International Business Environment PDF

International Business Environment EMGN578 Edited by Krishan Gopal International Business Environment Edited By: Krishan Gopal  CONTENT Unit 1: An Overview of International Business Environment 1 Ra...

International Business Environment EMGN578 Edited by Krishan Gopal International Business Environment Edited By: Krishan Gopal  CONTENT Unit 1: An Overview of International Business Environment 1 Rajeev Gupta, Lovely Professional University Unit 2: Components of International Business Environment 11 Rajeev Gupta, Lovely Professional University Unit 3: The External Environment and Challenges 39 Rajeev Gupta, Lovely Professional University Unit 4: International Trade Theories 52 Rajeev Gupta, Lovely Professional University Unit 5: Protectionism and Trading Environment 68 Rajeev Gupta, Lovely Professional University Unit 6: Economic Integration and Co 85 Rajeev Gupta, Lovely Professional University Unit 7: International Financial Markets 98 Rajeev Gupta, Lovely Professional University Unit 8: Global Debt and Equity Market 115 Rajeev Gupta, Lovely Professional University Unit 9: Global Competitiveness 128 Rajeev Gupta, Lovely Professional University Unit 10: Internationalization Strategies 145 Rajeev Gupta, Lovely Professional University Unit 11: Forms & Ownership of Foreign Production 161 Rajeev Gupta, Lovely Professional University Unit 12: International Business Diplomacy 178 Rajeev Gupta, Lovely Professional University Unit 13: Country Evaluation & Selection 190 Rajeev Gupta, Lovely Professional University Unit 14: Globalization and Society 203 Rajeev Gupta, Lovely Professional University  Unit 1: An overview of International Business Environment Notes UNIT 1: An Overview of International Business Environment CONTENTS Learning Outcomes Introduction 1.1 Globalization 1.2 International Business 1.3 Types of International Business Firms Self-Assessment Summary Keywords Review Questions Further Readings Learning Outcomes After studying this unit, you should be able relate with the international business environment relate with globalization identify different types of international business firms explain the influence of the environment on different types of international business firms Introduction One of the most important things that have driven international business for the past few decades is change. It can even be understood by one of the famous quotes by Prof. Leon C. Megginson. He said that “It is not the strongest or the most intelligent who will survive, but those who can best manage change.” Change plays a very important role when it comes to the environment. It gets even bigger in the role when associated with the international business environment. The same can be understood with the help of an example from the Swiss watch industry. Example: Swiss companies' mechanical movements had proven their durability and reliability for centuries and made this industry market leader in 1970. But their reluctance to adopt quartz technology cost them dearly. Exports of Swiss mechanical watches plummeted from 40 million in 1973 to only 3 million, ten years later. Japan and Hong Kong dominated the quartz segment and decimated the Swiss industry. Many small- to medium-sized watch companies in Switzerland closed their doors by the end of the 1980s. This reflects that if an organization not keeping a note of changes in the environment in which it's operating, can lead to the downfall of the organization. Fig. 1 Example: The Swiss Watch Industry LOVELY PROFESSIONAL UNIVERSITY 1  International Business Environment Notes Another example that can be discussed on the technological change in the environment that lead to the downfall of the organization is Kodak. Example: A generation ago, a “Kodak moment” meant something worth saving and savoring. Still, a few years ago Kodak experienced such a downfall in sales that it was forced into bankruptcy. After being founded by George Eastman in 1888, it became so dominant in photography that by 1976, 85% of all film cameras and 90% of all film sold in the US was Kodak. For almost a hundred years, Kodak was at the forefront of photography with dozens of innovations and inventions, making this art accessible to the consumer. In the 1980s, the photography industry was beginning to shift towards the digital. With Kodak inventing the digital camera, one would think that turning to digital would be the next logical thing for Kodak. The company jumped on the digital trend bandwagon although it was a late adopter while still selling analog cameras and film. As it turned out, digital cameras were not the biggest fish in the pond. Smartphones took the world by storm and digital camera producers saw their sales quickly spiraling down. People went from printing pictures to storing them on digital devices or sharing them online on social media platforms. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business. Therefore, it is necessary to understand the international business environment and globalization in a true sense to have an edge over competitors. 1.1 Globalization It refers to the elimination of barriers to international movements of goods, services, capital, technology, and the people that influence the integration of world economies. “Going global” is termed as a gradual process, starting with increased exports or global sourcing, followed by a modest international presence, growing into a multinational organization, and ultimately evolving into a global posture. Example: Airbnb started in 2008 and now has its footprints in more than 200+ countries. It is an online community marketplace that connects people looking to rent their homes with people who are looking for accommodation. The key to Airbnb's global strategy is localization. This example reflects the impact of globalization, in such a short period this organization has expanded its operation in 200+ countries. The brand has introduced a universal symbol as its logo – the Belo – which symbolizes ‘belonging’ no matter where you are in the world. The basic problem that Airbnb has to solve is bridging the global-local gap. On one side, one has to consider certain parts of the travel experience that must be applied in all places, like cleanliness standards. All wants freshly laundered bedsheets. On the other side, what makes Airbnb stand out from the millions of hotel rooms you can stay in is the uniqueness of the local experience. For 2 LOVELY PROFESSIONAL UNIVERSITY  Unit 1: An overview of International Business Environment Notes example, translation becomes a delicate aspect. If you're traveling to China from the U.K., you probably want to read home listings in English. But if Airbnb automatically translated Chinese profiles, visitors might expect that their host speaks English as well. The current solution: displaying profiles in the local language, and adding an optional translate button. Factors in increased globalization: The rise in the application of technology Liberalization of cross-border trade and resource movements Development of services that support international business Growth of consumer pressures Increase in global competition Changes in political situations and government policies Expansion of cross-national cooperation To protect its industries, every country restricts the entry and exit of not only goods and services but also the resources like workers, capital, tools, etc. However, most governments have reduced such restrictions, primarily for three reasons: Their citizens want a greater variety of goods and services at lower prices. Competition spurs domestic producers to become more efficient. They hope to induce other countries to lower their barriers in turn. Increased competitive pressures can persuade companies to buy or sell abroad. Example: A firm might introduce the product into the markets where competitors are already gaining sales, or seek supplies where competitors are getting cheaper or more attractive products. Governments support programs such as improving airport and seaport facilities to foster efficiencies for delivering goods internationally. Governments also provide an array of services to help local firms sell more in foreign markets. Regulating authorities like government and international bodies have to realize that their interest can be addressed through international cooperation employing treaties and agreements. This has happened largely due to: To gain reciprocal advantages To attack problems jointly that one country acting alone cannot solve To deal with areas of concern that lie outside the territory of any nation. 1.2 International Business It encompasses all commercial activities that take place to promote the transfer of goods, services, resources, people, ideas, and technologies across national boundaries. However, a broader definition of international business may serve you better both personally and professionally in a world that has moved beyond simple industrial production. exchanges can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument). The entities involved in international business range from large LOVELY PROFESSIONAL UNIVERSITY 3  International Business Environment Notes multinational firms with thousands of employees doing business in many countries around the world to a small one-person company acting as an importer or exporter. This broader definition of international business also encompasses for-profit border-crossing transactions as well as transactions motivated by nonfinancial gains (e.g., triple bottom line, corporate social responsibility, and political favor) that affect a business’s future. International business includes any type of business activity that crosses national borders. Though several definitions in the business literature can be found no simple or universally accepted definition exists for the term international business. At one end of the definitional spectrum, international business is defined as an organization that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country. At the other end of the spectrum, international business is equated only with those big enterprises, which have operating units outside their own country. In the middle are institutional arrangements that provide for some managerial direction of economic activity taking place