ACCA F1 - FIA ACCOUNTANT IN BUSINESS - INTERACTIVE TEXT

2, The political and legal environment

2, Môi trường chính trị và pháp lý

Government policy influences the economic environment, the framework of laws, industry structure and

certain operational issues. Political instability is a cause of risk. Different approaches to the political environment apply in different countries. International trade is subject to a further layer of international law and regulation.

The political environment affects the firm in a number of ways.

 A basic legal framework generally exists

 The government can take a particular stance on an issue of direct relevance to a business or industry

 The government's overall conduct of its economic policy is relevant to business

2.1 The political and legal environment

Laws come from common law, parliamentary legislation and government regulations derived from it, and obligations under treaties such as those establishing the European Union.

Legal factors affecting all companies

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Some legal and regulatory factors affect particular industries, if the public interest is served. For example, in the UK, electricity and gas, telecommunications, water and rail transport are subject to regulators who have influence over market access, competition and pricing policy (can restrict price increase). These UK bodies are called Offer, Ofgem, Ofcom, Ofwat and ORR respectively. Other countries will have similar regulator

This is because: 

  The industries are, effectively, monopolies 

  Large sums of public money are involved (eg in subsidies to rail companies) 

 2.2 The impact of government 

Porter notes several ways whereby the government can directly affect the economic structure of an industry. They are explained below

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In some industries, governments regulate the adoption of new products. This is well illustrated by the pharmaceuticals industry, where new drugs or medicines must in many countries undergo stringent testing and obtain government approval before they can be marketed

National and EU institutions also affect the operating activities of some organisations, for example: 

  Anti-discrimination legislation 

  Health and safety legislation  

 Product safety and standardisation (especially EU standards) 

  Workers' rights (eg unfair dismissal, maternity leave) 

  Training and education policies can determine the 'standard' of recruits

 QUESTION 

Government impact How do you think government policy affects the pharmaceutical industry in your country? 

 ANSWER

Using the example of the UK

(a) The government must authorise most new drugs (eg for safety before they can be sold)

(b) The UK government is a major purchaser of pharmaceuticals, for the national health service, and so has significant buying power

(c) Health education policies affect consumer demand

(d) Funding of universities affects the science base for recruitment

(e) Employment practices, such as working hours, are influenced by EU employment directive

2.3 Influencing government 

 Businesses are able to influence government policies in a number of way

(a) They can employ lobbyists to put their case to individual ministers or civil servant

(b) They can give MPs non-executive directorships, in the hope that the MP will take an interest in all legislation that affects them

(c) They can try to influence public opinion, and hence the legislative agenda, by advertising

Of particular importance is the need to influence the decision making processes of the European Commission. EU regulations, for practical purposes, take priority over national law. They are arrived at after a great deal of negotiation, and for this reason alone, are difficult to change. It is therefore much better to influence the drafting process of new regulations than to try and get them changed once they have been implemented

The EU will have an increasing role in the conduct of European businesses in:

 Product standards 

  Environmental protection 

  Monetary policy (a European Central Bank might set interest rates) 

  Research and development 

  Regional policy 

  Labour costs (wages, pensions) 

 In addition, an EU-Africa Business Forum has been set up to improve investment and the business climate in Africa

2.4 Political risk and political change 

 Changes in UK law are often predictable. A government will publish a green paper discussing a proposed change in the law, before issuing a white paper and passing a bill through Parliament. Plans should be formulated about what to do if the change takes place

However, it is political change which complicates the planning activities of many firms. Many economic forecasts ignore the implications of a change in government policy

(a) At national level, political influence is significant and includes legislation on trading, pricing, dividends, tax, employment as well as health and safety (to list but a few)

(b) Politics at international level also has a direct bearing on organisations. EU directives affect all countries in the EU

The political risk in a decision is the risk that political factors will invalidate the strategy and perhaps severely damage the firm. Examples are wars, political chaos, corruption and nationalisation

2.5 International trade 

 The political environment is of particular importance in international trade. Such trade is governed by an extra layer of legislation contained in treaties and agreements and is potentially subject to a higher level of political risk. This may be manifested in a variety of ways, such as taxation law, labour regulation and economic policy on such matters as ownership. At worst, there is a threat of expropriation or nationalisation. Failure to repress lawlessness and corruption are further complicating factors, as is open or covert refusal to consider international bidders for government contract

2.6 The European Union 

 The European Union operates a single European market, allowing for the free movement of labour, goods and services, and free competition

The EU single market programme has involved areas as diverse as harmonising technical standards, opening up areas such as telecommunications to competition, consumer protection, mutual recognition of professional qualifications and so on

2.7 International trade liberalisation: the World Trade Organisation (WTO)

The World Trade Organisation was set up to promote free trade and resolve disputes between trading partner

The theory of comparative advantage suggests that free trade is the best way to promote global economic growth and, by implication, domestic prosperity. In other words, people should be free to buy and sell goods and services anywhere in the world.