Business environment means all those external factors or factors affecting business environment which have impact on wealth earning activities. In other words, business environment includes all those factors or elements, which directly or indirectly affect the economic life of human.
In other words, business environment generally means those external factors which have direct economic impact on any business.
Thus, business environment includes that atmosphere or conditions, in which business activities are being accomplished. The profit, production, investments are determined by business environment.
Business environment is the most important factor influencing the business.
Every business enterprise in itself is a part of national economic environment. It is influenced by the economic activities taking place in the economy.
Factors Affecting Business Environment
Businss environment is affected by following factors, components and elements:
1. Natural Resources
Business environment is affected by natural resources available in country, including land, quality of soil, mineral wealth, water resources, vegetation, formation of surface and climate.
If the natural resources are abundantly available, their utilisation will result in economic development and large volume of employment.
If these are scarce then poverty, starvation, unemployment and backwardness will adversely affect the business environment also.
Related: 21 Importance of Study of Business Environment (Explained).
2. Human Resources
Human resource is an important determining factor for business environment.
A country having human resources healthy, intelligent, efficient trained and adequate then rapid economic development is possible.
Shortage of labour force and unhealthy and inefficient Labour force obstacles in the way of business development.
However, excessive human resources (overpopulation) also cause several problems and checks the proper excavation of natural resources.
3. Forms of Economic System
The forms of economic system also affect the economic development environment.
The economic system has positive as well as negative impact both. The main systems are:
Capitalist Economic System
It is also termed as “Free economy system” Private entrepreneurs play active role in development of economy.
The possession of property, profit motivation, economic freedom, competition and free price mechanism individualism and consumer sovereignty are basic characterstics of such economy.
Socialist Economic System
This system has total control over all production resources of the country.
The government plays and active role in economic development. Maximum goals of social welfare are achieved through economic planning, social ownership, efficient and professional management.
However, it main result into corruptions, strictness and rigidiyies, mismanagement and inefficient as also.
Mixed Economic System
Both the private and government sector business operate, Simultaneously.
Hence, personal profits are kept under control, in the social interests and efforts are made for achieving rapid economic development through decentralization.
Besides, social welfare is also effectively coordinated with overall business development.
4. Economic Policies
Business environment is also affected by economic policies of Government.
The industrial policy, licensing policy, monetary policy, fiscal policy, agricultural policy, price policy, labour policy, and Employment policy, all have impact on economic Industrial Development.
If these policies are effective, suitable, strong and progressive, development of Agricultur, industries and trade is quite sure.
Good policies help in increasing production, incomes, savings, investments, capital formation and bringing about rapid economic development of the country.
However, the faulty polices result in creating obstacles in the way of economic development.
Related: 16 Need and Importance of Business Environment (Explain).
5. Technological Development
Technology is understood as the systematic application of scientific or other organized knowledge to practical tasks. It is through a business that technology reaches people.
Technology changes fast and to keep pace with it, Businessman should be ever alert to adopt change technology to their business.
A Firm which is unable to cope with the technological changes does not survive. The differing technological environment of different countries main calls for product modifications.
Technological developments may increase the demand or some existing products.
The fast changes in technologies also create problems for Enterprises as they render plants and products obsolete quickly.
6. Capital Formation and Investment
Capital formation is an important factor of business environment. Rate of capital formation, development of capital market and availability of investments in the country directly affect the business environment.
A conducive atmosphere is created for the development and continuity of business in the country.
On the contrary, business environment in the country remains disappointing and undeveloped.
Related: 18 Major Factors Affecting Capital Structure (Complete List).
7. Monetary and Fiscal Policies
The monetary policy, controls the volume of currency and credit in the country to achieve the desired objectives.
During the period of boom, economic stability is sustained by controlling inflation, through reducing the volume of money and credit.
On the contrary, during periods of depression, momentum of economic development is speed up by increasing the volume of money and credit.
So, monetary measures are adopted to safeguard the economy, against trade eycles.
The fiscal policy, plays a vital role to raise income from various taxes, which is spent for developmental activities by government. Taxation policy, expenditure policy, public debit policy of the government affect business environment.
So, the government stops extravagances through fiscal policy and invests financial resources for developmental activities.
A proper balance and coordination between monetary and fiscal policy is helps in development of the economy.
8. Situations of Market
Business environment is affected also by the market situation, as follows:
- In situation of perfect competition, optimum utilisation of resources is achieved through over production, low costs, competitions and moderate profits, etc.
- In Monopoly market, development of the country is blocked due to high costs, high prices, low production, Monopoly profits and exploitation of consumers. Besides, optimum utilisation of sources for production is also not possible in monopolistic situations.
- In situation of imperfect competition, cut throat competition emerges as the result of diversified production, higher profits, low production and advertisement costs.
Thus, business environment is determined in consonance with the aforesaid conditions and sometimes, the government is required to enforce control on market system.
9. Entrepreneur and Innovation
Entrepreneur and innovation is an important factor among several factors which effects the business environment of any country.
“Economic development depends upon technical progress and innovations.
The entrepreneur provides contribution towards economic development by taking advantage of technical knowledge, in utilisation of the resources.
The entrepreneur has foresightedness and self confidence, which he utilizes for production activities.
In developing countries, there is a shortage of efficient and competent entrepreneurs. There are established facts of success not only in our country, but in foreign countries also.
Related: 19 Key Factors Influencing Entrepreneurship Development.
10. Capital and Money Market
These both are important factors of economic environment.
The money market arranges short term credit, whereas capital market arranges long term credit.
The capital of any country is a dynamic phenomena and two markets are developed organised.
