GOVERNMENT IMPACT

ON BUSINESS
Effects of Government Policies
on Businesses
Market Catalyst

• The government can implement a policy that

changes the social behavior in the business
environment.
• Imposing on a particular sector more taxes or duties
than are necessary will make the investors lose
interest in that sector. Similarly, tax and duty
exemptions on a particular sector trigger investment
in it and may generate growth.
Political Stability
• Government policy will always depend on the
political culture of the moment. Policy crafted
in a politically stable country will be different
that formed in an unstable country.
• stable political system can make business-
friendly decisions that promote local
businesses and attract foreign investors.
Unstable systems present challenges that
jeopardize the ability of government to
maintain law and order. This has a negative
affect on the business environment.
Government Spending

• Governments get money to spend from taxation. Increased

spending requires increases in taxes or borrowing. Any tax
increase will discourage investment, especially among
entrepreneurs, who take the risks of starting and managing
businesses. Increased spending also eats into the limited
pool of savings, leaving less money for private investment.
Reduction in private investments shrinks production of
goods and services. That, in turn, may lead to the
elimination of jobs.
Interest Rates
• Government policy can influence interest
rates, a rise in which increases the cost of
borrowing in the business community. Higher
rates also lead to decreased consumer
spending. Lower interest rates attract
investment as businesses increase production.
The government can influence interest rates in
the short run by printing more money, which
might eventually lead to inflation. Businesses
do not thrive when there is a high level of
inflation.
Regulations

• Trade regulations, the federal minimum wage, and the

requirements for permits or licenses have effects on
business.