Government Impacts on Business (Edexcel IGCSE Business)

The Provision of Infrastructure

• A key role of government is to ensure that important infrastructure is constructed, maintained and upgraded when required

Diagram: Infrastructure Funded by Government

Government funding ensures that key infrastructure, including transport networks, health and education facilities and energy grids, operate effectively

• Businesses benefit from the provision of key infrastructure in a number of ways

Government contracts 

• Some businesses are paid to carry out construction and maintenance of infrastructure on the government's behalf

  • In the UK, companies such as Mitie maintain public sector buildings, including hospitals and schools

Higher consumer spending

• Government spending generates income in an economy.

  • Increased incomes from employment can increase consumer spending, which leads to more demand for goods and services

Greater efficiency and productivity

• Improved networks can improve business performance

  • Better transport networks can improve logistics

  • Reliable energy networks and disaster protection, such as flood defenses, allow for business continuity

  • Faster communications networks can make online operations more efficient

  • Effective education and health systems improve the skills and wellbeing of workers, making them more productive

Legislation

• Legislation refers to the laws and regulations created by governments

  • Businesses must operate within these so as to avoid fines or legal action
    

• A strong legal framework in the country in which a business is located provides stability for businesses to plan and invest

Key Areas of Legislation Affecting Business

Trade Policy

• Government trade policy determines their approach to the import and export of products across borders

  • Importing involves bringing goods or services into a country from overseas

  • Exporting is where a business sells its products abroad
    
    

• Governments can use trade barriers to restrict the level of trade between countries for several reasons

  1. Protect new industries from overseas competition
     

     • E.g. The UK government heavily subsidises the solar panel industry
       
       

  2. Achieve a healthy balance of payments
     

     • Trade barriers applied by the US on products from China since 2017 have focused on reducing the country's trade deficit
       
       

  3. Protect jobs in industries that are major employers

     • E.g. The UK government provided subsidies of more than $500 million to Tata Steel, a major employer in South Wales
       
       

  4. Retaliation for trade barriers applied by other countries

     • China has applied retaliatory tariffs of up to 25% on US-produced goods such as soybeans 
       
       

  5. Prevent dumping of cheap goods from overseas

     • In 2017, India applied tariffs on imports of Bangladeshi jute that was priced to undercut domestic producers
       
       

  6. Pressure a foreign power to change policies

     • Many western governments have applied sanctions on Russia since 2022 in response to its foreign policy

Tariffs

• A tariff is a tax placed on imported goods from other countries 

  • E.g. Tennis rackets imported into the UK from China have a tariff of 4.7%
    

• A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses
  

Diagram: How Tariffs Work

When the USA places a tariff on imported cheese from Britain, the price of British cheese in the USA rises

• American customers are more likely now to purchase American cheese as the tariff has made British cheese equally expensive
   

• The benefits of tariffs include

  • Protection for infant industries so they can eventually become more competitive globally

  • An increase in government tax revenue 

  • Reduced dumping by foreign businesses as they cannot sell below the  market price 
     

• The disadvantages of tariffs include

  • Increased cost of imported raw materials, which may affect businesses who use these goods for production, leading to higher prices for consumers 

  • Less competition for domestic firms who may become more inefficient and produce poor quality products for their customers 

  • Reduced consumer choice as imports are now more expensive and some customers will be unable to afford them

Trade Blocs

• A trade Bloc is a group of countries that come together and agree to reduce or eliminate any barriers to trade that exist between them
  

• Membership of a trade bloc, such as the EU or ASEAN, usually includes barrier-free trade between member countries 

  • Most EU countries share a common currency, the Euro

  • ASEAN members are cooperating to harmonise laws and regulations relating to product safety, labelling and ingredients
    

    • This enables products manufactured in any of the countries within the trade bloc to be suitable for sale in all of the other countries
      

• Governments can cooperate with other countries outside of trade blocs to ease business transactions

  • A free trade agreement allows goods and services to be sold across borders as easily as domestic firms trade with each other 

    • E.g. Norway's free trade agreement with the EU allows its goods to be exported with ease to its member countries