Unit 1 Introduction To International Business Environment PDF

UNIT 1 INTRODUCTION TO ATIONAL BUSINESS ENVIRONMENT / Structure 1.0 0b.jectives I. 1 Introduction 1.2 Concept and Relevance of International Business Environment...

UNIT 1 INTRODUCTION TO ATIONAL BUSINESS ENVIRONMENT / Structure 1.0 0b.jectives I. 1 Introduction 1.2 Concept and Relevance of International Business Environment 1.2.1 Micro and Macro Environments 1.2.2 Domestic, Foreign and Global Environment 1.2.3 Rclevnnce of International Business Environment 1.3 Analysis of the Components of Foreign Environment 1.4 Geographic Environment 1.5 Economic and Financial Environment 1.5.1 Econot~licEnvironment 1.5.2 Financial Environment 1.G Socio-Cultural Environment 1.7 Political Environment 1.8 Legal Environment 1.9 Ecological Environment 1.I 0 Let Us Sum Up I. 1 1 Key Words 1.12 Answers to Check Your Progress 1.13 Terminal Questions 1.0 OBJECTIVES After going through this unit, you should be able to: I 8 explain the meaning, nature and relevance of international business environment i 8 describe the domestic, foreign and global dimensions of international business environ- ment I 8 analyse geograpl~ic,economic, financial, socio-cultural, political, legal and ecological I I components of a foreign country's environment j discuss implications of each components of international business environment. 1.1 INTRODUCTION Business is defined as a set of activities relating to industry and commerce. When these activities are performed on an international level, these can be termed as international business. Basic functions, processes and techniques of international business are essentially the same as those involved in domestic business. What is different is the environment within which these functions are performed and processes are carried out, While doing business within one's own country, one is familiar with most of the environ~nentalfactors and is readily able to cope with them. But the task of managing international business is not that easy. Because of operating in environments which are unfamiliar and different from the domestic environment, one needs to be extra careful and vigilant to these environ- mental differences. These variations may need adaptation for business success. h this unit, you will learn the meaning, nature and relevance of the international business environment.. You will further learn in detail the geographical, economic, financial, socio-cultural, legal and ecological aspects of global business environment.  ~'o~tccpls~d-l)l~ncn~Iuns Introduction to I n t c r n ~ t i o n ~ l 1 1.2 CONCEPT AND RELEVANCE OF I in which a firm operates. Differences exist not only between domestic and foreign environ- Business Envlronmcnt 1 INTERNATIONAL BUSINESS ENVIRONMENT Simply speaking, environmentrefers to one's milieu or surrounding. In the context of a i ments. but also among the environments prevailing in different foreign markets. Because. - of environmental differences, business strategies that are successful in one nation might fail luiserably in other countries. Foreign market operations, therefore, require an increased sensitivity to the environmental differences and adaptation of business strategies to suit the I business firm,environment can be defined as various extemal actors and forces that surround differing market situations. the firmand influence its decisions and operations. The two major characteristics of the environment as pointed out by this definition are: one these actors and forces are extemal to. Figure 1.1 International Business Environment the firm, and secondly these are essentially uncontrollable. The firm can do little to change them. It has to rather learn to live with them. i 1.2.1 Micro and Macro Environments In order to gain a better understanding, let us have a look at two important classifications of 1 environment One classification is the micro and macro environments. Micro environment can be defined as the actors in the firm's immediate environment which directly influence the firm's decisions and operations. These include: suppliers: various market intermediaries and service organisations such as middlemen, transporters, warehouses, advertising and marketing research agencies, business consulting firms and financial institutions; competitors, customers and general public. While the customers constitute firm's market, suppliers and market intermediaries help providing the firm with inputs and assist in production and marketing processes. Competitors and general public ,also influence the way a finn conducts its business. Macro enviro"mcnt, on the other hand, consists of broader forces which affect the firm as well as other actors in the firm's micro environment. These include factors such as geo- graphic, economic, financial, socio-cultural, political, legal, technological and ecological forces. Firms need to continuously monitor changes in these environmental forces and devise strategies to cope with them. 3.J 1.2.2 Domestic, Foreign and Global Environment Another way of understanding various factors constituting intemational business environ- ment is to divide the various factors into three broad groups: domestic, foreign and global environments. This classification is based on the location at which environmental actors and forces exi* and operate. Look at Figure 1.I where a schematic presentation ofthese three levels of environment alongwith their components has been shown. In the figure, innermost circle represents firm's business strategy and decisions with regard to The upper most circle, viz., circle four, represents the global environment. Global envi- production, finance, marketing, human resources and research activities. Since these strate- ronment transcends national boluidaries and is not confined in its impact to just one gies and decisions are made by the finn, they are called controllables. Firm can change them country. Global environment exerts influence over domestic as well as foreign countries but'within the constraints of various environmental factors. and co~nprisesof forces like world economic conditions, international financial system, I international agreements and treaties, and regional economic groupings. World-wide The next circle represents domestic environment and it consists of factors such as competi- econo~nicrecession; international financial liquidity or stability; working of the interna- tive structure, economic climate, and political and legal forces which are essentially uncon- tional organisations such as World Trade Organisation (WTO), International Monetary trollable by a firm. Besides profound effect on the firm's domestic business, these factors Fund (IMF), World Bank