The political environment in a country affects business organisations and could introduce a risk factor that could cause them to suffer a loss. The political environment could change as a result of the actions and policies of governments at all levels, from the local level to the federal level. Businesses need to be prepared to deal with the fallouts of government politics.
Impact on the economy
The political environment in a country affects its economic environment. The economic environment, in turn, affects the performance of a business organisation. In the UK, for instance, there are significant differences in Labour and Conservative policies. This has implications for factors such as taxes and government spending, which in turn affect the country's economy. A higher level of government spending tends to stimulate the economy, for instance.
Changes in regulation
Governments could change their rules and regulations, and this could have an effect on a business. For instance, after the accounting scandals of the early 21st century, the UK became more focused on corporate compliance. This was a response to the social environment that called for such change to make public companies more accountable.
Particularly for businesses that operate internationally, a lack of political stability in any country has an effect on its operations. A hostile takeover could overthrow a government, for instance. This could lead to rioting and looting and general disorder in the environment. All this disrupts the operations of a business. Such disruptions have occurred in Sri Lanka, which went through a protracted civil war, and in Egypt and Syria, which have been subject to disturbances as people agitate for certain rights.
Mitigation of risk
One way to manage political risk is to buy political risk insurance. Organisations that have international operations use this type of insurance to mitigate their risk exposure as a result of political instability. There are indices that provide an idea of the risk exposure an organisation has in certain countries. For instance, an index of economic freedom ranks countries based on how political interference impacts business decisions in each country.