abroad but stop short of controlling ownership of the business carrying on the activity. Influence of International Business Because most of the countries are not as fortunate as India in terms of market size, resources, and opportunities, they must trade with others to survive; Hong Kong has historically underscored this point well, for, without food and water from china proper, the British colony would not have survived along. The countries of Europe have had a similar experience since most European nations are relatively small in size. Without foreign markets, European firms would not have sufficient economies of scale to allow them to be competitive with US firms. Nestle mentions in one of its advertisements that its own country, Switzerland, lacks natural resources, forcing it to depend on trade and adopt the geocentric perspective. International competition may not be a matter of choice when survival is at stake. However, only firms with previously substantial market share and international experience could expand successfully. Factors in International Business Operations It starts with the objectives of the organization as mentioned in the figure above. An organization can make a move for going international because an organization is interested in sales expansion, resource acquisition, or risk minimization. Once the domestic market is getting saturated for the organization, objectives like sales expansion will come in handy for such an organization. Similarly, if an organization believes that resources are available at a cheaper cost in some other country then this could also serve as an objective for moving into the international market. Diversification leads to risk minimization and this could be yet another objective for organizations in moving towards international markets. 4 LOVELY PROFESSIONAL UNIVERSITY  Unit 1: An overview of International Business Environment Notes When an organization moves to the international market, the operating environment plays a crucial role as these factors are beyond the control of the organization. An organization has to pay attention to all factors that are a part of the operating environment as these factors influenced organization operations significantly. You will be reading about the same in the next unit. Organizations will keep changing their strategies depending upon which factor is creating an impact on the operations of the organization. An organization is going to adopt various measures to enter in international arena like discussing the mode of entry. An organization can opt for any of the options mentioned in the figure like licensing, franchising, turnkey operations, importing, and exporting. It depends on which mode is best going to suit the organization taking into consideration the product or service in which the organization deals. Example: Let us take an example of a cricket series taking place in England. Indian team fans want to watch their team performing live. Their tickets on British air and travel expenses in England are service exports for Britain and service imports for India. On an international level, for example, companies receive fees for engineering services rendered in turnkey operations. Companies also receive fees from management contracts arrangements in which they provide personnel to perform management functions for another such as Disney’s management of theme parks in France and Japan. Competitive factors also play a vital role in overall international business operations. Competitive factors (such as the number and strength of suppliers, customers, and rival firms) are all important for an organization. The influence of all these factors will be seen in units ahead. 1.3 Types of International Business Firms International Company: International companies are importers and exporters, they have no investment outside of their home country. The functioning and strategies are derived mostly from the primary market which is the domestic home country market. They have to continuously adjust to the trading norms of the home country. LOVELY PROFESSIONAL UNIVERSITY 5  International Business Environment Notes Example: Spencer's Retail is an Indian chain of retail stores headquartered in Kolkata, West Bengal which is providing a wide range of products across categories such as food, personal care, fashion, home essentials, specialty, and electrical and electronics to its consumers. Multinational Company: Multinational companies have an investment in other countries but do not have coordinated product offerings in each country. More focused on adapting their products and service to each local market. MNC’s have a centralized structure, with the head office in the home country taking important decisions. Products are decided and developed by the head office and subsidiary offices do have options to adapt to local markets if needed. Example: Adidas AG is a German multinational corporation that designs and manufactures shoes, clothing, and accessories. It is the largest sportswear manufacturer in Europe and the second-largest in the world after Nike. Global company: Global companies have invested and are present in many countries. They market their products through the use of the same coordinated brand in all markets. The corporate office is responsible for global strategy. Emphasis on volume, cost management, and efficiency remain the key factors. These companies work to have a foothold in a large number of countries, usually larger than a Multinational Corporation. Various subsidiaries are set but standard products are sold, without any flexibility in terms of adapting to local consumers. There is no change in branding or information about a global company, even if the country of operations changes. Example: Ikea was founded in 1943 and has been the world’s largest furniture retailer since 2008, with over 420 distinctive stores in more than 50 countries. It has a successful business model focused on offering stylish flat-pack furniture at affordable prices. Transnational Company: Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D, and marketing powers to each foreign market. Transnational companies follow a flexible approach, understanding and adapting to the local culture and demand of each country. Offices in each country work in a decentralized manner with decision-making powers. Subsidiary offices can launch and make products that might not be manufactured in the original home country if there is a chance of demand. 6 LOVELY PROFESSIONAL UNIVERSITY  Unit 1: An overview of International Business Environment Notes Example: Unilever operates in more than 100 countries, selling its products in more than 190 countries. The Company operates approximately 310 factories in over 70 countries. It operates a network of over 400 warehouses globally. The Company's brands include Axe, Dove, Lux, Rexona, and Sunsilk. Unilever has become a transnational company in the most basic sense: it thinks globally as well as acts locally. Similarly, we have other examples like McDonald's, Coca Cola and Vodafone. Characteristics of a Transnational company This company thinks globally and acts locally. This company adopts a global strategy but allows value addition to the customer of a domestic country. The assets of a transnational company are distributed throughout the world, independent and specialized. The R&D facilities of a transnational company are spread in many countries. Scanning or Information Acquisition: These companies scan the environmental information regarding the economic, political, social and cultural, and technological environment. These companies collect and scan the information regardless of geographical and national boundaries. Vision and Aspiration are global, global markets, global customers, and grow ahead of other global/transnational companies. Geographical Scope: They analyze the global opportunities regarding the availability of resources, customers, markets, technology, research, and development, etc. The scope is not limited to certain countries in analyzing opportunities, threats, and formulating strategies. Adaptation: Global and Transnational companies Adapt their products, marketing strategies, and other functional strategies to the environmental factor of the market concerned. Mercedes Benz is a super luxury car in North America, luxury in Germany, and standard taxi in Europe. Global Company is the one which has either produce in the home country or a single country and focuses on marketing these products globally and focuses on marketing these products domestically. Self-Assessment Multiple Choice Questions 1. The widening set of interdependent relationships among people from different parts of the world is known as ________. a) Globalization b) Offshoring c) Franchising LOVELY PROFESSIONAL UNIVERSITY 7  International Business Environment Notes d) Outsourcing 2. Which of the following best defines international business? a) It includes all economic flows between two or more countries. b) It includes all private economic flows between two or more countries. c) It includes all business transactions involving two or more countries. d) It includes all business transactions in countries other than your home country. 3. In terms of international business, it is most accurate to say that ________. a) there is a universal "best way" to conduct business b) global competition affects large companies but not small ones c) most firms depend either on foreign markets and supplies or compete against companies that do d) government regulation of international business has little effect on a company's profits 4. Devon, an accounts manager at a large electronics firm, does not have any direct international responsibilities; however, Devon would most likely benefit from studying international business issues so that he can ________. a) conduct better job interviews b) better understand how foreign operations affect the company's competitive position c) supervise and evaluate subordinates who have global assignments d) understand the legalities of importing and exporting products overseas 5. The shifting of national borders has most likely created which of the following situations for international business? a) It has left rural residents more isolated from technology. b) It has complicated the understanding of behavioral factors affecting business. c) It has increased physical barriers to exporting. d) It has slowed communications between a company's headquarters and foreign operations. 