OLCBIBT01 – INTERNATIONAL BUSINESS AND TRADE

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CHAPTER 4 - INTERNATIONAL BUSINESS ENVIRONMENT

Objectives:
a.) Discuss the international socio-cultural framework;
b.) Evaluate the role of technological developments;
c.) Examine the relevant aspects of the international economic
environment; and
d.) Assess the importance of international political environment.

A. INTRODUCTION
- Environmental factors are external effects that cannot be managed. Because
environmental factors cannot be managed they must be anticipated and analyzed.
The ability to predict or “guess” the future state of the environment enables the
marketer to position the firm defensively against environmental threats or to seize
opportunities that are created by the environment.
- Before entering into international market, a company must analyse the international
marketing environment very carefully because the future of the company depends on
this analysis only. However, you must note that this analysis should not be done at
the beginning but throughout the life of the business as the international marketing
environment changes really fast. A company needs to analyse the political, legal and
regulatory, socio-cultural, economic, and technological environment in order to
understand the international marketing environment.

B. SOCIAL AND CULTURAL ENVIRONMENT

- Though society and culture do not appear to be a part of business situations, yet
they are actually key elements in showing how business activities will be
conducted, what goods will be produced, and through what means they will be sold
to establishing industrial and management patterns and determining the success or
failure of a local subsidiary or affiliate.

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- Let us learn various aspects of international socio-cultural environment, discussed
in the subsequent subsections.

• Elements of Culture
▪ There are too many human variables and different types of international
business functions for an exhaustive discussion about culture. The
main elements of culture are:
• Attitudes and Beliefs: The set of attitudes and beliefs of a
culture will influence nearly all aspects of human behaviour,
providing guidelines and organisation to a society and its
individuals.
• Attitudes towards Time: Everywhere in the world people use
time to communicate with each other. In international business,
attitudes towards time are displayed in behavior regarding
punctuality, responses to business communication, responses
to deadlines, and the amount of time that is spent waiting in an
outer office for an appointment.
• Attitude towards Work and Leisure: People’s attitudes
towards work and leisure are indicative of their views towards
wealth and material gains. These attitudes affect the types,
qualities and numbers of individuals who pursue entrepreneurial
and management careers as well.
• Attitude towards Achievement: In some cultures, particularly
those with high stratified and hierarchical societies, there is a
tendency to avoid personal responsibility and to work according
to precise instructions received from supervisors that are
followed by the latter. In many industrial societies, personal
responsibility and the ability to take risks for potential gain are
considered valuable instruments in achieving higher goals.
• Attitudes towards Change: The international manager must
understand what aspects of a culture will resist change and how

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the areas of resistance differ among cultures, how the process
of change takes place in different cultures and how long it will
take to implement change.
• Attitude towards Job: The type of job that is considered most
desirable or prestigious varies greatly according to different
cultures. Thus, while medical and legal professions are
considered extremely prestigious in the United States, civil
service is considered the most prestigious occupation in several
developing countries including India.

• Cultural Dimension
▪ The influences of the religious, family, educational and social systems
of a society on the business system comprise the cultural dimension of
our picture. Because cultural attitudes vary so much among countries,
it is harder to find general patterns here than for the economic
dimension.
▪ Thus, to determine the cultural aspects of markets, we must, in large
measure, analyse each society by itself without the benefit of guiding
generalisations.
▪ There are, however, a few common threads that run through the
cultures of groups of countries.
▪ Religion is one, for, a few major religions have spread over large areas.
In northern Europe and the Anglo-Saxon countries (the United States,
Canada, and Australia), the Protestant influence has generally been
dominant, though other religions existing alongside have moderated its
importance. Religions are a major determinant of the moral and ethical
standards that play a large part in the business process. It is difficult,
however, to develop any generalisations about their nature in each
region. The basic codes of religions—the entire Bible, the Kuran, etc.—
exhort their followers to be honest, truthful and otherwise to act in a
“good” manner. In practice, however, all business systems are

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characterized to varying degrees by false claims, dishonesty and other
moral shortcomings. So the specific character of each society must be
analysed as a distinct entity in this regard.

