International Business

Environment
Introduction
• The global business environment is highly dynamic.

• Environment literally means the surrounding, external objects,

influences, or circumstances under which someone or something
exists.

• Davis Keith defines the environment of business as “the aggregate of

all conditions, events and influences that surround and affect it.”
Internal vs External
• There are two sets of factors- internal and external – which influence
the business policy of an organization.
• The internal factors are known as controllable factors because the
organization has control over these factors. The business can modify
or alter such factor to suit the environment.
• The external factors are known as uncontrollable factors and legally
beyond the control of the individual enterprise.
What does it really mean?
• The term “business environment” generally refers to the external
forces, factors and institutions that are beyond the control of the
business and they affect the functioning of a business enterprise and
include factors outside the firm which can lead to opportunities for or
threats to the firm.

• Although there are many external factors, the most important factors
include customers, competitors, suppliers, government, and the
social, political, legal and technological factors etc.
International Business Environment
• International business environment is different from domestic
business environment because the environment changes when a firm
crosses international borders.

• Typically, a firm understands its domestic environment quite well, but

is less familiar with the environment in other countries and must
invest more time and resources into understanding the new
environment.
IBE is multidimensional and encompassing
• Political
• Regulatory
• Tax
• Social & cultural
• Legal and
• Technological
Political Environment

• The political environment refers to the type of government, the

government relationship with business, and the political risk in a
country.

• Doing business internationally thus implies dealing with different

types of governments, relationships, and levels of risk.
Political Risk
• A particular concern of international firms is the degree of political
risk in a foreign location.

• Political risk refers to the likelihood of government activity that has

unwanted consequences for the firm.

• These consequences can be dramatic as in forced divestment, where

a government requires the firm to give up its assets, or more
moderate, as in unwelcome regulations or interference in operations.
Organization may broadly consider the following aspects under political
environment
• Political system of the business;
• Approaches of the Government towards business i.e., restrictive or
facilitating;
• Facilities and incentives offered by the Government;
• Legal restrictions such as licensing requirement, reservation to a
specific sector like public sector, private or small-scale sector;
• Restrictions in importing technical know-how, capital goods and raw
materials;
• Restrictions in exporting products and services;
• Restrictions on pricing and distribution of goods;
• Procedural formalities required in setting the business.
Economic Environment
• The economic environment relates to all the factors that contribute to
a country’s attractiveness for foreign businesses. The economic
environment can be very different from one nation to another.

• Countries are often divided into three main categories: the more
developed or industrialized, the less developed or third world, and
the newly industrializing or emerging economies.
Cont…
• These distinctions are usually made on the basis of gross domestic
product per capita (GDP/capita). Better education, infrastructure,
technology, health care, and so on are also often associated with
higher levels of economic development.
Consider the following aspects
• Economic system to enter the business sector.
• Stage of economic growth and the pace of growth.
• Level of national and per capita income.
• Incidents of taxes, both direct and indirect.
• Infrastructure facilities available and the difficulties thereof.
• Availability of raw materials and components and the cost thereof.
• Sources of financial resources and their costs.
• Availability of manpower-managerial, technical and workers available
and their salary and wage structures.
Technological Environment
• The technological environment comprises factors related to the
materials and machines used in manufacturing.

• An important aspect of the international business environment is the

level, and acceptance, of technological innovation in different
countries.
• Technology often is seen as giving firms a competitive advantage;
hence, firms compete for access to the newest in technology, and
international firms transfer technology to be globally competitive.
Technological factors to consider
• Level of technological development in the country as a whole and
specific business sectors.

• Pace of technological changes and technological obsolescence.

• Sources of technology.