6. The shifting of national borders has most likely created which of the following situations for international business? a) It has left rural residents more isolated from technology. b) It has complicated the understanding of behavioral factors affecting business. c) It has increased physical barriers to exporting. d) It has slowed communications between a company's headquarters and foreign operations. 7. Most of the world's goods and services are sold ________. a) in international markets b) in the countries where they are produced c) through exports to small countries d) through exports to large countries 8. Which of the following has NOT been a major force increasing globalization in recent decades? a) liberalization of cross-border trade b) increase in and expansion of technology c) growing pressure from consumers d) decreasing prices of natural resources 9. Which of the following best explains why the international business has grown rapidly in the past few decades? a) the end of the political division between the Communist and non-Communist blocs b) greater income equality in most countries c) growing concern about climate change d) increased concerns about terrorism 10. Imported flowers are now a stronger competitor to U.S. grown flowers in the U.S. market. Which of the following is likely the MOST important factor for this increase in imports? a) more effective production techniques b) advances in communication systems c) advances in transportation and logistics 8 LOVELY PROFESSIONAL UNIVERSITY  Unit 1: An overview of International Business Environment Notes d) cross-national cooperation 11. Because consumers want a greater variety of goods and services at lower prices, many governments have ________. a) reduced their restrictions on the international movement of goods and services b) acted to tax most imports at a lower rate than domestic products c) sought to eliminate reciprocal advantages negotiated through international organizations and treaties d) increased their participation in multinational problem-solving efforts True/False 12. Gaining some understanding of international business is important for any business student because global events and competition affect almost all companies. 13. It is difficult to compare the globalization of business over time because shifting national borders have changed the nature of transactions from domestic to international and vice versa. 14. Globalization refers to all economic transactions among countries. 15. International business includes all commercial transactions between two or more countries. Summary This unit attempts to give an overview of the international business environment and globalization in an as simple manner as possible. International business is all commercial transactions whether private and governmental between two or more countries. Private companies undertake such transactions for profits; Government may or may not do the same. These transactions include sales, investments, and transportation. Study of international business has become important because (i) it comprises a large and growing portion of the world’s total business, (ii) All companies are affected by global events and competition whether large or small since most sell output to and secures raw materials and supplies from foreign countries. Many companies also compete against products and services that come from outside their home country. The company’s external environment conditions such as the physical, societal, and competitive affect the business functions such as marketing, manufacturing, and supply chain management are carried out. Globalization refers to the elimination of barriers to international movements of goods, services, capital, technology, and the people that influence the integration of world economies. When a company operates internationally, foreign conditions are added to domestic ones making the external environment more diverse and complex. In international operations, organizations can be categories into different types like international, multinational, global, and transnational. It depends upon the nature of the product or service in which the organizations might be dealing. Keywords International Business: relates to any situation where the production or distribution of goods or services crosses country borders. Globalization: means the speedup of movements and exchanges (of human beings, goods, and services, capital, technologies, or cultural practices) all over the planet. International Company: International companies are importers and exporters; they have no investment outside of their home country. Multinational Company: Multinational companies have an investment in other countries, but do not have coordinated product offerings in each country. LOVELY PROFESSIONAL UNIVERSITY 9  International Business Environment Notes Global Company: Global companies have invested and are present in many countries. They market their products through the use of the same coordinated brand in all markets. Transnational Company: Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D, and marketing powers to each foreign market. Review Questions 1. What is international business? What are the primary reasons that companies engage in international business? 2. What is globalization? What modes of international business are used by firms that want to globalize? 3. Why should domestic managers have an understanding of globalization and international business? 4. What are the factors that have led to the increased in globalization in recent decades? 5. In a short essay, discuss why governments have been liberalizing cross-border movements of goods, services, and resources. Answers of Self-Assessment 1 A 2 C 3 C 4 B 5 C 6 C 7 B 8 D 9 A 10 C 11 A 12 True 13 True 14 False 15 True Further Readings International Business: Environments and Operations, 16th Edition by Daniels, Radebaugh and Sullivan et all. Pearson Charles W.L. Hill, International Business Competing in the Global Marketplace,4th Edition, Tata McGraw Hill, Publishing Company Limited. International Business Environment and Management, by V. K. Bhalla and S. Shiva Ramu Anmol Publication and PVT. Ltd. https://economictimes.indiatimes.com/news/international/business/oecd-sees- global-economy-turning-the-corner-on-coronavirus-crisis/articleshow/79509589.cms https://economictimes.indiatimes.com/industry/services/retail/spencers-retail- appoints-dr-lal-path-labs-trained-health-wellness-advisors/articleshow/77849981.cms https://economictimes.indiatimes.com/markets/stocks/earnings/adidas-cautious-for- year-end-as-pandemic-returns/articleshow/79153858.cms https://economictimes.indiatimes.com/industry/services/retail/increasing-local- sourcing-in-dialogue-with-stakeholders-for-collaboration-ikea-india- ceo/articleshow/78515594.cms` 10 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes Unit 02: Components of International Business Environment CONTENTS Objectives Introduction 2.1 Cultural factors 2.2 Political and Legal Factors 2.3 Economic Factors Shadow Economy 2.4 Technological Factors Summary Keywords Self-Assessment Answer for Self Assessment Review Questions Further Reading Objectives After studying this unit, you should be able to discuss the changing social structure and correlate the same with globalization analyze the changing political and legal environment and correlate the same with international business illustrate the changing economic environment and correlate the same with international business discuss the changing technological environment and correlate the same with international business Introduction Multinational companies operate in different geographic regions around the world and have to deal with a wide variety of economic, political, legal, socio-cultural, and technological factors. These factors constitute an operating environment that includes political, social, legislative, economic, cultural, and natural environmental factors that significantly affect the business of any international firm. These factors need to be considered during planning to ensure the strategies fit the operational environment and are based on current local conditions. LOVELY PROFESSIONAL UNIVERSITY 11  International Business Environment Notes When an organization moves to the international market, the operating environment plays a crucial role as these factors are beyond the control of the organization. An organization has to pay attention to all factors that are a part of the operating environment as these factors influenced organization operations significantly. As the operating environment inserts its impacts on business success, scale, vision, and development strategy, having a full understanding of this issue should be prioritized by top management of the companies. Let us try and understand the impact of each of these factors one by one. 2.1 Cultural factors Culture and society have an impact on each aspect of the international business of multinational companies. However, culture and society are not directly included in international business operations; they indirectly appear as important elements in directing how the business is managed, from what products are manufactured, and how and through what ways they will be sold, to the creation of managerial and operational patterns and the evaluation of the success or failure of foreign subsidiaries. International companies should be aware of predominant attitudes, values, and beliefs in each host country were decided to expand their business activities. The degree of differences in attitudes and values among management of a parent company and expatriate managers at the subsidiary level, on the one hand, and managers and employees in host countries, on the other, can contribute to serious functional problems. Getting clarity of the cultures of different people is useful because business employs, sells to, buys from, is regulated by, and is owned by people. The socio-cultural environment is important for multinational companies. Various socio-cultural factors significantly affect the economic activity as well as the performance of