The Environment of Modern Business - Economics Essay Example

The aim of this essay is to explore a list of ways how the government helps or hinders the development of a successful business environment - The Environment of Modern Business introduction. In order to achieve the clarification of this subject, PEST(LE) analysis is used. There is no doubt to say that every nation state needs some form of government to regulate its business affairs. As a function of any organised society, the governments play a key role in the modern business environment. But the form of government differs from nation to nation.

Whatever the form or structure, all governments have activities and objectives in common, namely political, economic, legal, technological, and social environment of business. We can use these PEST(LE) factors, mainly in political, economic, legal, technological factors to examine how the government helps or hinders the development of a successful business environment. The political environment is one of the major effective factors in the external business environment, which has a tremendous impact on the business organisation. Governments frequently use their political power to influence the business environment.

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By examining whether or not a government is effective, we often consider its political stability, policies and the nature of the government. Take Singapore as an example, despite the inherent disadvantage of a small domestic economy and a lack of nature resources, Singapore aspired to be a “global city” serving the world market and major multinational corporations in the 1990’s, the Singaporean government led the country towards free trade, a free market and an open economy. Since then, the country has established itself as one of the top trading nations in the world and is consistently voted as one of the best business destinations.

Singaporeans enjoy one of the highest qualities of life, with a per capital GDP of US$24,000. Singapore achieved this within only one generation. But during the same period of time, the communist government of North Korea did not lead its country’s economy into a positive direction. As a consequence of the government’s policy of establishing economic self-sufficiency, the North Korean economy has become increasingly isolated from that of the rest of the world. Its industrial development and structure do not reflect its international competitiveness (http://countrystudies. us).

Clearly, the nature of the government and its policies play an important role in the country’s business development. Government also has a large impact on the national economic environment, it acts at both macro and micro levels and this has a significant implication for the organization of business. A successful business environment reflects an efficient economy. Therefore, government intervention is vital for the development of the country’s economy, particularly for democratic market-based economies. For instance, a large firm has extensive and frequent contact with the government at a variety of levels and tasks.

At the macroeconomic level, a government’s exchange rate policy, or its view on interest rates can have a significant influence on the profitability of firms and even their ability to survive. As a result of this, the governments need to consider the feedback from firms before taking any action (Grant1987, P 36). At the same time when a government intervenes in firms and markets, firms also have the ability to shape their government’s policies. On 1st January 2002, the Euro became the sole currency in 12 of the European member states. The Euro has many advantages, such as greater transparency and cost efficiency.

By introducing the Euro, most of the large firms will benefit from saving a huge amount of money on transaction fees and the convenience of paying, buying, and invoicing. These advantages attract large firms to negotiate with their local government in the hope of joining the Euro zone. Some firms own a large part of the market share in their industry. In order to achieve a maximum profit, it is more likely for one firm or a few firms to work together to gain a monopoly in their industry and in turn this will cause market failure. It is also more likely for firms to operate against the public interest.

Therefore, governments often ban firms from operating as a monopoly by implementing a competition policy. An example of such implementation can be seen in Britain’s grocery industry. According to the news articles of The Financial Times on November 21, 2003, Morrison won the battle of bidding for Safeway with a ?2. 9 bn agreed offer. Tesco, Asda, Sainsbury, and Safeway are the four biggest market shareholders in Britain’s grocery industry. Tesco owns 26% of the market and Asda possesses 16% of the market. Asda is owned by American supermarket giant Wal-Mart which aims to e the No. 1 in Britain’s grocery industry. To avoid these firms operating as a monopoly, the UK government has restricted these three firms from acquiring Safeway. The economic and political environments are essential aspects and they present a framework for multinational enterprises (MNEs), which present a framework for multinational enterprises. This framework is important for MNEs in determining where they should locate their investment. Government often attracts foreign investment by offering MNEs grant aid and other forms of assistance.

Especially for governments in Eastern European and Asian developing countries (Worthington & Britton 2003, P286). Governments can reduce unemployment by attracting foreign investment. However, it doesn’t solve all the problems. MNEs normally locate their investment in the major cities, so only certain areas can benefit from the extra employment opportunities. Furthermore, there are also some disadvantages to attract foreign companies. It will cause the money to flow out of the country in the long run. Hence, governments of some developing countries impose import controls in order to protect their domestic firms.

