LEARNING OUTCOMES:

After attending the lecture & going through the study material, students should be able to:

LO1: Understand the factors affecting International business.

LO2: Describe and categorize different environmental factors affecting international business.
LO3: Explain various environmental factors and their impact on international business environment.

Factors of International Business Environment:

Business environmental factors are broadly divided into internal environmental factors and
external environmental factors. Internal environmental factors include human resource
management, trade unions, organization structure, financial management, marketing management
and production management management/leadership style, etc.
External environmental factors are further divided into micro and macro external
environmental factors. Micro environmental factors include competitors, customers, market
intermediaries, suppliers of raw materials, bankers and other suppliers of finance, shareholders and
other stakeholders of the business firm. External macro environmental factors include social and
cultural factors, technological factors, economic factors, political and governmental factors,
international factors and natural factors.

1. CULTURAL ENVIRONMENT:

Culture is, “the thought and behavior patterns that member of a society learns through
language and other forms of symbolic interaction – their customs, habits, beliefs and values, the
common viewpoints which bind them together as a social entity…. Cultural change gradually
picking up new ideas and dropping old ones, but many of the cultures of the past have been so
persistent and self-contained that the impact of such sudden change has torn them apart, uprooting
their people psychologically.”

Characteristics:
 Culture is derived form the climatic conditions of the geographical region and economic
conditions of the country.
 It is a set of traditional beliefs and values which are transmitted and shared in a given
society.
 It is a total way of life and thinking patterns that are passed form generation to generation.
 It is norms, customs, art, values, etc.
 It prescribes the kind of behaviour considered acceptable in the society.
 It is based on social interaction and creation.
 Culture is acquires through learning but not inherited genetically.
 Culture is not immune to change. It goes on changing.

Factors influencing International Business:

1. Cultural attitude and International Business:

Dressing habits, living styles, eating habits and other consumption patterns, priority of needs
are influenced by culture. The eating habits vary widely. Similarly, dressing habits also vary from
country and county based on their culture.

2. Cultural Universal
Irrespective of the religion, race, region, caste, etc, all of us have more or less the same
needs. These common needs are referred as “Cultural Universal”. The cultural Universal enable the
businessmen to market the products in many foreign countries with modifications. Example: TV’s,
cars, vedio games.
3. Communication with languages
Language is the basic medium of communication. There are more that 5000 spoken
languages in the world. The same words in the same language may mean different things in the
different regions of the country.
4. Time and Culture
Time has different meaning in different cultures. Asian di not need appointment to meet
someone and vice-versa. But Americans, Europeans and Africans need prior appointment to meet
someone and vice-versa. In Asian Countries, particularly in India, auspicious time is most important
for the business, admission in a college, travel, etc.
5. Space and Culture
Space between one person to another person plays a significant role in communication. But,
culture determines the pace/distance between one person and another person. Americans need more
distance from a third person for privacy. This is unimportant for Indians.
6. Culture and Agreement
The USA is very legalistic society and Americans are very specific and explicit in their
terms of agreement. The opposite is true in case of Asian countries. Asians never pick up face to
face confrontation. They keep quiet in case of disagreement.
7. Culture and Friendship
Americans develop friendship even in short time. In fact, they don’t develop deep personal
ties. Sometimes, people in the US complete the business and then develop friendship. People in
India, Japan and China firs develop friendship through several means including eating together,
presenting gifts and then transact business.
8. Culture and Negotiation
Americans are straightforward. Chinese negotiations are generally tough-minded and well
prepared and use various tactics to secure the best deal.
9. Culture and Superstition
Superstitious beliefs like fortune telling, palm reading, dream analysis, phases of the sun and
moon, vaastu are prominent in Asian Countries and also in some African Countries. Americans
knock on wood, cross their fingers and feel uneasy when a black cat crosses their path. Even Indians
feel uneasy when a cat crosses their path.
10. Culture and Gifts
Culture attitudes concerning the presentation of gifts vary widely across the world. In Japan
and India gifts are given first, but in Europe only after a personal relationship id developed. The
international businessmen should study the customs of the society in offering gifts.

2. SOCIAL ENVIRONMENT

It consists of religious aspects, language, customs, traditions, tastes and preferences, living
habits, dressing habits, etc., It also influence level of consumption. Example: The economic
position of Germans and French people is more or less same, culturally different. So study of social
environment helps in deciding type of market, product, etc.