• Marketing in Cross-Cultural Context

▪ In understanding, analyzing and predicting consumer behaviour for
marketing management purposes, the role of culture has always been
given a prominent role in consumer behavior studies, which in turn are
expected to facilitate the effectiveness of marketing management
efforts. In the post-Second World War years, with the adoption of
marketing concepts, marketers started imparting greater consumer
orientation to their marketing efforts. In recent years, the marketing
discipline has been going through a number of major paradigm shifts.
The traditional transaction-oriented marketing is being replaced by
relationship marketing. In recent times, segmentation marketing with
emphasis on viable segments as target markets is progressively
replaced by micro marketing facilitated by the advances in the
information, communication and production technologies.
▪ Though all people have much in common as human is, there still are
many differences in cultures as we move from nation to nation. Culture
is adaptive, and marketing strategies based on the values of society
must also be adaptive. When cultural changes occur, trends develop
and provide marketing opportunities to those who spot the changes
before their competitors do. As culture evolves, marketers may
associate product or brand benefits with new values, or they may have
to change the product if that value is no longer gratifying in society.
▪ With so much diversity present among the members of just one nation,
it is easy to appreciate that numerous larger differences may exist
between citizens of different nations having different cultures, values,
beliefs, and languages. If international marketers are to satisfy the
needs of consumers in potentially very distinct markets effectively, they

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must understand the relevant similarities and differences that exist
between the peoples of the countries they decide to target.

C. TECHNOLOGICAL ENVIRONMENT
- Pervasive are diversified in scope, technological changes affect many parts of
societies. These effects occur primarily through new products, processes, and
materials. The technological segment includes the institutions and activities involved
with creating new knowledge and translating that knowledge into new outputs,
products, processes and materials. Given the rapid pace of technological change, it
is vital that firms carefully study different elements in the technological segment. The
marketers need to identify the speed with which substitute technologies are likely to
emerge and the timing of any major technological changes. Some new technologies
that have helped international marketers are discussed in the following subsections.
• Internet
▪ A technology with important implications for business in the Internet
sometimes referred to as “the information superhighway.” The Internet
is a global web of more than 25,000 computer networks. It provides a
quick, inexpensive means of global communication (i.e. with strategic
/alliance partners) and access to information.
• Modems
▪ Modems are important for connecting personal computers to phone
lines that help gain access to the Internet. The technology in the
manufacture of modems has advanced rapidly. Their speed may only
be curtailed by the limits of conventional phone lines. Encyclopedia
Britannica Inc. is using the Internet to revive its business.
• High Speed Digital Stream
▪ To obtain technology to deliver a high-speed digital stream that can be
viewed as movies, Web sites or advertising on televisions with its
equipment.

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• Satellite Imaging
▪ Another new technology that is gaining rapid popularity is satellite
imaging. Several aerospace companies have invested up to $1 billion
in corporate earth imaging systems.

D. ECONOMIC ENVIRONMENT
- Perhaps the most important characteristic of the international market environment is
the economic dimension. With money, all things (well, almost all!!) are possible.
Without money, many things are impossible for the marketer. Luxury products, for
example, cannot be sold to low-income consumers. Hypermarkets for food, furniture,
or durables require a large base of consumers with the ability to make large
purchases of goods and the ability to drive away with those purchases. Sophisticated
industrial products require sophisticated industries as buyers. Let us learn more
about economic environment, discussed in the following sub-sections:
• Economic Systems
▪ There are three types of economic systems: capitalist, socialist, and
mixed. This classification is based on the dominant method of resource
allocation: market allocation, command or central plan allocation, and
mixed allocation, respectively.
i. Market Allocation
• A market allocation system is one that relies on consumers to
allocate resources. Consumers “write” the economic plan by
deciding what will be produced by whom. The role of the state in
a market economy is to promote competition and ensure
consumer protection.
ii. Command Allocation
• In a command allocation system, the state has broad powers to
serve the public interest. These include deciding which products
to make and how to make them. Consumers are free to spend
their money on what is available, but state planners make
decisions about what is produced and, therefore, what is

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available. Because demand exceeds supply, the elements of the
marketing mix are not used as strategic variables.
iii. Mixed System
• There are, in reality, no pure market or command allocation
systems among the world’s economies. All market systems have
a command sector and all command systems have a market
sector; in other words, they are “mixed”. In a market economy,
the command allocation sector is the proportion of Gross
Domestic Product (GDP).
• The International Economic System
▪ Several factors have contributed to the growth of the international
economy post World War II. The principal forces have been the
development of economic blocs like the European Union (EU) and then
the “economic pillars”– the World Bank (or International Bank for
Reconstruction and Development to give its full name), the International
Monetary Fund (IMF) and the evolution of the World Trade Organisation
from the original General Agreement on Tariffs and Trade (GATT).
▪ Until 1969 the world economy traded on a gold and foreign exchange
base. This affected liquidity drastically. After 1969 liquidity was eased
by the agreement that member nations to the IMF accept the Special
Drawing Rights (SDR) in settling reserve transactions. Now an
international reserve facility is available. Recently, the World Bank has
taken a very active role in the reconstruction and development of
developing country economies, a point which will be expanded on later.
• Income and Purchasing Power Parity around the Globe
▪ When a company charts a plan for global market expansion, it often
finds that, for most products, income is the single most valuable
economic variable. After all, a market can be defined as a group of
people willing and able to buy a particular product.
▪ Ideally, GNP and other measures of national income converted to U.S.
dollars should be calculated on the basis of purchasing power parities