If the money market of the countries active in the proper direction, the pace and directions of economic development will also be proper. Otherwise, the country may remain in the grip of inflation or deflation.
Similarly, the capital markets also has its own control on Financial Institutions, savings investments, capital formation.
The economic development will get momentum with the activeness and sound organisation of the capital market.
11. Economic Conditions
The economic conditions of any country will determine the business environment of that country.
If the economic condition is good, it may be said that the economic environment is good, otherwise, it is bad.
National and per capita income position of employment, availability of infrastructural facilities, living standards of the people of the country, rate of capital formation, balance of trade, situation of Balance of payments, exchange rate, and foreign currency reserve are the indicators of economic condition if these conditions.
If these indicators are favourable, then the business environment in that country will also be conducive for development.
If these indicators are adverse, then the business environment will be adverse to development.
Related: 11 Non-Economic Environments Affecting Business Environment.
12. Foreign Capital and Debt
Availability of foreign capital and debt is also a major factor affecting business environment.
If foreign capital is available, not only the availability of consumer and capital goods increase, but it is also helpful in creating efficient human resources for development.
However, if not used cautiously, it may harm the national security, encourge centralization of economic sources and push the country even towards political dependence.
13. Infrastructural Facilities
Business environment is directly affected by infrastructural facilities and composition.
The countries, where the infrastructural facilities are sound, economic development will be rapid and strong in those countries.
In India, infrastructural facilities has lacked and even today these are not adequate.
As a result, the pace of development is not only slow, but even the foundation is also not very strong.
Now, the cooperation of private sector is beling sough in development of the infrastructural facilities.
14. Occupational Distribution
Occupational distribution refers to he volume of population of any particular country, engaged in various activities of production.
Occupational distribution of population is of three types:
Includes agriculture,fisheries, Forestry, dairy and animal husbandry.
Includes industries, mining, constuction and public utility services.
Include all types of services, like banking, insurance, transportation, education, medical, administration and entetainment, etc.
Occupation of higher proposition of working population in primary sector indicate low level of development. It causes pressure of population on land and productivity of labour is also low.
On the contrary, occupation of higher proportion of population in secondary and service sectors indicate rapid economic development and high living standards of people.
Related: 15 Key Features of Effective Management Control System.
15. National Income and Distribution
Economic environment is also affected by the volume of national income and its distribution.
With higher National income in the country, the economic environment will also be as conducive to the development.
The per capita income will also be high due to high national income, which will increase in demand of commodities and services, and encouragement to various activities of development.
The creation of business environment is also affected by the distribution of national income. If the distribution of income is in favour of rich people, the savings will increase.
But, since consumtion will not increase by it, development will not get Momentum.
On the contrary, when income distribution is in favour of poorer sections, the demands increase quite substantially and development gets faster.
16. Efficient Organisation
Efficient organisation of the country also significantly influences business environment.
The problem of economic development is not mainly the financial problem, rather it is a problem of economic organisation and system.
More rapid development is possible even by lesser resources, if the organisation and system are good. Japan is its example. Human capital is required to be developed to make the organisation efficient.
17. Economic Laws
Economic laws include various laws, including trade law, Industrial law, Factories Act and labor law, monopolies restrictive and trade policies act, various taxation laws for income tax, sales tax, wealth tax, FEMA, etc.
These laws regulate business environment.
It also develops faith in stability of business environment and its continuity.
18. Social Cultural Factor
Social-Cultural fabric is an important environmental factor that affects the business environment.
The buying and consumption habits of the people, their language, beliefs, and values, customs and traditions, tastes and preferences, education are all factors that affect the business environment.
For a business to be successful, its strategy should be like that it is appropriate in the socio-cultural environment.
Even when people of different cultures use the same basic product, the mode of consumption, conditions of use, the purpose of the use or the product attributes, the method of promoting the product may have to varied suit the characteristics of the different market.
Related: 10 Objectives of Entrepreneurial Development Programmes – Explained.
19. International Condition
International conditions such as foreign aid, foreign economic policy, the balance of trade and balance of payment, exchange rate, etc. affect the business environment.
International documents, foreign trade policy, visiting of trade and Commerce representatives, etc. Creates an international business environment.
Cordial International relations help in the economic and technological agreement which results in increasing employment opportunities.
20. Transport and Communication
Transport and communication system is also an important element of the business environment.
Developed the transport and communication system helps in the economic development of a country.
Means of transport include Railways, Roadways, and water transport and the means of communication are postage and telegram, telephone and electronic meant equipment, etc.
Well developed means of transport and communication mobilize the whole economic system and lead to business development.
Related: 5 Types of Distribution Channels in Marketing (Explained).
21. Education System
The education system and training facilities also play an important role in the economic development of a Nation.
General education and well as Technical Education affects the economic environment.
If the education system stress on self Reliance and coordinate with the business environment, it will be helpful in economic development.
Agriculture, industries, and trade are influenced by the education system. Technical education has played an important role in the industrial revolution of England.
Overpopulation, as well as underpopulation, adversely affects the business environment.
There is a close relationship between the population and the economic development of a country.
The availability of adequate labours for (skilled and unskilled) helps in the industrial development of a country.
Overpopulation generates the problems of unemployment, poverty, starvation, and immorality. It also creates the problem of per capita income and low living standard.
Advertising is designed favourably to dispose a person towards buying a product or supporting a cause.
23. Political Stability
Political stability in any country may be visualized by presidents rules, the position of the governments in the states, anarchism, emergency, majority gained by ruling parties in parliament, etc.
If the government in the country is stable, then the entrepreneurs and business organizations will get encouragement for development-oriented activities and will make expansions of the enterprises and business.
Thus, now you know the factors affecting business environment.
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