BUSINESS’ POLITICAL ENVIRONMENTS
Business’ Political Environments
The incorporation of the political environment into a firm’s strategy is a fundamental ingredient of business success. As pointed out in semester 1 lecture 8, political set out rules for businesses and the society as a whole and thus the political environment can positively or negatively affect business. In his analysis of China’s political environment, McGregor (2019) claims that while the private enterprises were critical in driving the growth of China’s modern economy, the Communist Party has introduced total government control as the approach of running politics and business in the country. Eventually, the government and business are interdependent since political decisions can be highly consequential for business and political processes and because governance depend on the business’ decisions and performances (semester 1 lecture 7). Since a political system is a critical aspect of any business, the probable strategy of bolstering business performances through the various political environments must be probed.
The Importance of Different Types of Political Environments
The liberal democracy is one of the major political system dictating business environments in multiple different parts of the world. According to semester 1 lecture 8, liberal democracy is a political system where individual freedoms and rights are emphasized with the government exercising a limited role in its citizens’ economic and social life. Rodrik (2016) argues that democracy can be beneficial to business as it allows each nation to decide and shape its institutions in a manner that is contextually appropriate. Indeed, different countries have distinct aspects that dictate business growth. Thus, an emphasis of liberal democracy can allow each of society to embrace locally developed reforms and make democratic deliberations on how their economies should run. Ultimately, liberal democracy is vital to the realization of a high quality economic growth and greater economic predictability and resilience.
Despite its massive benefits to corporates, the business environment created by liberal democracy may not always be positive. For example, Rodrik (2016) postulates that while the rule of the law is deeply entrenched in liberal democracy, the strength of the legal administration and enforcement bodies plays a great role in determining growth, predictability, and resilience of an economy. Thus, having a weak legal administration and enforcement body like in the case of a majority of developing countries can render legal remedies against the violations of liberties in both business and the society at large ineffective. Also, Rodrik (2016) points out that those in power can deliberately discriminate against the minorities with an aim of enhancing their grip for power or disproportionately distributing resources to their supporters. Furthermore, Southall (2018) claims that democracy may be ineffective like in the case of most African countries where elections, political, and economic decisions are constructed along ethnic and tribal lines instead of modern political sentiments (p. 2). Therefore, the deep societal identities and ideologies propagated by liberal democracy is a significant threat to business success, and especially for minority groups.
In contrast, the state capitalism system creates a business environment where the trade and industries are mainly run by the private sector but with some input from the government. Musacchio, Lazzarini, and Aguilera (2015) define state capitalism as a model where the government liaises with private and foreign domestic investors to dictate the economy through governmental arrangements (p. 115). In this variation, the government can either own a majority or minority shares in major companies or provide subsidized credit or other protections to promote their strategic support. Furthermore, state capitalism promotes the efficient utilization of resources. According to Chan (2017), the monopolistic nature of state capitalism like in the case of China’s electric sector promotes the efficient use of the economies of scale. Indeed, running key companies through liberalization or leaving them to the private hands may result in inconsistent and unreliable services and poor maintenance especially when massive resources are required. Eventually, state capitalisms creates a conducive business environment as it ensures that while liberalism reins, the state takes a central role in making key strategic decisions.
Nevertheless, capitalism may also create business inefficiencies. According to Musacchio, Lazzarini, and Aguilera (2015) organizations operating under state capitalism perform a little lower than those operating as private firms due to the “liability of stateness” (p. 116). Indeed, state capitalism creates an environment where businesses experience more pressure to meet the interest of the state ahead of their growth and profitability. In addition, Chan (2017), suggests that the natural monopoly created by state capitalism like in the case of China’s electricity sector requires new firms to establish their own networks resulting in the duplication of infrastructure leading to inefficiency. Political interference is arguably the most significant factor derailing business in a capitalistic society. Musacchio, Lazzarini, and Aguilera (2015) suggest that state capitalisms often pulls firms into political tussles as politicians involved in the running of companies employ them for political mileage or are closely tied to the government like in the China’s case where state-owned firms’ directors are closely linked to the Communist party (p. 119). Thus, state ownership in state capitalism may result in bad financial performance that can significantly derail the economy.
However, there are three major capitalism models including minimal, developmental, and social-democratic state. According to semester 1 lecture 8, the minimal state capitalism business environment is characterized by neoliberalism, rolling back the state, an optimistic view of the market, and a voluntary exchange promoted by individual freedom. Jessop (2016) defines neoliberalism as a society in which the social, economic, and political aspects are profit-oriented and characterized by market mediated accumulation (p. 1). The economic growth is the single and most significant benefit of the minimal state. Since neoliberalism increases liberty and promotes free market, it promotes economic growth. On the other hand, Mosedale (2016) mentions that neoliberalism perpetuates government restructuring in a way that results in a constellation of all actors and enhances the marketization and commodification of social practices that have been traditionally outside the profit-motivated capitalist transactions, which leads to enhanced efficiency and output. In the end, the minimal state capitalism environment promotes economic consequently resulting in poverty reduction and a rise in the quality of life for the citizens of a country.
