International Business

Environment
 Business environment means the factors/activities those
surround/encircle the business. The factors that affect or influence
the business.

 Business environment factors are broadly divided into internal and

external environment factors.
 Internal environment factors affect the business from within. They
include: human resource management, trade unions, organization
structure, financial management, marketing management etc.

 External environmental factors are further divided into micro external and
macro external factors.
 Micro external factors include: competitors, customers, market
intermediaries, suppliers of raw material, bankers and other suppliers of
finance, shareholder.
 External macro environment factors include: social and cultural factors,
technological factors, economic factors and political factors, international
factors and natural factors.
 Factors which affect the business include

 Social and Cultural factors (S)

 Technological factors (T)
 Economic factors (E)
 Political factor (P)
 International factor (I)
 Natural factor (N)
 Social and Cultural Environment

 Social and cultural factors in various countries of the globe affect the
international business. These factors include attitude of the people to
work, attitude to wealth, family, marriage, religion, education, ethics,
human relations, social responsibilities etc.

 Culture is “ the thought and behavior that member of a society learns

through language and other forms of symbolic interaction-their
customs, habits, beliefs and values.
Culture is:
 Prescriptive: It prescribe the kinds of behavior acceptable in the

society. Like consumption of wine is acceptable in the west, but it is

not socially acceptable in India and Saudi Arabia.

 Socially Shared: Culture is based on social interaction and creation.

Like child marriages in India during the 18th and 19th centuries were
to protect the teenaged girls. Chinese parents, at one time referred
their female children to have small feet.

 Culture Facilitates communication: Culture brings common habits

of thought and feeling among people. Culture makes communication
easier among spread groups.

 Learned: Culture is acquire through learning but not inborn

genetically. If person learns the culture of the society where he is
raised, that learning is called socialization or enculturation.
 Some people learn the culture of the society other than the one in
which they are raised. Such learning is called acculturation.

 Subjective: Culture is subjective in the sense that people of different

cultures have different ideas about the same object. Regarding the
object of marriage the parents or the bridegrooms in many counties
offer money(dowry) to the parents of the bride whereas the situation
in India is quite opposite.

 Durable: Culture is relatively stable as it is passed from generation to

generation. Taking care of the old people, respecting the elders and
offering food first to the guests, next to old people and children and
last to the young people are the practices from generations together in
Indian society.
Culture Attitude and IB: Dressing habits, living styles, eating habits and other
consumption patterns, priority of needs are influenced by culture. Some Tahi and Chinese
and most of the Indians do not consume beef., Thailand Chinese believe that consumption
of beef is unacceptable and Indians (particularly Hindus) believe that eating beef is a
offense as they believe cow is holy. Similarly dressing habits also vary from country to
country based on their culture.

Culture and Thinking process: When foreigners visit the university in India, the
professor receive them at the airport, take them to the hotel, and make them feel
comfortable. When Indian went to France, They expected the same. They expected
someone from my host institution to receive me at the airport. This phenomenon is known
as the self reference criterion(SRC).

Cross-Cultural communication Process and Negotiations: In some countries like USA,

Canada, Germany the messages that the people convey are open and clear. They use the
actual words to convey the information. These cultures are called ‘low-context cultures’.

Incountries like India, Japan, Saudi Arabia and other middle eastern Arab countries.
Communication is mostly indirect and the expressive manner in which the message is
delivered becomes critical. Much of the information is transmitted through non-verbal
communication. Such culture are referred to as “ high-context cultures”.
 Culture of Friendship: Peoples in US complete the business and
then develop friendship. People in Japan and china first develop
friendship through several means including eating together and then
transact business. Americans use the first name but the French
people and most northern Europeans feel it offensive. In Germany
only relative and close friends call by the first name only.
 Culture and Negotiation: Americans are straightforward. Chinese
are generally tough-minded and well prepared and use various
tactics to secure the best deal.
 Culture and Superstition: Superstitious beliefs like fortune telling,
palm reading, dream analysis, phase of the sun and the moon, birth
date and time analysis, vasstu are more prominent in Asian counties.
Africans knock on wood, cross their fingers and feel uneasy when a
back cat crossed their path.
 Culture and Color: Red roses in Spain are associated with more of
envy than love. In France, yellow suggests unfriendly and cut flowers
are unlucky. A bouquet of thirteen is inappropriate in France and
Latin America. Yellow is associated with disease in Africa. Red is
lucky color for Chinese and is associated with anger in USA.
 Social Environment
 Religion: Religion is one of the important social body those
influencing business. A few religion have spread over a large areas in
the world. Religions play significant role in normal and ethical
standards in production and marketing of goods and services. Most of
the religions indicate in providing truthful and honest information. But
most of the marketing practice turn from these standards.

