What is the Political Environment? (AQA A Level Business): Revision Note

Introduction to the political environment

• The political environment refers to the actions, policies and decisions of governments and political institutions, both in the UK and internationally, that can affect how a business operates

  • This includes changes in government, new laws, taxation policy, trade agreements and international relations

• Political change can be sudden, such as a new law coming into force, or gradual, such as a shift in government priorities over several years

• Businesses can not control the political environment, but need to monitor and respond to it, since political decisions can create both opportunities and threats

Opportunities created by changes in the political environment

New trade agreements

• Can open up access to new markets, allowing a business to sell to more customers or source materials more cheaply

Example

In 2024, the UK officially joined the CPTPP trade bloc, giving over 99% of UK goods exported to member countries like Japan, Australia and Vietnam access to zero tariffs, opening up new markets across the Asia-Pacific region worth £12 trillion

Government grants, subsidies or tax incentives

• Can reduce costs or support investment in areas the government wants to encourage, such as renewable energy

Example

A renewable energy company may benefit from government subsidies designed to encourage investment in clean energy, reducing its costs and improving profitability

Deregulation

• Fewer rules can make it easier and cheaper for a business to operate or enter a market

Example

In 2020, the UK government relaxed the law to allow rental e-scooter trials in towns and cities after years of e-scooters being illegal to ride on public roads. This allowed private companies such as Lime and Voi legally launch rental scooter schemes across many UK cities, creating a brand-new market that did not really exist before the rules changed

Political stability

• Can increase investor confidence, making it easier for a business to raise finance or plan for the long term

Example

Ireland's stable political environment, combined with its low 12.5% corporation tax rate, has made it the top choice in Europe for US technology companies.

Apple, Google, Meta and Microsoft have all chosen to base their European headquarters there

Government spending on infrastructure or public services

• Can create new demand for a business's products or services

Example

The UK's HS2 rail project has generated over £15 billion of contracts across more than 35 deals, creating significant work for construction and engineering firms

Threats created by changes in the political environment

New laws or regulations

• These can increase costs

  • For example through higher minimum wages, new safety standards or environmental rules

Example

Since October 2023, England has banned single-use plastic plates, cutlery and trays.

Cafes and takeaways have had to switch to more expensive alternatives like wooden or bamboo cutlery, adding to their costs

Changes in taxation

• Such as higher corporation tax or increased National Insurance

• Can reduce a business's profit

Example

In 2025, UK employers' National Insurance rate rose from 13.8% to 15%. This meant that employing someone on a £30,000 salary cost businesses around £866 more a year

Firms were expected to absorb about 40% of that extra cost themselves as lower profit, rather than passing it all on through higher prices

Trade barriers

• Such as tariffs or new border checks

• Can increase costs or reduce access to international markets

Example

In 2025, the US doubled its tariffs on imported steel and aluminium to 50%, making everyday products like cars, cans and building materials more expensive for American businesses that rely on these imported metals

Political instability

• Such as a change in government or ongoing uncertainty

• Can make businesses cautious about investing

Example

In September 2022, the UK government's "mini-budget" caused the pound to fall sharply and government borrowing costs to spike, forcing the Bank of England to step in to prevent pension funds collapsing. This created exactly the kind of uncertainty that makes businesses cautious about investing

Changes in international relations

• Such as sanctions or conflict

• Can disrupt supply chains or close off markets entirely

Example

Following Russia's invasion of Ukraine in 2022, international sanctions and pressure over the war led McDonald's to exit the Russian market entirely after more than 30 years, selling all 847 of its restaurants there.

Impact on functional areas