CHAPTER 3 - INTERNATIONAL BUSINESS ENVIRONMENT

Introduction
Environmental factors are external effects that cannot be managed. Since 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 analyze 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 analyze the political, legal and regulatory, socio-cultural, economic, and technological
environment in order to understand the international marketing environment.
The (IBE) International Business Environment is multidimensional including the political
risks, cultural differences, exchange risks, legal & taxation issues. Therefore, (IBE) International
Business Environment comprises the political, economic, regulatory, tax, social & cultural, legal,
& technological environments. An international business environment is the surrounding in which
international companies run their businesses. It brings along it with many differences.
Thus, it is mandatory for the people at the managerial level to work on the factors that
make an International Business Environment.
The Difference – Business Environment and International Business
International business is an exchange of goods and services that conducts its operations
across national borders, between two or more countries. International business is also known as
Globalization whereas; a Business Environment is the surrounding in which the international
companies operate.
Forms of Business Environment
√ Import & Export
√ Licensing
√ Franchising
√ Joint venture
√ Foreign Direct Investment
Advantages of International Business Environment
 Helps in expanding the business
 Exposure to more customers
 Helps in the proper management of the product life cycle
 Helps in mutual growth
 Technology advantages:
 New business opportunities
 Proper use of resources
Importance of International Business Environment
1. Exports Increase Sales
Exporting opens new markets for a company to increase its sales. Economies rise
and fall, and a company that has a good export market is in a better position to weather an
economic downturn. Furthermore, businesses that export are less likely to fail. It's not only
the exporting companies that increase sales; the companies that supply materials to the
exporters also see their revenues go up, leading to more jobs.
2. Exports Create Jobs
A company that increases its exports needs to hire more people to handle the higher
workload. Businesses that export have a job growth 2 to 4 percent higher than companies
that don't; these export-related jobs pay about 16 percent more than jobs in companies with
fewer exports. The workers in these export-related jobs spend their earnings in the local
economy, leading to a demand for other products and creating more jobs.
3. Imports Benefit Consumers
Imported products result in lower prices and expand the number of product choices
for consumers. Lower prices have a significant effect, particularly for modest and low
income households. Studies show that lower import prices save the average American
family of four around $10,000 per year. Besides lower prices, imports give consumers a
wider choice of products with better quality. As a result, domestic manufacturers are forced
to lower their prices and increase product lines to meet the competition from imports. Even
further, domestic vendors may have to import more components of their products to stay
price competitive.
4. Improved International Relations
International business removes rivalry between different countries and promotes
international peace and harmony. Mutual trade creates a dependence on each other,
improves confidence and fosters good faith.
A. SOCIAL AND CULTURAL ENVIRONMENT
Social environment of business means all factors which affects business socially. Every
business works in a society, so societies has different factors like family, educational institutions
and religion affects the business. It includes the culture that the individual was educated or lives
in and the people with whom they interact. Social factor includes reference groups, family, role
and status in the society.
The cultural environment means an environment which affect the basic values,
behaviors, preferences of the society, all of which have an effect on consumer marketing
decision. Cultural aspects include aesthetics, education, language, law and politics, religion,
social organization, technology and material culture, values and attitude.
 Socio- cultural environment. A set of beliefs, customs, practices, and behavior that
exist within a population. International companies often include an examination of the socio-
cultural environment prior to entering their target markets. Socio-cultural factors are customs,
lifestyles and values that characterize a society.
Factors which effect social and cultural environment
1. Demographic factor- such as the age, and sex composition of population, family size,
habitant, religion, etc., which influence the business.
2. Religion- different religions have different principles, rules and regulations in which
they sacrifice to use some products and eat some food.
3. Social responsibility- while dealing with the social environment, we must also consider
the social environment of the business which encompasses the social responsibility and the
alertness or vigilance of the consumers and of the society at large.
4. Education- they provide good knowledge, education awareness, thinking what should
people buy or not to buy.
5. Family- is a basic part of society from the birth of a person and up to death. He lives in
family, so personal decision of buying and selling of goods are affects from family. So
businessman must analyze different family needs.
a. Taste preference
b. Natural factor
c. Technological factor
d. Income and lifestyle
e. Health and safety factor

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.

