Key Factors Influencing International Business

Analyzing similarities and dissimilarities prevalent in countries given wisdom; selecting a country for business enkindles spirit and minimizing risks knocks the door of success.

Learning value:
This chapter highlights the major factors influencing the direction of international business; 1. 2. 3. 4. 5. 6. 7. 8. Importance of environmental factors Economic environment Social environment Political environment Cultural environment Technological environment Legal environment Competitive environment

A pilot has to check the atmosphere prior to take-off and landing his aircraft. A sailor has to understand the depth of waters before sailing peacefully. A farmer has to plant seeds depending on the nature of the soil and monsoon. On the same line, an international business entry or operation depends upon multiple environmental factors. They may change the direction, strategy and every moment of international business operations. Prior to going deep in to the topic, we can ask ourselves few questions and seek answers.

a. Why ENRON could not succeed in India and also in whole

world? b. What is the major hindrance of success of Kellogg in India? c. Why KFC has not made any break through in India as it did in other countries? d. What made Whirlpool & Caterpillar stop business in India?
An international marketer is required to understand, evaluate and work out various parameters before venturing into any country. These Parameters are called environmental factors and they determine the direction and purpose of the international business operation. Many decisions depend upon environmental factors right from selection of the country, location of the plant, liaison with the government, and entry of investment from local bodies, product launch, channel management, promotion and opening of outlets. The first challenge for an organization is to navigate from its home country to the host country. Thereafter it has to develop a proper system so that the venture is successful in the host country; learn all about the regulatory bodies both in the host country and home country; understand the customers changing tastes and attitude towards foreign goods and finally obtain revenue and make the business effective with right people. A majority of the multinational corporations and large business houses appoint a team of experts who are specialists in economies, political science, sociology, industrial psychology and policy matters, to advice the management on its strategic decisions. These experts are called risk analysts. Prior to entry or investing millions of dollars, the experts gather all the relevant information about the country and interpret those facts to facilitate the company. By such risk analysis, companies can safeguard themselves from future dangers. The major risks are: 1. Political 2. Economic 3. Exchange 4. Socio culture 5. Financial 6. Legal 7. Technological

8. Competitive 9. Infrastructural and 10. Labour. An organization can overcome the effects of all the risks by taking into account the different environmental factors. Since the home environment is known, one can understand and overcome the pitfalls in the event that any action goes wrong. The international business related environments vary from continent, country to country and even from region to region. A detailed and comprehensive analysis of such fast changing environment is essential for formulating business strategies. Even well known companies with financial power, advance technology and an efficient management team have failed in other countries. Examples are the Enron project which did not take off in India; American style of managing a sales force which never worked for Procter and Gamble in Japan; the multilayer marketing technique of Amway, which did not work in South Korea and Kentucky Fried Chicken (KFC) and McDonalds hamburgers, which failed in Brazil and Tashkent respectively. Thus, it is important for a company to have an international team to design strategies to suit varying environments of different countries. In this chapter we discuss the environmental factors relevant to international business. The economic environment, political environment, cultural environment, technological environment, legal environment and competitive environment play a vital role in determining an international business operation. Certain environments are quite conducive to a company at the time of entry and later on they may pose major challenges. Argentina attracted huge investments before 2000. After 2002, they became detrimental to innumerable organizations. Hence environmental factors could be stimulant or detrimental. If it is stimulant, the business will flourish. But if it is detrimental, then the company has to be cautious.

ECONOMIC ENVIRONMENT:
The economic environment can be classified into three categories: a) Economy in the home country b) Economy in the host country c) Economy at a global level.

a) Home country Economy Since 1940, hundreds of MNCs from the USA have ventured abroad, with the support of their home country. After 1990, many Indian companies started venturing into sub-Saharan Africa, South East Asia and Latin America due to the liberal policies adopted in India. In order to encourage the business community to venture overseas, it is necessary for a country to have liberal economic and trade policies. 1. Economic policies The countrys economic policies are formulated and the targets are fixed looking at business opportunities in other countries. It is made simpler for businessmen to invest or set up units abroad.
2. Trade and commercial policies:

The trade policy is announced by the ministry of commerce and industry and the target for rational foreign trade is fixed. All the promotional bodies are geared to achieve the target. Many incentives are held out to overseas companies, so that they set up operations in the home country through local partners, Indonesia, Thailand and Brazil extend all facilities in their home country to promote their nationals.
3. Promotion and regulatory measures:

The home country should take the opportunity to do business abroad. It can do this by being proactive, encouraging persons to take risks and extending fiscal and promotional support. If restrictions are imposed and bureaucratic hurdles are encountered at all stages the business community will not think of taking any risks. By removing exchange control restrictions and draconian codes of business and providing an environment conductive to foreign trade, small countries like Malta, Cyprus and Mauritius have today transformed themselves into foreign trade economies.

b) Host Country Economy. When a firm from one country enters any other country, the following major criteria are taken into account: 1. Size of the market Many multinational firms are thinking of entering India, China, Brazil and Indonesia, because of their large potential markets. Coca cola, Pepsi, Hewlett Packard and Samsung are looking to India as a future destination keeping in mind the size of population which represents the size of the market. 2. Gross Domestic Product (GDP) GDP is an indicator o the health of the economy; it also determines pr capita income. A country with a high GDP is an attractive destination for any international businessman. If a constant growth rate is maintained, such a country would always be a magnet for investors. Thailand, Malaysia and Indonesia were attractive during the 1990s due to a very high growth rate in GDP, until the currency crisis affected their economies. 3. Industrialization Many firms in the developing world were interested in entering into Europe or the USA. The recent trend amongst companies in India is towards Latin America specially, Brazil, Argentina, Chile. This is due to the industrialization program, which is taking place in these countries. It is obvious that industrialization brings about prosperity and affluence. 4. Banking Banking is the only channel through which remittances take place, and hence is a major infrastructure for international business. European, American and far East economies have highly effective banking systems. Sub Saharan Africa and commonwealth Independent states (CIS) are not able to provide good banking services to the international business community. Thus, a firm which enters Africa or the CIS countries has to necessarily depend on other countries for banking services. 5. Purchasing Power

Another major determining factor for any international business unit is whether the people can afford to buy for a product is low. In other countries like Saudi Arabia, both the income and willingness to pay for the product are high. In the Scandinavian countries the per capita income is very high and they are ready to pay a premium price for highly sophisticated items. However, the low population is a limiting factor. 6. Foreign Exchange Another determining factor in international business is whether foreign exchange facilities are available transactions. Although more than 70% of the countries in the world do not have foreign exchange reserves, the majority of them are becoming liberal in transacting foreign exchange as a long term strategy for their future economic development. Against this, some countries with surplus foreign exchange reserves do not permit free movement of the currencies. Such countries that have restrictions in repatriation of foreign exchange will not be attractive to international business firms. Therefore, countries with sufficient foreign exchange reserves, a liberal policy on repatriation and which have a demand for the products and services are an ideal destination for any company to do international business. 7. Income Levels Economies are classified into low income and high income economies. Industrialized nations are high income economies and enjoy a high per capita income. Companies manufacturing or marketing premium quality or high technology products have an easy entry into such advanced countries with the proper strategies. Developing countries, which are the low income economies, are price sensitive. Many of them are under pressure from high population, unemployment and lack the vision to industrialize fast. Still they need only primary goods and rated one amongst less developed countries. Differences in the income levels may limit the involvement and investments. Sometimes, in a densely populated country, a small percentage of the population can afford to buy premium products. Since this does not represent the purchasing power of the whole country, the revenue is minimum. 8. Economic diversity

In the same country, a few urban centers may offer outstanding business opportunities, while in remaining areas there is no demand at all. Nairobi I Kenya, Lusaka in Zambia, Johannesburg in South Africa, Sao Paulo in Brazil and Casablanca in Morocco are cities with the highest purchasing power and demand for refrigerators, air conditioners, TV sets etc. However in other parts of the country, there is hardly any opportunity to do business. In Madagascar, despite the fact that it is a highly resourceful country, one can not get even the basic item for survival, except in two cities, Tamatave and Antamarino.

c) ECONOMY AT A GOBAL LEVEL Besides the home country and the Host country, there are certain other factors, which can influence the pattern of international business. Organizations such as the World Trade Organization, World Bank, International Monetary Fund, Asian development bank and the organization of petroleum Exporting countries (OPEC) can affect international business. The preferential treatment given to the members of NAFTA, ASEAN, the European Union and COMESA can have a negative impact on the trade between outside cartels and non-members. When shipments move from one destination to another, there are transit ports which charge huge sums as surcharge or transit charges.

SOCIAL ENVIRONMENT The social environment encompassing religious aspects, language, customs, traditions and beliefs, influences buying consumption habits. Many companies face failure in foreign countries, due to their inability to understand the socio cultural environment. For example whenever any company establishes business in some African countries, the local population expects that many jobs will open up for them. Very few countries perceive tat they may be exploited.