and the United Nations Conference on Trade and Development exert influence on the firm's foreign market operations. Lack of domestic demand or (UNCTAD); Agreement on Textiles and Clothing (ATC); Generalised System of Prefer- intense competition in the domestic market, for instance, have prompted many Indian ences (GSP); International Commodity Agreements; and initiatives taken at regional levels firms to plunge into international business. Export promotion measures and incentives in such as European Union (EU), North American Free Trade Association (NAFTA) and country have been other motivating factors for the firms to internationalise their business Association of South East Asian Nations (ASEAN) are some of the examples of global operations. Since these factors operate at the national level,.firms are generally familiar - environmental forces having world-wide or re'gional influences on business operations. with them and are able to readily react to them. , i 1.2.3 Relevance of International Business Environment The third circle represents foreign environment consisting of factors like geographic and economic conditions, socio-culturaj traits, political and legal forces, and technological and 1 As stated earlier, environment plays a vital role in the conduct of business operations. ecological facets prevalent in a foreign country. Because of being operative in foreign Especially in the context of international business, environment assumes critical importance. l market, firms are gen'erally not cognisant of these fact~rsand their influence on business as no two countries have similar environments and demand different business strategies to activities. The firm can neglect them only at the cost of losing business in the foreign cope with differing business conditions. As the environment affects firms' strategic as well h markets. The problem gets more complicated with increase in number of foreign markets as tactical decisions, it becomes imperative for the firm to have.in-depth knowledge of the domestic, foreign and global environments.  3. What do you mean by global environment? Introduction to International Conccpb and Dinlcnsiunr When a firm decides to enter into intetnational business, it faces two major decision prob- Business ~nvironrnent lems: one, in which market(s) to select, and second how to enter into those markets. Both these decisions are strategic in nature and are greatly influenced by the environmental forces. Firms select those countries as their target markets which have sufficient market potential. Market potential in turn depends upon geographic, economic and cultural envimnme~tsprevailing in the foreign counries. Demand for fans, for instance, will be I more in countries which are geographically located in hot zones and where per capita I income is high enough for the people to afford purchase of fans. Besides climate and i sufficient income, electricity should be available to make the fans workable. 1 4 4. Write three examples of global environmental forces having world-wide or regional intluences on business operations. Once the firm identifies countries with market potentials, it needs to decide as to what mode it should use for entering into those markets. A wide range of options such as exporting, licensinglfranchising, joint ventun or setting up wholly owned subsidiaries abroad are available to firms. Firm's actual choice of market entry mode is influenced by a variety of environmental factors. Exporting is desirable when it is economical to produce in the home country and there are no legal restrictions on import of given product in the foreign markets. In the case of import bans or excessive costs of transportation, a firm may choose to set up its manufacturing and marketing subsidiaries abroad. But this is feasible only when foreign governments are not averse to foreign direct investment, and necessary raw materials and labour are available locally at competitive prices in the foreign countries. 5. State whether following statements are True or False. In countries where fvst condition is not fulfilled, the firm can go in for either licensing or i) Basic functions, processes and techniques of international business are joint venture as these entry modes are politically less objectionable. essentially the same as those involved in domestic business. Environmental forces play an equally impoant role in shaping a firm's functional and ii) Market intermediaries fall under macro environment. tactical decisions. What should be the scale of production? Should the firm employ labour iii) Legal forces are controllable by a firm. or capital intensive techniques? How to finance firm's foreign operations? How much to repatriate? What marketing mix should the firm use? Should it hire local persons or iv) Business strategies which are successful in one country will also be successful employ foreign nationals? What should be their compensation package? Answers to these in another country. and other questions require in-depth analysis of the prevailing environments in foreign V) Global environment exerts influence over domestic as well as foreign countries. Since the environments differ, firm cannot be much successful by falling back countries, upon its domestic decisions and practices. Firm needs to screen the foreign country envi-. ronments and accordingly decide about the best course of action in each country. 1.3 ANALYSES OF THE COMPONENTS OF FOREIGN It may be pointed out here that environmental analysis is important not only for the firms entering into the foreign markets for the first time, but it is also important for the firms ENVIRONMENT already in international business. Since environmental conditions change over time, firms need to continuously monitor changes in the environment and mike suitable changes in All the three types of environments, viz., domestic, foreign 'and global environments, have their decisions. their effects on international business operations. Because of the vastness of subject, it is not possible to discuss all the three types of environments and their impact on business in Check Your Progress A one unit. The present unit, therefore, confines itself to a discussion of various components of foreign environment. The other two types of environments and their business influences 1. What is micro environment? are examined in detail in other units. Foreign environment was described, in the preceding section as consisting af geographical, economic, financial, socio-cultural, political, legal and ecological forces. A firm needs to examine these componentszofthe environment for each one of the foreign countries in which it operates. A brief description of these components and