The various factors of social environment effect on international business are:

1. Religion:
Religion is one of the important social institution on influencing the business. The religious
play a vital role in normal and ethical standards in production and marketing of goods and services.
Most of the religion indicates in providing truthful and honest information.

2. Family system:
In addition to religion, family system has impact on international business. Example: Most
of Islamic countries, women play less significant role in economy and also in family with limited
rights. But in Latin American countries, role of women is better compared to that of Islamic
countries. But women play a dominant role in European and North American countries.

3. Behavioural factors affecting the business:

Human behaviour affects the business include employee behaviour, consumer behaviour and
behaviour of stake holders (Holders of debentures, bonds, etc. Cultural factors also influence the
human behaviour cultural differences in various countries results in variations in human behaviour
from country to country. Business should consider behaviour pattern of social groups in hiring,
marketing and in selecting supplier of inputs and market intermediaries.
4. Behaviour based on group membership:
Attitude towards female employment vary from country to country. Example: Arabian
countries discourage females from seeking employment. Family membership is paramount rather
than individual achievements in certain societies like India, China, etc.,

5. Motivations and Achievements:

Economic development of a country depends on motivations of people to work hard and
desired of achievement. People rank the motivational needs differently from country to country.
People from poor countries are mostly motivated by compensation while their counter parts in rich
countries are motivated by the higher order needs like more responsibility, recognitions and other
esteem needs.

6. Power Distance:
Power distance denotes the relationship between superior and sub-ordinates. People in low
power distance prefer little consultations between superior an subordinates. Subordinates in high
power distance may prefer participating in decision making among themselves excluding the
superior.

7. Individualism V/s Collectivism:

Individualism and collectivism are consequences of the culture and affects the formation of
group, productivity and marketing practices.

8. Risk taking behaviour:

Employees in countries with the highest scores of the uncertainty avoidance prefer a system
and a methodological work based on rules that are not to be deviated. Employees in countries with
the low scores of uncertainty avoidance prefer flexible organization and flexible work.
Example: People in some countries like Norway trust most of the people and people in some
other countries like Brazil are very cautious in dealing with other.
3. TECHNOLOGICAL ENVIRONMENT:

Technology is the application of knowledge. In other words, technology has a systematic

application of scientific or other organized knowledge to a particular task.

Features:
a) Technology brings changes in the society, economy and politics.
b) Technology effects on entire globe.
c) Technology makes more technology possible.

Impact of technology on international business:

1. Investments in technology:
Advanced countries spend considerable amount on research and development for further
advancement of technology. Example: German spends 50% of research and development budget on
product innovation and remaining 50% on process innovation. But Japanese spend 70% on process
innovation and 30% on product innovation.

2. Technology and economic development:

Technology is one of the significant factor, determines the level of economic development of a
country. The differences between nation is mostly reflected by the level of technology. Example:
India has the vast natural resources. It remain importing the products from other countries through
exporting raw materials from itself due to its low level of technology.

3. Technology and International competition:

A few companies invent but many companies adopt scientific knowledge to generate wealth by
application and communication. The invention process and global competitiveness are the two
determinants of a national wealth. Example: Japan concentrates on innovation of automobiles. But
Italy concentrates on innovation of textiles and leather.
4. Technology Transfer:
Technology and global business are interdependent. International business spread technology
from advanced countries to developing countries by establishing the subsidiaries or establishing the
subsidiaries joint ventures with the host countries and arranging technological transfer to the
company of developing countries through technological alliances.

5. Technology and location of plants:

MNCs locate their manufacturing facilities based on the technology. In other words, MNCs
locate their plants with high technology in advanced countries and establish the labour driven
manufacturing facilities in developing countries in order to get the advantages of cheap labour.

6. Scanning of Technological environment:

The level of technology is not same in all the countries. Advanced countries enjoy the latest
technology while the developing nations face the consequences of outdated technology. Therefore,
MNCs have to understand technology and analyse it before entering foreign market.

7. Appropriate technology:
The technology that suit one country may not be suitable for other countries. As such the
countries develop appropriate technologies which suit their climatic conditions, social conditions,
conditions of infrastructure etc., Ex: Japanese automobile industry design different type of cars
which suit the Indian roads.

