International
Business
•
When business activities are
performed on an international level, these can be termed as
international business.
•
Basic functions, processes and
techniques of international business are essentially the same as those
involved in domestic business.
•
What is different is the environment
within which these functions are performed and processes are carried out.
•
International Business environments are
unfamiliar and different from the domestic environment
•
These variations may need adaptation
for business success
International Business
Environment
•
In the context of a business firm, environment
can be defined as various external actors and forces that surround the
firm and influence its decisions and operations.
•
The two major characteristics of the
environment as pointed out by this definition are:
•
These forces are external to the firm
•
These are essentially uncontrollable.
The firm can do little to change them.
Micro and Macro
Environments
Micro environment
can be defined as the forces in the firm's immediate environment which
directly influence the firm's decisions and operations. These include:
suppliers; various market intermediaries and service organizations such as
middlemen, transporters, warehouses, advertising and marketing research
agencies, business consulting firms and financial institutions; competitors,
customers and general public.
Macro environment
consists of broader forces which affect the firm as well as other actors in the
firm's micro environment. These include factors such as geographic, economic,
financial, socio-cultural, political, legal, technological and ecological
forces.
Domestic,
Foreign and Global Environment
•
In the figure, innermost circle represents
firm's business strategy and decisions with regard to production,
finance, marketing, human resources and research activities.
•
Since these strategies and decisions are
made by the firm, they are called controllable.
•
Firm can change them but within the constraints
of various environmental factors.
•
The next circle represents domestic
environment and it consists of factors such as competitive structure,
economic climate, and political and legal forces which are essentially uncontrollable
by a firm.
•
Besides other factors Export
promotion measures and incentives in country have been motivating factor
for the firms to internationalize their business operations.
•
Since these factors operate at the
national level, firms are generally familiar with them and are able to
readily react to them.
•
The third circle represents foreign
environment consisting of factors like geographic and economic conditions,
socio-cultural traits, political and legal forces, and technological and
ecological facets prevalent in a foreign country.
•
Because of being operative in domestic
markets, firms are generally not aware of these factors and their
influence on business activities.
•
The problem gets more complicated
with increase in number of foreign markets in which a firm operates.
•
Because of environmental differences,
business strategies that are successful in one nation might fail miserably
in other countries.
•
Foreign market operations, therefore,
require an increased sensitivity to the environmental differences
and adaptation of business strategies to suit the differing market
situations.
•
The upper most circle, viz., circle
four, represents the global
environment.
•
Global environment transcends national
boundaries and is not confined in its
impact to just one country.
•
Global environment exerts influence
over domestic as well as foreign countries and comprises of forces like
world economic conditions, international financial system, international
agreements and treaties, and regional economic groupings.
•
World-wide economic recession;
international financial liquidity or stability; working of the international
organizations such as World Trade Organization (WTO), International
Monetary Fund (IMF) and World Bank are some of the examples of global
environmental forces having world-wide or regional influences on business
operations.
Relevance
of International Business Environment
•
When a firm decides to enter into
international business, it faces two major decision problems:
1. Which
markets to select, and
2. How
to enter into those markets
3. Both
these decisions are strategic in nature and are greatly influenced by the environmental
forces
•
Firms select those countries as their
target markets which have sufficient market potential
•
Market potential in turn depends upon
geographic, economic and cultural environments prevailing in the foreign
countries
For example:
Demand for fans will be more in countries which are geographically
located in hot zones and where per capita income is high enough for the people
to afford purchase of fans. Besides climate and sufficient income, electricity
should be available to make the fans workable.
•
Once the firm identifies countries
with market potentials, it needs to decide as to what mode it should use
for entering into those markets.
•
A wide range of options such as exporting,
franchising, joint venture or setting up wholly owned subsidiaries
abroad are available to firms.
•
Exporting is desirable when it is
economical to produce in the home country and there are no legal
restrictions on import of given product in the foreign markets.
•
In the case of import bans or excessive
costs of transportation, a firm may choose to set up its manufacturing and
marketing subsidiaries abroad. But this is feasible only when foreign
governments are not averse to foreign direct investment, and necessary raw
materials and labor are available locally at competitive prices in the foreign
countries.
•
In countries where first condition is
not fulfilled, the firm can go in for either franchising or joint venture as
these entry modes are politically less objectionable.
•
Environmental forces play an equally
important role in shaping a firm's functional and tactical decisions.
• What
should be the scale of production?
• Should
the firm employ labor or capital intensive techniques?
• How
to finance firm's foreign operations?
• How
much to repatriate?
• What
marketing mix should the firm use?
• Should
it hire local persons or employ foreign nationals?
• What
should be their compensation package?
• Answers
to these and other questions require in-depth analysis of the prevailing
environments in foreign countries.
•
Since the environments differ, firm cannot
be much successful by falling back upon its domestic decisions and
practices.
FOREIGN
ENVIRONMENT
•
Foreign environment consists of geographical,
economic, financial, socio-cultural, political, legal and ecological forces.
•
A firm needs to examine these
components of the environment for each one of the foreign countries in
which it operates.
•
All the components-and
elements of the foreign environment might not be relevant to a decision
maker. Much depends on the nature of the firm and its decisions.
•
For a multinational corporation interested
in setting up a manufacturing plant in a foreign country, geographic
as well as socio-cultural, legal and political environments would be as
important as the economic environment.
Geographic
Environment
•
Geography refers to a country's climate,
natural resources and people.
•
Geographic features of the Foreign
country also influence the nature and characteristics of a society.
•
It also affects demand pattern of the
people living in the country.
•
Geography is a major contributory factor
to the trade centers and routes.
•
Different climatic conditions (viz.,
rain, snowfall, wind, temperature, humidity, etc.) give rise to demand for
different types of products.
•
It is largely due to climatic
differences that people differ in their housing, clothing, food, medical and
recreational needs.
•
Rolls Royce
cars from Britain, for instance, required extensive body work and
renovations in Canada due to four or five months of virtually continuous
snow in Canada.
Economic
Environment
•
Among all the uncontrollables, economic
environment is perhaps the most important factor due to its dynamic
nature
•
An analysis of economic environment
enables a firm to know how big is the market and what its nature
is.
•
Answers to these questions in turn
determine whether a firm should enter a specific foreign market, and if
yes, what strategies it should use to successfully run its business
operations.
•
Status of Economic Development:
Economic development is directly related to the development of marketing in a
country.
•
Countries characterized by high levels
of economic development not only have high demand for a variety of
products, but also have better infrastructure and more developed marketing
systems.
•
Competition is
also high in developed countries.
•
In the less developed countries,
on the other hand, not only demand is low, but infrastructure is also poor. It,
therefore, becomes quite difficult and more expensive to do business in
such nations.
•
Income:
Income is an important indicator of the country's level of development and also
its market size.
•
Gross national product (GNP)
and per capita income are among the major measures of income.
•
While sales of most of the industrial
goods and capital equipment generally co-relate with GNP, demand for
consumer products depends on per capita income.
•
Though per capita income is a useful
measure, it is not a full-proof measure of the country's development and
prosperity. What is more relevant is the distribution of income.
•
Besides income, one should acquire
information about the sectoral distribution of the GNP as it is an
important determinant of kinds of goods in demand in a foreign country.
•
If the majority of a country's GNP
comes from agriculture, it implies that the country is agriculture based
and it shall have a good demand for agricultural inputs such as seeds,
fertilizers, pesticides and agricultural machinery and tools.
•
An industrial nation with relatively
higher dependence on manufacturing, on the other hand, shall have a good
market for raw materials, plant and machinery, and also for a variety of
consumer durables and non-durables.
•
Expenditure Pattern:
Data on expenditure patterns are useful in judging as to how the money is spent
on different item and which products receive more weightage.
•
Infrastructure is
another vital dimension of the country's economic environment. Infrastructure
refers to various social overheads such as transportation, telecommunications,
commercial and financial services like advertising, marketing research, various
media, warehousing, insurance, distribution, credit and banking facilities.
•
Absence of adequate infrastructure not
only hinders country's development but also affects firms' costs and
capacity to reach various market segments.
Financial
Environment
•
Monetary and Fiscal Policies:
Inflation, interest rate, various kinds of duties and exchange rates are
the variables related to the country's monetary and fiscal policies and have a
substantial impact on the costs and profitability of business
operations.
•
These variables also Influence a firm's
decision to move funds from one nation to another.
•
Foreign Investment Policies:
Each country has its own commercial and foreign investment policies which must
be studied in detail to ascertain country's openness for trade and
investment with other countries.
•
A proper understanding of these policies
can be quite helpful in ascertaining
what tariff and non-tariff barriers the particular country uses to protect
its domestic industry from foreign competition.
•
Balance of Payments Account:
A country's balance of payments account is another major source of' information
about the country's foreign trade and foreign currency reserves.
•
Current account & Capital
account transactions
Socio-cultural
Environment
•
Business is much a socio-cultural
phenomenon. Per capita income in two countries may be the same, yet
the consumption patterns in these countries may differ.
•
Socio-cultural forces have considerable
impact on products people consume; designs, colors and symbols they like;
dresses they wear and emphasis they place on religion, work, entertainment,
family and other social relations.
•
Socio-cultural environment influences
all aspects of human behavior and is pervasive in all facets of
business operations.
•
Some of the important elements to
understand a country's culture are: language, aesthetics, education,
religions and superstitions, attitudes and values, business customs and
practices.
POLITICAL
ENVIRONMENT
•
It is rightly said that a foreign
business firm operates only as a guest and at the convenience of the
host country government.
•
To gain an insight into a foreign
country's political environment, one needs to analyze factors such as current
form of government and political party system, role of government in the
economy, political encouragement to foreign firms and political stability.
•
Current form of government: Single
party government is considered to be more stable and
favorable for business than the multiparty government.
•
Role of government: Political
ideology and government attitudes towards business.
Regulatory roles and involvement in business.
•
Political Stability: Due
to huge and irreversible investments
LEGAL
ENVIRONMENT
•
Problem for the international firms is
that the laws that they face in their home countries might be different
from those encountered in the host countries.
•
Advertising laws in Germany,
for instance, are so strict that it is best advised for the international
marketer to get himself good legal counsel before framing his advertising
strategy.
•
Similarly there exist laws in European
countries preventing promotion of products through price discounting.
These laws are based on the premise that such practices differentiate buyers.
•
Different laws regarding decisions like location
of plant, level of production, employment of people, raising money from the
market, accounting and taxation, property rights including immovable property
and patent, agreements etc.
•
Competition related laws:
In the United States, for instance, anti-trust legislation influences all
mergers, takeovers, and business practices which are in restraint of trade.
•
Gillette,
for example, was prevented from taking over Braun A.G. of Germany which was an
electric razor manufacturer on the grounds that it would distort competition.
ECOLOGICAL
ENVIRONMENT
•
Ecology refers to the pattern and
balance of relationships between plants, animals, people and their
environment.
•
Earlier there was hardly any
concern for the depletion of resources and pollution of the
environment.
•
But in recent years,
the magnitude and nature of the 'pollution overload' have assumed such alarming
proportions that pressures have built up all over the world to do something
urgently.
•
In almost all the countries,
there exist today legislations and codes of conduct to preserve the
earth's scarce resources and put a halt to any further deterioration in the
environment.
•
Corporations today are judged in
terms of not only financial returns, but also conservation of environmental
resources and reduction in pollution levels.
•
Similarly, restrictions have been put on
garment exports using cloth processed through the use of AZO dyes.
•
Germany
today is perhaps the country with most stringent environmental laws in
the world.
World Trade
Organization
·
The World
Trade Organization (WTO) is the only global international organization dealing
with the rules of trade between nations.
·
WTO agreements
are negotiated and signed by the trading nations and ratified in their
parliaments.
·
The goal is to
help producers of goods and services, exporters, and importers conduct and grow
their business.
Background of WTO
•
After Second
world war; IMF and World Bank-1944-through Bretton Woods Agreement; ITO
rejected
•
GATT (General
Agreement on Tariffs and Trade)-1947-by US, UK and others
•
GATT called as
“rich man’s club”
•
The WTO came
into being in 1995 (Jan 1st)
•
The WTO is the
successor to the General Agreement on Tariffs and Trade (GATT)
Difference
between WTO and GATT
Focus
GATT
–
Trade Of Goods
WTO-
Trade Of Goods and Services
Power
and Dispute Settlement
GATT- Less powerful and
inefficient dispute settlement body
WTO-
More powerful and Fast & strong dispute settlement body
Meeting
Duration
GATT-
Lack of fix schedules
WTO
– Meet after every two years
Organizational
set up
GATT-
Small set up
WTO-
Large set up
Time
duration of discussions
GATT- No time limit (Uruguay Round -8 Years)
WTO- Time limit for discussions
The
Past 50 Years: Exceptional Growth in World Trade
Objectives
Ø Improve
living standard of people residing in member countries
Ø Ensure
full employment and effective increase in demand
Ø Enlarge
production and trade of goods
Ø Sustainable
development and environment protection
Ø Ensure
sufficient growth in LDC’s (Least Developing Countries) as well as proper share
in global trade
Ø Enlarge
production and trade of services
Ø Ensure
optimum utilization of world resources
Ø Go
for sustainable development
Ø Protect
the environment
Role/ Functions of WTO
l Helping
Developing and Transition Economies
l Specialized
help for Exports
l Participation
in Global Economic Policy
l Information
deposition with WTO
l Spreading
the information
l Encouraging
development and economic reform
l Handling
Trade disputes
l Monitoring National trade policies
l Cooperation
with other international organizations
About World Trade Organization
Formation- 1 January
1995
Headquarters – Geneva
Switzerland
Membership -160
Countries
Official Languages –
English , French and Spenish
Director General- Roberto Azevêdo
Principles
of trading system
l Non-discrimination (MFN Status)
l Reciprocity (beneficial for all trading countries)
l Binding and enforceable commitments (with WTO
members)
l Transparency (Trade related information and
barriers)
l Safety valves (Permission for restrictions)
Criticisms
of the WTO
Ø The
WTO undermines state sovereignty & representative democracy
Ø Member
nations are not encouraged to protect the environment
Ø Members
are unable to uphold laws guaranteeing workers’ rights
Ø The
WTO is controlled by the larger nations
Ø The
WTO represents the interests of large corporations and wealthy citizens
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