Topic 6 - External influences on business activity

Political and legal influences

Syllabus overview:
6.1.1 – political and legal influences
 The advantages and disadvantages of nationalisation in a given
situation
 The advantages and disadvantages of privatisation in a given
situation
 How government might use the law to seek to control: employment
practices, conditions of work (including health and safety), wage
levels, marketing behaviour, competition, location decisions,
particular goods and services
 The impact of changes in political and legal factors on business and
business decisions

Key definitions:

Privatisation – the act of selling state-owned and controlled business

organizations to investors in the private sectors.
Nationalisation – the transfer of privately owned businesses to state
(government) ownership and control.
Minimum wages - employers are not allowed to pay less than the set
minimum wage per hour (in some countries its minimum pay per week or
month)
Monopoly – a market where there is only one supplier with no close
competitors.
Collusion – businesses agree to work together and restrict competition by
fixing prices and sharing contracts between themselves.

Advantages and disadvantages of nationalisation

Arguments for nationalisation Arguments against nationalisation

1. The government will have control of major 1. There is less profit motive, so less
industries. incentive to operate the industry
2. Integrated industrial policy (e.g. for water efficiently, and the government may
supply) should now be possible. provide subsidies to loss-making
3. It prevents private companies operating as nationalised industries.
monopolies and exploiting consumers. 2. Government may intervene too much in
4. Economies of scale can be achieved by business decision-making for political
merging all private businesses in an reasons.
industry into one nationalised corporation. 3. The cost to the government of buying
 private companies could be very high.
4. It removes the ability of the industry to
raise finance from private sources (e.g.
through the stock exchange).

Advantages and disadvantages of privatisation

Privatisation transfers ownership of state-owned industries into the private

sector by creating public limited companies.

Arguments for privatisation Arguments against privatisation

1. Private-sector businesses lead to greater 1. The state should take decisions about
efficiency than when a business is essential industries. These decisions can
supported and subsidised by the state. be based on the needs of society and not
just the interests of shareholders. This
2. Decision-making in state bodies can be may involve keeping open business
slow and bureaucratic. activities that private companies would
consider unprofitable.
3. Privatisation gives responsibility for
success to managers and employees. This 2. Privately operated businesses that
is motivating. There is a greater sense of compete with each other are unlikely to
empowerment than in state-owned achieve a coherent and coordinated
businesses. policy for the benefit of the whole
country, for example on the railway
4. Market forces operate: failing businesses system, electricity grid and bus services.
will be forced to change or die; successful
ones can expand. Profits of most privatized 3. Through state ownership an industry can
businesses have increased following their be made accountable to the country. This
sell off. is by means of a responsible minister and
direct accountability to parliament.
5. Important business decisions are taken for
financial reasons not political reasons, for 4. Many strategic industries could be
example keeping electricity prices operated as private monopolies if
artificially low. privatised and they could exploit
consumers with high prices.
6. Sale of nationalised industries can raise
finance for government, which can be 5. Breaking up nationalised industries,
spent on other state projects. perhaps into several competing units,
reduces the opportunities for cost saving
7. Private businesses will have access to the through economies of scale.
private capital markets and this will lead to
increased investment in these industries.
Legal constraints on business activity

In most countries, governments have introduced laws that control business

decisions and activities. These fall into the following main categories:

• employment practices, conditions of work and wage levels

• marketing behaviour, consumer rights and controls over some
products
• competition
• location of businesses

1. The law and employment practices:

These laws control the relationship between employers and employees.

The two main objectives of these laws are to:

• prevent exploitation of workers by powerful employers by insisting

on appropriate levels of health and safety and minimum wage rates
• control excessive use of trade union collective action.

Legal constraints usually cover the following areas of employment practices:

• recruitment, employment contracts and termination of employment.

• health and safety at work.
• minimum wages.

2. Recruitment, employment contracts and termination of

employment:

• A written contract of employment so that the employee is fully aware of the pay,
working conditions and disciplinary procedures to be followed.
• Minimum ages at which young people can be employed
• Maximum length of the working week
• Holiday and pension entitlements
• No discrimination against people during recruitment and selection or while at work
on the grounds of race, colour, gender or religion
• Protection against unfair dismissal.

