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
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:

 Political factors – for example, new laws and regulations or decisions made by
governments
 Economic factors – changes in the economy, people’s spending power, patterns
of wealth
 Social factors – changes and trends in society, for example, the number of people
aged over 60 in society
 Technological factors – changes in techniques or equipment that can lead to the
development 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.

 Totalitarianism
 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 country’s tax system, foreign policy,
domestic policy, political stability, judiciary etc.

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. Legislature
2. Executive or government
3. Judiciary

LEGISLATURE
 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:-
  Withholding stated amount from wages and salaries of employees for the
purchase of National Savings Certificates
 Giving special assistance to local government
 Providing relief, education
 Tree planting , Sanitary works
 Recreational activities
 Train unemployed

Providing 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
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.
 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 also
settles 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
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:

 Integrative technique,
 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.

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
country’s 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.
 REFERENCE

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

Publishing House, Mumbai.

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