Wednesday, May 18, 2011

The economic environment of business exercises a strong influence on the non-economic environment.

“The economic environment of business exercises a strong influence on the non-economic environment.” Discuss this statement with the help of examples.


The term “environment” refers to the totality of all the factors which are external to and beyond the control of individual business enterprises and their managements. Environment furnishes the macro-context, the business firm is the micro-unit. The environmental factors are essentially the “givens” within which firms and their managements must operate. For example, the value system of society, the rules and regulations laid down by the Government, the monetary policies of the central bank, the institutional set up of the country, the ideological beliefs of the leaders, the attitude towards foreign capital and enterprise, etc., all constitute the environment system within which a business firm operates. These environmental factors are many in numbers and various in form. Some of these factors are totally static, some are relatively static and some are very dynamic – they are changing every now and then. Some of these factors can be conceptualized and quantified, while other can be only referred to in qualitative terms. Thus, the environment of business is an extremely complex phenomenon.
The present day economic environment of business is a complex phenomenon. The business sector has economic relations with the Government, the capital market, the household sector and the foreign sector. These different sectors, together, influence the trends and structure of the economy. The form and functioning of the economy varies from country to country. The design and structure of an economic system is conditioned by socio-political arrangements. Such arrangements are relevant from the standpoint of macro-economic decision-making.
For example, in a democratic set up, people exercise an influence, direct or indirect, through the system of casting votes, on the nature of the decisions taken by the Government. In a parliamentary system, most decisions are processed by Cabinet ministers, whereas under a presidential form of Government the President acts as the real manager of the state: It is he who takes or makes decisions. Similarly, macro-real manager of the State: it is he who takes or makes decisions. Similarly, Marco-decision-making is more decentralized in a federal form of Government than in unitary form of Government.
All modern economics, whether capitalist, socialized, communist or missed, have certain fundamental economic problems to deal with. In each and every economy, including the so-called “affluent society”, some or many resources are scarce. Consequently, choices concerning the resource use have to be made together by individuals, by business corporations, and by society. It is the social choice and community preferences which give substance to the question of macro-economic decisions. From the standpoint of resources, the basic economic problem of every economy is that of just allocation of resources and subsequent optimum production. These may be the aspects to this problem: What to produce? How to produce? For whom to produce? When to produce?
Every economy has to decide on the quality and quantity of the goods and services to be produced. It has to decide on the nature of the technology and technique of production in view of factor endowment. It has to decide on the course and pattern of distribution of goods and services produced. It has to decide on the timing of production. The process of decision-making differs depending on how these problems are solved in different economies. This is what constitutes the functioning of the economy, or the nature of the economic environment. At the risk of over-implication, certain points can be made about the organisation and functioning of modern economics:
i) In most economies, both “free market mechanism” and “Centralised planning” exist in different degrees even today. By “free market mechanism” or “price mechanism”, we mean a free play of the market forces of demand and supply to determine an equilibrium solution of the allocation problem. Market mechanism determines commodity prices, factor prices, and income distribution. By “planning”, we mean a programme of action based upon consistency and feasibility of attaining a set of targets in view of a set of objectives through a set of instruments. In the present day world around us, planning is combined with free pricing to arrive at macro-economic decisions yielding “the maximum good to the maximum number”. Thus, the economy in which a business firm operates today is not an exclusively free economy making an indiscriminate use of prices and the markets. Rather, it is directed by a system of planning, control, regulation and coordination.
ii) In most economies, positive intervention by the Government in day-to-day economic affairs has existed over several decades in the past. Planning is a form of Government intervention. Besides this, the Government can also intervene through a system of controls and regulations. The “welfare state”principle induces the Government to enforce minimum wages, commodity controls, fair trade practices, etc, through legislation. The basic objectives of such economic legislations and policies are : growth, efficiency and equity. It is the intervene role fonder government that has made most business firms socially responsible. However, intervention by the Government is now on the decrees. Many economics have relaxed regulations and controls through economic reforms, and are allowing a free play of market forces.
iii) Modern economies age not “closed” and “open”; they are actively engaged in international trade and cooperation. So, the international transmission effect today is stronger than ever before. Though three are disparities in the levels of income and standards of living over space and time, there is a conscious effort to develop the port nations. The maintenance of steady growth and enveloped countries dependent on the acceleration of growth in underdeveloped countries. This idea has given new dimensions to issues like the role of multinational corporations, the ecological balance, the recycling of petrodollars, and the transfer of technology. The technological revolution is making strident moves. In order to keep their dynamism, the economics are determined to develop science and technology, and to balance environment and economy, and this is going to act as a unifying force for the world economic order. These facts define the environment and set the constraints within which modern business firms must operate. The managements cannot overlook the environment, whether market or non-market. No management can ignore the functioning of markets, the objectives of national planning, the polices of the Government or their social responsibilities, or the rate, pattern and structure of economic changes, or the forms of international cooperation. Progressive managements must keep themselves continuously informed about the magnitude and direction of changes in the national as well as international economic environment. Of course, both economic and non-economic environment have an important bearing on managerial decisions.

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