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(i.e. what the currency will buy in the country of issue) or through direct
comparisons of actual prices for a given product. This would provide an
actual comparison of the standards of living in the countries of the
world.
• Key Economic Issues that Influence International Business
i. Inflation
• Inflation is the pervasive and sustained rise in the aggregate
level of prices measured by an index of the cost of various goods
and services. Inflation results when aggregate demand grows
faster than aggregate supply- essentially, too many people are
trying to buy too few goods, thereby creating demand that
pushes prices up faster than incomes grow. Consider the impact
of inflation on the cost of living. Rising prices make it more
difficult for consumers to buy products unless their incomes rise
at the same or faster pace. Sometimes it is practically
impossible. Either alone or together, these measures slow or
stop economic growth.

ii. Unemployment
▪ The unemployment rate is the number of unemployed workers divided
by the total civilian labor force, which includes both the unemployed and
those with jobs. In practice, measuring the number of unemployed
workers actually seeking work in various countries is difficult given the
lack of a standard measurement method. Generally, people out of work
and unable to find jobs depress economic growth, create social
pressure, and provoke political uncertainty.
iii. Debt
• Debt, the sum total of government’s financial obligations,
measures the state’s borrowing from its population, from foreign
organizations, from foreign governments, and from international

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institutions. More recently, many countries have borrowed from
international lenders to finance their movement to freer markets,
a process of economic transition. Many countries that began with
this ambition but that eventually failed then increasingly had to
rely on foreign debt.
iv. Income Distribution
• GNI or PPP, even weighted by the size of the population, can
misestimate the relative wealth of a nation’s citizens. Uneven
income distribution is not a problem of poorer nations. There is
a strong relationship between skewed income distributions and
the split between those who live in urban settings versus those
who live in rural areas.
v. Poverty
• A related but separate issue concerns poverty- the state of
having little or no money, few or no material possessions, and
little or no resources to enjoy a reasonable standard of life. In
many parts of the world, workers and consumers struggle for
food, shelter, clothing, and clean water, health services, to say
nothing of safety, security, and education. Failure results in
suffering, malnutrition, mental illness, death epidemics, famine,
and war.
vi. The Balance of Payments
• The Balance of Payments (BOP), officially known as the
statement of International Transactions, records a country’s
international transactions that take place between companies,
governments, or individuals. Managers use the BOP as a
comprehensive indicator of a country’s economic stability.

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• POLITICAL ENVIRONMENT
▪ Majority of the MNCs have to face complex political environmental
problems because they must cope with the politics of more than one
nation. That complexity forces MNCs to consider three types of political
environment: foreign, domestic and international.
▪ The developing countries and the less Developed Countries (LDCs)
often view foreign firms and foreign capital investment with distrust and
even resentment, owing primarily to a concern over potential foreign
exploitation of local natural resources. Dependency Theory explains
why Latin American countries are reluctant to welcome foreign-based
MNCs. According to this theory, the ongoing economic, political and
social transformations have made it necessary for Latin America to rely
on the capitalistic system. Let us know some more about political
environment, discussed in following subsections.
i. Political Systems
• In order to appraise the political environment of a country, the
knowledge of the form of government of that country is essential.
Basically, the government can be classified into two categories
– parliamentary (open) or absolutist (closed). In the
parliamentary form of government, the citizens are supposed to
be consulted from time to time for learning about their opinions
and preferences. In this type of government the policies are thus
intended to reflect the desire of the majority segment of society.
Most of the industrialised nations and democratic countries can
be classified as parliamentary.
• The absolutist governments include monarchies and
dictatorships. In the absolutist system, the ruling regime dictates
government policies without considering citizens’ needs or
opinions. The United Kingdom is a good example of a
constitutional hereditary monarchy. Despite the monarch, the
government is still classified as parliamentary.

