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What are the most important forces in the macroenvironment facing companies today?

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sea0tter | eNotes Newbie

Posted May 27, 2013 at 10:31 AM via web

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  • What are the most important forces in the macroenvironment facing companies today?

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chaseguinn | (Level 1) Adjunct Educator

Posted June 12, 2013 at 8:40 PM (Answer #1)

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Two macro-factors stand out as the most important concerns for business today.

The first is interest rates.Whether in the US or abroad, the rate at which a business can borrow directly affects its ability to invest in itself and, if there is a high interest rate, it keeps balance sheets low by discouraging borrowing.

Basically, in the reverse, a low interest rate implies a low cost of capital. Say you can get $100,000 for 5%. Whatever opportunity you're going to pursue with that $100,000 only has to beat the 5% interest rate to be profitable.

If 5% interest rises to 10%, or even 7%, that cost becomes harder to reach. Interest rates offered by banks are directly related to the federal funds rate (US Treasuries). Historically low ~0.5% US rates have led to concomittantly low interest rates for borrowing by business, and consequently more projects are considered profitable. If this low interest rate changes, as it is likely to do, businesses will have a harder time profiting on their projects due to the higher cost of capital borrowed for the project.

A second key macro-factor is political uncertainty. Businesses typically make investment decisions on 5-10 year time horizons, betting that the conditions for their business will be relatively similar over the course of that investment. Political instability makes this calculation much more difficult in actual application. In some countries, political instability might be a violent coup. In others, that could mean a change in tariffs on imports of a key manufacturing component. This political instability factor has been increasingly true in the United States. Businesses are unsure of how taxes will be levied or what environmental restrictions will be put in place, causing them to be reticent about making investments. This uncertainty is a driving force in business decisions today.

These are only two of many macro-factors to consider. Hopefully this will get you started on a more robust list.

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