Due to the entry of foreign firms the economic and hence the social environment of an area can completely change. An example is southern China, which has completely changed to an affluent society due to the fact that almost 2000 companies get their products manufactured in coastal south China. 1. National Taste In Thailand, People prefer black shampoo; Nestle brews different varieties of instant coffee because people in those countries have different tastes, uncommon in other countries. Green is the favorite color of all the Arab countries; Red is still widely used in Russia, in banners, posters, and hoardings although communism is in no way relevant to modern Russia. 2. Language Cross culture and cross border operations call for necessary language skills, e.g. South Koreans have learnt Indian languages to operate in India. One can see this in Hyundai or LG factories in India. Companies also have to change their brand names and slogans in different countries. In Japan, General Motors slogan body by fisher means corpse by fisher, and Pepsi Cola slogan come alive means come out of the grave. Prior to promoting the brand, one has to take into account the sociocultural background of a specific nation and different interpretations of a name in the local language. 3. Values and beliefs It is also important for companies to understand the significance of different designs and colors in different countries. For example, blue is perceived as feminine in Holland and masculine in widen. Green is favorite color in the Muslim world, but is associated with illness in Malaysia although it is a Muslim country. White indicated death in china and Korea but it is the color of bridal dresses in Europe. Red is associated with danger in many countries but it is a favorite in Russia. Another example is swastika, which is considered sacred in India, but has completely different connotations in the west.

4. Demography A number of demographic factors such as age, sex ratio, family size and occupation influence the business of many companies. Different companies concentrate on different segments. For example, Barbie generates huge revenues through the childrens segment of affluent countries. 5. Literacy rate Countries with a high literacy rate experience a better standard of living. Here the need is for standardizes goods, supported by technical services. For a country with an educated population, the amount of training required for the staff will be far less than in the case of the country which has a low literacy rate. This is an important factor, as it influences the cost incurred. An argument holds in the case of educating the consumer about the products manufactured. 6. Female Workforce The most spectacular change that has taken place in the current era is the empowerment of women throughout the world. In China, Indonesia, Russia and Thailand, women are major contributors to the GDP. With economic independency, women no longer have to depend on men to make decisions about what to buy; they can make their own decisions about whether to purchase any consumer product or durable. Dulex, a well known brand of paint in Europe was promoted through campaigns directed at women, because it was felt that women have an aesthetic taste for colors in the household paint segment. The performance of the i-pod of Apple hit the roof in terms of revenue generation due to female customers. The female work force is very strong in various sectors in many countries. Examples are: Indian women in IT enabled services and handicrafts, Chinese women in the soft toys and ceramics and Indonesian women in garments and paper work, who have brought great success to their countries. 7. Double Income Families As the household income increases, the demand for the number of products increases proportionately. This is specially true for

packaged food items, electronic gadgets, household appliances, health equipment, Japanese entertainment electronics and French perfumes dominate in the whole of Europe and North America. Pizza Express, McDonald and Kentucky Fried Chicken invariably rule the households of double income families throughout the world. 8. Impulse buying Benefit oriented buying is taking place everywhere. Preplanned shopping and scheduled purchases are gradually going away. Throughout the world, people need instant items. They see, ask and buy. It is a major challenge to international businessmen to provide benefits to lure impulse buying. POLITICAL ENVIRONMENT. The political environment in international business operates in different dimensions: 1. The home country political environment; 2. The host country political environment, and 3. The global political environment. 1. Home Country Political Environment In an ideal world, one would not normally expect domestic policies to affect the firms international activities. Some countries like the USA encourage their organization to establish activities abroad, especially in their core competency fields. Japan encouraged their electronics and auto companies to spread their activities outside Japan. Domestic firms that continue to invest and manufacture abroad while ignoring their home country are often accused of creating domestic unemployment problems and may be subject to political pressure, from the government. Indian government encourages business houses to go and perform outside in steel, healthcare, mining, textile and automobile. 2. Host Country Political Environment If the actual benefits of foreign firms are shared in terms of employment, taxes and social security with the locals, political