In spite of this, critics view the minimal state capitalism as a rationale for class domination and exploitation. According to Venugopal (2015), the neoliberalism that is a major characteristic of the minimal state capitalism perpetuates singularity, power centrality, and oppression promote a greater level of contingency and variations among the populace. Furthermore, Venugopal (2015) argues that while the application of technology in neoliberalism improves the overall efficiency, it promotes centralization resulting in the production of heterogeneous outcomes. Moreover, the minimal state rolls back the state by transferring the control of economic factors from the public to the private sector (Semester 1 lecture 8). This can be a great hindrance to the economic growth of the oppressed and especially the minority groups. Since the government plays a critical role in promoting equity through setting and implementing rules and policies, a reversal of the control to the private sector can reverse the equality gains previously attained and rather promote the dominance of the upper class while promoting the exploitation of those in the lower economic class.
On the other hand, the developmental state capitalism is predominantly run by the market and the private sector with the government with only intervening in improving the economic conditions. Nem and Ovadia (2018) claim that developmental state incorporate interventionist policies to facilitate the realization of a long-term and sustainable economic development (p. 1035). As mention in lecture 1 section 8, the developmental state is founded on the notion that the market is susceptible to sub-optimal performances and thus the government needs to intervene from time to time to bolster industrial growth and economic development. Such a political environment is indeed effective for business growth as any deviation from the normalcy is reversed through government policies and initiatives. Furthermore, Bishop et al. (2018) suggest that the establishment of the developmental state political environment in South East Asia nations including Thailand, Indonesia, and Malaysia enabled the government to intervene and embrace pro-growth ideologies that played a critical role in propelling their economies between the 1960s to the 1990s (p. 5). Thus, the ability of the developmental state political environment to allow the economy to grow on its own with the government intervening from time to time to set growth policies renders the economic structure approach effective for the economies of developing nations.
Regardless of this, the business environment created by the developmental state may not always drive the desired economic growth. According to Nem and Ovadia (2018), effective developmental strategies mainly depend on the adoption of political ideologies that focus on raising income levels and promoting a sustainable industrial growth (p. 1035). Bishop et al. (2018) claim that while the Eastern Asian Nations experienced an outstanding economic development from the 1960s to the 1990s, they have failed to realize a similar success story as nations like Korea Singapore, and Taiwan (p. 5). In essences, Korea Singapore, and Taiwan embraced more strategic industrial policies that played an instrumental role in bolstering their economies to the desired levels. While the government’s intervention in Thailand, Indonesia, and Malaysia were equally meant to enhance economic growth, Bishop et al. (2018) argue that the focus was primarily on increasing the state’s business client. Furthermore, the authoritarian regimes that the East Asian countries had for years saw the political elites collude with capitalists for their selfish interests. Thus, whilst the developmental state political environment propels economic growth, bad politics can be a hindrance to the optimal economic growth.
On the other hand, the social democratic state is founded on the Keynesian welfare consensus. Martinelli (2017) suggests that the Keynesian welfare approach ensures that the state takes charge of the services that were previously sold in the market and transforms them into charitable activities (p. 13). The focus on equity is the most significant positive effect of the political environment created by the social democratic state structure. Based on lecture 1 section 8, a reliance on social democratic state promotes social justice. Indeed, dominance and exploitation remains a major hindrance to minorities business especially in the minimal state capitalism political environment. Furthermore, we learned in lecture 1 section 8 that the social democratic state embraces progressive taxation to curb poverty and inequality. Thus, the social democratic state is a perfect remedy to the elites’ dominance and the exploitation of the poor in the society like in the case of a minimal state capitalism structure. By balancing the interest of the wider society, the political environment approach ensures that every person within the community is embraced in the economic growth.
Nonetheless, social democracy has been cited as a threat to democracy. According to Kenworthy (2016), the social democratic state does not produce absolute equality. Instead, it denies a large number of citizens an opportunity to optimally apply their skills and energy to take part in the optimal economic production. In the end, social democracy results in the exploitation of the wealthy members of the society to keep down the cost of goods to cushion those in the lower economic class. Equally, Lennartz and Ronald (2017) argue that the social investment strategy mainly focuses on halting the materialization of the existing and new social risks consequently failing to resolve the underling social problems and risks (p. 203). Moreover, social democracy bring forth austerity during recession implying that the existing projects are likely to be halted when the economy crashes. Kenworthy (2016) believes that social democracy constrains the economic freedom of a nation as the government takes money from individuals and employs it to bolster economic opportunities, the citizenry’s living standards, and security.
The political environment affects business operations and performance in various distinct ways. Thus, managers and directors should make the political environment central to their business strategies to realize optimal performance. Although the liberal democracy political environment allows a nation to shape its economy based on its strengths and weaknesses, businesses’ success are at the mercy of the strengths of the legal institutions. On the other hand, while capitalism bolsters’ effective corporate governance, it pulls companies into the competing political tussles consequently impacting on their performance and profitability. The minimal state promotes economic growth but also propagates economic exploitation and dominance. Similarly, the developmental state is critical to economic growth. However, bad politics can greatly hinder economic growth. While the positivity of a social democracy lies in justice and equality, its negativity is that it limits economic freedom. Accordingly, the decision for China to shift from the minimal state capitalism to a somewhat social democratic state is critical to ensure a comprehensive economic growth for all citizens regardless of their economic class.
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Semester 1 Lecture 7, The political environment. School of Business and Enterprise
Semester 1 Lecture 8, Types of political system. School of Business and Enterprise
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