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What Factors Determine the Business Climate?

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  • Written By: John Lister
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 June 2014
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The business climate is a measure of how various factors aid or harm the chances of business as a whole thriving in a particular region. It is based on systemic factors such as regulations and government policies, not on actual business performance or variable factors such as whether or not there is a recession happening. Assessments of the business climate are based solely on how good the situation is for businesses, regardless of how that affects society as a whole.

One of the factors which will usually be mentioned in any discussion of the business climate is taxation. It is generally believed that lower corporate taxes are more favorable to business overall. This is because it encourages people to start businesses, leaves more profits which can be reinvested in a business, and may attract businesses from overseas.

When comparing the business climate of countries around the world, the respective legal systems play a major role. Factors include how well-protected intellectual property rights such as patents are, the state of law and order, and whether or not there is significant political corruption. While a corrupt system will be a great benefit to some individual businesses, it’s seen as a bad thing for business overall as it lessens the advantages available to businesses which compete legally, for example those which produce the best products, have the best marketing and set the most effective prices.

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The business climate is also affected by the availability of resources. This includes how many people of working age are available, how well-trained and well-educated the population is, and whether legal practices make it easier or more difficult to recruit staff. There are also effects to do with machinery and other capital such as how easy it is to get credit in the country to buy equipment. In manufacturing in particular, there is an effect from the cost of electricity, water and gas, which can depend on how much competition there is in the utility markets.

Regulation can play a big role on the business climate. As a general rule, the less regulation, the better a country is thought to be for business. These regulations can include health and safety, environmental rules, licensing of particular industries and employment issues.

Unlike many economic factors, there is no single objective measure for business climates. This is because there is some subjectivity about how important different factors are. There are several rival annual surveys which aim to rank regions or countries for their business climates. As a very general statement, the top rated nations usually include the United States, Japan, European countries and the larger members of the Commonwealth.

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