Environment of international business and its significance

Differences in business environment between regions and

nations may call for different business strategies.Internal EnvironmentExternal Environment• Domestic environment• Foreign environment• Global environment A strategy that is successful in one market may not be

successful in another, where the business environment is very different. Eg : P & G in japan.

Economic Environment

Economic environmentThe host of most important economic factors which affect business

are : • Nature of economy

• Low income economies• High income economies• Middle income economies

• Developing and developed economiesSome special factors are • Least developed countries ( Most backward and disadvantaged)• Newly industrializing economies ( Very high growth rate over a long

period of time )• Transition economies ( transition from centralized to market

economy )

Some of the poor countries like India are among the largest economies in the world.

Several developing countries are very vibrant and growing fast.Structure of the economy : Economy has three broad sectors namely ,• Primary ( mostly agricultural )• Secondary ( industrial )• Tertiary ( service sector ) Economic policies :• Industrial policy• Trade policy• Foreign exchange policy• Foreign investment and technology policy• Fiscal policy• Monetary policy

Social/Cultural Environment

Social/Cultural environmentCulture is the sum total of societal behavior.The cost of ignoring the socio-cultural environment in business

could be very high.Elements of culture : • Knowledge and beliefs• Ideals• PreferencesSome of the complexities involved in multicultural business : • CULTURAL ADAPTATION The message of cultural adaptation for IB is that the firm

and its people will have to adapt to the environment of different markets.

• CULTURAL SHOCK Environmental changes sometimes produce cultural shock-a

feeling of confusion, anxiety, insecurity caused by strangeness of new environment.

• CULTURAL TRANSMISSION Elements of culture are transmitted among the members of the

culture, from one generation to next, and new members admitted into that culture.

Cultural transmission takes place by means of symbolic representation. Eg , TV, literature, film, advertising, marketing etc play very important roles in cultural transmission.

Transmission facilitates cultural diffusion i.e., the spread of cultural elements from one place to another. At high educational levels transmission and diffusion are easy in a well organized communication system.

• CULTURAL CONFORMITY Individuals in a culture tend to either conform to the cultural

norms or to deviate from them Eg, a student who abides by the rules of his school discipline, does

his work regularly and studies properly is conforming to his role obligations.

The knowledge of the nature and extent of cultural conformity and deviance will sometimes be helpful in business decision-making.

• CULTURAL LAG Important factors that contribute to cultural lag include

ignorance, wrong notions, conservatism, sentimental factors and political factors, interests.

It is necessary to overcome cultural lag to successfully market a new idea (including service, product and technique). It’s a blunder to introduce a product to a market which is not ready to adopt to it.

• CULTURAL TRAITS Low-context and high-context cultures Masculine and feminine cultures Universalism Vs particularism Neutral Vs emotionalAnd so on..• CULTURAL STEREOTYPES Cultural stereotyping is an attempt to highlight the

homogenetic characteristics of a group. Eg, Nationality : American Stereotype : Brash, materialistic, A society plagued by

crime and violence, a cowboy culture where indivuduals are obsessed with time and deadlines.

Religious factors, often very sensitive, need to be paid attention by business.

Attitude towards work and wealth, working timings and holidays demand and consumption patterns etc. are influenced by religion.

Religion

Language and communication are very sensitive in the business environment .

For example :A multinational blundered in the middle east

when its detergent advertisement picture soiled cloths on the left, the box of detergent in the middle and clean clothes in the right.

Language

The cultural impact on international business is reflected by severalbasic beliefs and behaviours.

One of the important reasons for the failure of number of companies inforeign markets is their failure to understand the culturalenvironment of those markets, that is, consumer preferences, habitsand beliefs, and suitably formulate their business strategies.

Culture and Organizational Behaviour

Economic environment is one of the important determinant of product and pricing strategies.

Etiquette

Culture Types of Handshake

United States Firm

Asian Gentle (shaking hands is unfamiliar and uncomfortable for

some)

British Soft

French Light and quick (not offered to superiors); repeated on

arrival and departure

Latin American Moderate grasp; repeated frequently

Middle Eastern Moderate grasp; repeated frequently

German Brisk and firm; repeated on arrival and departure

Demographic Environment

Business(market, demand) is people in the sense that the demand dependson the people and their characteristics – income levels, tastes andpreferences, beliefs, attitudes and sentiments, host of other demographicfactors.

Demographic trends across the world are an important determinant of globalbusiness.