their influence on the firm's international business operations is provided in the folloGing sub-sections. Though'we shall be discussing each of the components separately, in reality there exists a lot of overlapping as well as interactions among various components. Population, for 2. Distinguish between domestic and foreign environments, instance, is discussed in literature as,an element of both the physical and economic envi- ronments. There is a lot of overlapping among the socio-cultural, legal and political forces. Geographic characteristics of a counw have profound impact on the country's economic and socio-cultural environments. ' Moreover, it should be kept in mjnd that ali the components-and elements of the environment might not be relevant t o a decision maker. Much depends on the nature of the firm and its decisions. For a small firm interested in exporting, analysis of the commercial policy and the economic environment would be sufficient. But for a multinational corporation interested in setting up a ~nanufacturingplant in a foreign country, geographic as well as socio-cultural,  ( ' r ~ ~ ~ r r p l s :Di~ncnsiotls ~ad Various dimensions one needs to consider while attempting an econoniic and financial introduction to lnternatiot~al legal and political environments wolild be as irnporlant as 111~.cconolnic c!ivr~.c~r~~nent. Let L I + Business Environrncnl Ctmc now learn these environrne~italcornpnncnts in detail. analysis include : foreign country's level of econonlic development, income, expenditure pattern, infrastructure including financial institutions and system, inflation, foreign invest- ment in the country, commercial policy, balance of payments account, accounting systems 1.4 GEOGRAPHIC ENVIRONMENrlf --- ,- Geography is nn important con~pone~lt of the foreign enviro~lmentancl refers to a country's I 1 and practices, and integtation of the foreign country's foreign exchange, money and capital markets with the resl of the world. Let us learn these economic and financial environment in detail. climate, topography, natural resources and people. Everyone engaged in international business must have some knowledge of geographic features of the Foreign country as these 1.5.1 Eco~lomicEnvironment influence the nature and characteristics of a society. It also affect demand pattern of the people living in the cvuniry. Geography is a major contributo~yfactor to the development Economic environment is the most important indicator of the global market analysis. Let us of busincss systems, -trade ce~itresand ro~ites. discuss the major ecor~omicindicator influe~~cing the foreign market decisions. Diffcrelll cli~n:tliccol.~ditions(viz., ~. i ~ i l~i.~ ~ l j w f wind, a i l , tcn1pel.nture, hl.lmitlity, etc.,) give Economic Developn~elrt:Economic development is directly related to the development of rise to de~.nnndfor different types IOS 111.oducts.It is 1:ugely due to climatic dil'fc:rences that mnrketing in a country. Countries characterised by high levels of economic development not people diff2r in their housing, clotlli~lg,fczoc!, 111edical and recreational needs. Many a tinle only liave high demand for a variety of products, b ~also ~ thave better infrastructure and more nceds are same, and Ihc sa~rleproduds iirc den~anilcd. But because or the cli~nnticand b developed marketing systems. Competition is also high in these countries. In the less devel- topogr:~phicdif'fel,cnces, prodricts need ucli~ptationor modifications to suit local conditions. oped countries, on the other hand, not only demand is low, but infrastructure is also poor. It, Rolls Royce cars fro111England, for instar~ce,~~equired extensive body work and renovations therefore, bccomes quite difficult and more expensive to do business in such nations. i i i Canada because tlle salted sand, spread over streets to keep them passable throughout i four or five months of virtually continuous snow in Canada, caused rusting and corrosion 1 Income: Income is an important indicator of the country's level of development and also its in the fenders and door panels and oil systen~also developed leaks. market size. Gross national product (GNP) and per capita income are among the major measures of income. While sales of most of the industrial goods and capital equipment Geographic conditions also affect a firm's plant location decision. A firm prefers to set up generally col-relate with GNP, demand for consumer products depends on per capita income. its !nanufacturing plant in a country which has favourable climatic conditions, possesses suitable topography (i.e., surface features such as hills, plains, river and sea) and where raw Besides income. one should acquire information about the sectoral distribution of the GNP materials, energy and labour are cheaply and abundantly available. Foreign country's as it is an important determinant of kinds of goods in demand in a foreign country. If the nearness to other markets and its strategic location on rnajor trade routes are other equally majority of a country's GNP comes from agriculture, it implies that the country is agriculture irnporta~~tconsidel-ations. based and it shall have a good demand for agricr~lturalinputs such as seeds, ferlilisers, pesticides and agricultural ~nachirleryand tools. An industrial nation with relatively higher Firms' distribution and logistic strategies are directly influenced by geographic conditions dependcncc on ~nanufacturing,on the other hand, sllall have agood market for raw materials, in the foreign markets, Re-ordcr points and safely level stocks are kept generally higher for plant and machinery, and also for a variety of consumer durables and non-durables. those countries or places which are not easily accessible and can be cut off suddenly and heavily d ~ r eto bad weatl.