- The economic factors of a country play a major role in deciding the special features or limitation of its economy or society.
- The size and the nature of business development are also dependent on economic factors prevailing in the nation.
Following economic factors affect the business environment of the country:
1. Economic system:
- The organized way in which a country allocates resources and distributes goods and services is known as the economic system of that nation.
- How the country functions and in which direction is its economy moving is ascertained by the economic system that the country follows.
There are three major types of economic system existing in the world:
(A) Capitalist economic system:
- If the country follows capitalist economic system, it means that the country will adopt a policy of free trade.
- In this system, the government does not interfere much. It allows the producer to take all the major decisions with respect to production and distribution.
(B) Socialist system:
- The economic system which is controlled and regulated by the government so as to ensure welfare and equal opportunity for people of the society is known as socialist system.
- In this system, all major decisions are taken by the government. Individuals do not have a major role to play.
(C) Mixed economy (Mixed economic system):
India has adopted a mixed economy i.e. a combination of socialist and capitalist economy. Under this system, India allows businesses of certain sectors to do business freely whereas certain sectors are controlled by the government itself.
2. Degree of economic development:
By studying the business structure it can be known whether the country is economically developed, developing or underdeveloped i.e. one can know the degree of economic development.
The level of development determines the business environment in that country.
(A) Developed country:
- In a developed country, the level of gross national income and per capita income is high and all the available resources are fully developed.
- Such an environment encourages growth and development of business and industry. For example, America, UK, etc.
(B) Developing country:
- In a developing country, the national income and per capita income show positive growth. Moreover, there is also a rising trend in the use of available resources and the standard of living. For example, India.
- In such countries the business opportunities continuously increase. Also, the social structure keeps on transforming which then proves favourable for business.
(C) Underdeveloped country:
- In underdeveloped countries, income levels are very weak. This weakens the business development and hence the economic growth.
- Underutilization of available resources is easily visible. For example, Afghanistan.
3. Sectorial growth and inter-sectorial combinations:
A country’s economy is divided into three sectors namely,
(B) Industrial and
The division of country’s economic activities among these sectors and the environment of these sectors largely affect the business environment.
(A) Agriculture (Primary) sector:
- If majority population of a country earns its livelihood from agriculture, then it can be said that agriculture is the primary sector of economy for that nation.
- In such a country, development of agriculture leads to the overall development of the economy.
- Majority of the resources are used in primary sector and hence the industrial growth is quite slow.
(B) Industrial (Secondary) sector:
- There is wide and large use of minerals and metals in an economy dominated by industries.
- The industrial sector employs large number of people for producing several goods.
- Strong hold of industrial sector leads to several innovations and modernization. This overall increases business opportunities.
(C) Service sector:
- The service sector comprises of providing social and economic services.
- Development of services such as transport, communication, banking, tourism, education, health, etc. fuels investment in various businesses. This in turn develops the economy.
- As the country develops, the business environment rises and shifts from agriculture to industries and finally to service. However, it is important that the country maintains a fine balance between these three sectors so as to have a healthy economic development and favourable business environment for all.
4. National income and per capita income:
- When the national income rises, it creates a favourable business environment.
- If the national income rises but the population does not rise proportionately, the rate of rise in per capita income will be more than the rate of rise in national income.
- When both, national income and per capita income rise, it increases the demand for goods and services and other basic necessities. This becomes favourable for business.
- Also, when income rises, the demand for superior quality goods i.e. luxurious goods and branded clothes also rises.
5. Distribution of national income:
- How the national income is distributed among the different sections of the society affects the business environment of that country.
- For example, if the distribution is quite unequal then there will be very high demand of luxurious and prestigious goods and services.
- If the distribution pattern changes, it will affect the demand for goods and services.
6. Monetary policy:
- The macroeconomic policy laid down by the central bank with respect to management of money supply, rate of interest, etc. is called the monetary policy.
- Monetary policy includes changes in interest rates, inflation rate, credit creation, credit availability, etc.
- If the interest rate on housing loan is reduced, the demand for houses will increase. This will also increase the demand of products of industries like cement, steel, furniture, sand, raw dust, bricks, etc. related to housing.
7. Fiscal policy:
- Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence national economy. Thus, fiscal policy depends on the tax structure and governmental expenditure.
- How can the tax structure be made effective for individual, units and the entire industry.
- How much is the effect of public expenditure on economic activities.
- The framework of fiscal policy largely impacts the business environment of the nation.
8. Other factors: Apart from factors discussed above, other factors such as raw materials, its supply, components of machinery, financial facilities, manpower and its productivity etc. also affect the economy and the business environment.