multinational companies. The key socio-cultural factors that have a major impact on the operation of multinational companies: The shared values, attitudes, and beliefs of a group of individuals constitute a culture. Values form the bedrock of culture. They provide the context within which a society’s norms are established and 12 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes justified. Values are learned, and all individuals have them. They are reflected in their attitudes, beliefs, and actions. Their core values are so strong that they are not negotiable, whereas peripheral values are less dominant. The nation provides a workable definition of culture because similarity among people is both a cause and effect of national boundaries. It is a reference people make to we versus them. Despite using the nation as a cultural reference point not everyone therein shares the same values and attitudes. Subculture exists within nations. Social-cultural factors affecting International Business Operations The main points that are highlighted in the above figure related to cultural factors are cultural awareness, identification and dynamics of cultural behavior, behavioral practices affecting business, and strategies for dealing with cultural differences. When we talk about cultural awareness, it’s an important aspect for multinational companies as they are supposed to understand the culture of the host country for better serving the target market. Multinational companies are supposed to formulate strategies so that they can deal appropriately with cultural differences that home and host countries are having. Hofstede’s Comparison of National Culture Hofstede’s Cultural Dimensions Theory, developed by Geert Hofstede, is a framework used to understand the differences in culture across countries and to discern the ways that business is done across different cultures. In other words, the framework is used to distinguish between different national cultures, the dimensions of culture, and assess their impact on a business setting. National Context Cultures Attitudes Mindsets Impact People Workplace Influence LOVELY PROFESSIONAL UNIVERSITY 13  International Business Environment Notes Five dimensions of Culture Power distance Uncertainty and avoidance Individualism vs. Collectivism Masculinity vs. Femininity Long-term and short-term orientation Power distance: It is a measurement of employee preferences of interaction between superiors and subordinates. Evidence suggests that people perform better with these interactions that fit their preferences. With high power-distance, people prefer little consultation between bosses and subordinates. Uncertainty and Avoidance: It describes a trait of being uncomfortable with ambiguity. Where this trait is strong, most employees prefer to follow set rules even if breaking them may be in the company’s best interests. Individualism vs. Collectivism: High individualism describes a preference to fulfill leisure time, build friendship, and improve skills independently of the organization. Such employees also prefer to engage in personal decision-making and on-the-job challenges. This reflects societies where ties between individuals are loose. High collectivism reflects employee’s penchant for dependence on the organization through training, satisfactory workplace conditions, and good benefits. Societies where people are integrated often from birth, into strong, cohesive groups, embracing loyalty and bonds reflect high collectivism. Masculinity vs Femininity: Masculinity applies when gender roles are assigned, implicitly or explicitly, to males, reflecting being tough, assertive, seeking material rewards, and to females reflecting tenderness and quality of life. Femininity applies when tenderness and quality of life are assigned, implicitly or explicitly, to both males and females. Long-term and short-term orientation: Long-term orientation culture reflects a fostering virtue towards future rewards in particular perseverance and thrift. Short-term orientation culture reflects a fostering of virtues related to the past and present in particular respect for tradition, preservation of face, and fulfilling social obligations. International Business involves people from different national cultures, which affect every business function- managing a workforce, marketing and transporting output, purchasing supplies, dealing with regulators, securing funds. Cultural diversity can be a competitive advantage, but managing it can be difficult. Let us understand the same with the help of an example. Case of Starbucks: Starbucks started way back in 1971 in the United States and established its presence now in 76 countries. It is having more than 30000 stores across the globe and generated revenue of $4 billion in 2019. Starbucks started its efforts to enter the Indian market from 2006 onwards and made several attempts to ally with some local companies but it did not work out. Finally, in 2012 Starbucks did a 50/50 joint venture with Tata Global beverage limited and opened its first store in Oct. 2012. This move of Starbucks was taken by surprise as industry experts were thinking that the company may enter India without a partner. It was there in the mind of analysts because the Government of India allowed 100% FDI in single-brand retail in 2012 itself. The locations were branded as “Starbucks Coffee — A Tata Alliance,” an unusual move, as the Seattle firm does not typically sell its products under a hybrid brand. But in India, they did it to make a better connection with the target market as Tata is considered a very reliable brand in the Indian market. Starbucks decision to enter the Indian market was also supported by the change in preference of beverage in a certain section of the 14 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes society. Let us understand the same with the help of some statistics on the consumption volume of tea and coffee in India from the financial year 2015-2020. © Statista 2020 The consumption volume of tea in India was approximately one billion kilograms during the financial year 2020. Consumption of this hot beverage has increased consistently throughout the years. Year on year growth rate remains approximately 2% for tea in the country. India's per capita tea consumption is 0.78 kg per year till 2020. However, tea remains the preferred drink among Indians but coffee is on the rise in this new millennium. In the past decade alone, domestic consumption of coffee has grown at more than double the rate of tea. If we analyze the consumption volume of coffee in India, it can be seen from the chart below that consumption of coffee is on the rise. © Statista 2020 According to the reports of Statista, the coffee segment amounts to $808m and is expected to grow annually by 8.9% CAGR in 2020-2025. In India, the average per capita consumption and revenue stood at 0.03 kg and $0.6 in 2020. India has always been a ‘chai’ nation. And, coffee or rather ‘kaapi’ as it is called down South, has been a humble beverage that’s now an integral part of the ‘let’s hang out’ culture. According to a Euromonitor study, coffee consumption in India is closely associated LOVELY PROFESSIONAL UNIVERSITY 15  International Business Environment Notes with out-of-home consumption, mainly by young consumers with high disposable incomes. Also, the growth of cafe chains over the last decade has boosted the visibility and per capita consumption of coffee in India. Starbucks in India tried to build up what they call the ‘third place’ experience, where they wanted their consumers to come for the coffee, stay for the warmth, and return for the human connection. Starbucks stores across the world have this whole feeling of having values from the neighborhood and fit into the culture beautifully. For instance, their flagship store in Hyderabad is designed with the elements of Hyderabadi pearls. The same can be seen in the picture below. The flagship store in Pune has copper elements because the city has a history with copper. It can be noted that no two Starbucks stores look similar, and the flagship ones are where a lot of local inspiration can be seen. Starbucks ' efforts to fit in with the Indian culture continued as the company brought eatables along with coffee in its menu. Indians have the habit of eating along with coffee/tea. So, Starbucks has introduced Indian dishes like Konkani Twist or a Reshmi Kebab Roll in their menu along with other tried and tested muffins and sandwiches. Indians prefer tea more than coffee. Hence, Starbucks has introduced Tata’s branded tea called Teavana and Himalayan water beverages to add to the products. 16 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes The success and acceptance of Starbucks by different cultures stems from its carefully planned business strategy – localization. With localization, Starbucks can adapt to the tastes of different cultures, managing to convince consumers in other locations to drink coffee. This is particularly impressive in Asia where tea is the preferred drink. The service ensures that all information about a company and product is in the local language. In some cases, it requires some changes in the brand’s colors and appearance as well as adapting the brand name to fit the local culture. Company websites are localized, making them available in the local language and conforming to local preferences, traditions, beliefs, laws, and regulations. Starbucks kept its price competitive in India as compared to its competitors like CCD, Barista, etc as India is a price-sensitive market. Starbucks was able to bring down the cost of procurement of coffee due to its partner Tata. All the Starbucks coffee available in the Indian market is supplied by TATA Coffee. As a result, Starbucks saves a lot of money by not importing coffee. Example: Starbucks Localization Strategy This example reflects the importance of adapting to the culture of the host country for getting a better return on investment. Starbucks has done that fairly well in the Indian market as it has done in various other countries. LOVELY PROFESSIONAL UNIVERSITY 17  International Business Environment Notes Company and Management Orientation A company and its managers adapt abroad depends not only on the host, country culture but also on their attitudes. This includes: Polycentrism Ethnocentrism Geocentrism Polycentrism: The polycentric organization believes it should act abroad like companies there. However, polycentrism may be the overly cautious response to cultural variety, causing a firm to shy away from certain countries or avoid transferring home-practices or resources that will work well abroad. Ethnocentrism: Ethnocentrism reflects the conviction that one’s practices are superior to those of other countries. In international business it usually applied to a company so strongly committed to the principles of what works at home will work abroad that its foreign practices ignore the difference in culture and markets. This leads to sometimes poor performance. Geocentrism: It integrates home-and host-country practices as well as introducing some entirely new ones. It requires companies to balance informed knowledge of their own organization culture with home- and host-country needs, capabilities, and constraints. 