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How Does Politics Affect Entrepreneurship?

written by: Ginny Edwards•edited by: Michele McDonough•updated: 9/13/2010

Although entrepreneurs consider themselves fiercely independent, the reality is that entrepreneurs have to pay certain homage to the political climate in which they operate. Read more to find out how politics affects the decisions of aspiring entrepreneurs.

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    Understanding the Impact of Politics on Entrepreneurship

    Congratulations, you have figured out that you have what it takes to become an entrepreneur and you have done your homework and prepared a well-developed business plan. Leading economists are praising you as the "the backbone of the economy" who will lead the jobs recovery with a wave of new hirings. So what else do you need to consider in pursuit of your entrepreneurial dream? Taking into account the current political climate is a good place to start to determine whether governmental policies coming through the pipeline will be supportive or end up breaking the newly-hailed backbone of the entrepreneur.

    Because many entrepreneurs run small businesses, political decisions usually have a greater percentage impact on the company's bottom line. For example, the Presidential Council of Economic Advisors reported in 2009 that small businesses pay up to 18 percent more per worker than larger firms for the same insurance policy. Without policies directed to correct this disparity, any increase in health care costs will most likely be felt disportionately by small businesses. For startup companies, the effect of cost drivers and regulatory requirements can be overwhelming as entrepreneurs try to also balance time demands of branding and building a customer base with complying with financial and regulatory requirements.

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    How Politics Touches the Concerns of the Entrepreneur

    Every entrepreneur faces challenges that can affect their future success in growing their business. The National Federation of Independent Businesses has identified the most common concerns as reported on its monthly survey of the economic trends for small businesses. Many of these concerns have a political component that entrepreneurs need to be aware of:

    • Inflation - primarily controlled by the interest rate policies set by the Federal Reserve.
    • Poor sales - generally attributable to economic conditions which can be the focus of governmental stimulus.
    • Interest rates - a product of the monetary policies of the Federal Reserve.
    • Cost of labor - increased through mandates and legal requirements for employee benefits.
    • Government regulation and red tape - touches many areas of operating a small business, including licensure, certification, and permitting processes.
    • Competition from large businesses - alleviated in part by government programs directed to help small businesses gain traction and compete more effectively, including rewarding a certain percentage of government contracts to companies that qualify as small businesses.
    • Quality of labor - partly attributable to politics directed to funding and supporting educational and training initiatives.
    • Cost and availability of insurance - directly related to the integral role politics plays in determining insurance coverage, benefits, and limits in such areas as health care, workers compensation, unemployment insurance, and in a few states, disability insurance.
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    How Politics Can Send Sunshine or a Cloud over Entrepreneurship

    The effects of politics on entrepreneurship can be either a ray of sunshine or a dark cloud hanging over the prospects of the ultimate success of the entrepreneur's venture. Political stances on taxes, regulatory reform, immigration, intellectual property rights, and funding for social and educational programs weigh heavily on the decisions of entrepreneurs to hire employees, expand capital spending, increase inventories, and apply for credit.

    Entrepreneurs need to stay on top of the political agendas aimed to boost entrepreneurship through investment tax credits, capital expenditure deductions, and incentives to promote lending to small businesses. For example, the recent 2010 proposal to give businesses a short-term one year 100 percent capital expense deduction is great for small businesses ready to reinvest in their business. The hope is that business reinvestment will stimulate the economy, reduce cyclical unemployment, and eventually bring back strong consumer demand.

    Dark Affects of Politics on Entrepreneurship Dark clouds from politics can sweep in at any time and have bad or unintended consequences. Sometimes even good intended policies fall short of their objectives. For example, government policies to stimulate lending to small businesses can be ineffective because the government fails to recognize that loan demand is down not because of the lack of credit but because small businesses are not applying for loans for the want of customers. Other potential dark clouds that entrepreneurs need to keep a lookout for on the horizon are political decisions regarding the Bush tax cuts, cap and trade, and value added taxes (VAT) to reduce the rising budget deficit. However, for the entrepreneur, the biggest challenge in laying out their business plan is managing the uncertainty and cloudy conditions that politics can generate.

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    Resources

    Dunkelberg, William C., and Holly Wade. "Small Business Economic Trends - July 2010." NFIB. www.nfib.com/Portals/0/PDF/sbet/sbet201007.pdf (accessed September 12, 2010).

    Image Credit: fandango/morgueFile.com