Cambridge Syllabus Notes

6.1 External Influences – Political and Legal

Learning objective

Explain how changes in political and legal factors affect businesses and the decisions they make. Evaluate the impact of government actions such as privatisation, nationalisation and the use of law to control business activity.

1. What are political and legal influences?

Political influences – actions, policies and ideologies of governments (local, national or international) that shape the business environment. They include legislation, taxation, trade agreements, subsidies, stability of government, etc.
Legal influences – the body of law that regulates how businesses operate. This comprises statutes, regulations and case law covering employment, health & safety, consumer protection, competition, environmental standards, intellectual property, contract enforcement and more.

2. Key political factors

Factor	What it means for business	Illustrative example
Government stability	Predictable policy environment vs. uncertainty from frequent elections, coups or coalition changes.	Turkey’s 2023 elections caused a sharp fall in the Lira, affecting import‑cost calculations.
Trade policy	Tariffs, quotas, free‑trade agreements, import/export licences – affect price and market access.	EU‑Japan Economic Partnership Agreement (2019) removed most duties on automotive parts.
Taxation	Corporate tax rates, tax incentives, changes to VAT or excise duties – directly affect profitability.	UK corporation‑tax rise from 19 % to 20 % in 2023.
Subsidies & grants	Financial support for specific sectors (e.g., renewable energy, R&D) can lower costs or create new markets.	German “EEG” feed‑in tariffs for solar power.
Regulation of foreign investment	Restrictions, screening or incentives for overseas investors influence location decisions.	China’s “negative list” for foreign‑owned enterprises.
Political ideology	Free‑market vs. interventionist approaches determine the level of state involvement.	Scandinavian welfare states tend to impose higher labour standards.
Privatisation & nationalisation	Transfer of ownership between state and private sector – see section 4.	UK rail privatisation (1996) and French EDF partial nationalisation (1970s).

3. Key legal factors

Legal area	Typical requirements for businesses	Example
Employment law	Minimum wage, working‑time limits, health & safety, discrimination, redundancy procedures.	UK National Living Wage increase 2024.
Consumer‑protection law	Product safety, labelling, advertising standards, rights to refunds/warranties.	EU Consumer Rights Directive (2011) on 14‑day returns.
Competition (antitrust) law	Prohibits monopolies, price‑fixing, market‑sharing, abuse of dominant position.	EU blocked Siemens‑Alstom merger (2019).
Environmental legislation	Emissions caps, waste‑disposal rules, sustainability reporting, product‑eco‑design.	EU REACH regulation on chemicals.
Intellectual‑property law	Patents, trademarks, copyrights, trade‑secrets – protect innovation and brand.	US Patent‑Act 1952, EU Trade‑Mark Regulation.
Contract law	Rules on formation, enforceability, breach and remedies – underpin all commercial agreements.	Sale of Goods Act 1979 (UK) – implied terms.

4. How governments use law to control business activity

Area of control	Legal tools used	Typical business impact	Real‑world example
Employment practices & conditions	Minimum‑wage Acts, Working‑Time Regulations, Health & Safety at Work Act, Equality legislation	Higher labour costs, need for training, shift‑pattern changes, risk of fines	UK National Living Wage rise 2024
Marketing & advertising	Advertising Standards Authority (ASA) codes, Consumer Protection from Unfair Trading Regulations, tobacco/alcohol advertising bans	Limits on claims, mandatory labelling, possible withdrawal of promotional material	EU ban on TV tobacco advertising (2003)
Competition	Competition Act 1998, EU Competition Law, merger‑control regimes	Restrictions on mergers, price‑fixing penalties, required divestments	EU blocked Siemens‑Alstom merger (2019)
Location decisions	Planning permission, zoning laws, local tax incentives, environmental permits	Choice of site, additional compliance costs, possible relocation	UK “Enterprise Zones” offering tax relief
Specific goods & services	Licensing (pharmaceuticals, broadcasting), safety standards, import bans, age‑restriction laws	Barrier to market entry, product redesign, extra testing	EU REACH chemicals regulation

5. Privatisation vs. Nationalisation

Aspect	Privatisation	Nationalisation
Definition	Transfer of state‑owned enterprises to private ownership.	Transfer of privately‑owned enterprises into state ownership.
Typical government motives	Raise revenue, improve efficiency, reduce public‑sector borrowing.	Secure strategic control, protect jobs, ensure universal service.
Advantages for business	Greater competition, access to private capital, flexible management.	Stable demand (often from the state), possible subsidies, reduced market risk.
Disadvantages for business	Market‑driven price pressure, possible job losses, loss of public‑service focus.	Potential inefficiency, political interference, limited profit‑maximising freedom.
Evaluation criteria	Impact on efficiency, consumer price, innovation and fiscal balance.	Impact on strategic security, employment levels, public‑service quality.
Real‑world examples	UK rail privatisation (1996) – creation of private Train Operating Companies.	French EDF partial nationalisation (1970s) – state control of electricity generation.

