Business fears sudden changes in government policies because firms need to plan.  Firms need to have assumptions on which they can base their planning instead of simply not knowing what will happen.

For example, imagine that you owned an oil company that wanted to invest in Venezuela.  When you consider doing this, you would have to understand that you would be putting a lot of money into your investment.  Now consider the government of that country.  At any moment, Hugo Chavez might change the laws and either take your equipment or reduce the amount of profit you are allowed to make.  You would fear this because your ability to do business might be radically altered without any warning.

This is an extreme case, of course.  But the same thing can happen on a much smaller scale even in countries that are more stable.  Imagine if you were investing in wind power in the US.  You would fear what might happen if Republicans come to power and suddenly cut subsidies to wind power.

Government decisions can have a huge impact on the business environment.  Firms need to know that their environment will remain stable so they can plan.  Therefore, they fear sudden changes in policy that will upset their plans and can cause them to lose money.

Why does business fear sudden changes in government policies?

Governmental policies often shape the way in which businesses obtain resources, manufacture goods, and sell products or services to consumers. Because of this, changes in governmental policies can have far-reaching impacts upon the activities and profits of business organizations.

Consider one example situation: The Occupational Safety and Health Administration (OSHA) sets guidelines that carry the force of law in establishing expectations that businesses must meet to protect their employees while at work. One illustration of this is regulation 1926.100 for head protection, which reads:

1926.100(a)

Employees working in areas where there is a possible danger of head injury from impact, or from falling or flying objects, or from electrical shock and burns, shall be protected by protective helmets.

 

1926.100(b)

Helmets for the protection of employees against impact and penetration of falling and flying objects shall meet the specifications contained in American National Standards Institute, Z89.1-1969, Safety Requirements for Industrial Head Protection.

 

1926.100(c)

Helmets for the head protection of employees exposed to high voltage electrical shock and burns shall meet the specifications contained in American National Standards Institute, Z89.2-1971.

If research and tests were to show that a newly developed material or configuration of helmet was more effective in providing protection of workers at risk for head injuries, the regulations would be revised to reflect this improved standard. Businesses would then be required to spend time, effort, and money informing their employees of the new standard(s) and would need to purchase the improved protective equipment for their workers or reimburse workers who purchased the equipment personally. Businesses that did not meet the requirements of the new regulation after the published transition date could be fined or otherwise punished for not following the law set out by the regulation.

In the same way, changes in governmental policies can impact the methods used to obtain natural resources, can radically change the public's perception of the safety of products offered for sale by businesses, and can force businesses to alter or abandon practices that become economically prohibitive due to changed policies.