atmosphere tends to be hospitable. If it is felt that the foreign firms contribute nothing to the well being of the nation, it may produce a hostile reaction from the business community and labor organization, which in turn puts pressure on the government. In extreme cases, this may lead to either political turmoil or the appropriation of the assets of the foreign firm. Mc Donald had to face a change in the ruling party, in Israel. When the National Religious Party (NRP) came into the power it demanded that McDonald should change its practices or be shut down. 3. Global Political Environment This may be describes as the combined politics of the home country, the host country and the other countries in the world. Multilateral agreements between international organizations, such as GAAT, the UNO and the Commonwealth, may constitute an impediment to free trade as well as to the nature and scope of the operation of international firms. Embargos, Cartels, free trade pacts and customs unions allow a few nations to enjoy competitive advantages, whilst others lose their business prospects. However, there may also be advantages, e.g., the commonwealth generalizes Systems of Preferences (CWGSP) offers good opportunities to all commonwealth countries to supply and receive goods and services at concessional rates, which ultimately give them a competitive edge over non-commonwealth nations. Global politics can influence business in vastly varying ways. For example the economic embargo on Iraq by the Security Council of the United Nations in 1991 meant that conducting trade with that country was illegal for all international firma. Another example is China Ordering Microsoft to stop selling. Windows 95 as it contained politically offensive material including phrases like communist bandits. Microsoft agreed to change the material for reentry.

CULTURAL ENVIRONMENT

The cultural environment for international business refers to the set of factors which shape the material and psychological development of a nation and represents the primary influence on individual lifestyle, attitude, pre-deposition and behavior as consumers in the market. The most important task of international business is to identify relevant similarities and differences among countries, and means and methods to match the organizations culture with that of the country of its operation. For example, when Toshiba gained 100 percent ownership of Rank-Toshiba in the Plymouth all the managers in charge learnt the British Style of working. Working it is the operation of a business or dealing with customers one cannot overlook cultural elements. The performance of a company in the international arena partly depends on how well the strategic elements fit into the culture of the host country. Culture may be described as the totality of the complex and learned behavior of members of a given society. Elements of culture include beliefs, art, morale, code of conduct and customs. Culture has the following three characteristics: - It is learned: acquired by people over time through their membership in a group that transmits culture from generation to generation. - It is interrelated: i.e. one aspect of the culture is connected with another part, e.g. religion and marriage, or business and social status. - It is shared: i.e. tenets of a culture extend to other members of the group. Culture is perhaps one of the most important determinants of human behavior. Food habits, social class, the family system, community units and other cultural and sub-cultural elements influence the process of decision making in day to day dealings and the buying habits of customers. Thus, there is a need for cross-cultural understanding because of the significant differences in attitude, belief, motivation, perception and life styles between nations. For example, branded products will move fast in Europe and

America, but Africans perceive branded products as being very expensive. The Influence Of Culture On International Business 1. The Utility value of a product may differ considerably from country to country because of differences in beliefs, values and lifestyles. Fast foods, such as Kentucky Fried Chicken, McDonalds, hamburgers and pizzas are more popular in modern societies than in traditional societies. Similarly, branding and packaging are very susceptible to cultural bias. 2. Products are launched in markets on the basis of either perceived or real utility value. Products from certain parts of the world such as Western Europe, Japan and United states command premium prices in developing countries because it is felt that they are of better quality than locally manufactures products. They have a higher value. 3. Culture is perhaps the most powerful influence in determining the acceptability of advertising copy, design and other elements in various countries. Advertisements released in France may not be acceptable in the United Kingdom. Many advertisements acceptable to the other pats of the world will not be accepted in the Saudi Arabia. Liquor advertisements are prohibited in many countries. 4. Holidays in different countries vary on religious grounds. Friday is a holiday in the whole of gulf region. In China, the offices and factories are closed for a week for the New Year celebrations. For companies having firms in different countries, it is therefore impossible to impose the rule of common business practices everywhere, as productivity would be very low during festive days. Any strict implementation of company policy will have direct repercussions, which may even lead to closure of the business in different countries. 5. Local norms and practices may affect certain distribution strategies. Eating in public places during Ramadan days is prohibited in Muslim countries. Therefore, eateries are not opened during the day at this time. In Spain, mail order shopping is very popular, whereas in the US and Europe chain stores are preferred, and door-to-door delivery is common in many Scandinavian countries. Shopping malls are coming up in