2.2 Political and Legal Factors A very famous quote by Mr. Hunter S. Thompson “Politics is the art of controlling your environment.” It reflects the impact of the political factor on overall international business operations. Politics and laws are always and everywhere dynamic. At different times, different parties champion different ideologies that endorse different political systems. Despite the globalization of business, firms must abide by the local rules and regulations of the countries in which they operate. Until recently, governments were able to directly enforce the rules and regulations based on their political and legal philosophies. The Internet has started to change this, as sellers and buyers have easier access to each other. Nevertheless, countries still can regulate or strong-arm companies into abiding by their rules and regulations. As a result, global businesses monitor and evaluate the political and legal climate in countries in which they currently operate or hope to operate in the future. Normally, Multinational Firms are more comfortable investing in markets with a good political environment and law transparency, to assure game rules will not change dramatically making them pay more money for those changes or even lose their investments. Legal factors affecting business include all regulatory and law determinants that can negatively or positively affect results of market actions and decisions of the management of a company functioning in a particular country. International companies must analyze and identify those factors (legal environment) independently for every state they function. Consequently, investing and operating internationally exposes MNE to risks that arise from a change in a country’s political system. 18 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes Political and legal factors influencing international business operations As we can see from the exhibit above, factors such as the role of government in society, political ideologies, political risk, legal environment, and operational and strategic legal issues impact international business operations to a large extent. Multinational enterprises need to make changes in their modus operandi. Let us understand the same with one of these factors like political risk. Source-Fitch Solutions This political risk map provides a perspective for more than 200 countries and territories. Countries highlighted with red and yellow are more unstable concerning political, economic, and operations risks. Whereas countries highlighted with blue shades are the stable ones. This map is reflecting it on a scale from 0-100. The degree of political risk threatens the short-term profit and long-term sustainability of the business activity. Therefore, managers evaluate politics and law and estimating the resulting risks to the profitability and sustainability of their operations. Let us understand the same with help of an example. The trade war between the United States and China reflects the political risk for the companies operating in these two countries. One of Trump's main 2016 campaign themes was that the United States, the world's biggest economy had been taken advantage of by its trade partners and he pledged to shake up global trade arrangements and eliminate the nation's trade deficit. That was indicating towards the change in a LOVELY PROFESSIONAL UNIVERSITY 19  International Business Environment Notes political and legal environment. The goal of the political system is to integrate the diverse elements of society. Its test is sustaining society in the face of divisive viewpoints. The legal system is the mechanism for conceiving, stipulating, interpreting, and enforcing the laws in a formal jurisdiction. After four years in office, President Donald Trump has failed to achieve his promise to eliminate the US trade deficit and dealt a lasting blow to the multilateral economic system that global trade is based upon. Trump has indeed shaken up the global trading system but the US trade deficit has grown under his presidency. Trump's trade policies have delivered few tangible benefits to the US economy while undercutting the multilateral trading system, disrupting long-standing alliances with US trading partners, and fomenting uncertainty. While the US trade deficit with China which was Trump's main target has indeed shrunk, imports from Canada and Mexico have jumped, deepening the overall deficit. The import tariff increases that Washington has imposed on many products have protected American manufacturers. But those tariffs also "raised production costs" for the US industry and demonstrated the extent of the reliance on Chinese suppliers. The global economic infrastructure has gone into a deep state of flux. Trump's refusal to appoint new judges had paralyzed the World Trade Organization's dispute resolution system, hobbling the arbitrator of the world's multilateral trading system. The truce in the US-China trade war reached in January 2020 left unsolved major points of contention such as intellectual property theft and forced technology transfers. Trump's four years in office have resulted in the weakening of the rules-based multilateral trading system, embodied by the WTO, that the US was instrumental in setting up. The positions of both Democrats and Republicans have hardened in recent years towards China, which is now viewed as a rival that needs to be contained as it has not evolved into a liberal market economy as had been hoped. The trade war was inevitable given China's economic rise and persistence with high levels of state intervention rather than adoption of market forces. This reflects how a political system can bring complexities for the companies operating in the international business arena. This also takes us towards the concept of individualism and collectivism. Individualism The doctrine of individualism emphasizes the primacy of individual freedom, self-expression, and personal independence. Individualism champions the exercise of one’s ambitions while opposing regulations that constrain them. Collectivism The doctrine of collectivism emphasizes the primacy of the collective over the interest of the individual. Collectivism in the business world holds that the ownership of assets, the allocation of resources, the structure of industries, the conduct of companies, and the actions of managers share a common goal, which started making decisions and conduct activities that improve the welfare of the collective. Political Ideology A political ideology encapsulates the doctrine of political behavior and change. A political ideology is a certain set of ethical ideals, principles, doctrines, myths, or symbols of a social movement, institution, class, or large group that explains how society should work and offers some political and cultural blueprint for a certain social order. The Political spectrum In practice, purely democratic and totalitarian systems are exceptions. Looking around the world, one sees many variations. For example, democratic systems range from radical on one side (advocates of extreme political reform) to reactionary (advocates of a return to past conditions). Likewise, totalitarian systems emphasize the different degrees of state control. Fascism aims to control people’s minds, souls, and daily existence, whereas authoritarianism confines itself to political control of the state. 20 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes This could be easily understood with the help of an example. Let us take an example of an economy like India, in 2017, Transport Minister Mr. Nitin Gadkari shocked the automobile industry (and the world) when he announced that he intended for India to move to 100% electric cars by 2030. He said at an industry conference "I am going to do this, whether you like it or not. And I am not going to ask you. I will bulldoze it."That was an ambitious target given that even the UK and France were hoping to phase out conventional combustion-engine cars only by 2040. The reason for such a move was a high dependency on fossil fuels and 21 of the 30 most polluted cities were from India then. This dependency on crude oil imports takes away a major portion of the total expenditure that the government of this country proposed to spend every year considering development. Due to which things do not work out the way the government of India planned things in the long run. On the crude oil front, the Indian government has started an initiative to blend ethanol and increase its blending limit to almost double. The enhanced capacity will help meet the government’s target of 10% ethanol blending by 2022. This is likely to reduce the country’s oil imports by 2 million tonnes annually and reduce the oil import bill by $ 1 Billion. On the pollution front, the government has decided about electric vehicles but as such no policy was made. The impact of the announcement made by the government of India on the electric vehicle front can be seen from this aspect only that companies like Hyundai and MG motors started working on this front by making strategies to capture the market share in the electric vehicle. Taking it further let us understand the initiative taken by a company like MG motors in the Indian market. Before we talk about the same let us go through some vital information about