~er. Though per capita income is a useful measure, it is not a full-proof measure of the country's development and prosperity. What is more relevant is the distribution of income. While in Location of a country on the world map is an cill~allyinlportant consideration. It affects its the developed countries income distribution is relatively more even, it is highly skewed in the trade prospects with other countries. Landlockcd countries such as Bolivia, Zambia and developing countries. Since only a small portion of the population accounts for 60 to 70 pkr Zimbabwe ,are not only costly to reach but are also difficult to penetrate as trading with cent of the country's GNP and the rest are poor in the developing countries, market for high these countries depend upon their relations with neighbouring countries through which priced product and non-essential products is limited only to select rich people. goods have to cross. Expenditrlre Pattern: Data on expenditure patterns are useful in judging as to how the money Consumer demand for man), a low priced and essential product is directly related to the is spent on different i t e m and which products receive more weiglltage. number of people living in a country. It is primarily due to large populations thot :he countries like China and India have become the targets of the multinational corporations Infrastructure: Infrastructure is another vital dimension of the country's economic environ- which are vying with one another to gain a foothold in these markets, To al-rivc: at a correct ment and is directly related to the country's economic development. Infrastructure refers to estimate of the market size, however, one needs to take into ~ c c o u n other t factors alsq such various social overheads such as transportation, telecommunications, comnlercial and as population growth, population density and population distribution by age, income, financial services like advertising, m~rketingresearch, various media, warehousing, location and occupation, ~ a k e ntogether, these variables provide better estimates o f the insurance, distribution, credit and banking facilities. Absence of adequate infrastructure not present and future market potentials and also help in providing information relevant for only hinders country's development but also affects firms' costs and capacity to reach communication, distribution, product quality and pricing decisions. various market segments. Companies find it difficult to co-ordinate and control their business in countries with poor communication systems. -- --- 1.5 ECONOMIC AND FINANCIAL ENVIRONMENT 1.5.2 Financial Environment , Alnong all the uncontroliables, economic environment is pethaps the most important Sound tinancial position of the country coupled by the favourable investment policies factor. An analysis of econodic environment enables a firm to know how big is themarket reflect strong denland potential. Let us briefly learn important financial indicators. and what its nature is. Answers to these questions in turn determine whether a firm should enter a given foreign market, and if yes, what strategies it should use to successfully run its Monetary a r ~ dFiscal Policies: Inflation, interest rate, various kinds of duties and exchange business operations, Closely related to the economic environment is the financial environ- rates are the variables related to the country's ~nonetaryand fiscal policies and have a ment which affects a firm's capital stnlctr~re,investmentdecisions and accounting ~ractices. , Mdt~~trlna. , i t $..iii~atltll~pactUII the costs and profitability of business operations. These variables also lntrodllction to lnternationul Furthermore, within each culture there are many subcultures that can liave business signifi- rlltltlmce u firm's decision to move funds from one nation to another. Business Environmer~t cance. For instance, in a country like United States distinct subcultures prevail in the South, C'!,elmcrcial and Foreign Investment Policies: Each country has its own commercial and North-Eastern or midwestern parts. Subcultures are found in all national cultures and failure fairztpn investment policies which must be studied in detail to ascertain country's opellness to recognise them may create impressions of sameness which in reality may not exist. A ttt tr,itlr! ,~ndirlvcstment with other countries. A proper understanding of these policies can single national and political boundary does not necessarily mean a single cultural entity. Ire rl~rrtcttslpfuj in nscertaining what tariff and non-tariff barriers the particulq country Canada, for instance, is divided between its French and English heritages, althoug11politi- IJ ,a) r to protect its domestic industry from foreign competition. The country m a y plan to cally the country is one. Because of such distinctive cultural division, a successful marketing ndirii~niuethe incidence of these trade measures. strategy among the French Canadians might not effectively work among the English Canadi- ans or vice-versa. Similarly a single personnel policy may not work with workers employed in H~lelrceof Payments Account: A country's balance ofpayments account is another major two different plants if they belong to different subcultural groups and differ in their work i,i,lrrsa of'infomation about the country's foreign trade and foreign currency reserves. The habits and underlying motivations. ctrrrt.ltt ;iccoccnt throws light on the country's exports and imports as well as its major \r41rrr cs of imports and destinations of exports. Capital account reveals stocks of foreign Elements of Culture 1 nnwdftnretirs,borrowings, lending and foreign exchange reserves. An international firm nrr+iilatic duly nwnre of exchange controls prevalent in the foreign countries. Countries Some of the important elements to understand a country's culture are: language, aesthetics, rat~ninpcfeficit5 ill their balance of payment accounts generally impose controls on rnove- education, religions and superstitions, attitudes and values, material culture, social groups rtsnt of firreign exchange into and out of their economies. These controJs prompts the and organisations, arrd business customs and practices. rv~~ltin;rtiottal col-porations to resort to transfer pricing mechanism, i.e., overinvoicing of ir~ipc~rts and underpricing of exports so as to move out more than permitted finds from Language: Language is an important element of culture and it is through language that most secll countries. of the communicatio~~s take place. An international marketer should have a thorough under- i standing of the language of the market -particularly the semantic differentials and idiom- atic nuances which are essential characteristics of all languages of the world. Dictionary translation could be quite different from the idiomatic interpretation of a language. When literal translations are made of brand names or advertising messages from one language to Business is as much a socio-cultural phenomenon as it is an economic activity. Per capita another by people who know the language but not the culture, serious mistakes ntay occur. income in two countries may be the same, yet the consumption patterns in these countries When General Motors of tlie United States literally translated its marketing phrase 'Body by may differ. Socio+culluralforces have considerable impact on pmductgpeople consume; Fisher' into Fle~nislllanguage, it meant 'Corpse by Fisher'. Similarly, the phrase "Come designs, coloun md symbols they like; dresses they wear and emphasis they place on alive with Pepsi" faced problems when it was translated