 Family system: In most of the Islamic countries, women play less

significant role in the economy and also in the family with limited
rights. In Latin American countries, through the role of women is
better compared to that in Islamic countries, women role is limited in
economics and in families. But women play a dominant role in
European and North American counties.
 Technological Environment

 Technology influences the way we live, we cook(electric rice cooker), we

drink even water(filtered and mineral water), communicate(telephone, fax, e-
mail, video conferencing, e-mail chatting etc) , preparing for a class or a case
or reading a new paper through internet, marriage alliances through internet,
computer aided design, production, selling(e-commerce), satellite networks,
electronic fund transfers, unmanned factories, miracle drugs, new diagnostic
methods.
 Technology and Economic Development: Technology is one of the
significant factors which decide the level of economic development of a
country. The difference between the nations is mostly reflected by the level of
technology. Like India had vast natural resources, it remained a major
importing country due to its low level technology before 1991.
 Technology Transfer: Technology and global business are interdependent.
International business spreads techno- logy from advanced counties to
developing countries by Establishing the subsidiaries in developing counties
 Establishing joint ventures with the host country companies. Acquiring the
host country companies or by merging with the host country firms
 Arranging technological transfer to the companies of developing countries
through technological alliances.
 Technology and Location of Plants: In addition, MNC’s relocate their
manufacturing facilities based on the technology. In other words, MNC’s
locate the plants with high technology in advanced counties and establish
the labor motivated manufacturing facilities in developing countries, in
order to get the advantages of cheap labor.
 Scanning of Technological Environment: The level of the technology is
not the same in all the counties. Advanced counties enjoy the fruits of latest
technology while the developing nations face the consequences of obsolete
or outdated technology. Therefore the MNC,s have to understand the
technological environmental information regarding:
 The level of technology of the industry in the home country
 The level of the technology of the industry in the proposed host country
 Compatibility of the home country technology with the host country
technology
 If the technology is not compatible, then select the appropriate technology for
the host country, if possible. If not select the host country that suits the home
country technology.
 Study the host country governmental policies regarding technology transfer
 Study the modes of technology transfer like joint ventures, technological
alliances etc.
 Information Technology and Globalization: The information technology
facilities help the global companies in:

 Reducing the size of inventories

 Reducing delivery time
 Reducing unproductive waiting time
 Reducing the incidents of stock outs and lost sales
 Responding to market changes at a faster rate
 Reducing Rush orders
 Cutting down over production
 Reducing unnecessary movements of forwarding's and back
tracking
 Reducing paper work and wasteful process
 Planning reduction levels accurately
 Reducing physical movement of employees, suppliers and
customers
 Economic Environment

IB is mostly and directly influenced by the economic environment of various

countries. Global economy has undergone a sea changed during the last 50
years. The change is innovative after 1990.

Capitalistic Economic system: Under this system, customer allocates

resources. Customers choice for product/service decides what will be
produced by whom. This economic system provides for economic
democracy, thus giving the customer, his choice for products/services.
Individualism believing in private ownership of production and distribution
facilities.

 Mixed Economic System: Under this system, major factors of production

and distribution are owned, managed and controlled by the mixture of
public ownership and private ownership. The purpose is to provide the
benefits to the public more or les on equity basis.

 Communistic Economic: In this system private property and property

rights to income are stop. The state owns all the factors of production and
distribution.
 ECONOMIC ENVIRONMENT
 Per capita income and size of population
 Stages of economic development
 Consumption pattern

 Economic system
 Product demand analysis
 Competition analysis
 Stages of Business Development

 Different countries in the world are at different stages of development.