Demographic Environment

Important demographic bases of market segmentation includes:

Age structureGenderFamily sizeOccupationEducationReligionRaceNationality

Population size – The size of population is one of the important determinant of demand for many products. Countries with small population are generally not attractive for business. However, small firms may find promising niches in these markets.

Developing nations like India, enjoy a demographic dividend, that is,a higher proportion of people in the working age.

The changes in the age distribution have a lot of implications for business.Several pharmaceutical companies, for example, are paying a lot of attention to the potential requirements of the aged population.

Political Environment

Political environment includes the characteristics and policies of thepolitical parties, nature of constitution, government system are among the factors of utmost importance in market selection and business strategy formulation.

The political environment includes:Industrial policyPolicy towards foreign capital and technologyForeign trade policy

As against the past suspicion against foreign capital and technology,a large number of developing countries, are trying to woo foreign capital and technology.

However, there is a lot of difference in restrictions and regulations of business, scope of foreign business, trade policies, procedures,incentive system and so on.

Hostilities between some countries affect business in developingcountries also. For example, Arab countries did not do business withIsrael. These countries insisted that countries who wanted to dobusiness with them must produce Israel Boycott certificate.

Regulatory Environment

• Each region has a particular regulatory environment in which the major world players compete for market share.

• There are wide variations between countries in the policies and regulations regarding the conduct of business.

• For example, certain trade practices or strategies allowed in some countries may be regarded as unfair by the laws of some other countries.

Categories of laws• An international business firm will confront home’s, foreign and

international laws.

• International laws, treaties and conventions etc.

• Laws of foreign countries.

• Laws of home country (India) related to international business

Settlement of disputes• Disputes are common in international business. There are two

avenues for the settlement of disputes

• Judicial dispute settlement – dispute will be solved by judicial court. It often takes long time, very expensive and strains the relations of the parties involved.

• Extra-judicial dispute settlement – if parties agree on conciliation, they want an amicable settlement of their dispute with active assistance of a third person, the conciliator, and hope an amicable settlement can be achieved.

Regulation related to products• Product Standards – Many countries may have its own products

standards or specifications. For example, ISO 9000 accreditation is necessary for certain products for selling in markets such as European Union. It is mandatory to make certain disclosure about the product such as ingredients, shelf life, possible adverse effects etc.

• Product liability – If a person suffers any damage because of a product, he has to prove that the producer was at fault in respect of the defect in the product causing the damage.

• Packing and labelling regulations – Many countries have their own regulations regarding packing and labelling.

Natural Environment

• At the core of social system is the natural environment and the available technology. The natural factors and available technology indicate the potential for the development of business or economy of the region/nation.

• The natural environment “ the source and support of everything used by businesses, raw material, energy source, every life-sustaining factor” determines what can be done in a society and how institutions can function.

• In short, geographical and ecological factors, such as weather and climate conditions, locational aspects in the global context, port facilities, are all relevant to business.

Technological Environment

• Technology – systematic knowledge to manufacture a product, application of process, rendering a service that are necessary to carry on or to improve existing production and distribution of goods and services and also entrepreneurial expertise and technical know-how.

• The type of technology in use, level of technological developments, the speed with which new technologies are adopted, technology policy etc., are important to business.

• Appropriate Technology and its Adaptation – When different technologies are available, it needs to be ensured that the technology chosen is the appropriate for the business.

• This could be due to reasons such as differences in natural factors like climatic/weather condition, soil conditions etc., difference in income level, demand conditions, customer characteristics.

• Technological appropriateness can vary between environments. Situations may require adaptations or modifications to technology. Modifications may help companies to do better than users of technology in its original form.

Appropriate Technology and Technology Adaptation

Transfer of Technology

• Technology transfer is the process by which commercial technology is passed on to developing countries.

• While technology is transferred, some of the issues might crop up. They are cost, appropriateness, dependence and obsolescence are some of the issues comes with transfer of technology.

• Product technology – Provision of propreitary know-how, transfer of product designs, technical consultations to help them master new technologies, collaboration in R&D.

• Process technology – provision of machinery and equipment to suppliers, technical support on production planning, quality management, inspection and testing, visits to supplier facilities to advise on layout, operations and quality.

• Organizational and managerial know how – assistance with inventory management and use of just-in-time and other systems, assistance in implementing quality assurance systems, introduction to new practices such as financial, purchase and marketing techniques.

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