Governments establish many regulations and policies that guide businesses. Some rules, like minimum wage, are mandatory, while other policies may influence your business indirectly. Businesses need to be flexible enough to respond to changing rules and policies. This is true not only at the national level but more locally as well, as states and municipalities have their own sets of rules. Indeed, there are also international treaties that can influence the way companies do business.
Policy as a Market Catalyst
The government can implement a policy that changes the social behavior in the business environment. For example, the government can levy taxes on the use of carbon-based fuels and grant subsidies for businesses that use renewable energy. The government can underwrite the development of new technology that will bring the necessary change. Imposing on a particular sector more taxes or duties than are necessary will make the investors lose interest in that sector.
Similarly, tax and duty exemptions on a particular sector trigger investment in it and may generate growth. For example, a high tax rate on imported goods may encourage local production of the same goods. On the other hand, a high tax rate for raw materials hampers domestic production.
Political Stability and Political Culture
Government policy will always depend on the political culture of the moment. Policy crafted in a politically stable country will be different that formed in an unstable country. A stable political system can make business-friendly decisions that promote local businesses and attract foreign investors.
Unstable systems present challenges that jeopardize the ability of government to maintain law and order. This has a negative affect on the business environment.
Government Taxation and Spending
Governments get money to spend from taxation. Increased spending requires increases in taxes or borrowing. Any tax increase will discourage investment, especially among entrepreneurs, who take the risks of starting and managing businesses. Increased spending also eats into the limited pool of savings, leaving less money for private investment.
Reduction in private investments shrinks production of goods and services. That, in turn, may lead to the elimination of jobs.
Setting Interest Rates
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
The government can influence interest rates in the short run by printing more money, which might eventually lead to inflation. Businesses do not thrive when there is a high level of inflation.
Regulations and Permits
Trade regulations, the federal minimum wage, and the requirements for permits or licenses have effects on business. For example, periodic health inspections must be carried out in all restaurants. Businesses might spend a lot of money and time to comply with regulations that ultimately prove to be ineffective and unnecessary. Fair and effective regulations, however, promote business growth.
One thought on “Impact of Government Policy Changes on Business”