Impact of Government Policies on Business and Industry

Interest rates can be influenced by government policy, with an increase increasing the cost of borrowing. Higher interest rates reduce consumer spending, while lower interest rates attract investment as businesses increase production.

FREMONT, CA: Governments impose numerous regulations and policies that guide businesses. While some regulations, like the minimum wage, are required, others may have an indirect impact on a firm. Companies must be adaptable enough to adjust to new laws and regulations. In addition to being true on a national level, this is also true on a more local level because different states and municipalities have different sets of laws. International agreements can affect how businesses conduct themselves.

Government Taxation and Spending

Taxation is the source of revenue for governments. Increased spending requires increases in taxes or borrowing.  Any tax hike will deter investment, particularly from business owners who take on the risk of creating and running their own companies. Moreover, increased consumption depletes the little amount of savings, leaving less money available for private investment. Production of products and services is reduced when private investments are reduced. That can then result in the loss of jobs.

Policy as a Market Catalyst

In the business environment, the government can implement a policy that changes social behaviour. The government, for example, can impose taxes on the use of carbon-based fuels and provide subsidies to businesses that use renewable energy. The government can fund the development of new technology that will bring about the required change. Imposing more taxes or duties on a specific sector than is necessary will cause investors to lose interest in that sector. Consequently, tax and duty exemptions on a specific sector encourage investment and may result in growth. A high tax rate on imported goods, for example, may encourage local production of the same goods. A high tax rate on raw materials, on the other hand, stifles domestic production.

Setting Interest Rates

Interest rates are influenced by government policy, and when they rise, the cost of borrowing for businesses increases. Moreover, higher rates result in lower consumer expenditure. When businesses boost production, lower interest rates draw investment. By printing additional money, the government can affect interest rates in the near term, but this could eventually result in inflation. Companies do not prosper in an environment of rising inflation.

Permits and Regulations

The federal minimum wage, trade regulations and permit or licence requirements all have an impact on business. For example, all restaurants must have regular health inspections. Businesses may spend a significant amount of money and time complying with regulations that are ultimately ineffective and unnecessary. However, fair and effective regulations encourage business growth.

Political Stability and Political Culture

Government policy will always depend on the current political culture. Policy developed in a politically stable country will differ from policy crafted in an unstable country. A stable political system can make business-friendly decisions that benefit both domestic and foreign businesses. Unstable systems pose challenges to the government's ability to maintain law and order. This has a detrimental impact on the business environment.