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• Political system of many countries does not fall neatly into these
two categories. Some monarchies and dictatorships like Saudi
Arabia and North Korea have parliamentary elections. The
erstwhile Soviet Union had elections and mandatory voting but
was not classified as parliamentary because the ruling party
never allowed any alternative on the ballot. Countries such as
the Philippines under Marcos and Nicaragua under Somoza held
elections but the results were suspect because of the
government’s involvement in fraud.
• At the international political level, the governments can be
classified in a number of ways. However, the best way to classify
the government is through the political parties. The classification
could be based on four types of governments (i) Two party, (ii)
Multiple party, (iii) Single party, and (iv) Dominated by one party.
• In a two party system, there are mainly two parties that control
the government, turn by turn, which-so-ever in a majority and the
other parties are also allowed to support any one of the two
parties.
ii. Political Risks Defined
• Political risk, sometimes called “sovereign risk,” has several
elements. First, it is found whenever a government prevents a
private sector debtor from repaying its obligations. Second, it
occurs when the foreign government is itself a debtor and
defaults on its own obligations due to its own volition. Third,
political risk is present when a government repossesses the
assets of a private entity (sometimes referred to as
“confiscation,” or “expropriation”). Other examples of political
risks include imposition of new controls (such as trade
restrictions, exchange limitations or monetary controls), and war,
revolution or insurrection. Ultimately, the exact definition of

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“political risk” will be listed in any insurance or guarantee
documentation.
iii. Political Risk Analysis
• There are a number of political risks which are to be faced by
international marketers. The risks, which the marketers face
from the host government, are:
• Confiscation is the process of a government’s taking ownership
of a property without compensation.
• Expropriation differs from confiscation in that there is some
compensation though not necessarily just compensation. More
often than not, a company whose property is being expropriated
agrees to sell its operations – not by choice but rather because
of some explicit or implied coercion.
• Nationalisation involves government ownership and it is the
government that operates the business being taken over. In
domestication, foreign companies relinquish control and
ownership either completely or partially to the nationals. The
result is that private entities are allowed to operate the
confiscated or expropriated properties.
iv. Indicators of Political Instability
• To assess a potential marketing environment, a company should
identify and, evaluate the relevant indicators of political difficulty.
Potential sources of political complication include social unrest,
the attitudes of nationals, and the policies of the host
government.
1. Social Unrest
o Social disorder is caused by such underlying conditions
as economic hardship, internal dissension and
insurgency, and ideological, religious, racial, and cultural
differences. A company may not be directly involved in

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local disputes, but its business can still be severely
disrupted by such conflicts.
o The breakup of the Soviet Union should not come as a
surprise. Human nature involves monastery (the urge to
stand alone) as well as systems (the urge to stand
together), and the two concepts provide alternative ways
of utilizing resources to meet a society’s needs.
Monastery encourages competition, but systems
emphasize cooperation. As explained by Alderson, “a
cooperative society tends to be a closed society. Closure
is essential if the group is in some sense to act as one.”
Not surprisingly China, although wanting to modernize its
economy, does not fully embrace an open economy,
which is likely to encourage dissension among the various
groups. For the sake of its own survival, a cooperative
society may have to obstruct the dissemination of new
ideas and neutralize an external group that poses a
threat. China apparent has learned a lesson from the
Soviet Union’s experience.
2. Attitudes of Nationals
o An assessment of the political climate is not complete
without an investigation of the attitudes of the citizens and
government of the host country. The nationals’ attitude
toward foreign enterprises and citizens can be quite
inhospitable. Nationals are often concerned with
foreigners’ intentions in regard to exploitation and
colonialism, and these concerns are often linked to
concerns over foreign governments’ actions that may be
seen as improper. Such attitudes may arise out of local
socialist or nationalist philosophies, which may be in

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conflict with the policy of the company’s home country
government.
3. Policies of the Host Government
o Unlike citizens’ inherent hostility, a government’s attitude
toward foreigners is often relatively short-lived. The mood
can change either with time or change in leadership, and
it can change for either the better or the worse. The
impact of a change in mood can be quite dramatic,
especially in the short run. Government policy formulation
can affect business operations either internally or
externally. The effect is internal when the policy regulates
the firm’s operations within the home country. The effect
is external when the policy regulates the firm’s activities
in another county.

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REFERENCES:

Jain, S. C, International Marketing, Singapore: Thompson Learning

Aswathappa, K., Business Environment for Strategic Management,

Mumbai: Himalaya Publishing House

Adhikary, M., Global Business Management, New Delhi: Macmillan Notes

Vasudeva, P. K. (2010), International Marketing, 4th Edition, New Delhi:
Excel Books

LINKS
TOPICS LINKS FOR VIDEO
Social and Cultural Environment https://youtu.be/2HXgMsHT2Eg

Technological Environment https://youtu.be/pvPUf2xAzpA

Economic Environment https://youtu.be/D__f6yyqMBs

Political Environment https://youtu.be/eKc-OgPJu34

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