this company. Morris Garages was founded in the UK (95 years old) and is known for its classic sports cars. MG was acquired by China's state-owned Shanghai Automotive Industry Corporation in the late 2000s. MG Motor, the latest car brand to enter India, was trying to position itself as an innovation and technology leader in a bid to crack the market, which was dominated by Maruti Suzuki and Hyundai, who together account for 70 percent of all cars sold. The company has already announced its product, MG ZS EV, an electric vehicle for the Indian market. MG Motor India was aware that India as a country was not yet ready for an electric car. India largely lacks in infrastructure required for electric vehicles to operate as one of the prerequisites charging stations.MG Motor India started working (with partners) to set up charging infrastructure and work on battery end-of-life strategy. Such positioning would make MG a force to reckon with in India and lay the foundation for its long-term plans, which include a possible entry into the small-car market. SAIC’s parent company of MG in China started making a $1.5 billion investment in a state-of-the-art battery manufacturing facility, the first by a car manufacturer, which would help MG Hector when it comes to power the electric car that it has launched in India. It would help the company customize the battery for its models better and give a pricing advantage. This brings us to a very interesting aspect of this topic that is political risk. LOVELY PROFESSIONAL UNIVERSITY 21  International Business Environment Notes Political Risk It refers to the threat that decisions or events in a country will negatively affect the profitability and sustainability of an investment. In continuation to the above example, the Indian government made a surprising U-turn on the electric vehicle policy. The government of India said it would not be mandatory by 2030 as India lacks infrastructure for the same. So, companies who have started investing taking into consideration the future aspect have to readjust their plan of action like MG motors and Hyundai concerning electric cars on Indian roads. Therefore, such things need to be managed by international business firms when operating in different geographic regions. Classifying Political Risk Systemic Procedural Distributive Catastrophic Systemic Political Risk: A country’s political processes aim not to punish companies arbitrarily. Rather investors commonly face the political risk that follows from shifting public policy. Newly elected officials, for instance, adopt policies that differ from their predecessors. Systemic political risk by influencing the macro business environment affects the business of all firms. Procedural Political Risk: It institutes impediments that constrain the flexibility of local operations. Political policies sometimes impose frictions that slow or stop these transactions. Corrupt officials for instance might pressure a firm to pay additional money to clear goods through customs. This risk is micro as it affects some but not all companies. Distributive Political Risk: It gradually eliminates the local property rights of foreign companies. If an MNE making better profits government tends to look for bigger cuts and in due course impose regulations that may create trouble for the operating firm. Catastrophic Political Risk: It devastates the business environment for all companies. It affects the operations of very firms in a country that arise from macro. An example could be a civil disorder or geopolitical dispute. Types of Legal Systems Common Laws: It is developed by judges through the decisions of courts. It respects established case law in resolving disputes. Civil Laws: It is based on the strict application of statutory laws. It is the most widespread type of legal system. Theocratic Laws: It is based on the inspirations and instructions of religious teachings. Like Muslim law prevails in the Middle East and Northern Africa. Customary Laws: It is based on norms of behavior that gain legitimacy through ongoing practice. It prevails in many developing countries, particularly in Africa. Mixed Legal: This system results when a nation uses two or more of the preceding types, like Bangladesh, Singapore and Pakistan blend common and theocratic law. 22 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes 2.3 Economic Factors The world economy has changed profoundly since World War II. Perhaps the most fundamental change is the emergence of international markets; responding to new opportunities, international competitors have steadily displaced local ones. Concurrently, the integration of the world economy has increased significantly. Economic integration stood at 10 percent at the beginning of the 20th century, today it is approximately 50 percent. Integration is particularly striking in two regions, the European Union (formerly the European community) and the North American Free Trade Area. Economic factors influencing International Business Operations Economic factors talk about the type of economic environment in terms of its state of development, the economic freedom managers have to make investments and run operations, the orientation of the economic system that shapes its path of development, performance, and potential and the drivers of economic change, particularly the moderators of productivity, innovation, and competitiveness. International Economic Analysis The economic environment helps managers make better investment choices and operating decisions. Resource constraints require managers to identify which countries in the world warrant investment as well as those they must avoid. The world bank identifies 214 discrete economic environments in the world- 188 countries and 26 economies with a population of more than 30,000. Resource constraints require managers to prioritize options, targeting markets that offer the greatest return with the least risk. It provides the analytical tools to determine the impact of an international company’s operations on the economies of both host and home countries, as well as the impact of the host countries' economic environment on a foreign firm. As per United Nations, based on a wide range of dimensions, it classifies a nation as a: Developed economy, Developing economy, and Economy in transition. Developed Economy: A developed economy has a robust economic environment marked by wide-ranging activities, efficient capital movement, stable institutions, extensive infrastructure, international trade and investment, advanced technologies, and higher economic freedom. Developing Economy: A developing economy has an uneven economic environment that is marked by narrow market activities, inefficient capital movement, resistance to foreign ownership, trade restrictions, imperfect LOVELY PROFESSIONAL UNIVERSITY 23  International Business Environment Notes competition, unstable institutions, limited infrastructure, sketchy technologies, and lower economic freedom.UN has classified around 150 countries as developing. Economy in Transition Such economies are marred by fragile political institutions, heavy indebtedness, poorly performing markets, and ongoing conflicts. The term emerging economies is often used in place of economies in transition like Brazil, India, and China. Gross world output increased nearly six-fold between 1970 and 2015, growing from $12 trillion to $78 trillion. In absolute terms, globalization expanded the economy for all. In relative terms, though, many countries prospered some more than others, and few not at all. The Global Economy’s Shifting Centre of Gravity In 1980 the global economy’s centre of gravity was mid-Atlantic. By 2008, from the continuing rise of China and the rest of East Asia, that centre of gravity had drifted to a location east of Helsinki and Bucharest. Extrapolating growth in almost 700 locations across Earth, the world’s economic centre of gravity is projected to locate by 2050 literally between India and China. Observed from Earth’s surface, that economic centre of gravity will shift from its 1980 location 9,300 km or 1.5 times the radius of the planet. If soft power mirrors but lags economic power, then the source for global and political influence will be similarly gradually shifting east over the next 50 - 100 years. Policy formulation for the entire global economy and global governance more generally, will no longer be the domain of the last century's rich countries but instead will require the more inclusive engagement of the east. Economic Freedom Economic freedom holds that one has the right to work, produce, consume, save, and invest in the way that one prefers. It measures the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty. Economic Freedom Index An index of economic freedom measures jurisdictions against each other in terms of trade freedom, tax burden, judicial effectiveness, and so on. It estimates economic freedom in a particular nation. The dimensions of the economic freedom index include Rule of Law (property rights, government integrity, judicial effectiveness) If we understand in terms of property rights, the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. Government Size (government spending, tax burden, fiscal health) like tax burden imposed by the government. 