into German advertisements as mligion, work, entertainment, family and other social relations. ~ocio-culturalenvironment "Come out of grave" or in Chinese as "Pepsi brings your nncestors back from the grilve". influences all aspects of human behaviour snd is pervasive in all facets of business ope* When the American car called 'Nova' was introduced in Puerto Rico, sales were poor until tionr, - the company realised that the word Nova was pronounced as 'Nova' which literally meant in Spanish "does not go". Sales were better when the name was changed to 'Carbie'. C u l l u ~CUI be defined es a "sum total of man's knowledge, beliefs, art, morals, laws, curloms end any other capabilities and habits acquired by man as a member of society." It Aesthetics: Aesthetics pertain to a culture's sense of beauty and good taste, and is ex- is a distinctive way of life ofa group of people, their complete desi$n of living. Culfore pressed in arts, drama, music, folklore, dance and the like, Aesthetics are of special interest to thus refers to a man's entire social heritage -a distinctive life sfyle of a society and its "@.'I value system which is intricately related to Be consumption pattern of the people and the international business executives for these govern tlie norms of beauty in a society and mmapanent philosophies and practices. Look at the box which gives you insight about h e are helpful in correctly interpreting meanings of various methods o f artistic expressions, 8 ~ ~ ~ c ~ I environment, tural colours, shapes, forms and symbols in a particular culture. Colours, tor instance, mean different things to different people. The colour of mourning is black in the United States, but it is white in the Far East. Green is resthl colour to Americans, but it is disliked by people in I pa"icipati~e Management Sty* Backfires! A p d u ~ l l o nmmager who had been sent to Peru from the United S t a b w u convinced 1 Malaysia where it connotes illness and death. Symbols also need to be interpreted correctly, Seven, for instance, signifies good luck in the United States but just opposite in Singapore, ~ h a n aand Kenya. Use of number four should be avoided in Japan because it is pronounced ha mdl'ate work^^ to higher productivity by inaituting a more democratic as 'shi' which in Japanese means death. Sensitivity to the aesthetics of a society and their 'Ow rn ' dwiBnmrtfng *Ie- He brought in bincrs from Me home officeto teach supemi.ors aa'icitN&edon$ a d feedback from the workem, shortly a&r he new Ont 'Mlc wm inkoduccd, h e worken began quioing their john When uked symbolic expressions can greatly help in avoiding socially embarrassing situations and. correctly designing the products and messages. M' tb' micd whU ' (bat fie new Pmduction manager wd his supervison appamty did weE,the~fore,&khg the worken for advice. Obviousln Education: Education is generally understood as formal schooling. But it is better to adopt UUI wmpmy ' not Imt VUMd qU" bdf're the W l l a ~ an^ tin& long with hat kind of management, md workers, therefon, beawe ~ then everyone would be huntingfor a job st a broader perspective and define education as any process, formal or infonnal, through which one learns skills, ideas and attitudes. Education is important as it affects not only the education levels but also the development of mental faculties and various skills, In general, educated people have been found to be more sophisticated, discriminating and receptive to new products and ideas. Availability of educated manpower like skilled labour, technicians and professional is also dependent on the country's education level. Media to be used by a company for promoting its products an$ services are also dependent on education level prevailing in the country. The conventional forms of printed communications, for instance, do not work in countries where literacy rates are low, Religions and Superstitions: Religions are amajor determ,inant of rnotal and ethical values and influence people's attitudes, habits and outIook on life which are reflected jn their work  behavioural nornis, codes of social conduct, value systems, etc., that may be of relevance to lntroductior~to lnternntional lli\hbitsmd consumption patterns. Dr. Ernest Dichter observed: "In puritanical cultures, it is Busincss Environment the i~lternationalbusiness managers in their decision making. castornary to lhink olsleanliness as being next to godliness. But in Catholic and Latin American countries, to fool too much with one's body to overindulge in bathing or toiletries, Busia~essCustotms and Practices: A familiarity with business customs and practices preva- llas the.oppositemeaning. It is that type olbehaviour which is considered inlmoral and lent in different countries is a must to avoid business blunders. An international business improper". n-nanager must have necessary knowledge about how business is col~ductedand what 'I'l~ereare nun~erousreligions and faiths in the world, with prominent ones being : Animism, importance business people in a foreign cou~ltryattach to work, time, formality, change and Buddhism, Christianity, Hinduism, Islam and Shinto. Each one has its own morals and codes achievement. American managers, for instance, are by nature highly work oriented and attach of conduct. A working knowledge of the religions prevalent in the target markets helps in upmo:;!. i~nportni~r"~: ro spced and punctuality in business dealings. They are, moreover, understanding people's work habbits, underlying motivations and consumption behaviours. highly acliievcll~i:nt oriented and fond of new things. But people in other partsrof the world do not share these values and beliefs. Japanese, for instance, are also workaholics but they Equally impor-tant are the superstitions of the people in a society. People's beliefs in astrol-.are very slow in decision makingl'latin Americans too do not believe in haste and spend ogy, hand reading, ghosts, lucky days and places are integral part of certain cultures. In some considera1.de time in socialising and developing friendships before coming to business countries, single storey houses are preferred because it is considered bad to have another's transactions. foot on ones head. Location of a building and its architecture in many Asian countries is governed by the principles of 'vastushastra' rather than purely geographical and econo~nic A person dealing with people from different cultures should be well aware of differences in considerations. the number and nature of stages involved in business negotiations ancl formalities to be observed in concluding business contracts. While in countries like the Ullited States it is Attitudes and Values: Besides religions and superstitions, one must be cognisant of atti- necessary to have final agreement in writing, this practice is not rnrlch appreciated in many tudes, values and beliefs prevalent in a society. These attitudes and values may relate to West Asian countries where oral agreement alone is considered more than sufficient. consumption level, material possessions, risk taking and change. 