8. Technology and globalization:

The industrial revolution resulted in large scale production and the recent technological
revolutions leads to the production of high quality products at lower cost. These factor forced the
domestic company to enter the foreign countries in order to find market for their products. Thus
technology is one important cause for globalization.

9. Information technology and globalization:

The information technology redefined the global business through its development like internet,
www sites, e-mails, information super highways and on-line transactions brought significant
development to the global business.

Impact of technology on globalization:

 Technological advances have tremendously faster globalization. Technology have been a
very important facilitating factor of globalization.
 Several technological development becomes a compelling reason for internationalization
technology are substantially increasing the scale economies and market scale required to
break even.
 Global sourcing encouraged not only to trade liberalization but also by technological
developments which reduces transportation cost.
 Technology monopoly encourages internationalization because the firm can exploit the
respective demand without any competition.
 Development in telecommunication and information technologies have reduced the barriers
to time and place in doing a business. It is possible for customers and suppliers to transact
the business at any time and any part of the globe.

4. ECONOMIC ENVIRONMENT

Economic environment refers to all those economic factors which have a bearing on functioning
of a business unit. Economic environment of various countries directly influences the international
business. In fact, international economic environment and global business interact with each other.
The major changes include:
 Capital flow rather than trade or product flow across the globe.
 Establishment of production facilities in various countries.
 Technological revolution link the relations between the size of the production and level of
employment.
 The macro economic factors of individual nations independently do not significantly control
the global economies.
Economic system:
Economic system is one of the important factor of economic development that influences
the international business to the greater extent. Economic system is an organization of institutions
established to satisfy human needs or wants.

There are three types of economic system viz.,

 Capitalistic Economic System
 Communistic Economic System
 Mixed Economic System

Capitalistic Economic System: This system provides for economic democracy and customer choice
for product or service. This system emphasizes on the philosophy of individualism, believing in
private ownership of production and distribution facilities Ex: USA, Japan, UK.

Communistic Economic System: Under this system private properties and property rights to income
are abolished. The State owns all the factors of production and distribution but the major limitation
of this system is to reduce the individual freedom of choice; and failed to achieve significant
economic growth.

Mixed Economic System: Under this system, major factors of production and distribution owned,
managed and controlled by the State. The purpose is to provide benefits to public more or less on
equality basis. This system, does not distribute the existing wealth equally among people, but
believes in full employment and suitable rewards for the workers efforts. Ex: India, UK, France,
Holand etc.,

Countries classified on the basis of income:

 Low income countries
 Lower middle income countries
 Upper middle income countries
 Higher Income countries

Low Income Countries: This country is also known as third world countries or pre industrial
countries. The characteristics includes, high birth rate, low literacy rate, political instability an
unrest, technological backwardness, underutilization of natural resources, excessive unemployment
and underemployment, and excessive dependency on imports.

Lower Middle Income Countries: These countries are known as less developed countries. The
characteristics of these countries include – early stage of industrialization, expansion of consumer
market, availability of cheap and motivated human resource, location for production of standardized
products or exporting, ex: clothing for exports.

Upper Middle Income Countries: These countries are called industrializing countries. The
characteristic of these countries are – less dependency on agriculture, high exports, increase in
literacy, formal education, rapid economic development, occupation mobility of people from
agriculture to industry and increased wage rate.

High Income Countries: These countries are known as advanced countries, industrialized, post-
industrialized or first world countries. The characteristics include – development of information
sector, emphasize on future plan, development of intellectual technology over machine technology
and it aims at building information society.

Impact of economic environment on international business:

1. Economic growth:
Business helps for the identification of peoples’ needs, wants, production of goods and services
and supply to the people. Thus it creates for the conversion of inputs into the outputs and enables
for consumption. It leads to economic development. The high economic growth rate of the
countries providing an opportunity of expanding market shares to international business firms,
managers of the MNCs are interested in knowing the future economic growth rate of various
countries in order to select the market either to enter or concentrate more resources to the market.
2. Inflation:
It is the another important factor that affects the market share of the international business firm.
It affects the interest rate as the demand for money is high due to the higher prices and it also affects
the exchange rate of the domestic currency in terms of various foreign currencies.