• Restrictions and facilities for technology transfer and time taken for
absorption of technology.
Cultural Environment
• The cultural environment is one of the critical components of the
international business environment and one of the most difficult to
understand.
• This is because the cultural environment is essentially unseen; it has
been described as a shared, commonly held body of general beliefs
and values that determine what is right for one group.
• Beliefs and values are generally seen as formed by factors such as
history, language, religion, geographic location, government, and
education; thus firms begin a cultural analysis by seeking to
understand these factors.
While analyzing social and cultural factors, the
organization may consider the following aspects:
• Approaches of the society towards business in general and in specific areas;
• Influence of social, cultural and religious factors on acceptability of the
product;
• Life style of people and the products useful for them;
• Level of acceptance of, or resistance to change;
• Values attached to a particular product i.e. possessive value or functional
value in the product;
• Demand of specific products for specific occasions;
• Propensity to consume and to save
Competitive Environment
• The competitive environment also changes from country to country.
This is partly because of the economic, political, and cultural
environments; these environmental factors help determine the type
and degree of competition that exists in a given country.
• Competition can come from a variety of sources. It can be public or
private sector, come from large or small organizations, be domestic or
global, and stem from traditional or new competitors.
• For the domestic firm the most likely sources of competition may be
well understood. The same is not the case when one moves to
compete in a new environment.
TOOLS FOR INTERNATIONAL
BUSINESS ENVIRONMENT ANALYSIS
• PEST ANALYSIS (Political, Economic, Social and Technological analysis)
describes a framework of macro-environmental factors used in the
environmental scanning component of international business
management.
• PESTEL MODEL is PEST including legal, environmental, ethical and
demographic forces.
• SWOT Analysis It is an analysis of an organization’s strengths and
weaknesses alongside the opportunities and threats present in the
external environment.
Cont.…
• Porter’s five forces model is an analysis tool that uses five forces to
determine the profitability of an industry and shape a firm’s
competitive strategy. It is a framework that classifies and analyzes the
most important forces affecting the intensity of competition in an
industry and its profitability level. Five forces model was created by
Michael Porter in 1979 to understand how five key competitive forces
are affecting an industry.
• Global Competitiveness Index The World Economic Forum releases
annual Global Competitiveness Reports which studies and
benchmarks the many factors underpinning national competitiveness.
Chapter 2 Global Economic Environment
• REGIONAL ECONOMIC INTEGRATION: is a process in which states
enter into a regional agreement in order to enhance regional
cooperation through regional institutions and rules.

• The objectives of the agreement could range from economic to

political to environmental, although it has typically taken the form of
a political economy initiative where commercial interests have been
the focus for achieving broader socio-political and security objectives,
as defined by national governments.
Cont…
• Intra-regional trade refers to trade which focuses on economic
exchange primarily between countries of the same region or
economic zone.
REGIONAL TRADING BLOCS
• A trade bloc is a type of intergovernmental agreement, often part of a
regional intergovernmental organization, where regional barriers to trade,
(tariffs and non-tariff barriers) are reduced or eliminated among the
participating states.

