How Politics Affects Business: 6 Concepts Every Business Leader Should Understand

1. What is geopolitical risk, and how does it affect business?

Geopolitical risk can affect business strategy and operations across a variety of sectors, including trade, technology, AI, energy, and more. Assessing it requires businesses to look beyond current events, focusing on systematically identifying and monitoring geopolitical developments, understanding country-level risks and considering how different scenarios could affect their organisation. Disruptors such as geopolitical conflict, tech innovation, systemic rivalry between countries and the breakdown of the established international rules-based order can all influence the environment in which business decisions are made.

A recent example is the weaponisation of the Strait of Hormuz and other choke points for global trade routes, in the wake of the Middle East war.

Simply put, when planning international business operations, organisations must shift their approach from monitoring geopolitics to proactively integrating it into strategy. Country-risk assessment and scenario-based geopolitical analysis can help decision-makers identify potential risks and most effective strategies, considering how different developments could affect a market, their planned investment or a specific project's feasibility.

2. How do geopolitics and trade policy affect international business?

International trade decisions are as much about identifying where goods and services can be produced efficiently as they are about understanding how geopolitical rivalry, strategic dependence on a particular country, technology or market, industrial policy and market regulation can influence where and how businesses trade and invest.

Foreign direct investment (FDI), for example, is not purely a financial decision. Cross-border ownership and control can also raise legal and political questions, particularly when an investment involves a strategically important sector. The evolving relationship between western economies and China, for example, including elements of strategic security risk as well as economic rivalry, has led to the review of major Chinese digital and physical infrastructure investments.

International treaties, domestic regulation, contracts, trade practices and other forms of international commercial law can also affect cross-border transactions, as businesses may need to navigate multilateral frameworks such as the WTO, regional economic integration and individual countries' regulatory priorities.

The question is therefore not just “Where is it most efficient for us to trade or invest?” but “What strategic dependencies are we creating? Which rules govern the transaction? How could government intervention change the equation? And how should we manage the resulting commercial risk?”

3. How do interest rates, inflation and fiscal policy affect businesses?

Interest rates, inflation, exchange rates and taxation feed directly into business decisions. A change in interest rates can make borrowing more expensive, affect demand and even completely change the case for an investment. Inflation can put pressure on costs and margins, while exchange-rate movements affect how the company earns revenue, buys inputs or holds debt in different currencies. Sovereign debt and currency crises can make these calculations even more difficult.

Looking only at the headline interest rate, however, gives an incomplete picture. Central banks use different conventional and unconventional instruments, and their decisions work their way through banks and financial markets before reaching businesses and the wider economy. They also face competing considerations: price stability, financial stability and, increasingly, sustainability.

For companies operating internationally, taxation adds a further consideration, as businesses may encounter tax treaties, different rules on where income should be taxed and the problem of the same income being taxed in more than one jurisdiction. More than 3,000 bilateral double-taxation agreements form part of the international framework designed to address these issues and provide greater legal certainty for cross-border activity.

4. How does AI regulation affect businesses?

With many businesses increasingly adopting AI technologies, business leaders must know which uses are permitted, what obligations apply and who is held accountable when AI contributes to a decision.

Regulatory approaches differ across the EU, UK, US, China and other markets. For companies operating internationally, these differences can create questions around jurisdictional reach and regulatory arbitrage, including whether an AI system can be deployed in the same way across different markets.

The risk-based approach of the EU AI Act is a useful example of why managers need to understand these details. The obligations attached to an AI system depend partly on how and where it is used: an application used in a sensitive decision-making context may face very different requirements from a lower-risk commercial use. Businesses also need to consider fairness, bias, discrimination, explainability and whether AI-supported decisions can be challenged.

At the same time, while AI can improve analysis, consistency and productivity, its use in decision-making can introduce risks such as automation bias, opacity, over-reliance and loss of accountability. Businesses, therefore, need to think about how much decision-making should be delegated to AI and whether it should be at all, clearly identifying where human judgement needs to remain and who takes responsibility for the decision's outcome.

5. What is competition policy and why does it matter to businesses?

Competition policy affects how companies can grow, acquire, partner, and compete in a market. It becomes particularly relevant when businesses consider mergers and acquisitions, relationships with competitors, market dominance and their position within a supply chain.

A merger, for example, may create efficiencies or synergies for the companies involved, but regulators will also consider its effect on competition. Could it reduce competitive pressure or strengthen a company's position in ways that disadvantage rivals?

One example is IAG (British Airways' parent) €1 billion bid for Spain's Air Europa in 2024. IAG was forced to abandon the deal after the European Commission blocked it on competition grounds. IAG wanted to strengthen its Madrid hub and dominate the lucrative Europe–Latin America travel corridor by combining Air Europa with its existing carrier, Iberia. The Commission, however, found the deal would remove competition between the two closest rivals on some routes to and from Spain, where consumers had few alternative carriers. The US Department of Justice publicly backed the EU's decision.

Similar questions arise around collusion, abuse of dominance, exclusion of rivals and relationships between businesses at different stages of a market. A commercially attractive strategy can carry competition and legal risks that need to be considered before any decisions are made.

6. How should businesses engage with policymakers?

Apart from being affected by public policy, businesses can directly contribute to how it develops. Effective engagement starts with understanding who makes the decision, how the process works and when businesses and other stakeholders have an opportunity to provide evidence or make their views heard.

This is particularly important in complex systems such as the European Union, where different policy areas can follow different decision-making processes. Competition, trade, foreign direct investment, environmental legislation and sector-specific regulation can involve different institutions and routes for engagement. Businesses, therefore, need to understand the process before deciding how or where to participate.

When responding to proposed regulation, companies should be able to explain their likely economic and commercial consequences with credible evidence, identify where their interests overlap with those of other stakeholders and understand where they conflict. Policy debates can even become a source of competitive positioning, as rival businesses may favour different regulatory outcomes.

A recent example in point is the EU's 2025–2026 "Omnibus I" legislative package, aimed at simplifying EU regulations. In effect, it scaled back corporate sustainability and ESG rules that had only recently been adopted. Stakeholders were - and still are - divided over the issue: businesses generally seek lower compliance costs and pushed for a narrower scope and delay of these rules, while a coalition of 211 investors managing €6.6 trillion, the ECB, and civil society groups fought to preserve robust standards, warning that weaker rules would lead to ‘greenwashing’.