Question

Regulators may impose political costs on firms. However , there are ways that some firms practice to minimise such costs. Discuss with examples.

Answer 1

Political Cost: Understanding of the environment in which the organisation is operaing is biggest challenge. for Example A company operating in SEZ it means govrnment regulations, its tax regulations, exemptions, others. Second in B company operates in Other than SEZ zones they have to bear the tax regulations, price regulations as imposed by the ruling state in the land.

Government imposes cost on particular products by raising taxes , putting extra statutory governance documentations, which somewhere increase the cost of the comapny. The clear objective behind increasing the same is as government is not able to meet the demands of the customer as alone and hence passes on the burden to the players in the market to contribute in the burden.

Same can be shared by investing in corporate social responsibiity, passing in the tax examptions to the customers as stated in the regulations etc.

Suppose A company selling goods at 230 with taxation @ 18%

Hence Total Cost = 230 +41.4 = 271.4

Secondly in a meanwhile govt reduces the taxation level to 10 %

So, But Comapny Did: 271.4 X 100 / 110 = 246.72

Hence Price is raised to 246.72 +24.67 = 271.4

Here the burden of the tax benefit is not passed on the customers, so it is against the government regulations. Due to this explanatory press release will be issued and penalty cost will be imposed by the government.

In order to maintain the the economy political cost shall be imposed to recover the cost unethically or where the economy is not in condition to support as per the global demands.

Above political risk can be tackled by changing the policy within the organisation, changing the investment to be made in the near future by the organisation.