6.1.1 Political and legal
Governments shape the business environment through ownership (deciding which industries are run by the state), and through law (setting the rules within which every business must operate). A change of government, or a new law, can transform the costs, opportunities and risks facing a business almost overnight.
Privatisation
Definition Privatisation is the transfer of the ownership and control of a business or industry from the public sector (the state) to the private sector, usually by selling shares to private investors or to another company.
| Advantages of privatisation | Disadvantages of privatisation |
|---|
| Profit motive and competition push the business to cut costs and improve efficiency | A state monopoly may simply become a private monopoly, exploiting consumers with higher prices |
| Access to private capital for investment, without relying on government budgets | Unprofitable but socially important services (rural routes, remote branches) may be cut |
| The government receives revenue from the sale and no longer funds losses | Strategic industries (defence, energy) may fall under foreign control |
| Decisions are made on commercial grounds, free from political interference | Job losses as new owners restructure; assets may be sold below their true value |
| Shareholders hold managers accountable for performance | Profit may be prioritised over safety, quality or the environment, requiring costly regulation |
Example Air India was privatised in 2022 when the government sold it back to the Tata group, ending years of state funding of losses. The UK privatised British Telecom, British Gas and the railways in the 1980s and 1990s; telecoms became far more competitive, while debate continues over whether rail privatisation improved services.
Nationalisation
Definition Nationalisation is the transfer of the ownership and control of a business or industry from the private sector to the public sector (the state).
| Advantages of nationalisation | Disadvantages of nationalisation |
|---|
| Can rescue a strategically important business from collapse, protecting jobs and supply | Weaker incentives to be efficient — losses can be covered by taxpayers |
| Services can be provided for social benefit, not just profit (e.g. affordable fares, universal coverage) | Political interference in pricing, hiring and investment decisions |
| Natural monopolies can be run in the public interest | Cost to the government of buying the business and funding future investment |
| Long-term investment is possible without pressure from short-term shareholders | May discourage private investment elsewhere if investors fear future nationalisation |
Example During the 2008 financial crisis, the UK government took control of banks such as Northern Rock and a majority stake in Royal Bank of Scotland to prevent their collapse. India nationalised its major commercial banks in 1969 and 1980 to direct credit towards agriculture and small businesses. In 2024 the UK passed a law to return passenger rail franchises to public ownership as their contracts expire.
How governments use the law to control business activity
| Area of law | What it controls | Examples |
|---|
| Employment practices | Recruitment, discrimination, contracts, dismissal, working hours, trade union rights | Equality laws; unfair dismissal rules; limits on weekly working hours |
| Conditions of work (incl. health and safety) | Safe workplaces, equipment, training, protective clothing, accident reporting | Factory safety inspections; fire regulations; India's Occupational Safety, Health and Working Conditions Code |
| Wage levels | Minimum pay rates, equal pay for equal work | National Minimum Wage (UK); state-level minimum wages in India |
| Marketing behaviour | Truthful advertising, product safety, labelling, unfair contract terms, consumer rights to refunds | Consumer protection laws; bans on misleading advertising; mandatory food labelling |
| Competition | Preventing monopoly abuse, price- fixing cartels and mergers that reduce competition | Competition Commission of India (CCI); UK Competition and Markets Authority (CMA); EU competition rules |
| Location decisions | Where businesses may build or operate; land use | Planning permission; zoning laws; special economic zones that encourage location |
| Particular goods and services | Licensing, taxing, restricting or banning products | Tobacco and alcohol advertising bans; licences for pharmacies; |
| Area of law | What it controls | Examples |
| | bans on single-use plastics |
Example The Competition Commission of India has fined large technology companies, including Google, for abusing dominant market positions. The EU imposed multi-billion-euro fines on Google for similar conduct in Europe. India banned many single-use plastic items in 2022, forcing food, retail and packaging businesses to redesign products.
The impact of changes in political and legal factors on business
| Change | Possible impact on business |
|---|
| Higher minimum wage | Higher labour costs, especially in labour-intensive businesses (retail, hospitality); may lead to higher prices, automation or fewer jobs — but also higher consumer spending and possibly motivation |
| Stricter health and safety law | Costs of new equipment, training and inspections; fewer accidents, lower absence and fewer legal claims |
| Tougher competition law | Limits on mergers and pricing strategies of large firms; opportunities for smaller rivals |
| Consumer protection rules | Costs of compliance and product changes; greater consumer trust in the market |
| Change of government / political instability | Uncertainty delays investment; new policies change taxes, regulation and spending priorities |
Analysis chain
Government raises the minimum wage by 10% → labour costs rise sharply for a supermarket chain → profit margins are squeezed → chain responds with self-service checkouts and fewer staff hours → productivity rises but some jobs are lost — the effect depends on how labour-intensive the business is
🔒 Also in the full notes
- 6.1.2 Economic
- 6.1.3 Social and demographic
- 6.1.4 Technological
- 6.1.5 Competitors and suppliers
- 6.1.6 International
- 6.1.7 Environmental
- Exam practice: 5 practice questions
- 2 exemplar answers with full model answers and mark breakdowns
- Where students commonly lose marks
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