24 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes Regulatory Efficiency (business freedom, labor freedom, monetary freedom)- it covers aspects of the legal and policy framework that regulates the country’s labor market. Open Markets (trade freedom, investment freedom, financial freedom) like in trade freedom- the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. The Presence and Prevalence of Economic Freedom Economies rated “free” or “mostly free” in the Index enjoy incomes that are more than twice the average levels in all other countries and more than five times higher than the incomes of “repressed” economies. Economic freedom is closely related to openness and limited government, advancing entrepreneurial activity. Given this relationship, it should be apparent that a government’s most effective stimulus activity is not increasing its spending or putting in place more layers of regulation, both of which reduce economic freedom. The best results are often achieved instead through policy reforms that limit the size of government and create greater economic dynamism in the private sector. Economically freer countries that open their societies to new ideas, products, and innovations have largely achieved high levels of social progress. It is not massive redistributions of wealth or government dictates that produce the most positive social outcomes. Instead, mobility and progress require lower barriers to market entry, freedom to engage with the world, and less government intrusion. In other words, those who believe in economic freedom believe in the right of individuals to decide for themselves how to direct their lives. The added benefit from society’s point of view is the proven power of self-directed individuals, whether working alone or working together in associations or corporations, to create the goods and services that best respond to the needs and desires of their fellow citizens. No country provides perfect freedom to its citizens, and those that do permit high levels of freedom differ concerning which aspects they believe are most important. That is consistent with the nature of liberty, which allows individuals and societies to craft their unique paths to prosperity. LOVELY PROFESSIONAL UNIVERSITY 25  International Business Environment Notes Types of Economic Systems Command Economy: The state owns and controls the factors of production. Public officials and not private agents, decide what products to make, in what quantity, at what price, and in what way. Examples: China, Russia, and Saudi Arabia. The philosophical anchor for such an economy is communism. Mixed Economy: It falls between the market and command types. It is a system in which economic decisions are principally market-driven and ownership is largely private, but the government intervenes, from a little to a lot, in valuing assets, allocating resources, regulating activities, and organizing the market. Examples: Japan, South Kore, Brazil, and India. The philosophical anchor for such an economy is socialism. Market Economy: It is a system whereby individuals, rather than government, make most of the decisions. Optimal resource allocation follows from consumers exercising their freedom of choice and producers responding accordingly. This economy is commonly found in developed economies like the US, Australia, and Canada. The philosophical anchor for such an economy is capitalism. Economic Environment Indicators Interest rates Inflation Gross National Income (GNI) Gross Domestic Product (GDP) Gross National Product (GNP) Exchange Rates International trade (Surplus) Gross national income, GDP, or GNP, efficiently summarizes the economic activity of households, businesses, and governments in terms of their consumption, investment, spending, and trading. These indicators need to be managed by the policymaker in the right way otherwise it leads to various serious issues like seen in Venezuela, Zimbabwe, and others. We will be covering the example of Venezuela for a better understanding of the same. Let us begin with the timeline of the crisis in Venezuela 26 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes 1920s to 1970s: Oil is discovered in Venezuela, which is found to have the world’s largest reserves. The nation’s economic development is based on rising prices and profits in oil exports. 1980s to 1990s: Global oil prices fall; Venezuela’s economy contracts. The country faces massive debt. 1998: Hugo Chavez, former leader of a 1992 coup attempt, is elected president. He promises to use the country’s oil wealth to improve the lives of the poor. 2000s: Chavez expands social services, but corruption is rampant, and a steady decline in oil production reduces oil reserves and increases government debt. 2010 to 2012: Chavez’s attempt at economic reform like currency devaluation and price controls are ineffective. 2013: With inflation at more than 50% a year, the National Assembly gives Maduro emergency power for a year, beginning in November. 2014: Public spending is curtailed because of low oil prices. Anti-government protests are broken up with force. 2015: the opposition Democratic Unity party wins control of the National Assembly, ending 16 years of Socialist Party rule. 2016: The economy is in crisis, and the healthcare system lacks funding. Hunger and malnutrition, maternal and child mortality, infectious diseases, and unemployment increase alarmingly. We can see from this. when economic indicators are overlooked by the policymaker in a country such situations can take place. Venezuela’s hyperinflation rate increased from 9,02 percent to 10 million percent since 2018, according to the International Monetary Fund, though it is expected to decline to back below 1 million percent due to some moves by the country’s central bank, such a situation would not attract any FDI. Shock therapy measures, based on recent economic history, can include ending price controls and government subsidies, instituting higher tax rates and lower government spending to reduce budget deficits, devaluing the currency to boost foreign investments, and selling state-owned industries to the private sector. These are some of the measures that were available to the policymakers to manage the situation. Venezuela will have to transform its current scheme of restricting foreign investment to fund the restoration of the energy sector, as well as its infrastructure, including the country’s roads and bridges and the power grid. Besides foreign investment, Venezuela will likely need help from multinational institutions such as the World Bank, the Inter-American Development Bank, and the Development Bank of Latin America to fund infrastructure development. The lack of human capital is another issue Venezuela will have to address to recover from its economic crisis. Venezuela has lost more than 10% of its population in recent years. The number of Venezuelan migrants and refugees has reached 4 million and is expected to surpass 5.3 million by the end of this year, according to the U.N. Refugee Agency. What we see here is a catastrophic effect on one issue leading into others and creating an unsustainable situation. We try to compare the inflationary situation through purchasing power parity in Venezuela. One cup of coffee in Venezuela may cost 1 hundred thousand US dollars, comparing it with the US it will cost only $3. This example reflects the importance of managing the economic indicator in the desired range for better managing the economies. Accordingly, multinational companies can review the status of a particular economy before entering into it with the help of these economic indicators. Shadow Economy The shadow economy includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. It includes extra-legal activities as well as illegal doings that fall beyond official statistics. It is also known as black, grey, or parallel market or the informal economy. LOVELY PROFESSIONAL UNIVERSITY 27  International Business Environment Notes Example: Counterfeit products market in Indian Economy Counterfeit products have created around $14 billion hole in the Indian economy. Counterfeiting is a universal issue and is 3.3 percent of global trade, according to the organization of economic cooperation and development data, impacting social and economic development across the world. It includes the currency, FMCG, alcohol, pharma, documents, agriculture, infrastructure, automotive, tobacco, lifestyle, and apparel, as the 10 sectors impacted most by counterfeiting. Among these, currency, alcohol, and FMCG continue to be the top three sectors with the highest counterfeiting in the last two years in India. This is an example of a shadow economy. Important Indices for Economic Environment 1. Global Competitive Index The world economic forum holds that providing increasing prosperity hinges on how well a country develops institutions, regulates activities, and uses resources to improve productivity. A country’s proficiency in managing these domains determines its international competitiveness. GCI taps dimensions like financial market development, macroeconomic environment, technological readiness, market efficiency, and innovation. 2. Global Innovation Index Countries increasingly look to brainpower for innovations that boost productivity, fortify competitiveness, and increase prosperity. The growing power of ideas and insights in the global market makes a country’s capacity for innovation a key determinant of its economic performance and potential.GII estimates a nation’s capacity to imagine ideas, leverage them into pioneering products, and, in the process, generate knowledge, competitiveness, and wealth. 3. The World Competitiveness Index The world competitiveness project assesses a nation’s ability to set and sustain a business environment that enables enterprises to compete, prosper, and create wealth. Four factors determine a nation’s competitiveness such as economic performance, business efficiency, government and efficiency, and infrastructure. It helps WCI to summarize a nation’s performance. 