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Political stability and instability

S:\TripleA\DP_topic_packs\business management\student_packs\articulate_interactions\images\stability_change.jpgEven in countries perceived as politically stable, political change can have a significant impact on business. This may simply be because government changes the legal framework, which as we have seen in the previous section is wide-ranging, but it could also be that a change of government changes the political attitudes towards business. This may result in less 'business-friendly' policies, changes in business taxation and regulations or, perhaps, political changes that affect the firm's marketing.

Governments can also change the social agenda and this may impact on firms. For example, a government may introduce, or modify, a minimum wage. Many businesses oppose a minimum wage as they believe it:

  • increases costs
  • damages flexibility
  • reduces international competitiveness, especially against those countries which do not have minimum wage levels.

Governments may also sign up to additional agreements. For example, the European Union governments agreed to improve the terms and conditions of employees in the Social Chapter of the 1992 Maastricht treaty, which sets out broad social policy objectives concerning working conditions, consultation of workers, employment rights, and social security. This gave employees many additional rights including:

  • Paternity rights on the birth of a child
  • Additional employment protection
  • Equal employment status for part-time workers
  • Maximum working hours
  • Free movement of EU nationals
  • Free association in trade unions and collective bargaining
  • A minimum working age of 16
  • Protection for disabled workers

Changes of this nature will affect firms significantly and may increase their costs. However, additional rights could also result in improved motivation and this may help compensate for higher costs. Businesses will look carefully at all political changes to assess the impact that they will have on them and their competitors.

Political instability

Political instability can have an even greater impact on business and it may make them reluctant to invest in new capital or enter new markets. It may even encourage relocation of activities to a more stable and predictable area as business owners hate risk! Political instability in an area where a firm operates will mean that the firm has to be very flexible and adaptable; ready to change their operations at very short notice to reflect changes in the political environment.

The 2011 unrest in Tunisia is an example. Business ratings agencies such as Fitch consider political stability when advising businesses on investment opportunities.