The Political Environment Introduction - Business Environment

In the late 1980s, following a period of difficult negotiations, the British government entered into a collaborative agreement with the governments of Germany, Italy and Spain, to develop and produce a European fighter aircraft (EFA), due to come into service in the later 1990s. This agreement, which involved the participants jointly funding research and development costs, was greeted with delight by firms in Britain’s aerospace industry and by their suppliers who welcomed the prospects of a large order of aircraft at a time when defence spending was being restrained. For firms such as GEC Ferranti, BAe, Lucas Aerospace, Rolls-Royce and Smiths Industries, the collaborative venture offered the prospects of future profits and the opportunity to retain their technological edge. For the communities in which these firms were based, it promised to sustain and possibly create employment during a period of growing economic uncertainty.

Subsequent indications (in 1992) that the German government would pull out of the venture on the grounds of escalating costs and a reduced military threat sent shock waves through the British aerospace industry and threatened to sour relations between the participating governments, the rest of whom wished to continue with the project. In the event, a compromise was reached under which the countries involved agreed to continue with research and development in an effort to produce a cheaper aircraft, to be known as the Euro fighter 2000. Given the problems of German reunification, the German government reserved the right to make a final decision on production at some time in the future. In late 1997 the four countries finally signed an agreement to proceed with production after years of political controversy and delay, there by triggering a multi-billion pound contract culminating in delivery of the first aircraft in 2002.

What this simple example illustrates is that business activity takes place both within and across state boundaries and frequently involves governments, whether directly or indirectly. Consequently the political and economic arrangements within the state in which a business is located and/or with which it is trading can have a fundamental impact on its operations even to the extent of determining whether it is willing or, in some cases able, to trade at all. It is this politico-economic context within which businesses function and the philosophical foundations on which it is based that are the focus of this and the following chapter.

As a prelude to a detailed analysis of the political environment, it is necessary to make a number of general observations regarding political change and uncertainty and its impact on business activity. First, the nature of a country’s political system including its governmental institutions tends to reflect certain underlying social values and philosophies which help to determine how decisions are made, including decisions about the allocation of resources. Thus, while governments may come and go, the values on which their decisions are based tend to be more enduring and as are sult disputes normally center around ‘means’ (e.g. sources of revenue), rather than‘ends’ (e.g. controlling inflation). While this gives a certain degree of stability to the business environment, this stability cannot be taken for granted, as events in eastern Europe have readily demonstrated. In short, the political environment of business is a dynamic environment, containing elements of both continuity and change, and students and practitioners of business alike need to be constantly aware of developments in this area, if they are to gain a greater insight into the background of business decision making.

Second, changes in the political environment also emanate from a country’s institutional arrangements. The tendency in democratic states, for example, to have regular elections, competing political parties offering alternative policies, and a system of pressure groups, all help to generate a degree of discontinuity, which renders predictions about the future more uncertain. For a business, such uncertainty can create not only opportunities but also a degree of risk which will often be an important influence on its decisions. Moreover, given that perceptions of such risks (or opportunities) are also normally reflected in the attitudes and behaviour of a country’s financial and other markets,this represents a further variable which at times can be critical for an organization’s future prospects. For many businesses, taking steps to maximize opportunities(or to minimize risk) may ultimately make the difference between short-term failure and long-term survival.

Third, it is important to emphasize that political influences are not restricted to
national boundaries a point emphasized by the increasing importance of international and supranational groupings such as the G8 nations, the European Union and the World Trade Organisation, all of which are discussed below. These external politico economic influences form part of the environment in which a country’s governmental institutions take decisions and their impact on domestic policy and on business activity can often be fundamental. No discussion of the business environment would be complete without an analysis of their role and impact, particularly in shaping international political and economic relationships.

Fourth, the precise impact of political factors on a business tends to vary to some degree according to the type of organisation involved. Multinational corporations operating on a global scale will be more concerned with questions such as the stability of overseas political regimes than will the small local firm operating in a localized market, where the primary concern will be with local market conditions. That said, there will undoubtedly be occasions when even locally based enterprises will be affected either directly or indirectly by political developments in other parts of the globe as in the case of an interruption in supplies or the cancellation of a foreign order in which a small business is involved as a subcontractor. In short, while some broad generalization scan be made about the impact of global (or domestic) political developments on an individual organization, each case is to some extent unique in both space and time, and observers of the business scene need to be cautious and open-minded in their analysis if they are to avoid the twin dangers of over-simplification and empiricism.

Finally, it needs to be recognized that businesses are not merely reactive to changes in the political environment; they can also help to shape the political context in which they operate and can influence government decision makers, often in a way which is beneficial to their own perceived needs. One of the hallmarks of democracy is the right of individuals and groups to seek to influence government, and businesses both individually and collectively have been active in this sphere for centuries. It would be a mistake to underestimate their impact on government policy or on the shaping of values in the established capitalist nations of western Europe and elsewhere.

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