Understanding How Politics Can Affect Your Business

Politics can enormously impact business. For example, regional laws and regulations can determine how a company operates or whether it benefits from international expansion. For this reason, aspiring entrepreneurs, business leaders, and strategists in heavily regulated industries should familiarize themselves with politics’ effects on business.

Here's an overview of the role politics plays in business—domestically and internationally—and why it’s important to understand it.

Government's Role in Business

To understand government’s role in business, it's important to recognize its place in a country. In the online course Global Business, Harvard Business School Professor Forest Reinhardt explains that government has four basic functions:

1. Protecting citizens from external harm
2. Protecting citizens from internal threats
3. Protecting property rights
4. Creating means of resolving disputes

How governments fulfill these responsibilities significantly impacts businesses. For instance, to protect citizens’ well-being and guarantee a living wage, a government may impose a base pay requirement. The United States is one example, which enforces a federal minimum wage of $7.25 per hour.

Protecting citizens’ property rights also has a major impact on businesses. Those hoping to create organizations must be assured that they own the rights to their products. For this reason, governments establish copyright and trademark laws to ensure companies maintain ownership of their goods or brands.

International Factors

Several international political factors influence business when a company expands globally. The same is true when international companies become competitors by expanding into domestic territories.

A country's political nuances is one of the primary challenges of international business. Political leaders often make decisions that impact labor laws, education, transportation, and taxes, which, in turn, influence business. Navigating multiple countries’ political challenges isn't easy, so before expanding your business, it's critical to ensure it’s prepared for globalization.

Related: 6 Pros and Cons of Globalization in Business to Consider

Government Value Creation

Value creation in economics refers to the process of creating goods and services that are worth more than the resources used to produce them. Governments can create value in the same way as businesses by purchasing resources—like labor and raw materials—and using them to produce goods or services of higher value.

Compared to businesses, governments have greater power. For example, governments can compel individuals and businesses to pay taxes regardless of whether doing so will create value.

Governments often attempt to directly create value by producing public goods, which have two identifying factors:

1. Non-rivalrous: An individual's consumption of goods doesn't prevent anyone else from accessing them.
2. Non-excludable: Nobody is prevented from using the good.

Since public goods are accessible and benefit everyone, businesses don't often produce them because they don’t generate profit.

Public goods benefit businesses because they allow other entities to create value by using them. For example, a government provides education to the public, which produces skilled individuals businesses can hire.

Challenges of Government Politics

While politics can benefit businesses by creating value, it can also interfere with value creation. Whether through corruption, subsidization of domestic companies, or competitor globalization, several challenges can arise that threaten a company's well-being.

Domestic Challenges

One of the primary challenges organizations encounter is corruption. The ability to influence businesses—regardless of whether doing so creates value—can allow officials to take advantage of their power.

There are three primary forms of corruption in government:

• Extortion: Public officials using their power to obtain wealth through threats or force
• Theft: Public officials appropriating government assets for personal gain
• Capture: Firms paying government officials to influence political decision-making for profit

The primary form of corruption that influences businesses is capture. There are many instances where corrupt companies influence political decisions for their benefit, giving them a clear competitive advantage. While this kind of corruption is illegal in many countries, it's an expected part of business in others.

Even if organizations operate outside of such countries, corruption can play a large role in their decisions. For example, in mergers or acquisitions, it's important to examine a company's history for signs of corruption. If it’s found that a business’s success couldn't have been achieved without corruption, it’s a sign for the acquiring company to steer clear.

Investment decisions are also impacted by corruption. It's important to practice sustainable investing to ensure that any businesses you invest in aren't corrupt. While not always apparent, it's crucial to thoroughly research a company before investing to ensure it aligns with your moral standards and has strict anti-corruption policies in place.

International Challenges

An additional challenge pertaining to international business arises when international companies enter domestic markets. Consumers who purchase from your business could turn to international competitors. This can be difficult because your competition may provide similar products for lower costs.

One example Reinhardt presents in Global Business is a country subsidizing domestic companies. Additional funding from the government allows companies to produce more at a lower price for consumers, enabling them to expand to neighboring countries with a competitive advantage over domestic companies.

Related: 5 International Business Examples to Learn From

Another challenge of conducting international business is encountering situations where investments are withdrawn from a country. This can occur when governments take more power than they're entitled to. In these situations, such countries could become highly dangerous to conduct business in.

There may be times, however, when a withdrawal is necessary. Some of the primary reasons include:

• Corruption: Since capture is a prevalent form of corruption in many countries, companies need to recognize it when expanding.
• Financial crises: The great recession in Russia between 2008–2009 caused many companies to withdraw as the country prioritized domestic companies’ well-being over that of international ones.

The Importance of Understanding Global Politics

Understanding global politics is critical to your business's success, regardless of whether you plan to expand internationally. It's always possible an opportunity to globalize your business will arise.

Knowledge of global politics is also important because of international competition from foreign companies. Yet, global politics’ challenges can produce multiple opportunities. An effective business strategy takes both globalization and domestic factors into account.

If you're interested in learning more about how globalization and political activity impact your business, consider taking an online course, such as Global Business. Doing so can prepare you for the reality of globalization and the ramifications of political decisions on your business.

Are you interested in expanding your business internationally? Consider enrolling in Global Business—one of our online courses related to business in society—to learn more about the broader political landscape your organization operates in.