• A trade bloc is basically a free-trade zone, or near-free-trade zone, formed

by one or more tax, tariff, and trade agreements between two or more
countries. Trading blocs are a form of economic integration, and increasingly
shape the pattern of world trade
• Advocates of worldwide free trade are generally opposed to trading blocs,
which, they argue, encourage regional trade as opposed to global free trade.
TYPES OF REGIONAL TRADING BLOCS
• Trade blocs can be stand-alone agreements between several states
(such as the North American Free Trade Agreement (NAFTA) or part of
a regional organization (such as the European Union).
• Depending on the level of economic integration, trade blocs can fall
into six different categories, such as preferential trading areas, free
trade areas, customs unions, common markets, economic union and
monetary unions , and political union.
Preferential Trade Area
Preferential Trade Areas (PTAs) exist when countries within a
geographical region agree to reduce or eliminate tariff barriers on
selected goods imported from other members of the area.
This is often the first small step towards the creation of a trading bloc.
• Free trade area : Free Trade Areas (FTAs) are created when two or more
countries in a region agree to reduce or eliminate barriers to trade on all
goods coming from other members. This is the most basic form of economic
cooperation. Member countries remove all barriers to trade between
themselves but are free to independently determine trade policies with
nonmember nations. An example is the North American Free Trade
Agreement (NAFTA).
• 3. Customs union : This type provides for economic cooperation as in a free-
trade zone. Barriers to trade are removed between member countries. The
primary difference from the free trade area is that members agree to treat
trade with non-member countries in a similar manner. A customs union
involves the removal of tariff barriers between members, plus the
acceptance of a common (unified) external tariff against non-members. This
means that members may negotiate as a single bloc with third parties, such
as with other trading blocs, or with the WTO. The Gulf Cooperation Council
(GCC) Cooperation Council for the Arab States of the Gulf is an example.
Common market
• Common market: A ‘common market’ is the first significant step towards full
economic integration, and occurs when member countries trade freely in all
economic resources – not just tangible goods.
• This means that all barriers to trade in goods, services, capital, and labor are
removed. In addition, as well as removing tariffs, non-tariff barriers are also
reduced and eliminated. For a common market to be successful there must also
be a significant level of harmonization of micro-economic policies, and common
rules regarding monopoly power and other anti-competitive practices.
• There may also be common policies affecting key industries, such as the Common
Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European
Single Market (ESM). This type allows for the creation of economically integrated
markets between member countries
Economic and Monetary union
• This type is created when countries enter into an economic
agreement to remove barriers to trade and adopt common economic
policies. An example is the European Union (EU). Monetary union is a
type of trade bloc which is composed of an economic union (common
market and customs union) with a monetary union.
• Monetary union is established through a currency-related trade pact.
An intermediate step between pure monetary union and a complete
economic integration is the fiscal union. Economic and Monetary
Union of the European Union with the Euro for the Euro-zone
members is the example of monetary union.
Political union
• In order to be successful the more advanced integration steps are
typically accompanied by unification of economic policies (tax, social
welfare benefits, etc.), reductions in the rest of the trade barriers,
introduction of supranational bodies, and gradual moves towards the
final stage, a “political union”.
• Political union is the final stage in economic integration with more
formal political links between the countries. A limited form of political
union may exist when two or more countries share common decision
making bodies and have common policies. It is the unification of
previously separate nations. The unification of West and East Germany
in 1990 is an example of total political union.
ADVANTAGES OF REGIONAL TRADING
BLOCS
• 1. Free trade within the bloc: Knowing that they have free access to
each other’s markets, members are encouraged to specialize. This
means that, at the regional level, there is a wider application of the
principle of comparative advantage.
• 2. Market access and trade creation: Easier access to each other’s
markets means that trade between members is likely to increase.
Trade creation exists when free trade enables high cost domestic
producers to be replaced by lower cost, and more efficient imports
• 3. Economies of scale: Producers can benefit from the application of
scale economies, which will lead to lower costs and lower prices for
consumers.
• 4. Jobs: Jobs may be created as a consequence of increased trade
between member economies. By removing restrictions on labor
movement, economic integration can help expand job opportunities.
• 5. Protection: Firms inside the bloc are protected from cheaper
imports from outside, such as the protection of the EU shoe industry
from cheap imports from China and Vietnam.
• 6. Consensus and cooperation: Member nations may find it easier to
agree with smaller numbers of countries. Regional understanding and
similarities may also facilitate closer political cooperation.
DISADVANTAGES OF REGIONAL
TRADING BLOCS
1. Loss of benefits: The benefits of free trade between countries in
different blocs is lost.
2. Distortion of trade: Trading blocs are likely to distort world trade,
and reduce the beneficial effects of specialisation and the
exploitation of comparative advantage.
3. Inefficiencies and trade diversion: Inefficient producers within the
bloc can be protected from more efficient ones outside the bloc.
• Retaliation: The development of one regional trading bloc is likely to
stimulate the development of others. This can lead to trade disputes,
such as those between the EU and NAFTA,
• 5. Employment shifts and reductions: Countries may move production
to cheaper labor markets in member countries. Similarly, workers may
move to gain access to better jobs and wages. Sudden shifts in
employment can tax the resources of member countries.
• 6. Loss of national sovereignty: With each new round of discussions
and agreements within a regional bloc, nations may find that they
have to give up more of their political and economic rights. The
economic crisis in Greece is threatening not only the EU in general but
also the rights of Greece and other member nations to determine
their own domestic economic policies.
Integration of countries

