Solutions to Assignments
MMPC-003 - Business Environment
Question No. 2
What are the important elements of politico-legal environment? How does the government regulate business? Discuss in detail.
The critical elements of the politico-legal environment of business are:
1. The Form and Structure of the Government: It is a very important and decisive factor for the business sector. Democracy states government of the people, by the people and for the people.
At the enterprise level also people’s participation is very important. We authorize the local Government to collect some business taxes and spend money on local activities, when we accept the principle of democratic decentralization. Thus, the system of government and the structure of administration affects business.
2. The Ideology of the Ruling Party: It influences ownership, management, structure and size of business. The philosophy of the ruling party may help or hurt the course of business activity.
3. The Strength of the Opposition: Opposition has a very important role in democracy.
The party which gets an absolute majority forms the government under the two party system whereas, the party which gets a relative majority forms the Government with the collaboration of some other political parties. The candidates who do not command majority forms the opposition.
The strength of the opposition depends on whether the opposition parties are united or divided. To protect, promote and regulate business in the best interests of society, opposition is as important as a dedicated government.
4. The Role and Responsibility of the Bureaucracy: The work done by the Government is through the bureaucracy Ministers change from time to time, but Government administration must run without any break. Here the bureaucracy comes in.
The bureaucracy is very powerful in enforcing Government rules and regulations, systems and procedures, licenses and restrictions.
The bureaucracy enjoys tremendous power in the context of a system environment based on a host of controls and regulations. When the Government proposes liberalization, relaxation of rules and regulations, streamlining of systems and procedures, control becomes redundant and meaningless.
5. Political Stability: Business grows in a Politically stable region. Whenever the nation becomes politically unstable, the flow of foreign capital and enterprise is adversely affected, and this in turn effect the business, both.national and multinational.
6. The Velocity of Government Policies, Plans and Programs: If policies and programs are stable then business can plan its activities. otherwise it faces a tremendous amount of “non-market” risk and uncertainties. Stable policies help corporate planning and build up business confidence.
Sometimes policies are formulated with a clear “direction” but at snail’s’ “speed” and sometimes “speed” is fast but “direction” is not clear, we suffer on account of lack of “velocity” of such policies and this affects business unfavorably.
When there are so many policies such as policy-thinkers, policy-planners, policy-makers, policy executors, policy-adjudicators and so on, the business sector views policies with suspicion. Policies once formulated have to be implemented.
7. Socio-economic Legislation’s: Laws are needed to protect consumers, workers, managers, owners, shareholders and society at large. MRTP, FERA, IORA and so on are some of the business legislation’s to maintain order in the industrial economy. Industrial order and harmony is a condition for survival and expansion of business.
8. Politico-legal Institutions: These are the parts of the non-economic environment of business’s. The functioning of the legislative, executive and judicial organs of the Government affects business environment directly and indirectly.
In traditional sense, the role of any government has been to maintain law and order,
protect the nation from external aggression, provide social security exercise control over
public activities, etc. These roles were in the context of providing basic infrastructure to
business. But, in course of time, emphasis on planned economic development and
various other circumstances prompted the Government to play an active role in
promoting and regulating the business activities.
In order to ensure that balanced
economic development is planned within the constitutional framework, the public
utilities and infrastructure facilities are duly built up, and the business is run on sound
lines, the role of Government has assumed four dimensions as under :
- Regulatory Role,
- Promotional Role,
- Entrepreneurial Role, and
- Planning Role.
Their distinctive features notwithstanding, these roles are not exclusive to each other.
There may be occasions when the Government becomes active in more than one way to
serve national or sectoral objectives. For example, the planning and regulatory roles
may be mutually complementary and so can be the entrepreneurial, planning and
promotional roles. Let us now discuss the implications of each.
Regulatory Role
Government regulation of business, industry and trade generally refers to all measures
and instrumentalities which are aimed at defining and laying down the limits of private
enterprise. More specifically, Government may regulate business activities using direct
(discretionary) measures and/ or indirect (non-discretionary) measures.
Direct regulation refers to measures which are applicable at the discretion of
administrative authorities like, for example, - fixation of maximum and minimum prices
of commodities, industrial licensing, allocation of foreign exchange for imports ,
quantitative restrictions on imports and exports, rationing supplies and distribution of
particular goods, etc. In many developing countries, Government regulation by way of
direct controls has been used after the second world war for various reasons. For
instance, industrial licensing has been practiced on the ground that the market
mechanism was incapable of allocating scarce resources optimally, and that the State
could ensure resources to be allocated in accordance with national priorities. It was
believed that the resulting resource allocation would be socially optimal and desirable.
Promotional Role
Promotional role of Government has been of great significance in the developed
countries and so also in the developing countries. According to Dimock, Governmental
function in USA to assist and help develop industrial, labour, agricultural and consumer
interests is quite large considering the totality of government activities. This view m'ay
be quite surprising. But as Dimock puts it, the surprise is a measure of the degree to
which Americans "take for granted some of the most basic duties of the liberal
government and fail to appreciate their value adequately". For a developing country the
promotional role of government is obviously of greater significance. It may include :
(a) Initiating and promoting the develop~nent of infrastructure to facilitate industrial and
comnzercial activities by assuming tlie responsibility to provide and strengthen
power supply, transport network, availability of financial resources, training
institutions, R&D, guidance for pro~notiolial activities, and so on.
(b) Providing assistance for development of backward areas by way ofsubsidies,
allocation of scarce resources, allotting land at concessional price, power and water
supply at concessional rates, making available credit and finance at low interest, and
marketing through specialized organisations.
(c) Providing fiscal and monetary incentives, facilities for insurance of business risks as
well as information inputs for the developlnent of priority sectors.
Entrepreneurial Role
The entrepreneurial role of Government means that the government itself becomes the
entrepreneur which implies its participation in economic activities through public
ownership and management of industrial and commercial undertakings. The
justification for this role may be found in developed as well as developing countries.
Defence production, public utilities, passenger road transport, multi-purpose river-valley
projects, railways, airlines operations and strategic industries have been areas of
government engagement even in developed countries. Besides these activities, the
Government in developing countries assumes the entrepreneurial role even in other
areas:
(a) on account of the necessity of government to step in where private enterprise and
private management are not conducive to public good, e.g., providing safe drinking
water at affordable rates;
(b) to secure balanced development of the economy;
(c) to promote capital intensive industries involving large investments which may not be
attractive to private entrepreneurs due to low return in the short run; and
(d) to take over and manage private undertakings which become unprofitable but need to
be revived and continued so as to prevent large-scale unemployment and waste of
resources.
Planning Role
The planning role of the Government has been closely related with its regulatory role.
In developing countries, the objective of planned economic development has been to
secure optimum use of resources for rapid economic growth. Many states in Asia and
Africa, free from colonial rule after the second world war, were inspired by the erstwhile
Soviet model of centralised planning and control which evolved during the inter-war
period. The ideological appeal of the welfare states of western countries also
strengthened the idea of state planning. The basic argument in favour of Government's
planning role was that exclusive dependence on the market mechanism and freedom of
private enterprise has not been conducive to rapid economic development.
