UNDERSTANDING HOW POLITICS CAN AFFECT YOUR BUSINESS
Clarke Ricks
School of Business, Liberty University
BUSI 690: Policy and Strategy in Global Competition
Dr. Hicks
April 8, 2021
UNDERSTANDING HOW POLITICS CAN AFFECT YOUR 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.
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.