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 behavior, providing guidelines and organization 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 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 religion, 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,
analyze each society by itself without the benefit of guiding generalizations. However, a
few common threads 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 Notes business process. It is difficult, however, to develop any
generalizations 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 characterized to varying
degrees by false claims, dishonesty and other moral shortcomings. So the specific character
of each society must be analyzed as a distinct entity in this regard.
 Family systems fall into three general categories. One, especially prevalent in
Muslim areas, traditionally places the wife in a subordinate and secluded role, with few
rights and little control over the affairs of the family. This general pattern still prevails over
much of the Middle East, though in many Muslim countries, like Turkey and Pakistan,
women have achieved a high degree of emancipation. A second pattern is particularly
common in Latin America. The wife is still definitely a junior member of the partnership,
the husband having the final authority in all but minor matters. The third type of
relationship is found in varying forms throughout most of Europe and the Anglo-Saxon
countries. The basic code in this pattern is equality, though there are many variations in
actual practice. In other respects, cultural attitudes related to the family system differ
widely among countries. Such matters as the way in which the sexes attract each other bear
both on products sold and advertising methods, and they are subject to a host of local codes.
As far as educational systems are concerned, the obvious marketing factors are the
literacy rate and the general level of education, both of which generally run parallel to the
pattern of economic development. There are also differences in educational methods
common to large areas.
Marketing in Cross-cultural Context
In understanding, analyzing and predicting consumer behavior 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.
Though all people have much in common as human is, there are still 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 must
understand the relevant similarities and differences that exist between people of the
countries they decide to target.
When consumers make purchase decisions, they seem to take into consideration the
countries of origin of the brands that they are assessing. Consumers frequently have
specific attitudes or even preferences for products made in particular countries. This
country of origin influence how consumers rate quality and sometimes, which brands they
will ultimately select.
 The theme of cultural influences in a given country has two variations. Cross-
cultural influences are norms and values of consumers in foreign markets that influence
strategies of multinational organizations marketing their products and services abroad.
The second variation refers to subcultural influences that concern differences in
values among different groups within a country that distinguish them from society as a
whole.
As more foreign markets emerge and offer opportunities for growth, marketing in
foreign Notes countries is likely to increase in importance. Marketing across cultural
boundaries is a difficult and challenging task because cultures may differ in
demographics, languages, values and non-verbal communications.
Cross-cultural analysis helps marketers determine to what extent the consumers
of two or more nations are similar or different. The greater the similarity between
consumers, the more feasible it is to use relatively similar strategies in each country. In
case the cross-cultural analysis reveals that there are wide cultural differences, then a
highly individualized marketing strategy may be indicated for each country.
ASPECTS THAT SHOULD BE ADDRESSED:
• Approaches to society towards business in general & in specific areas;
• Influence of social, cultural & religious factors on the acceptability of the product;
• The lifestyle of people & the products used for them;
• Level of acceptance of, or resistance to change;
• Values attached to a particular product i.e. the possessive value or the functional value of
the product;
• Demand for the specific products for specific occasions;
• The propensity to consume & to save.

B. TECHNOLOGICAL ENVIRONMENT

The Technological Environment comprises factors related to the materials and machines
used in manufacturing goods and services. Technology often is seen as giving firms a competitive
advantage. Nevertheless, how is this T. E. affects business?
Technology trends affect businesses on many levels. Example; when an employee is
efficient, he turns out to be productive. Additionally, when a business is more in touch with its
present and potential customers, the more chance it has to build a strong customer loyalty base.
Therefore, advancement of technology can make this possible. Strategic leaders are
constantly looking for development and updates within the technological environment. In this way,
they not only improve their operations but they will also be well aware of business transformational
phase. They will derive groundbreaking strategies to grow exponentially.
Technological environment of business has changed the way in which businesses function.
Advancements in information technology have almost taken over every department of the
organization. Technology has brought in a transformation through which companies collect,
record, retrieve and utilize data and which also helps them in coming up with ground breaking
business strategies. Through available data, companies are able to monitor and evaluate customer
trends and their demands for a particular product. Technology is not only useful for collecting and
using data but it is also being used by organizations to analyze data and make meaningful
conclusions as well as informed decisions. Having more focus on the customers, business
strategies will certainly prove out to be effective for the success of an organization. Changes in
technology affect how a company will do business. A business may have to change their operating
strategy as a result of changes in the 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 below.
Internet. A technology with important implications for business. 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.
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.

The Impact of Technology on a Business Environment

Impact on Human Resources. Experts have long predicted technology will someday
replace many of the jobs done by humans. However, history has shown that as jobs become
obsolete, new opportunities open up. Technology has also transformed hiring, with the internet
allowing workers to complete their duties from home or another remote location. This has the
added benefit of giving businesses access to a global talent pool that allows them to hire
specialized, experienced workers at affordable rates.
Impact on Customer Outreach. Thanks to social media and the internet, reaching
consumers is easier than ever. Using a do-it-yourself website tool and various social platforms,
even the newest small business can post content that helps interested customers find them. Instead
of paying third parties for advertising in print or electronic media, today’s businesses are in charge
of their own customer outreach. The result is a reduced cost that levels the playing field between
large corporations and startups.
Impact on Operating Costs. Another area where the technological environment has
evened things out is the overhead associated with running a business. Companies sell their items
online, which means they do not need a brick-and-mortar storefront. The cost of starting a new
business has dropped dramatically in recent years, since founders can now launch a venture from
home as a side gig. There is no need to travel to land new clients, because researching and reaching
out to potential customers can all be done online. Moreover, instead of hiring a bookkeeper or an
assistant, entrepreneurs find that software handles all of the early-stage functions they need.
Impact on Security. One area where the impact of technology on business has brought
both positives and negatives is security. Having so much information on internet-connected
server’s means, it is susceptible to theft. Data breaches can be devastating to a new business
without the resources to handle it, with the average incident costing small businesses about
$36,000. Businesses now need to put significant effort into securing their networks and all
connected devices, which often means paying a monthly fee for top-tier cloud hosting and software
to keep equipment safe. This has also opened up opportunities for tech specialists in the
cybersecurity arena, where experts are in high demand.
The Day-to-Day Impact on Business. Today's technology has completely changed some
businesses as well as creating entire business niches that never even existed before. Business
owners run their companies from laptops, tablets and smartphones, never even considering
opening a brick-and-mortar presence. The daily environment in existing businesses has changed
immensely, too. Office workers often spend part of their week working remotely from home
or on the road. Business meetings no longer mean driving long distances as teleconferencing
means getting everyone together online. Many offices are now paperless, keeping all their
documents in the cloud, while others use online chat technology to keep teams in constant
communication.