'What is important and desirable' differs from society to society and is largely governed by the attitudes and ~ a l u e s Check Your Progress B existing in a society. Americans in general are more receptive to change and risk taking, but people in many societies are averse to change and risk taking. They prefer doing what is 1. What is economic environment? traditional and safe. New products are not accepted unless these have the approval of local chiefs or religious leaders. Material Culture: According to Ball and McCulloch, material culture refers t o all nian- made objects and its study is concerned with how man makes things and who makes what and why. While the question 'how7 relates to technology, other questions 'who', 'what' and 'why' are part of economics. Technology includes the ways and means applied in making of material goods. It is technical know-how in possession of the people of a society. Choice oftechnology I~asits repercus- 2. Distinguish between Current Account and Capital Account. sions 011 the size of investment, scale of operations as well as type and Amber of workers to be employed. Tkchnology transfer has been a highly controversial issue in the past. Because of supply of obsolete or inappropriate technology, many developing countries have laid down stringent rules and regulations concerning technology import$ and payments. Since transfer of new technology is often riddled with workers' resistance to change and public criticisms, multinational corporations are advised to have suitable action plans to counter such opposition. Economic aspects of material culture, i.e., who, what and why, have already been discussed 3. Enumerate four elemellts of culture, in Sub-section 1.5.1. It is suffice to say here that these elements influence the leveI of demand as well as types and quality of goods in demand, and consumption pattern in a society. Business implications of material culture of a society are obviously many. The goods and services that are acceptable in one market may not be acceptable in another market because of differences in material cultures of two societies. For example, sophisticated electronic appliances widely in demand in the technologically and economically advallced Western countries may not find a market in the less developed countries of Asia, Africa or Latin America. '4. What is material culture? Social Croups and Organisations: A study of social goups and organisations is i~nportant as it determines how people relate to one another and orgmise their activities. The size and cohesiveness ofthe family, role ofmen and women in society, and positions of different* s a c i ~classes i differ from country to country. Social groups and organisations mould the pattern of living and interpersonal relationships of people in a socieo. They influ&ce the  Introduction Business illternationa' to Environment i:onrcpts H I I ~Dimensior~s initiated or predetermined. Whereas firm lnltlated and predetermi~ieddomestication entail low 5. State whether following statements are True or False. levels of risk, government initiated domestication is quite risky and is ranked with expropria- Different climatic conditions give rise to demand for different types of products. ii) Demand for consumer products depends on Gross National Products. Another type of risk relates to a temporary or permanent blocking of finds. Unlike other kinds of risks, a business firm under blockage of funds owns the funds and property rights iii) Per capita income is a fullproof'measure of the country's development and prosperity. but it cannot remit the funds or earnings back to home country. This was a common problem faced by Indians during Amin's rule in Uganda, Although the government did not iv) Countries running deficits in their balance of payment accounts generally formally ~nakeany announcements regarding takeover of property, it became almost impose controls on movement of foreign exchange into and out of-their economies. impossible for the firms to repatriate their earnings in any form. No doubt black money market operations may exist in any country, it is difficult for such operations to handle v) Green connotes illness and death in America. large scale of funds involved. 1.7 POLITICAL ENVIRONMENT I International firms need a proactive approach to deal with political risks. An effective management of risks calls for recognising the existence of various kinds of political types of risks and their consequences, and developing appropriate plans and policies to deal with It is rightly said that a foreign business firm operates only as a guest and at the convenience of the host country government. The government reserves the right of allowing a foreign 1 such risks... firm to operate in the country as well as laying down the manner in which a foreign firm can conduct business. To gain an insight into a foreign country's political environment, one needs to analyse factors such as current form of government and political party system, role i 1.8 LEGAL ENVIK~NMENT of govemment in the economy, political encouragement to foreign firms, political stability, Every business firm operates within the jurisdiction of legal system. This is true of domes- and political risks to business. tic as well as intematiollal firms. But the problem for the international finns is that the laws that they face in their home countries might be diEferent from those encountered in the Form of Government and Political Party System: Government in a foreign country can be host countries. Advertising Iaws in West Germany, for instance, are so strict that is best either parliamentary or absolutist. While the parliamentary type of government is run by advised for the international marketer to get himself good legal counsel before framing his people's representatives selected from time to time, the absolutist government assumes the advertising strategy in West Ge~many,Similarly there exist laws in Eoropean countries f o w of absolute monarchies or dictatorships, and only a select few make policies. In the preventing promotion of products through price discounting. These laws are based on the case of parliamentary government, one needs to know whether it is a single party system or premise that such practices differentiate buyers, multiparty govemment system. Single party government