Small and medium sized enterprises (SMEs) are major elements of national economy. They are important creators of employment and produce the largest part of any GDP in a country’s economy. SMEs have a great effect on increasing the competitiveness in the various industries. In 2002, small and medium-sized businesses in the UK accounted for over 99% of all 3. 7 million active businesses, and account for 50% of the total UK turnover. Therefore, the larger and more developed the SME sector is, the greater the SME contribution to the growth of the economy will be (http://www. me-union. org). According to the UK former cabinet minister Peter Mandelson’s interview of Monetary Policy, the MP suggested that the government could help business by promoting small and medium size businesses, which is important for the UK’s current economy. There are certain ways in which governments can help small and medium size businesses: by offering City Grants, which will support private sector and capital projects in order to benefit local areas; by the funds and loans for farmers that aim to benefit rural communities; by offering low interest loans to timulate unemployed and poor people to start their own business. Government can help SMEs by making regulations, providing technological and information support, which are specified in later paragraphs (Worthington & Britton 2003, P291). As trade competition increases rapidly, access to information and technology is vital for every business sector, especially for the progress of production, management, and selling. Therefore, information and technology are well related to each other and are the key factors on which production, commerce, and services have to rely.

They are widely considered as an index of business viability. Large enterprises have the ability to continue their research and development (R&D) in information and technology in order to reduce their production cost and occupy a greater market share. This will increase the gap between large enterprises and SMEs. In order to make industry more competitive, government normally supports SMEs by giving due consideration and investment in education (e. g. life long learning). It will help to improve human resources and will give training support to increase the number of skilled employees.

Government will also provide information to help SMEs to understand current market directions. SMEs are encouraged to work with universities, a policy which has been widely adopted by government in recent years (Tayeb 2000, P275). The legal environment has an impact on business organisations, which controls all the business activities. Firms can only operate within the framework of the law. It is the major instrument for government to influence the business environment. Without it, business cannot persist. The legal environment is also another key element for MNEs to determine the location of their investment.

Legal reliability and legal risk are the major considerations for MNEs. In order to attract foreign investment, government frequently offers MNEs grant aid and other forms of assistance. China is a good example: since 1 April 2002, the country has legislated a new regulation to attract foreign investment, which means that foreign firms are likely to obtain more investment opportunities in China. The new regulation shows a trend that China will expand cooperation with foreign investors (http://fpeng. peopledaily. com. cn). Moreover, laws and regulations are requently used to correct the imperfections in the market and regulate unacceptable structure and behaviour. On 1 December 2003, The Financial Times reported that the UK government would introduce a regulation to change the way of disposing of the old electrical equipment in UK. The regulation is directed by the European Union, which aim to encourage recycling and improve the treatment of waste products to stop hazardous materials entering the environment. The UK government will restrict the use of certain substances in electrical and electronic equipment such as lead, cadmium and mercury.

By introducing the regulation it will bring significant environmental benefits and will encourage firms to produce more sustainable products. Consequently, government plays an important role in business environment. This role presents a crucial link between the development goals of business and government. Government is responsible for formulating and implementing polices in a global context in order to influence all business organizations on its political, economic, legal and technological environment. A successful business environment can hardly exist without the role of government.

Bibliography

Bream, R. (2003) Electrical waste order may generate sparks. The Financial Times, 01 December 2003, 3 Grace, W. (2002) Foreign Investors Encouraged to Participate in SOE Reform. 27 February 2002. [Online newagroup]. [Accessed 28 November 2003] Grant, W. and Jane, S. (1987) Business and politics in Britain. London, Houndmills. Worthington, I. and Chris, B. (2003) The business environment. 4th ed. Harlow, Prentice Hall. Lee, Mun Woong. (1976) Rural North Korea under Communism. Houston: Rice University. Ryan, N.J. (1976) A History of Malaysia and Singapore. Kuala Lumpur: Oxford University Press. Tayeb, M. H. (2000) International Business. London, Prentice Hall. Thuss, H. J. (2003) The Role of SMEs for the Overall Economy. [Online]. Available at: [Accessed 29 November 2003] Voyle, S. and Bob, S. (2003) New legal move over Safeway. The Financial Times, 21 November 2003,1

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