Political Influences (Cambridge International A-Level Business)

An introduction to political influences

• Political influences refer to the ways in which government actions, decisions, and policies can affect how a business operates

  • These can come from local, national or international governments

Political influence on business comes from laws, regulations, tax policy, trade policy, government spending and stability

• Laws and regulations

  • Businesses must follow rules related to health and safety, employment, consumer protection, and the environment
  • Breaking laws can lead to fines, damage to reputation or even being shut down

• Taxation policy

  • Governments decide how much tax businesses must pay
  • Higher taxes can reduce profits
  • Lower taxes may encourage investment or expansion

• Trade policies

  • Includes tariffs, quotas, and free trade agreements
  • These influence how easily businesses can buy and sell goods internationally

• Government spending

  • When governments invest in infrastructure, such as roads, hospitals and schools, certain businesses benefit
  • During economic downturns, governments may also support industries through subsidies or grants

• Political stability

  • Businesses prefer to operate in stable countries where laws and policies are predictable
  • In countries with unrest or frequent policy changes, there is more risk

Case Study Nestlé India and changing environmental regulations

• In 2019, the Indian government introduced strict environmental regulations to reduce plastic waste
• This included phasing out single-use plastics, such as plastic straws and wrappers, used in food and beverage packaging

Responses

• Nestlé India responded to the changing political environment by

  • Re-designing packaging for products, including Maggi noodles and chocolate bars
  • Investing in research to develop recyclable and biodegradable materials
  • Working with suppliers to source new eco-friendly packaging materials
  • Launching campaigns to inform customers of its new sustainability efforts

Impacts

• Costs increased in the short term due to changes in materials and production
• However, Nestlé improved its brand image, especially among environmentally aware consumers
• The company avoided legal penalties and reputational damage by acting early

Privatisation

• Privatisation occurs when government-owned firms are sold to the private sector

  • Examples of industries that are often privatised include transport, energy, telecommunications and healthcare services

• Many government-owned firms have been partially privatised

  • The government retains a share in them so they can influence decision-making and receive a share of the profits
  • e.g. Shares in Singapore Airlines are 55% government-owned and 45% privately owned

Advantages of privatisation

1. Raises government revenue

• Governments earn money from selling state-owned businesses
• Funds can be used to reduce debt or invest in public services

2. Improves efficiency

• Private firms aim to cut waste, boost productivity and earn profits
• Often more innovative and customer-focused than public organisations

3. Reduces government spending

• Running businesses is costly for governments
• Selling them reduces long-term financial pressure

4. Encourages investment

• Private ownership attracts both domestic and foreign investors

• Can lead to more jobs and economic growth

  • E.g., Nigeria’s sale of NITEL helped expand mobile coverage

5. Increases competition and choice

• Opens markets to new firms, giving consumers more options

• Can lead to better services and lower prices

  • E.g. Privatising parts of Australia's rail and electricity sectors led to lower prices for customers

Disadvantages of privatisation

Nationalisation

• Nationalisation is when a government takes ownership and control of a business or industry from the private sector

  • This means the service or company is now owned by the state and run on behalf of the public

• Nationalisation usually happens in sectors that are considered essential or where private ownership has failed to meet the needs of society

Advantages of nationalisation

• Nationalisation allows the government to directly manage industries that are vital to the economy or national security, such as transport, healthcare, or energy

  • This means it can set policies in the public interest, such as keeping prices affordable, ensuring services reach rural areas or responding quickly in times of crisis

• Unlike private firms, state-owned businesses don’t need to maximise profit for shareholders

  • This means services can be designed to benefit citizens, workers and consumers more fairly
  • Prices may be lower, access more equal and working conditions more secure

• When a business is nationalised, it may gain financial stability and access to long-term government investment

  • This can be especially helpful if the business was struggling under private ownership
  • Government backing also allows the company to focus on long-term goals, such as infrastructure development or environmental sustainability, without worrying about short-term profit pressures or investor demands

Disadvantages of nationalisation

• Running a nationalised business can be very expensive

  • The government must fund day-to-day operations, invest in maintenance and improvements, and cover losses if the business isn’t profitable
  • This can place a strain on public finances, especially during economic downturns

• Without the pressure to make a profit or compete with rivals, nationalised businesses may become less efficient

  • They might have more bureaucracy, slower customer service, or fewer incentives to innovate
  • Customers and workers may experience delays, outdated technology, or inconsistent quality

• Nationalised businesses can be affected by political pressure, where decisions are made for short-term popularity rather than long-term success

  • Politicians may interfere in areas like pricing, recruitment or expansion, even if it goes against what’s best for the business
  • This can make planning and management difficult, especially as different governments often have diverse priorities

Case Study Nationalisation of YPF – Argentina’s Oil Giant

Scenario

In 2012, the Argentine government made headlines when it nationalised 51% of YPF, the country’s largest oil company, which was majority-owned at the time by the Spanish firm Repsol. This dramatic shift brought a key energy asset back under state control

Reasons for nationalisation

• Strategic industry control: Oil and gas are essential to Argentina’s economy and energy independence. The government argued that letting a foreign company control such a vital sector was risky
• Falling investment: Repsol was accused of failing to reinvest enough in Argentina's oil infrastructure. As a result, domestic production was declining, forcing the country to import more energy, worsening its trade balance
• Public interest and economic stability: The government believed nationalisation would allow Argentina to boost production, lower fuel import bills, and make energy more affordable and accessible, especially in rural and underserved regions

Outcome

• Short-term benefits: Nationalisation helped stabilise energy supplies. The state could now steer investment toward long-term infrastructure goals and reduce reliance on imports
• Increased government control: The move gave Argentina more control over pricing and supply, enabling subsidised fuel prices for domestic consumers
• Legal and financial fallout: However, the nationalisation sparked international lawsuits. Argentina had to eventually compensate Repsol nearly $5 billion, which strained public finances
• Efficiency concerns: Critics noted that YPF's productivity improved slowly, and the firm faced issues with bureaucracy, political interference, and a lack of innovation—typical drawbacks associated with state-run enterprises