is considered to be more stable I than the multiparty government. Different Iaws exist not only in the area of marketing mix variables but also for other I business decisions like location of plant, level of production, employment of people, raising Political Ideology and Role of Government: Besides political party system, one must have money from the market, accounting and taxation, property rights incIuding immovable knowledge about the political ideology and government attitudes toward foreign business ,property and patent and trade marks, cancellation of agreements. and investment. In addition to regulatory role, government itself can be directly involved in business. In such cases, government enterprises emerge as dominant players in the market Besides directly influencing firm's busin&s operations, laws affect the environment and pose tough competition to the foreign firms. Even supplying goods and services to the within which a firm operates in the foreign country, Tlius while one country may promote agencies is not hassle free. Because of monopsonic power of the government competition within its markets through its legal system, another country might try to organisations, it becomes quite arduous to negotiate prices and other terms with them. protect its industry and thereby restrain competition. In the United States, for instance,' anti-trust legislation influences all mergers, take-overs, and business practices which we in Political Stability: Stability of the government and government policies are a major concern restraint of trade, Court's verdicts in this respect are governed by paragraph one of for the international firm. Since business decisions, these days involve huge investments and Sherman Act. Gillette, for example, was prevented from taking over Braun A.G. of West are irreversible, what the foreign firms look in for is politically stable countries. Political Germany which was an electric razor manufacturer on the grounds that it ~voulddistort instability can result from either change in the type of government, a shift ip-political parties competition. that form the government or change in the government policies without cl(ange in the government or shifts in political parties. A major problem with laws in different countries is that the legal systems of the world are not harmonised and are in fact based on contradicting legal philosophies. The legal systems Political Risk: Political risk which is defined as the vulnerability of a project to the political that exist in different countries of the world are antecedents of one of the two legal philoso- acts of a sovereign government is a big threat to foreign business. The political acts leading phies ,viz., common law and code law. Common law finds it roots in Britain and is to political risks can range froni confiscation, expropriation, nationalisation,domestication to practised today in the United States, United Kingdom and Canada. The basis of common restrictions on transfer of finds. Confiscation occurs when a foreign investment is taken law is tradition, past practices m d past rulings of higher courts who look upon similar over by a govemment without any compensation. Expropriation takes place when the problems within the accepted set of laws. Code law, on the other hand, is based on Roman ,govehment takes over foreign investment but some compensation is paid. The compensa- law and is an all inclusive system of written rules that encompass all eventualities. One tion may or may not equate with the market value of a fum. Nationalisation affects the entire important business implication of the two legal philosophies is that the judgements industry rather than a single company, and involves transferring ownership of the confis- awarded in the case of a commercial dispute can be radically different. To illustrate, let Us cated or expropriated business to a national firm or government entity. take the interpretation of non-fulfilment of required conditions of a contract under 'act of god'. h a t constitutes an 'act of god' in code law is not necessarily the same under Domestication is a mild form of intervention and involves transfer of control of foreign common law. Thus while strike by workers may be looked upon as an 'act of god' in code investment to national ownership to bring the firm's activities in line with national interest. law, it will definitely not be a reason for non-fiiirlfilment of the contract under the common It differs from expropriation in the sense that it is gradual encroachment of the freedom of I law. 16 operation of a foreign operator. Domestication can be either firm initiated, governrhent  1 I ('o~~rcptsid I ) i ~ n c ~ ~ s i o n ~ In last few decades, efforts have been made to evolve international laws, International laws 1 lntroductif~nto lntcrnntiona 1 2. Distinguish between confiscation and expropriation. Buslness Environmen deal with upholding orders. Originally these laws recognised only nations as entities, but today these laws also incorporate role played by individuals. International laws ma; be 1I............................................................................................................ defined as a set of rules and regulations which the nations consider binding upon them 4 I selves. This definition brings out two important characteristics of international law. One I there is absence of the existence of a comprehensive legal system. There is truly no compre- < hensive body of law because as stated earlier international commercial law is of recent I birth. This has had a direct bearing upon the existing administering authorities. As of L I today, there are only a few international bodies for administeringjustice. These include I lnternational Court of Justice founded in 1946 and the World Court at Hague. Second cllaracteristic of the international law relates to tlie fact that no nation can be forced into i r 3. What do you mean by domestication? these rules as stated in the phrase 'consider binding upon thenl'. Since all nations recognise the sovereignty of the legal systems, international judgements are, therefore, based on the premise of good humanity and not on the basis of any particular country's legal system. I t In the absence of laws having jurisdiction over sovereign countries, a major problem faced by the international business~firmsis which country's laws, viz.. hon country's or home ' countly's or third country's laws, shall be binding in the case of a dispute. Firms also need to be aware of differentmodes of the settlement of trade disputes and role of lnternational 4. What is international law? Chamber of Commerce' Court of Arbitration............................................................................................................. Because the field of international law is wide, in this sub-section we have made only an attempt to highlight some of the major legal issues. A detailed discussion of various legal aspects is provided in Units 14 to 16. 