C. 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.
The economic environment refers to all the economic factors that affect commercial and
consumer behavior. The economic environment consists of all the external factors in the immediate
marketplace and the broader economy. These factors can influence a business, i.e., how it operates
and how successful it might become.
The economic environment consists of microeconomic and macroeconomic factors.

A. Microeconomic factors. The microeconomic environment refers to things that happen

at the individual company or consumer level. Microeconomic factors do not affect the whole
economy. Below are some microeconomic factors that may influence a business: Competitors,
Demand, Market size, Suppliers, and Supply
B. Macroeconomic factors. The macroeconomic environment, on the other hand, refers
to things that affect the entire economy. Macroeconomics is concerned with general or large-
scale economic factors, such as Unemployment, Inflation, Interest rates, GDP growth (Gross
Domestic Product), Taxes, Exchange rates, Levels of consumer confidence, and Savings rates.

Why Is the Economic Environment Important?

The economic environment of a business will play a pivotal role in determining the success
or failure of a business. Let us first consider some macroeconomic factors. If interest rates are too
high, the cost of borrowing may not permit a business to expand. 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.
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.
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 available. Because demand exceeds supply, the
elements of the marketing mix are not used as strategic variables.
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 Organization from the original
General Agreement on Tariffs and Trade (GATT).
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 (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
The key economic issues that influence international business are discussed below:
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.
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.
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 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.
Income Distribution. GNI, 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.
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.
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.

D. POLITICAL ENVIRONMENT

The political environment can influence business organizations in many ways. It could
add a risk factor and lead to a major loss. You should understand that the political factors have the
power to change results. It can also affect government policies at local to federal level. Companies
should be ready to deal with the local and international outcomes of politics.
 Political Environment is the state, government and its institutions and legislations and
the public and private stakeholders who operate and interact with or influence the system. The
political atmosphere should be good and very stable for a firm to operate successfully. Political
Environment forms the basis of business environment in a country. If the policies of the
government are stable and better, then businesses would get impacted in a positive way and vice
versa.

Why is political environment important?

Changes in the government policy make up the political factors. The change can be
economic, legal or social. It could also be a mix of these factors.
Increase or decrease in tax could be an example of a political element. Your government
might increase taxes for some companies and lower it for others. The decision will have a direct
effect on your 23 businesses. So, you must always stay up-to-date with such political factors.
Government interventions like shifts in interest rate can have an effect on the demand patterns of
company.

What Political Factors Affect Business Environment?

With a change in administration policies, there arise political factors that can change the
entire business scenario. These changes can be economic, legal or social and can include the
following factors:
Tax and economic policies: Increasing or decreasing rate of taxes is a good example of a
political component. Government regulations may raise the tax rate for some businesses and can
lower the same for others due to specific reasons. This decision will directly impact businesses.
This is why maintaining a strategy which can deal with such situations is very important.
Political stability: Lack of political stability within a country can significantly impact the
operations of a business. This can especially be true for businesses that are operating on the global
scale. For instance, a hostile takeover can take over a government. Eventually, such a situation will
lead to looting, riots and general disorder within the environment. Such situations can disrupt
business operations and activities which can have a major impact on its bottom line.
Foreign Trade Regulations: Every business has a need to expand business operation to
other countries. However, political background of a country can influence the desire for a business
to expand its operations. Tax policies that are particularly controlled by the government can induce
a particular business to expand operations in different regions whereas; other tax policies can
hinder the process of business expansion for some industries.
Employment Laws: Employment laws are made to protect the rights of employees and
include every aspect of employer/employee relationship. Employment law is an aspect that is very
complex and involves several pitfalls as well. When businesses are in touch with the latest
developments in this law, they can manage to take their business in the right direction however,
those who get it wrong needs to be completely prepared for the expensive results it will generate.
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.

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 industrialized 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.