3. Balance of payments:
Balance of Payments position of a country is an outcome of international business and also
affects the future of the international business. Export and import trade in goods and services
affects the current accounts position and flow of capital affects capital accounts position. The
managers of MNCs should monitor the balance of payment position of the countries.

4. Economic Transition:
The process of liberalization provided a significant opportunities to MNCs to enter most of the
countries of the world either by locating their manufacturing facilities or expanding or both. Thus
MNCs are immediate and greatest beneficiaries of L, P and G of world economies.

5. POLITICAL ENVIRONMENT:

The influence of political environment on business is enormous. Political system prevailing

in a country promotes, decides, encourages, directs and control the business activities of that
country. PE includes factors such as characteristics and policies of political parties, the nature of
constitution and Government system and the Government environment influencing the economic
and business policies and regulation.

Concepts:

1. Political ideology:
Political ideology is the body of complex ideas, theories and objectives that constitute a socio-
political program. Political ideologies of the people in the same country vary widely due to the
variations in culture, ethic group, community groups, religious and the economic groups. These
variations influence the people to form different political parties. The difference in political
ideologies change the national boundaries. The IB manager should understand these ideologies of
various in the countries in order to know the possible political tensions and instabilities.

2. Democracy:
It refers to political arrangement in which the supreme power is vested in the hand of people.

3. Political rights and Civil liberties:

It helps for evaluating the freedom of citizens. The major indicators of political liberties
include:
 conduct of elections fairly and competitively
 power and ability of the voters in casting their votes in the process of electing
 people ability in forming political parties and
groups. The major indicators of civil liberties include:
 Degree of freedom of the press,
 Equality for all individuals under the law,
 Freedom from extreme in difference of Govt. and corruption.

Totalitaranism:
It refers to an individual freedom is completely subordinated to the power of authority of the state or
concentrated in the hands of one person or in a small groups.

Political Relations and International business:

Political friendly relationship results in the growth of bi-lateral or multi-lateral trade. Ex: The
friendly relationship between Indian companies but also the MNCs operating in India to have a
close business linkages with the USSR. Similarly the friendly relationship between Pakistan and
USA helped the Pakistan companies to have a close business linkages with USA.

Types of Political System:

Appraisal of political system help us in having a ideas of political system and their impact on
international business. The are classified as:
Two party system: Two parties takes turn of controlling the Government under two party system
Ex: USA and UK.

Multiparty system: In a multiparty system, there are many parties and no party is strong to gain the
control of the Government: Ex: Germany, France and India.

Single party system: In this system, only one dominant party gets the opportunity to control the
Government even through several parties exists Ex: Egypt.

One party Dominated system: In this system, dominate party rules the Government even though
there are more than one party. Ex: USSR, Cuba.

Political Risk:
Political risk refers to risk of loss of assets earning power or managerial control, due to the events or
action that are politically motivated.

Political risk that affects the international business:

The international business firms face political risk as and when there are changes in Government
policies or changes in political parties in power. Risks are based on host Government actions like:

Confiscation: The process of nationalization of property without compensation is called

confiscation.

Expropriation: It is the process of nationalization of a property with compensation.

Nationalisation: It is a process of shifting the ownership of private property from private individuals
to Government.
Domestication: In this, foreign business firm control and ownership in favour of domestic
investors either partly or fully.
General Instability risk: These risk are due to social, political, religious, unrest in the host
country.

Operation risk: These risk are due to imposition of controls on foreign business operations
by the host Government.

Political instability can be viewed from the corruption, social unrest, attitudes of nationals
and policies of host Government.

How to minimize the political risk?

The risk that are involved in international business cannot be avoided but it can be
minimized. It can be minimized from the following:
Stimulation of the local economy: The foreign company can stimulate the economic
development of host country by investing in their priority area. The foreign countries can
stimulate the host country economy by being export oriented.

Employment of nationals: MNCs can minimize political risk by employing, developing

and promoting the local people.

Sharing ownership: Foreign company should allow the domestic investors to invest and
share the ownership by converting the company into public limited company and
ownership can be shares through joint ventures.

De-civic minded: The MNCs in addition to doing business in foreign countries should also
be good corporate citizen. It may help the foreign countries in different ways like
constructing schools, hospitals, roads, etc.,

Political Neutrality: MNCs should not involved in political risk or disputes among the
local group of host countries from the point of view of long run
interest.