in which trade is conducted are enacted by the politicians – thus good relations are needed between stakeholders in the business sector and politicians, to facilitate success.