(A). Strategic planning and decision-making by companies will take into consideration the fiscal and monetary policies of the government (or of several governments, in the case of multinational companies). Companies usually want economic stability because uncertainty creates additional risks. For example, stable interest rates and foreign exchange rates would reduce or eliminate foreign exchange risk and interest rate risk, thus making financial planning much easier.

If companies do not have trust in the government’s ability to achieve its macroeconomic policy targets, the economic uncertainty might persuade corporate decision-makers to defer new capital investments, or to provide for additional inflation in cash flow estimates for the purpose of capital investment appraisal. If companies believe that a government will be fairly successful in achieving its economic policy targets, forecasts of growth in GNP might be used in strategic planning to forecast the growth in customer demand.

A government might try to influence investment decisions by companies. Investment decisions are affected by the cost of borrowing, where companies used borrowed funds as their source of investment finance. Higher interest rates are likely to discourage some investments by companies and lower interest rates are likely to result in some increase in capital investment.

Incentives might also be provided for investment through the tax system. One commonly-used policy is the provision of accelerated capital allowances on certain types of spending, such as capital spending on research and development projects.

In some geographical areas, a government might also offer cash grants to companies that invest and provide jobs in that area. Companies might be attracted to an under-developed region by the prospect of cash grants that will lower their net cost of investment.

More generally, a government might try to support businesses through the provision of business and economic statistics and other information. For example, many companies make use of information on inflation produced by governments’ statistical offices. In some countries, there have also been initiatives to provide information and advisory support to small businesses, since a large proportion of business activity is conducted by small and medium-sized enterprises (and much business innovation begins in small companies).

(B). Investment decisions by companies should consider the likely benefits and costs over the entire economic life of a project. With increasingly tough regulations against waste and pollution, it seems possible that the ‘cleanup’ costs at the end of a project might become a significant cost factor in the investment analysis. Costs of meeting regulatory requirements on pollution or waste might also need to be included in estimates of annual operational costs throughout the life of a project.

Some investment decisions might be affected by government incentives for environmentally-friendly investment such as tax incentives for using energy-saving equipment. For example, under the carbon credits trading scheme, a company investing in a ‘green’ project might receive carbon credits from the government, which can then be sold on to another company wishing to buy them. The effect of carbon credits would be to reduce the cost of the investment in the ‘green’ project, making it more viable financially.

(C). Large businesses, if they operate efficiently, might be able to achieve economies of scale that are not achievable by smaller companies in the same industry. If some of the benefits of economies of scale are passed on to customers, selling prices will be lower. In such circumstances, both companies and their customers can benefit from economies of scale. To some extent it is therefore desirable to have large companies operating in industries where significant economies of scale are achievable.

Unfortunately, a large company might obtain a dominant position in its markets and they might act against the public interest by using their monopoly position to charge higher prices or deliver a poor quality of product or service. It is therefore usual for a government to have for the regulation of monopolies and competition.

In many countries there is a regulatory authority which might conduct investigations into selected industries, to identify anti-competitive behaviours and activities that are against the public interest. Proposals for large takeovers or mergers might also be referred to the authorities for regulatory approval.

Competition policy has clear implications for financial management, financial management strategy is based on growth, particularly growth through acquisitions.