1.9 ECOLOGICAL ENVIRONMENT 5. State whether following statements are True or False, i': : Ecology refers to the pattern and balance of relationships between plants. animals, people i) The nbsol~~tist government assumes the form of absolute monarchies or and their environment. Earlier there was hardly any concern for the depletion of resources dictatorship. and pollution of the environment. Smoke stemming from the chimneys and the dust and grime associated with factories were accepted as a necessary price to be paid for the devel- ii) , Government initiated domestication is not risky. opment. But in recent years, the magnitude and nature of the 'pollution overload' have iii) Advertising laws are very strict in West Germany. assumed such alarming proportions that pressures have built up all over the world to do something urgently lest the situation gets out of control. In almost all the countries, there iv) In the United States, anti-trust legislation influences all mergers, take-oven exist today legislations and codes of conduct to preserve the earth's scarce resources and and business practices which are in restraint of trade. put a halt to any further deterioration in the environment. ~usinesdo~erationsof the Germany lias relaxed environtnental laws. v) international firms are no exceptions and have been brought under such regulations. Very recently, the United States government imposed a ban on expbrts of marine products from countries including India which did not have special devices fitted into fishing trawlers to free the tortoises trapped during fishing expeditions. Similarly, restrictions have been put 1.10 LET US SUM UP on garment exports using cloth processed through the use of AZO dyes. Germany today is perhaps the country with most stringent environn~entallaws in the world. A major difference between domestic and international business is the environment within which business is conducted, While doing business within one's own country, one is The concept of industrial progress and development has also undergone paradigm sbifts. familiar with the prevailing environment and is readily able to adjust to it. But problem Corporations today are judged in terms of not only financial returns, but also conservation with doing business in foreign countries is that environments in foreign countries are of environmental resources and reduction in pollution levels. Green technologies, green different and also unfamiliar to a business firm. Because of environmental differences, products and green companies are highly valued in today's global market place. strategies a firm uses in the home country might not be appropriate in the foreign coun- vies. One, therefore, needs to be extra careful in identifying various environmental forces.%heckYour Progress C operating at the home country, host country and global levels; and should examine their influence on production, personnel, financial and marketing operations of the firm.Tho.. 1: What is political instability? ~najorforeign environment to be analysed include; geographical, economic, financial, socio- cultural, political, legal and ecological........................................................................................ I ' '""""""'?"'~.."...""".'."..'.."'...'.."'.'......r.,......,.......:............................. 1.11 KEY WORDS , I I....."..."..... 1................1......................,..~.....,,.,,.,..,.,.,..,.,.,...,..,,...,...... Business environment: Various external actors and forces that surround a business firm and influence its decisions and operations. ( ' o ~ ~ r r lHtItI ~~ JI ) ~ I ~ ~ c I I Y ~ ~ I ~ k~rcrt,envir40nment:Actors in the firm's ~tnrneaiateenvtronmer~tsuch as suppliers, various mnrlctrtinr! " intermediaries, services organisations, competitors and cnstonlers which directly influence a firm's decisions and operations. Macro environment: Broader geographic, economic, financial, socio-cultural, political, legal and ecological forces in the firm's environment which affect the timl as well as other actors in Structure the firnm's micro environment. These forces can operate at the home ti.e.,domesric) country, host (i,e., foreign) country and global levels. 2.0 Objeclives i 2.1 Introduction Geographic environment: It refers to a country's climatic conditions; topographic features I 22 0b.jectives o f Trade Theories like size; locatipn, hills, rivers and access to sea; natural resources and people. j 2.3 Ricardian Theory of Trade 2.3.1 I,abour'TIleory of Value Economic and financial environment: It pertains to country's economic and financial features 2.3.2 Autarky Equilihl.ium Such as level ofeconomic development, income, pattern of expenditure, infastructure, 2.3.3 Absolute Advantage versus Cotnparativc Advantap inflation, commercial and foreign investment policies, monetary and fiscal systems, account- 2.3.4 Frec Trade 2nd Gains from "I'radc ing systems and balance of payments account. 2.3.5 I'errns of 'Trodc 2.4 'The Neocl;~ssicaITheory of Trade Cliltural Environment: Culture is defined as the sum total of man's knowledge, beliefs, art, 2 I lielativc Fmtor Abundance morals, laws, customs and any other capabilities and habbits acquired by man as a member of 2.4.2 Fhctor lnlensity the society. 2.4.3 The Assuniptions of the Neoclassical Model 2.4.4 ProduCt Pricc Iintio and ITactorPrice Ratio i'olitical risks: Political risks refer to vullierability of a project to the political acts of a 2.4.5 The Heckschcr-Ohlin- Satnuelson (MOS) 'Theorem sovereign government. 2.4.6 Factor i'ricc EquaIisation 'I'heorem 2.4.7 SxnueIson-StolperTheorem Ecology : It refers to pattern and balance of relationships between plants, animals, people and 2.4.8 12ybczynski Thcorem their environment. 2.5 Modern Theories of Trade 2.6 Let Us Sum Up 2.7 Key Words 1.12 ANSWERS TO CHECK YOUR PROGRESS 2.8 Answers to Check Your Progress 2.9 Terminal Questions A 5 i) True; ii) False; iii) False; iv) False; \I) True. B 5 i) True; ii) False; iii) False; iv) True: v) False. 2.4) OBJECTIVES ' i - After studying this unit, you should be able to: 1.13 TERMINAL QUESTIONS r describe the pattern o f trade between two countries 1. Define international business environment. Also differentiate between micro and r discuss how international trade is mutually beneficial to the trading countries macro environments. r explain the classical theory of kade 2. I How does the home country environment influen