4. The-Where-To-Be-Born Index It holds that how well a country provides opportunities for a healthy, safe, and prosperous life helps explain both its current and future economic environment. The economic environment factor plays a very crucial role for multinational firms where they operate in international geographies as is being seen in this section of the unit. 2.4 Technological Factors Technological factors are variables that are being used for evaluating available alternatives concerning technological capabilities. Multinational companies consider it an important tool for improving operations and functions. Technological factors are one of the various external environmental factors that affect businesses greatly and are also an integral component of the PESTLE analysis. In the present scenario, utmost dependence on equipment, technological factors can have more effect on business operation and success globally than ever before. The technological environment of business has changed how businesses function. Advancements in information technology have almost taken over every department of the organization. Now, information is stored in data servers and cloud technology as against the old way of storing data in registers and files. Furthermore, the development of technology has also introduced digital marketing strategies through which companies can sell their products and services. Even the research and development R&D divisions in companies have changed their way of functioning and more advanced techniques in the development of products and services have been introduced only through technological advancements. The impact of technological factors on international business operations can be seen in this section in three different interesting scenarios. The first scenario will cover the proactive approach where we will see how the countries are trying to stay relevant to the changing scenarios by updating themselves to the changing technologies. In the second scenario, we will discuss the impact of being reluctant to bring change with time in the technological up-gradation of the organization's 28 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes operations. In the final scenario, we will see if the technology is such which is not able to find a target market can also lead to failure. Technological Factors influencing International Business operations These factors consider the rate of technological innovation and development that could affect a market or industry. Factors could include changes in information and communication technology, automation, research and development. There is often a tendency to focus on developments only in digital technology, but consideration must also be given to new methods of distribution, manufacturing, and also logistics. Technological factors have a critical macro-economic influence on a business’s operations, its products, how it delivers its services, and even its markets. Disruptive Technologies Disruptive technology is an innovation that significantly alters the way that consumers, industries, or businesses operate. A disruptive technology sweeps away the systems or habits it replaces because it has recognizably superior attributes. Let us understand the first scenario with the help of the example mentioned below. Saudi Arabia is going to invest $20 Billion in artificial intelligence by 2030. A country like Saudi Arabia whose government relies on crude oil for its revenue generation is looking to invest in a disruptive technology like artificial intelligence. It Stated that shares will be open to both foreign and local investors, as the country seeks to establish more than 300 start-ups in artificial intelligence by 2030. Like most countries in the energy-rich Gulf, Saudi Arabia has been trying to diversify its economy which has been hit by the double whammy of low oil prices and the coronavirus pandemic. So the country’s policymakers are taking proactive measures to create an alternative source of income for their country. Now let us understand this disruptive technology i.e. artificial intelligence and machine impact on multinational firms and how its adoption is creating an opportunity for companies that looking to expand their footprint at the global level. Artificial Intelligence and Machine Learning It refers to the ability of machines to learn and act intelligently – meaning they can make decisions, carry out tasks, and even predict future outcomes based on what they learn from data.AI and machine learning already play a bigger role in our everyday life of ours than you might imagine. Alexa, Siri, Amazon’s product recommendations, Netflix’s and Spotify’s personalized recommendations, every Google search you make, security checks for fraudulent credit card purchases, dating apps, fitness trackers, all are driven by AI. Case Study: Spotify Spotify is the largest on-demand music service application today. The firm has a record of pushing boundaries in technology by using AI and machine learning to enhance the user experience through nuanced customer data insights. They’ve recently acquired several data science companies to further push the envelope, ensuring they remain at the forefront of the music streaming world. LOVELY PROFESSIONAL UNIVERSITY 29  International Business Environment Notes Now the question arises how AI works in music streaming companies and how it has been proactively taken up by Spotify to capture a large chunk of the target market. With tens of millions of users listening to music every minute of the day, brands like Spotify accumulate a mountain of implicit customer data comprised of song preferences, keyword preferences, playlist data, geographic location of listeners, most used devices, and more. Data drives decisions across every department at Spotify. This information is used to train algorithms that extrapolate relevant insights both from content on the platform and from online conversations about music and artists, as well as from customer data, and use this to enhance the user experience. One example is ‘Discover Weekly’, which reached 40 million people in the first year it was introduced. Each Monday individual users are presented with a customized list of thirty songs. The recommended playlist comprises tracks that users might have not heard before, but the recommendations are generated based on the user’s search history pattern and potential music preference. Machine learning enables the recommendations to improve over time. Not only does it keep users returning, it also enables greater exposure for artists who users may not search for organically. Discover weekly data flow chart below helps in understanding the information flow that is taking place while creating a playlist for the user in a customized manner. Discover Weekly Data Flow For Spotify to generate the ‘Discover Weekly’ personalized music list, the team uses a combination of three models: Collaborative Filtering Natural Language Processing (NLP) Audio models Collaborative filtering involves comparing a user’s behavioral trends with those of other users. Content streaming platform Netflix similarly adopts collaborative filtering to power their 30 LOVELY PROFESSIONAL UNIVERSITY  Unit 02: Components of International Business Environment Notes recommendation models, using viewers’ star-based movie ratings to create recommendations for other similar users. While Spotify doesn’t incorporate a rating system for songs, it does use implicit feedback like the number of times a user has played a particular song, saved a song to their lists, or clicked on the artist’s page upon listening to the song to provide relevant recommendations for other users that have been deemed similar. Natural Language Processing (NLP) model analyses human speech via text. Spotify’s AI scans a track’s metadata, as well as blog posts and discussions about specific musicians, and news articles about songs or artists on the internet. It looks at what people are saying about certain artists or songs and the language being used, and also which other artists and songs are being discussed alongside, if at all, and identifies descriptive terms, noun phrases, and other texts associated with those songs or artists. These keywords are then categorized into “top terms”. Every artist and song is associated with thousands of top terms that are subject to change daily. Each term is assigned a weight, reflecting its relative importance in terms of how many times an individual would attribute that term to a song or musician they like. Spotify doesn’t have a fixed dictionary for this, but the system can identify new music terms as and when they come up – not just in English, but also in Latin-derived languages across cultures. Audio models are used to analyze data from raw audio tracks and categorize songs accordingly. This helps the platform evaluate all songs to create recommendations, regardless of coverage online. For instance, if there is a new song released by a new artist on the platform, NLP models might not pick up on it if coverage online and on social media is low. By leveraging song data from audio models, however, the collaborative filtering model will be able to analyze the track and recommend it to similar users alongside other more popular songs. In this way, Spotify portrays itself not just as a platform for popular existing musicians, but also one that provides opportunities for the next generation of budding musicians to gain recognition. Spotify has reported total revenue of $7.44 billion in 2019. Announced on February 5th, as part of the streaming giants for the record financial performance report, Spotify revealed they had made total revenue of $7.44 billion last year, an increase of 29% when compared to 2018. This is an example of the adoption of disruptive technologies and getting an edge over the competitors by adopting the latest disruption at the right time but this does not happen always and sometimes companies remain reluctant to adapt to the latest disruption and pay a heavy price for the same later. This can even have the reference as an example of Kodak from the previous unit. Let us understand the second scenario now with the help of an example. From market domination to sell-off in less than 10 years, as Microsoft swoops in to buy Nokia's mobile business for £4.6bn, what happened to Finland's most beloved firm. Whenever you turned on one of Nokia's legendary handsets, you always got the same thing like the famous signature logo, holding hands. LOVELY PROFESSIONAL UNIVERSITY 31  International Business Environment Notes Nokia was by no means the first company to release a commercially available mobile phone, but it was the first to do it well, and with true mass appeal. Nokia was so dominant. People didn't talk about what brand, it was just about the number, 3210, or whatever you had. Then all of a sudden, in January 2007, Steve Jobs walked on to a stage and pulled an iPhone out of his pocket and changed the world forever. The fall was swift. According to figures from analyst firm Gartner, Nokia's Smartphone market share in 2007 was a dominant 49.4%. In subsequent years, it was 43.7%, then 41.1%, then 34.2%.In the first half of 2012, it had plummeted to just 3%. Nokia makes great phones, they still do. They went through this incredible decade of innovation in hardware, but what Apple saw was that all you needed was a rectangle with a screen, and the rest was all about the software, where Nokia fail to adapt miserably. This reflects the importance of technology adoption at the rig