Counties are segments based on GNP per capita. World countries are divided
into four categories Like:
Low Income Countries: these counties are also known as third world
countries or pre-industrial counties. The are also those with 1992 incomes of
less than US$400 per capita. Characteristics of these counties include:
 Limited industrialization, and excessive dependency of population on
agriculture
 High Birth rates
 Low Literacy rates
 Heavy reliance on foreign aid
 Political instability and unrest
 Concentrated in Africa, south of the Sahara
 Excessive unemployment and underemployment
 Technological backwardness
 Underutilization of natural resources
 Excessive dependency on imports
 Lower-Middle-Income countries: These countries are also
known as less developed counties. These counties are with a
GNP per capita of US$ between 400 and 2000(1992).
Characteristics of these counties include:
 Early stages of industrialization
 Expansion of consumer markets
 Availability of cheap and motivated human resources
 Domestic markets are dominated with the products like
clothing, batteries, tires, building materials, packaged foods etc
 Location for production of standardized/mature products like
clothing for exports
 create threat to the rest of world in labor intensive products
due to cheap labor
 Have competitive advantage in mature and labor intensive
products
 Upper-Middle-Income countries: These countries are
also known as industrializing counties. GNP per capita of
these countries ranges between US $ 2000 and 12,000.
Characteristics of these countries includes;
 Less dependency on agriculture.
 Occupational mobility of the people from agriculture to
industry
 People migrate from rural to urban areas which results in
increased urbanization
 Increase in literacy, formal education and increased wage
rates
 Low wage costs compared to advanced countries
 High exports and rapid economic development
 High-Income-Countries: These countries are also known as advanced
countries, industrialized, post industrial or first world countries. The GNP
per capita (1992) of these countries is more than US$12,000. The
characteristic of these countries include:
 Oil-rich countries are excluded from this category.
 Counties developed through the modification of theoretical knowledge
rather than from random inventions are included in this category
 Service sector contributes more than 50 percent of the GNP
 Development of information sector.
 Development of intellectual technology over machine technology.
 High income counties mostly aim at building the information society
 These countries face the problems like pollution, excessive urbanization,
economic depression, increase in aged population etc.

 Basket Cases: Basket cases are countries which are unattractive for
investment and operations due to economic, social and political problems.
Some are low income countries like Rwands. Some of them are affected by
civil wars.
 Political Environment
 Political environment factors also influence the operations of international
business firms . The influence of the political system of a country influences
the business from multi-angles like deciding, promoting, encouraging,
sheltering, directing and controlling the business activities. The success and
growth of IB depend upon the stable, dynamic, honest, people, secured
political system in a country. Friendly diplomatic relations between India
and USA helped not only the Indian companies but also the MNC’s operating
in India to have close business linkages with the USA.

Types of Political Systems

 In parliamentary government people are consulted and are allowed to

participate in decision making on all important issues.

 Under absolutist government the ruling government dictates government

policies, rules and regulations on all citizens, they do not allow to express
their voice. The business in these countries is completely based on
government policies rather than the people’s need.
 Two party system: Two major parties take turn of controlling the
government under two party system. USA and UK are the example of
two party system. Republic party and democratic party.

 Multiparty system: There would be many parties and no party is

strong to gain the control of the government in multiparty system.
Germany, France, India and Poland are examples for multiparty system.

 Single Party: Only one dominant party almost gets the opportunity to
control the government, through several parties exist. Egypt is the best
example for this.
 One party Dominated system: In this system, through there are more
than one party, the dominant party rules the government and it does
not allow any opposition party to come up. Like Cuba, Libya are
examples of this system.
 POLITICAL ENVIRONMENT
 At the basis of international law and
international relations: sovereignty (self
determination and independence from
external interference, authority over all
nationals)
 International trade limits sovereignty.

 Governments can appeal to rule and put at

risk firm’s operations

 Political Risk

 Risks Related to Government Trade policies:

 Tariffs,
 exchange-rate controls,
 quotas,
 export/import license requirements,
 other trade barriers (embargos, sanctions)
 Political Risk (contd.)

 Risks Related to Government Economic Policy:

 Controlling foreign investment through taxes
 transfer of assets from company to local
ownership:
Confiscation (without compensation)
Expropriation (some reimbursement)
Creeping expropriation (paperwork, judicial
systems, regulations)
Nationalization (local government takes over)
Domestication (transfer to local enterprises)
 Risks Related to Labor and Action Groups
 Risks Related to Terrorism
 Minimizing Political Risk

 Understand both ruling and opposition parties.

 Remain politically neutral.
 Be exemplary corporate citizens.
 Sell a quality product or service that is essential for
local development.
 Partner with local companies and create local
expertise.
 Use local suppliers.
 Obtain insurance coverage against expropriation,
nationalization, confiscation, and terrorism.
 NATURAL ENVIRONMENT
 Geology and natural resources (access to
resources, e.g. oil)
 Topographies and access to Markets
 Hydrology
 Climate
 Population/ Human Capital
 Environmental Quality (regulations on the
natural environment, e.g. hormones,
pesticides, CO2-Levels