• ASEAN ASSOCIATION OF SOUTH-EAST ASIAN NATIONS

• ASEAN is the most prominent regional grouping in Asia.
• The Association of Southeast Asian Nations is a geopolitical and economic
organization of ten countries located in Southeast Asia, which was formed
on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and
Thailand.
• Since then, membership has expanded to include Brunei, Burma (Myanmar),
Cambodia, Laos, and Vietnam. Its aims include accelerating economic
growth, social progress, and cultural development among its members,
protection of regional peace and stability, and opportunities for member
countries to discuss differences peacefully.
Aims and Purposes
• 1. To accelerate the economic growth, social progress and cultural development in
the region through joint endeavours in the spirit of equality and partnership in
order to strengthen the foundation for a prosperous and peaceful community of
Southeast Asian Nations;
• 2. To promote regional peace and stability through abiding respect for justice and
the rule of law in the relationship among countries of the region and adherence to
the principles of the United Nations Charter;
• 3. To promote active collaboration and mutual assistance on matters of common
interest in the economic, social, cultural, technical, scientific and administrative
fields;
• 4. To provide assistance to each other in the form of training and research facilities
in the educational, professional, technical and administrative spheres;
Cont..
• 5. To collaborate more effectively for the greater utilisation of their
agriculture and industries, the expansion of their trade, including the
study of the problems of international commodity trade, the
improvement of their transportation and communications facilities
and the raising of the living standards of their peoples;
• 6. To promote Southeast Asian studies; and
• 7. To maintain close and beneficial cooperation with existing
international and regional organisations with similar aims and
purposes, and explore all avenues for even closer cooperation among
themselves.
EUROPEAN UNION
• The EU is the world’s largest trading bloc, and second largest
economy, after the USA. The European Union (EU) is an economic and
political union of 27 member states that are located primarily in
Europe.
• The EU operates through a system of supranational independent
institutions and intergovernmental negotiated decisions by the
member states.
• The European Parliament is elected every five years by EU citizens.
The EU’s de facto capital is Brussels.
Role the European Union
• The initial aim was to create a single market for goods, services, capital, and labour by eliminating
barriers to trade and promoting free trade between members.
• Some examples of the role the European Union plays around the world are given below:
• – The EU promotes peace and reconciliation through its political, practical and economic support.
• – It provides development aid which is making a huge difference to millions of people’s livelihoods
around the world.
• – The Union is committed to human rights and works to ensure they are respected universally.
• – The Union works closely with the United Nations on a host of issues.
• – It supports in building security around the world through its Common Security and Defence Policy
(CSDP).
• – The European Union is the world’s largest trading bloc. Trade is a common policy so the EU
speaks with a single voice in trade negotiations with international partners in promoting a free and
fairer international trading system.
The European Union (EU) has four main
institutions namely through which it
functions
• the Council of Ministers,
• the European Commission,
• the European Parliament and the
• European Court of Justice.
• Other bodies such as the Economic and Social Committee and the
Committee of the Regions have particular roles to play in the decision
making process.
NORTH AMERICAN FREE TRADE
AGREEMENT (NAFTA)
• The North American Free Trade Agreement (NAFTA) is a
comprehensive trade agreement that sets the rules of trade and
investment between Canada, the United States, and Mexico. Since
the agreement entered into force on January 1, 1994, NAFTA has
systematically eliminated most tariff and non-tariff barriers to free
trade and investment between the three NAFTA countries.
Objectives of NAFTA
• eliminate barriers to trade in, and facilitate the cross-border movement of goods
and services between the territories of the Parties
• promote conditions of fair competition in the free trade area;
• – increase substantially investment opportunities in the territories of the
Parties;
• – provide adequate and effective protection and enforcement of intellectual
property rights in each Party’s territory;
• – create effective procedures for the implementation and application of this
Agreement, for its joint administration and for the resolution of disputes; and
• – establish a framework for further trilateral, regional and multilateral
cooperation to expand and enhance the benefits of this Agreement.
SOUTH ASIAN ASSOCIATION FOR
REGIONAL COOPERATION (SAARC)
• The South Asian Association for Regional Cooperation (SAARC) is an
organisation of South Asian nations, which was established on 8
December 1985 when the government of Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan, and Sri Lanka formally adopted its charter
providing for the promotion of economic and social progress, cultural
development within the South Asia region and also for friendship and
cooperation with other developing countries.
• It is dedicated to economic, technological, social, and cultural
development emphasising collective self-reliance
Objectives
• – To promote the welfare of the peoples of South Asia and to improve
their quality of life;
• – To accelerate economic growth, social progress and cultural
development in the region and to provide all individuals the
opportunity to live in dignity and to realise their full potentials;
• – To promote and strengthen collective self-reliance among the
countries of South Asia
Cont…
• – To contribute to mutual trust, understanding and appreciation of
one another’s problems;
• – To promote active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields;
• – To strengthen cooperation with other developing countries;
• – To strengthen cooperation among themselves in international
forums on matters of common interests; and
• – To cooperate with international and regional organizations with
similar aims and purposes
SOUTH ASIAN FREE TRADE AREA
(SAFTA)
• SAPTA was envisaged primarily as the first step towards the transition to a South
Asian Free Trade Area (SAFTA) leading subsequently towards a Customs Union,
Common Market and Economic Union.
• The SAFTA Agreement was signed on 6 January 2004 during Twelfth SAARC Summit
held in Islamabad, Pakistan. The Agreement entered into force on 1 January 2006,
and the Trade Liberalization Programme commenced from 1stJuly 2006.
• The purpose of SAFTA is to encourage and elevate common contract among the
countries such as medium and long term contracts. Contracts involving trade
operated by states, supply and import assurance in respect of specific products etc.
• It involves agreement on tariff concession like national duties concession and non-
tariff concession.