8/8/2019 ese 28

1/11

ASSIGNMENT

ON

POLITICAL ENVIRONMENT AND BUSINESS

(CP203: Economic and Social Environment)

Submitted to:

Dr. Bibhuti Bhusana Mohapatro

(Faculty, Business Management Department)

Submitted by

Monalisa Mohapatra

Roll No: 13201FM092017,

2nd semester, MBA

FAKIR MOHAN UNIVERSITY

VYASA VIHAR

BALASORE

8/8/2019 ese 28

2/11

INTRODUCTION

Business environment is a set of political, economic, social and technological

(PEST) forces that are largely outside the control and influence of a business and that

can potentially have both a positive and a negative impact on the business. Today's

world is a rapidly changing place. Developments across a range of factors will have an

impact on the business or industry. The classic PEST framework (political, economic,

social, and technological) identifies four major categories of external factors that affect

the ability of the organization to survive and prosper.

PEST analysis: When assessing the main impact of external factors on any

business or organization, it is helpful to group these together using the acronym PEST.

This stands for the four areas that represent the most common external influences.

These are:

y Political factors for example, new laws and regulations or decisions made bygovernments

y Economic factors changes in the economy, peoples spending power, patternsof wealth

y Social factors changes and trends in society, for example, the number of peopleaged over 60 in society

8/8/2019 ese 28

3/11

y Technological factors changes in techniques or equipment that can lead to thedevelopment of new goods and services or new ways of doing things

The influence of political environment on business is enormous. The political

system prevailing in a country decides, promotes, fosters, encourages, shelters, directs

and controls the business activity of that country. A political system which is stable,

honest, efficient and dynamic and which ensures political participation of the people,

and assures personal security to the citizens, is a primary factor for economic

development. The rich countries of today owed their success mainly to the political

systems they richly enjoyed.

Two basic political philosophies are in existence all over the world.

y Totalitarianismy Democracy

Totalitarianism

Totalitarianism also called as authoritarianism. In this type of system individual

freedom is completely subordinated to the power of authority of the state and

concentrated in the hands of one person or in a small group of person which is not

constitutionally accountable to the people.

Democracy

Democracy refers to a political arrangement in which supreme power is vested in

the people.

Democracy does not guarantee high rates of economic growth. Nor

Totalitarianism drives a country to slow economic growth. Rate of growth-the increase

in the amount of goods and services produced by a nation- is influenced by many

variables other than political and civil liberties. These include a countrys tax system,

foreign policy, domestic policy, political stability, judiciary etc.

8/8/2019 ese 28

4/11

THE POLITICAL SYSTEM

Political systems can be classified based on the party system in the society, and

mode in which governments attain power. Based on the way governments come into

power, they can be classified into parliamentary type or absolutist type. The citizens

elect parliamentary governments. Absolutist governments are not elected. They come

into power by force.

Based on the number of parties active in a country, the political establishment can

be classified into four types: single-party, two-party, multiparty, and one-party

dominated systems. In a single-party system there is only party. This party has absolute

power. In a two-party system two major groups with differing political philosophies

compete for control of the government. In a multiparty system no single party may have

the strength to form the government.

As a result, parties enter into coalitions with many small parties to form the

government. In a system dominated by a single-party, although there are many parties,

only one party is strong enough to form the government. India, for example, had such a

single-party dominated system for nearly 50 years after Independence.

The political system under democratic dispensation like India comprises three vital

institutions. They are:

1. Legislature2. Executive or government3. Judiciary

LEGISLATURE

8/8/2019 ese 28

5/11

Legislature is the most powerful political institution vested with such powers as policy making, law making, budget approving, executive control and acting as a

mirror of public opinion.

The influence of the legislature on the business is considerable. It decides such

vital aspects as the type of business activities the country should have, who should own

them, what should be their size of operations, what should happen to their earnings and

other related factors.

EXECUTIVE OR GOVERNMENT

The term government refers to the center of political authority having the power

to govern those it serves. The government shapes, directs and controls the business

activities. Government formulate policies which influence the business and there are

certain activities of the business those influence government. According to E.V.

Schneider, executive or government is that institution by which men everywhere seek

to order society, that is , to control the structure and functioning society.

Responsibilities of business towards government

Business firms have a number of responsibilities to the government. They must

obey the laws of government. It should look to the government for support, sustenance,

encouragement and guidance. A few important responsibilities of business towards the

government are:

Tax payment: taxes paid by business firms constitute a major source of revenue

to the government.

Voluntary programs: business firms cooperate with government agencies on a

voluntary basis in connection with various programs such as:-

8/8/2019 ese 28

6/11

y Withholding stated amount from wages and salaries of employees for thepurchase of National Savings Certificates

y Giving special assistance to local governmenty Providing relief, educationy Tree planting , Sanitary worksy Recreational activitiesy Train unemployedProviding information: political leaders, either because of inexperience or over

enthusiasm, make certain decisions which may not be in the overall interest of business.

So the business leaders should provide relevant information to the political leaders.

Government contract: many business firms bid for government contracts and

carry out the resulting projects with the required specification and standards.

Government service: business offers services of its leaders to the government.

They lead or accompany delegations to foreign countries for exploring trade and

industry prospects. They also serve on various advisory boards constituted by the

government.