3. Health and safety at work:

These requirements aim to protect workers from discomfort and physical
injury at work. Providing a healthy and safe environment in which to work is
now a legal requirement in most countries.
Health and safety laws usually require businesses to:

• equip factories and offices with safety equipment and train staff to
use it
• provide adequate washing and toilet facilities
• provide protection from dangerous machinery and materials
• give adequate breaks and maintain certain workplace temperatures.

4. Minimum wages:

Minimum wage rates are legally binding on businesses. The rates vary
considerably around the world.
The two main aims of the minimum wage are to:

• prevent exploitation of poorly organised workers by powerful

employers
• reduce income inequalities between the high paid and low paid in
the economy.

Apart from these two benefits, other effects of the minimum wage are:

• increased standard of living and purchasing power of low-paid

workers
• a work incentive, as working is more worthwhile than being
unemployed.

Criticisms of most minimum wage systems include:

• They can be avoided by employers insisting on casual employees

with no employment contracts and no job security. These actions
are illegal, but difficult to prevent.
• Raising labour costs can make businesses uncompetitive and they
might make workers redundant.
• Other workers being paid just above the minimum wage will ask for
a wage raise, and inflation might increase as business costs
increase further.

5. Impact on business of changes in employment and health and

safety laws:
There are both positive and negative effects to changes to these laws. On
the one hand, they are constraints that add to business costs, including:

• supervisory costs for checking on recruitment, selection and

promotion procedures
• higher wage costs if a minimum wage is introduced or increased
• higher costs from an increase in paid holidays, pension
contributions and paid leave for sickness, maternity and paternity
• employment of more employees to respond to controls over length
of the working week
• protective clothing and equipment to meet stricter health and
safety laws.

There are some benefits to be gained by businesses that meet or even exceed minimum standards
laid down by law. The benefits include:

• Workers will feel more secure, more highly valued and more motivated with a clear
and fair employment contract.
• A safe working environment reduces the risk of accidents and time off work for ill
health or injury.
• Meeting minimum standards avoids expensive court cases and heavy fines.
• Businesses that make a policy of providing employment conditions and a healthy
environment beyond legal requirements are likely to attract the best employees.
• Good publicity will be gained if the business culture is considered to treat workers as
partners in the business, equal in status and importance to managers and shareholders.

6. Impact on business of consumer protection laws:

Complying with these laws increases business costs for:

• redesigning products to meet consumer health and safety laws

• redesigning advertisements to give only clear and accurate
information
• improving quality-control standards and the accuracy of weights
and measures.

Laws to protect consumers may require a change of strategy and culture in

the business. Putting consumer interests at the forefront of company policy
may demand a change of attitude among very senior managers.

Possible benefits of consumer protection include:

• reduced risk of consumer injury from using a product and resulting

bad publicity
• reduced risk of court action
 • improved customer loyalty for products that meet minimum
performance standards
• a reputation for dealing with complaints fairly and quickly and for
advertising with fairness and honesty.

If consumers are offered an improved deal in terms of honest advertisements, accurate

promotional offers, quality products and good after-sales service, then the sales and marketing
benefits, and eventually profit increases, could be real and long-lasting.

7. The law and business competition:

It is usually argued that free and fair competition between businesses has the following benefits
for consumers:

• There is a wider choice of goods and services than when just one business dominates
a market.
• Businesses have to keep prices as low as possible to be competitive.
• Businesses compete by improving the quality, design and performance of the product.
• Competitive markets within one country also have external benefits. Rival businesses
become more competitive against foreign firms and this helps to strengthen the
domestic economy.

Governments attempt to encourage and promote competition between businesses by passing laws
that:

• investigate and control monopoly activities and make it possible to prevent mergers
and takeovers that create monopolies
• limit or outlaw uncompetitive practices between businesses, such as collusion.

Possible past paper questions: