INTERNATIONAL BUSINESS ENVIRONMENT

•Sometimes referred to as global business environment.•The global environmental variable is very important and needs to be understood first and foremost before any considerations are made in global management.•The environmental variable is the main determinant of the difference between domestic business and international business.•The international business environment refers to factors or forces that a business is likely to encounter in foreign markets.•Scholars have used different frameworks to classify business environment e.g.

•The macro and micro environments.•Remote, industry, and operating environments.•Economic, political-legal, socio-cultural, etc environments.

• For the purpose of this course the third approach is used with some reconfiguration to make it more relevant for understanding the issues that are important in global business management.

• The forces, therefore, are classified according to whether they are:• Economic • Political-legal• Social-cultural

• The factors involved in each of the above environmental variables can facilitate or hinder international business operations depending on their precise nature, which may be favourable or unfavourable to foreign business in a country.

THE ECONOMIC FRAMEWORK

• The major components of the economic environment are as follows:

1. The international trade factors, such as:• The balance of payments.• Exchange rate.• Regional or international groupings.In what ways could each of these factors facilitate or hinder business

in a foreign market?

2. The international financial factors, such as:• The International Monetary Fund (IMF).• The World Bank• The United Nations Development Programme (UNDP) How could the role each of these play facilitate or hinder business?The policies these institutions adopt towards certain countries can

limit business opportunities in the affected countries.

4. Income factors, such as:• Per capita income• Income distribution• Gross National Product (GNP)How is each of these factors relevant for consideration?

5. Natural resources, such as:• Minerals and agricultural products• Topography• Climate• Wildlife• Others e.g. rivers, lakes and forests

6. Economic development, such as:• Level of economic development • Infrastructure e.g. roads, communication, security, financial

insurance, etc.• Urbanization

7. Foreign investment, such as:

• The type and number and number of foreign firms

operating in a market.

• The methods and strategies foreign firms are using to operate in a market.

why it is important to know these?

THE POLITICAL-LEGAL FRAMEWORK

• This is a product of national and international political climate e.g. the political-legal factors that foreign firms in Kenya would encounter are a product of Kenya’s political climate as well as the international political climate.

• Therefore included here are any national or international political and legal factors that can affect business operations in foreign markets.

POLITICAL FACTORS

The major political factors are:1. Government investment:• This may take the form of:

• Sole ownership.• Part ownership.

• Sometimes the government may be a monopolist in an industry.• In communist and less developed countries government

investment tend to be relatively high.• Implications of government investment:

• Government monopoly may preclude any other firm from operating in the industry.

• The government may be the only available partner for the international firm.

• The international firm may have the government as its only customer or supplier in an industry.

• The government could be a major competitor for the international firm in an industry.

2. Government purchasing or consumption.• The government may be the largest single buyer of certain goods

and services.

• Government purchasing and payment procedures tend to be quite elaborate and protracted.

• It is important to consider the procedures and regulations that govern government purchasing and payments in a country.

3. Economic and political ideology.• The following countries deserve careful attention:

• Non-democratic• Socialistic• Capitalistic• Nationalistic i.e. strong spirit of nationalism.

• Business operations in a country are greatly influences by the country’s politico-economic ideology.

• The spirit of nationalism can be countered if the international firm develops a localized image – to avoid falling victim.

4. Political stability.• A country may not be without change, but the change should be

gradual and non-violent.• Abrupt changes in the political-legal parameters can be quite

disruptive to business.• Political changes can also lead to adverse changes in government

actions towards business.

5. International relations.

• The host country’s relations with other countries may have the following implications for the international firm:• Hostile relations with other countries may lead the host

or other countries to extend the hostility to the firm and its subsidiaries.

• A firm operating in a country that has bad international relations may find it difficult to export or import while in such a country.

LEGAL FACTORS

Included here are the laws and regulations that affect business activities. These may be categorized as follows:

1. Laws of the firm’s home country.• Certain home country laws may impose constraints on

the extent to which a firm can participate in business activities in foreign markets. Examples of such laws are:

• Export controls.• Antitrust laws i.e. laws intended to maintain free

competition by limiting the concentration of economic power in one or a few firms.

• Other laws and regulations that may impose constraints or limitations on the firm making it difficult for the firm to freely exploit foreign market opportunities.

2. Laws of the firm’s host country, such as:• Laws and regulations regarding the following:

• Product content

• Labeling and packaging

• Promotions

• Distribution

• Pricing

• Ownership e.g. in some sectors, proportion of equity to be owned by locals

• Exchange control

• Pollution

• Value added i.e. some proportion of value to be added locally

• Labour laws and regulations• Corporation laws and regulations

3. International and regional laws, such as:

• Regulations of the IMF (lends on long term basis), WTO (World Trade Organization), and World Bank (lends on short-term basis).

• The International Standards Organization (ISO).• Trade Law Commission (UNCITRAL) – established by

the United Nations (UN) to promote a uniform commercial code for the entire world.

• The Patent Cooperation Treaty – which aims at simplifying the patent application system among members nations.

• The international trademark conventions – which aim at simplifying the trademark registration process.

• International and regional groups or conventions, such as:• ECOWAS• SADC• EAC• EU• COMESA• IAS (International Accounting Standards)• NAFTA (North America Free Trade Area)• LOME Convention

International and regional conventions facilitate international business in the following ways:

• They extend the market for international business• Other countries may be used as abase to export elsewhere.• International business may be done more conveniently and

cheaply due in part to simplification of procedures and reduction of tariffs.

Such conventions could also impose constraints due to:• Intensified competition.• A foreign firm may not fully enjoy privileges accorded to

firms of member countries.• Powerful firms from other member countries could easily

THE SOCIO-CULTURAL FRAMEWORK

• Included here are cultural factors and social factors that affect international business operations.

CULTURAL FACTORS

• Culture is the man-made part of a people’s environment and may be defined as the distinctive way of life of a people, for example, how the people of a society eat, the kinds of food they eat, and how they prepare and store such foods.

• Culture is manifested in all aspects of life, such as: the people’s farming life, their ways of transport, how they spend their leisure time and in various things that human beings do in the process of living.

• Culture, therefore, is developed by people and is not a product of nature that man has had no influence over. Culture is quite dynamic and continues to evolve.

• The major cultural parameters that affect international business are as follows:

1. Material culture

• This refers to the tools and technology of a society. It involves techniques and physical things, but only those made or developed by man, as opposed to those found in nature. Material culture affects the nature of the following:

• Product• Packaging• Promotional strategy• Personnel policies• Production policies

2. Language

• Language refers to symbols, whether verbal or non-verbal that people use for communication. The meanings conveyed through language may be:

• Denotative meaning• Connotative meaning

• International business is affected both by the language symbols used by the denotative and connotative meanings of such symbols.

• The business operations most affected by language are:• Promotional techniques• Personnel relations (PR activities)• Corporate image

3. Aesthetics• This refers to a culture’s ideas concerning beauty and good

taste, as expressed in the fine arts, such as, music, art, drama and dancing.

Aesthetics also involves appreciation of colour and form. Different societies have different esthetical preferences. Aesthetics has significant implications in the following:

• Deigns e.g. of products and premises• Colours• Music• Brand names

4. Education

• Education refers to the learning or acquisition of knowledge, skills, attitudes and values that are important for life in the society. Education may occur through the following processes:

• Formal e.g. training in schools and colleges.• Informal or non-formal processes of acquiring knowledge,

skills, attitudes and values e.g. participation in traditional social activities.

• A person may be highly learned, but most uneducated. Likewise, a person may not have been to school, but yet be the most educated.

• Although the educational information available regarding foreign markets is usually that a formal education only, such partial information may still be useful in the following ways:

• Indicates the extent of literacy in a country to guide advertising, labeling, research work, product design and development, and instruction manuals.

• Determining degree of cooperation and relations to expect from distribution channel members.

• Indicates the nature and quality of marketing support services available.

• Guidance regarding appropriate personnel policies and management techniques and styles.

• Useful for manpower planning and development.

5. Attitudes and values• Attitudes are reflected in people’s likes and dislikes and

in their beliefs and ideas about things.• Values are reflected in what people think is right or

appropriate and what they consider as important or desirable.

• Attitudes and values are important in explaining a people’s behaviour and should be taken into account in business decisions, actions and plans.

6. Religion• This may generally be defined as belief in the supernatural.

Religious beliefs and motivates can explain many things that people do. The following are some of the direct effects that religion can have on an economy:

• Religious holidays – can affect work schedules and business programmes.

• Consumption patterns – may be a result of religious requirements and taboos.

• The economic role of women in a society e.g. in Islamic and Buddhist societies.

• Restriction of participation of certain groups in the economy e.g. cast system in India.

• Joint decision making e.g. among the Hindu joint family – affecting consumption, employment, and acceptance of responsibility.

• Pressure groups–affecting business decisions and strategies.• Religious divisions and conflicts which can affect distribution,

promotion, and other aspects of business management in a country.

SIX RULES OF DOING BUSINESS ACROSS CULTURES.

1. Be prepared:

• A mentor is desirable, complemented with a lot of reading on social and business etiquette, history and current affairs, culture values affecting the two countries.

2. Slow down:

• Americans are clock watchers seen to be in a rush. Japanese and Germans are considered time – obsessed i.e. take time.

3. Establish trust:

• The marketer must be established as worthy of the business and dependable in the long run.

4. Understand the importance of language:

• An interpreter is often critical and man be helpful even when one of the parties speaks the other’s language.

5. Respect the culture:

• Americans in foreign countries have a tendency to treat the natives as foreigners and they forget that actually it is they who are the foreigners themselves.

6. Understand the components of culture:

• Any region have two components of culture

(i) Surface culture (fads, style, food)

(ii) Deep culture (attitudes. Beliefs and values).

SOCIAL FACTORS

• Social organizations are the most important social factors that affect business operations.

• Social organizations reflect the way people relate in society e.g. how a person relates to other people in society i.e. the ties individuals have with others.

• The ties greatly influence how people behave as individuals and as groups. It is important to know the types of social organizations that dominate a society and to understand their precise nature. The kinds of social organizations that characterize a society can offer or limit opportunities for business in the society, as well as dictate how business operations can be effectively carried out.

• The following are the major types of social organizations found in most societies:

1. Kinship

• This means family. Kinship is the primary kind of social organization.

• In some countries e.g. developed nations, kinship is quite small, restricted primarily to the immediate family, which includes only the father, mother and the unmarried children in the household.

• In other countries, e.g. developing countries, the perception or concept of kinship is extended to include even distant relatives.

• Some of the implications of kinship on business are as follows:

• Affects marketing decisions and policies relating to product sizes.

• Affects personnel decisions and policies relating to housing, fringe benefits and compassionate leaves, among others.

2. Common territory

• This refers to what the people of a society perceive as a common territory i.e. how the people of a given area perceive themselves as essentially belonging to one group.

• In developed or urbanized societies, the common territory is usually the neighbourhood, the suburb, or the city.

• In developing nations e.g. Africa and Asia, it is usually the “tribe” or some geographic region.

• Groupings based on common territory have the following implications for business:

• Can be a basis of market segmentation.• Can affect group dynamics in the organization.

3. Special interest groups

• These may be based on any of the following:• Religion• Occupation• Politics i.e. political affiliations• Socio-economic class• Ideology• Ethnicity• Age• Gender

• Special interest groups should be taken into account in the following aspects of business operations:• Market segmentation.• Business decisions and strategies, especially strategy

implementation, since they may act as significant pressure groups. • Understanding and managing group dynamics in the organization.

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