Responsibilities of government towards business

Government responsibilities to business are much greater than the obligations of

business to the government. Government has the power, will and resources to decide,

shape and control business activities. Some important responsibilities of government

towards the business are:

Establishment and enforcement of laws: Government establishes and enforces

laws and regulations under which the business functions. Laws and regulations covering

all aspects of business are enacted by the government. Government is responsible for

providing the rules of the game, which make the business systems function smoothly.

It is the responsibility of the government to enforce the laws and to provide a system of

8/8/2019 ese 28

7/11

courts for adjudicating differences between business firms, individuals, or Government

agencies.

Maintenance of order: Government has the responsibility of maintaining order

and protecting persons and property. It would be impossible to carry on business in the

absence of a peaceful atmosphere.

Money and credit: the Government Provides a system of money and credit by

means of which transactions can be affected. It is also the responsibility of the

Government to regulate money and credit and protect the integrity of the rupee, that is,

to guard against rapid fall in its value.

Orderly growth: this implies balanced regional development, distributive justice,

full employment and protecting the economy against booms and busts. The

Government has the resources and capabilities to ensure orderly growth.

Infrastructure: business needs for its effective functioning of such infrastructural

facilities as transportation, power, finance, trend personnel and civic amenities. It is the

responsibility of the Government to provide these facilities.

Information: Government agencies publish and provide a large volume of

information which is used extensively by business firms. It includes information

services of the departments of commerce and industry, agriculture, labor, health,

education, banking, atomic energy and host of others. These services carry on important

activities in providing business firms and private citizens with objective and impartial

information about economic and business activity in general, specific line of business,

scientific and technological developments and many other things of interest to business

leaders.

Assistance to small industries: small size business establishments have special

role to play in our economy. Being small in size, these firms face problems in various

facets. So it is the responsibility of Government to provide the required facilities and

encourage the small scale sectors to grow.

8/8/2019 ese 28

8/11

Transfer of technology: Government owned research establishments transfer

their discoveries to the private industry in order to put them to commercial production.

Government competition: Government often competes with private business

firms for the purpose of regulating competition, improving quality or to supplement

private activities with Government programs. In some cases Government regulates the

prices which may be charged for buyers.

Inspections and licences: Government agencies conduct inspection activities-

food and drugs, for example, assuring quality products to consumers. Government

issues licences to competent business establishments to carry on different activities.

Tariffs and Quotas: Tariffs and Quotas are used by government to protect

business from foreign competition.

JUDICIARY

The third political institution is the Judiciary. Judiciary determines the manner in

which the work of the Executive has been fulfilled. It sees to it that the exercise of

executive authority conforms to the general rules laid down by the legislature. It alsosettles the relationship between private citizens and between citizens and the

government upon others, where these gives rise to problems which do not admit of

solution by the government.

It is the power of judiciary to settle legal disputes that affects business

considerably. Disputes between employer and employer; employer and employee;

employee and employee, employer and public and employer and the government are

often referred to courts for settlement and their verdicts are sought.

To understand and assess the political environment of a company it is necessary to

identify and evaluate factors that can cause political instability. Social unrest, attitudes

of nationals, and policies of the host government are some factors that can cause social

8/8/2019 ese 28

9/11

instability. Political risk refers to political actions that have a negative impact on a firm's

value. Companies operating internationally have to deal with foreign politics, domestic

politics, and international politics.

The political environment in the host country is referred to as foreign

politics. A company may face problems due to a political crisis in its parent country

also. This crisis is confined to domestic politics. Political relations between two or more

countries also affect business relations between the countries. A company can face

problems if the relations between the country in which the firm operates and the country

from which it hails are not good.

The process of establishing a cause-and-effect relationship between political

factors and business income is called political risk analysis. Some government policies

that adversely affect the business environment include non-convertibility of currency,

preventing the repatriation of profits, nationalization and inadequacy of compensation,

and domestic political violence. Political risk analysis is an ongoing function and is not

restricted to the initial investment decision. Publications of political analysts,

international rating agencies and the views of employees of the foreign subsidiaries are

some of the sources of information on political risk.

Companies operating internationally employ different strategies to reduce their political

risk. The strategic techniques are:

y Integrative technique,y Protective/Defensive techniques

A company adopting the Integrative Technique tries to blend with the host

country's ethos. Companies can minimize the political risk they face by adopting

Protective Techniques. A company can locate its key operations beyond the control of

the host country government.

8/8/2019 ese 28

10/11

A business organization has its physical existence in a socio-political environment.

Therefore, the policies, practices and philosophy of the organization have far reaching

effects on the society. At the same time, society also has certain influences on the

organization. The organization has a three-pronged role: social, ethical and political.

CONCLUSION

A political system integrates the parts of a society into a viable, functioning unit.

A major challenge of the political system is to bring together people of different ethnic

or other backgrounds and to allow them to work together to govern them-selves. A

countrys political system influences how business is conducted domestically and

internationally. In Hong Kong, for example, the political change that resulted when

China took control in 1997 worried many managers because they believed that China

would change the relationship between government and business, with the government

exerting more influence and control in the business environment. Political policies are

established by aggregating, or bringing together, different points of view that are

articulated by key constituencies, such as politicians, individuals, businesses, or other

special-interest groups.

8/8/2019 ese 28

11/11

REFERENCE

Aswathappa, K., Essentials of Business Environment, Eighth Edition (2006). Himalaya

Publishing House, Mumbai.

Schneider, E.V.,Industrial Psychology, p. 514.