urban India faster than in any other country in the world. Still small traditional shops near hometown are perceived as trustworthy suppliers when the customers need groceries. TECHNOLOGY ENVIRONMENT Technology and its applications are key factors in determining the international competitiveness of a firm in conducting international business. Multimedia using Pentium 4 is common in advanced countries whereas it will take at least another five years to introduce such products in Africa. Leadership in technology is achieved and maintained through a consistent program of intensive research and development, which can be very expensive. Only those companies that are able to maintain their technological activities will remain competitive. A Company may invest millions of dollars in R&D, despite the fact that the projected revenue in the home country would be very low. However other countries will generate huge revenues over a period of time. The Hoffkins, Bio Rad, Genen technology and Pfizer are examples of institutions and firms, who are investing huge sums of money in R&D, because they are sure of their returns on their investments over a period of time. In the late 20th century, Asian tigers, Japan, South Korea, Hong Kong, Singapore and Taiwan achieved a miraculous success due to their investment and implementation of the technology policies in specific sectors. Few countries, such as Japan for electronic equipment, Germany for medical equipment, and the USA for pharmaceuticals have remained leaders in their fields for decades. Other countries have remained behind them. The time between the innovation and its adoption and its adoption may vary from country to country. Innovating countries are few. Following countries are many. Technology leaders encash on skimming pricing strategies, wherein the margins are huge. Eriksson, Nokia, Motorola and LG have been successful since they manufactured cell phones. Currently, the business opportunities exist in every country in the world. The people around the world are adaptable to the technology too. While technology innovation is adaptable to the masses, the companies involved in such business prosper. Today Hewlett Packard, Fujitsn, Apple, Samsung and Lenova compete against each other by educating the workers on using their laptops and launch their new versions everywhere.

LEGAL ENVIRONMENT : This relates to the laws and regulations governing the conduct of business activities in the country. Before entering any country, firms avail of the services of local legal firms to understand business interpretations pertaining to labor legislations, taxes, environment, pollution, investment, distribution, contracts, logistics etc. The international legal environment has three aspects: a) Home country laws b) Host country laws c) International laws. a) Home Country Laws These deal with two important issues: i) Conduct of the firm in the domestic territory. ii) Trade with the other countries For international operators, the home country laws are not stringent. They are more of facilitating or regulating in nature, but not controlling in normal practice. b) Host country laws These include investment regulations, tariffs and duties, anti-dumping regulations and protection of local industries from unfair competition from industrialized countries. Tariffs and duties are used to discourage imports of non-essential products in order to conserve foreign exchange and maintain a favorable balance of trade and to generate revenue. Seven advanced countries impose laws against developing countries. Super 301 against Indian nylon skirts imposed by USA as inflammable fabric and ban on Indian sea food by Europe are the examples. c) International Laws These comprise treaties, conventions and agreement between nations, and have basically the same standing as laws. They are particularly in areas relating to patents and trademark protection and privacy laws. One has to understand the broad provisions of UN resolutions, and multilateral trade agreements such as the WTO. Disputes are solved by different means. Food and drug administration, health regulation, registration formalities are judiciously implemented in international

business operations. Investment restrictions in some sector, promotion in others and the role of regulatory authorities are part of legal environment. For example, Nigerian government nationalized the assets of British petroleum, when it was revealed that the company as selling Nigerian crude oil to South Africa, despite an embargo. COMPETITIVE ENVIRONMENT: Competition is a threat imposed by an environment, which may effect or hamper or challenge the operation of an international business firm. Competition either could be from the firms home country or host country or third country. Some times product related competition may crop up through substitutes or low cost production process or technology or cost reduction through economies of scale. The current international business operation has to encounter competition as various levels such as entry, operation, production, administration, human resource, technical resource, and financial resource. Distribution and logistics. Motorola had to face the face the competition from Nokia, soon Nokia concentrated in fast growing markets of India and China resulting the follower became leader in the world. Cuba based White Spirit Company; Havana club entered very late in the field and surpassed the erstwhile leader like Smirnoff. Tusker and Phoenix the major beer brands in COMESA countries (Common Market for East and South Africa) have been overtaken by King Fisher after UB group took over National Breweries of South Africa. For international companies, facing competition is a way of life. According to them, competition keeps their mind alert, quality war is inevitable. Beyond theoretical models, they believe in learning competitiveness in streets, countries and production centers. They consolidate competitive advantages and succeed. Hyundai motors in India, Honda motors in Europe and Tata Motors in Africa withstood all the competitive forces and succeeded.

FACTORS INFLUENCING INTERNATIONAL BUSINESS

ENTITY

ENVIRONMENT

ACTIVITIES

END RESULT

Economic

Manufacturing
Political INTERNATIONAL FIRM

Social

Investment International Destinations Trading

Cultural

Legal

Technology

Competitive

Marketing