6. How political and legal changes influence business decisions

Strategic planning – Scenario‑planning for policy shifts (e.g., Brexit, US‑China trade war).
Location decisions – Choose a country/region based on tax rates, subsidies, regulatory stringency and political risk.
Pricing strategy – Adjust prices to reflect changes in VAT, excise duties, carbon taxes or digital services taxes.
Product development & innovation – Redesign to meet new safety, environmental or labelling standards.
Human‑resources management – Revise recruitment, training, wage structures and health‑and‑safety policies.
Supply‑chain management – Reroute sourcing, build inventories or seek alternative suppliers to mitigate tariffs or import bans.
Marketing & sales – Modify advertising, promotional offers and packaging to comply with consumer‑protection rules.
Corporate social responsibility (CSR) – Align CSR initiatives with legal reporting requirements and political pressure for ethical conduct.
Financial planning – Incorporate compliance costs, potential fines and changes in corporate tax into budgets and cash‑flow forecasts.

7. Political vs. Legal influences – a comparative view

Aspect	Political influence	Legal influence
Source	Government policy, political parties, international bodies (WTO, IMF)	Statutes, secondary legislation, case law
Typical frequency of change	Often linked to elections, geopolitical events, policy reviews	Can be gradual (safety standards) or abrupt (new legislation)
Direct impact on costs	Tax rates, tariffs, subsidies, licence fees	Compliance costs, fines, litigation expenses, insurance premiums
Impact on market entry	Trade agreements, foreign‑investment restrictions, political‑risk ratings	Licensing, competition‑law clearance, sector‑specific regulations
Strategic response	Lobbying, relocation, diversification, joint ventures with local partners	Legal audits, policy updates, staff training, contract renegotiation

8. Illustrative case study

Background (2023‑24): The UK increased the main corporation‑tax rate from 19 % to 20 % and introduced a 2 % Digital Services Tax (DST) on revenues earned by online platforms. Simultaneously, the UK GDPR amendment imposed stricter data‑protection obligations.

Business responses:

Strategic review – Multinationals reassessed the cost‑benefit of retaining UK operations versus relocating to lower‑tax jurisdictions such as Ireland or the Netherlands.
Investment in automation – Companies accelerated capital spending on robotics and AI to offset higher tax‑related profit pressures.
Compliance spend – IT departments upgraded security infrastructure; legal teams performed data‑impact assessments, raising annual compliance budgets by ≈5 %.
Pricing adjustments – Digital‑service providers added a small surcharge for UK customers to cover the DST.
Stakeholder communication – Shareholders were briefed on expected profit‑margin compression; employees were consulted on potential restructuring.

The case shows how simultaneous political (tax) and legal (data‑protection) changes can force businesses to adapt strategy, operations, pricing and investment decisions.

9. Checklist for business decision‑makers

Monitor political developments – elections, trade negotiations, fiscal‑policy announcements.
Track legal changes – subscribe to government bulletins, professional bodies and legal‑counsel updates.
Quantify the financial impact of any new tax, tariff or compliance requirement.
Analyse strategic options: adapt processes, relocate activities, diversify product lines or lobby for change.
Incorporate compliance costs into budgeting, pricing models and profit forecasts.
Review contracts and supply‑chain clauses for “force‑majeure” or political‑risk provisions.
Communicate potential impacts to stakeholders – shareholders, employees, customers and suppliers.
Maintain a regular “external‑environment scan” as part of the strategic‑planning cycle.

10. Suggested diagram

Flowchart: How political and legal changes feed into the four main decision areas – Strategy, Operations, Finance and Human Resources – and the feedback loop of monitoring and review.

11. Summary

Political and legal environments are powerful external forces that shape a business’s cost structure, market opportunities and operational requirements. Managers must continuously scan for policy shifts, legislative reforms and government actions such as privatisation or nationalisation, assess their implications, and adjust strategic, operational, financial and HR decisions accordingly to stay competitive and compliant.

the impact of changes in political and legal factors on business and business decisions