MPANDE, D

BUSINESS ENVIRONMENT
CHAPTER FOUR
UNIT 4
POLITICAL/LEGAL ENVIRONMENT
4.1. Political ideologies

Political factors include factors such as new legislation i.e. the national minimum wage, tax
levels such as Corporation Tax, VAT, Income tax, Royalties as well as debt levels. Economic
factors on the other hand include interest rates, inflation, GDP, unemployment and foreign
currency exchange rates. For example in the Zambian scenario, usually parties that are voted
into power tend to abandon all old projects and start new ones as well as introducing new tax
regimes which might affect the economy negatively and reduce business activities country
wide.

4.2. Functions of government in society

Every time governments change their regulations, businesses are affected. Governments should
introduce regulations that allow young entrepreneurs to compete fairly as these will not have
enough resources. The government must show political will to involve stockholders and
develop viable policies that encourage growth of the business sector. If you have a government
with no political will, any attempts at establishing policies will not be implemented due to the
undesirable political environment. The purpose of the majority of regulation is protection
provision, either individually or environmentally. Now whether the main topic is protection of
the environment, safety and protection at the workplace, it should be understood that
regulations have diverse effects.

4.3. Political risk and management of political risk

The exercise of power in politics that affect the value of a company is known as political risk.
An example is when a government embargo prohibits a foreign country from trading in
products produced by that particular company. Governments also have the power to prevent to
docking of ships from its ports and when a government does this, it effectively prevents the
entry and exit of goods on those ships thus the company that produced those goods is basically
prevented from trading in those goods.

International trade has some risks but these risks tend be lower in developed markets and
higher in emerging markets thus companies need to take great care when doing business in
emerging markets. Even though political risk is unavoidable especially in global markets,
emerging markets tend to be very advantageous for companies because of emerging markets
are increasing turning into areas of consumption with a lot of attractive opportunities.
 MPANDE, D

4.3.1. Political Risk Effects

Various factors that can negatively affect the income of the company or cause a complication in
its strategy constitutes political risk in international business. Examples of such factors are:
macroeconomic issues e.g. civil unrest and high interest rates. Also actions of governments for
example confiscation assets from a company which of course will make it highly difficult for the
company to access finances and ultimately its ability to supply goods and services are examples
of political risk. Some political events can also impede the company's ability to access foreign
exchange and export or import goods and services.

4.3.2. Factors That Contribute to Political Risk

When a company launches its operations into international markets, it needs to be aware of
factors such as change in leadership in that country, deterioration of the economies of the
countries where the company has expanded, the improvement occurring in the economy of the
countries and imminent social unrest. Also important in this regard is the presence of
regulatory changes issued by government agencies. the same applies to changes in agreements
made by multi lateral agencies.

4.3.3. How to Manage Political Risk

Political risk can be managed in the following 3 ways by business:

• Identification of political risks by managers. These can come as higher taxes or

activities of terrorist groups and as a manager you should be able to determine
how these particular issues affect the ability of the company to meet its objectives.

• Secondly, you must quantify political risks impact a company's performance

through the use of financial models for example discounted cash flow.

• And lastly connecting the impact of political risk to the company's tolerance of
risk.

4.4. Legal environment and regulatory framework

The growth of business sectors can be encouraged through promotion policies. The
government has a responsibility of ensuring that the policies developed promote growth of
businesses. A lot of counties have taken measures to formulate policies at national level that
differ in scope and address the private sector concerns. In the case of Zambia, the following are
some of the policies;
 MPANDE, D

4.4.1 The Technology Development and Advisory Unit (TDAU)

TDAU established in 1975 has the following objectives:-

• Provide help and advice on the design of agricultural as well as household

equipment aimed at the local market.

• to serve as a development centre for innovative processes and equipment

• to act as a centre gathering advice from university personnel on various

industries

• to act as a centre for information on technology that is appropriate for rural

areas

4.4.2. National Council for Scientific Research (NCSR)

NSIR was established with the following functions:-

• Provide guidance to the Government on activities of national scientific research

policies

• To co-ordinate all scientific research in the country

• To encourage research programmes in relation to development plans

• To maintain liaison with bodies such as government ministries and private

industries responsible for the research results application

• To maintain liaison with scientific bodies outside Zambia and to guide on

research cooperation

• To advise the Government on use of finance for scientific research purposes

• To advise government on the recruitment and appropriate use of research staff

Others include the Zambia Development Agency (ZDA) which aims at facilitating investment,
entrepreneurship and trade in Zambia and also the development of policies that facilitate the
existence of initiatives such as the Nyamuka Zambia project which finances feasible businesses
of young Zambian entrepreneurs.