A business does not exist in a vacuum, separate from the rest of the society. It is an integral part of the socio-economic and political milieu of modern life and, as a result, changes in this external environment can have mild to severe ramifications for your business.
Of course, some of these changes may be positive, but others will undoubtedly be negative; therefore, it’s essential to understand the potential impact of the political environment on business.
Here we will discuss several ways in which external factors are affecting business in today’s world, as well as some of the ways you can prepare for – and mitigate – the associated risks.
Political Impact on Business
In modern society, politics can be defined as all those activities and systems which have a direct impact on how power and authority are allocated and used. From a business perspective, changes in these machinations can affect the fortunes of your company in several different ways, regardless of your size or reach.
The most common impact is in the form of changes in laws and regulations that affect your business. Taxes, in particular, can have a massive effect on your overhead and profit margins.
In most democratic states, changes in government often bring significant regulatory changes related to taxation, with these changes often hinging on the political ideologies of the party in power.
For example, the Republican Party in the US and the Conservative Party in the UK are a clear illustration of parties who favour tax cuts as a route to helping businesses grow. Donald Trump’s election in the US has resulted in some of the biggest tax cuts in living history, which, of course, is great news for enterprises in that region.
However, this works both ways, of course. If you live in a region where the governing party has established high corporate tax rates and offered little incentive for small business owners, then you might want to consider moving your company elsewhere.
Regulations and Compliance
Besides taxes, governments also have the power to change laws related to other aspects of business operations, such as environmental sustainability, social responsibility, labour laws, and more. An increase in compliance regulations can affect the overall ease of doing business.
Governments often initiate these changes in response to challenges that arise in the other segments of what is known as the PESTLE framework. For instance, global warming has become a key social and political issue in recent years. Governments across the world are enforcing stricter emission norms, which affect the way auto-makers design and produce their vehicles. This, in turn, can have an impact on supply chains and other supporting businesses.
Even more relevant from a business perspective are changes concerning compliance – particularly with respect to financial reporting and auditing. An excellent example of this is the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in the US in 2010 by Barack Obama as a response to the 2008 financial crisis. Designed to reign in recklessness and preserve financial stability, it was targeted by critics who claimed it would make US firms less competitive. Subsequently, it was repealed in 2018 by the Trump administration, demonstrating how the political will of the day can severely impact day-to-day business operations one way or the other.
While changes in taxation and laws can have a positive impact, deviations in the overall political climate are usually negative. Sweeping political reform can affect businesses in many ways, particularly in regions experiencing substantial social unrest.
A prime example of this would be present-day Venezuela. As a result of growing anger at the ruling regime, the country is experiencing widespread civil unrest; the economy has tanked, and hitherto thriving businesses are unable to survive under such circumstances.
Similar stories can be seen playing out in other areas, such as Afghanistan, Yemen, Haiti, and several African nations, where cycles of political crisis, violence, and general instability have made it virtually impossible for businesses to prosper and investment to arrive.
Why Is the Political Environment so Challenging?
Perhaps the biggest issue with political factors is that they are often unpredictable. Take Brexit, for example. When then-UK Prime Minister David Cameron announced an EU membership referendum as a means of appeasing fringe Eurosceptics within his party, few would have raised an eyebrow.
Since the vote to leave, however, the subsequent uncertainty has been significant for both British and EU-based enterprises. Despite repeated warnings from business bodies that political indecision is massively affecting companies’ ability to operate effectively, business owners are being forced to make contingency plans at a significant cost.
When you are a business owner, these situations can be especially frustrating. While you can seek to be pro-active, rather than reactive, the reality is that you can’t adequately prepare for the unknown – a situation made doubly maddening when political playmakers ignore the realities of businesses “on the ground”. Political changes can be morally and emotionally taxing for an entrepreneur because they can render you completely powerless.
Domestic vs International Implications of Politics on Business
Another issue is the global nature of modern business. We live in an increasingly interconnected world where even SMEs have global supply chains; gone are the days when business owners had to contend only with changes in domestic politics. Unless a war or an oil crisis was on the horizon, international disputes had a relatively minor impact on smaller businesses, especially when compared to the present day.
Now, however, it is not just multinationals who are affected by changes in the status quo in international relations. Such shifts take no prisoners when it comes to business – regardless of sector or size – with the burgeoning trade war between China and the US a case in point.
Given the deep business and trade ties between these two superpowers, numerous sectors are being affected, including farming, retail and technology. Multinational enterprises such as Apple and Huawei may be the most high-profile casualties of this, but countless smaller enterprises with supply chains in China are also feeling the strain. This illustrates how international politics can require you to either reshape your business model or cease trading.
Why Enterprises Are Not Entirely Powerless
It’s not all doom and gloom, though. Entrepreneurs and business people are not entirely powerless, especially in modern democracies.
Pressure groups and lobbying are two ways in which democracies deal with feedback between politics and business. Political parties need the support of businesses – especially larger, influential ones – both in the form of votes as well as contributions.
A pertinent example of this is India’s developing retail sector. With the recent arrival of major online brands such as Amazon, there has been a predictably adverse effect on small scale retail enterprises in the country.
However, by organising and establishing their presence as a reliable vote bank, these traders were able to persuade the ruling government to make key changes to eCommerce policy, effectively curtailing the big players. There is always safety in numbers in business, so taking steps to join an influential representative organisation can work in your favour when the winds of change blow.
Ultimately, as a business owner, the political environment is just one of the many change factors that you are going to have to deal with. There is no way to insure your organisation completely against adversity in this context. Thankfully, though, it is not all doom and gloom; as with all things in life, change can represent a positive opportunity if you are savvy enough to seize it.
Remember: politics is to business what winds are to a sailing ship. When they blow favourably, you have to exploit them to the fullest, but when they inevitably change their direction, you have to be able to adapt quickly.
What do you think? In what other ways can the political environment affect your business? Let us know your experiences in the comments below.