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International Business Management

Unit 3

 

 

 

 

 

Unit 3

International Business Environment

 

 

 

 

Structure:

3.1Introduction Objectives

3.2Economic Environment National economic policies Economic structure Balance of payments

3.3Political Environment Nature of politics Political stability

3.4Demographic Environment Segment selection Branding and strategy

Market trending and comparison among products Assumptions of country culture

Understanding demographic changes Socio-cultural Environment

3.5Legal Environment

Legal systems

Dispute resolution systems

3.6Summary

3.7Glossary

3.8Terminal Questions

3.9Answers

3.10Case-let

3.1 Introduction

In the previous unit, you have studied about the evolution, advantages, globalisation and the future of international business (IB). This unit covers economic, political, and legal environments in which an IB operates and gives an insight into different theories that companies adopt while going international.

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Scanning the global business environment is a must for any firm whether doing business domestically or internationally as the domestic markets are now open to global competition by opening to foreign players. This analysis is part of a company’s analysis-system, involving both internal as well as external factors. The analysis system may comprise the following areas in order to explore the business opportunities and challenges in key markets for any firm.

Conducting business within your own country is different than in a global environment, where you will be dealing with international features, prospects and challenges. It is important that managers take an active interest in these economic, political, demographic and legal environments of a country in order to:

ï‚·Analyse market conditions of different countries.

ï‚·Assess risk.

ï‚·Identify growth sectors.

ï‚·Make investment decisions.

In order to succeed, a company needs to gather data on national economies, interpret and make cross border comparisons using standard

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criteria. Knowledge of the IB environment allows management to allocate resources so that they reap the benefits and operate with high efficiencies in any country. For instance, garment companies use manufacturing facilities in China and save on costs, which will be higher in the nation of origin.

Objectives:

After studying this unit you should be able to:

ï‚·analyse economic environment of a country for doing business.

ï‚·interpret the factors affecting political environment of a country.

ï‚·discuss the legal issues involved in the international trade.

ï‚·explain the demographic environment and its increased utility in intentional trade.

3.2 Economic Environment

The economic environment refers to the economic conditions under which a business operates and takes into account all factors that have affected it. It includes prime interest rates, legislation concerning employment of foreigners, return of profits, safety of country, political stability and so on.

3.2.1 National economic policies

National economic policies depend on a country’s socio-economic and cultural background. All governments aspire to achieve four major economic objectives:

ï‚·Full employment.

ï‚·A high economic growth rate.

ï‚·A low rate of inflation.

Absence of deficit in the country’s balance of payments.

The basic problem is that the first two objectives work against the last two. Measures such as low interest rates, tax cuts and increase in public spending creates jobs and stimulates growth but also causes inflation, increase in wage, and higher imports. Due to increased consumer expenditure the country’s balance of trade worsens.

3.2.2 Economic structure

International Business managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional

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distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. Variables that are examined when assessing national economic environments include:

Economic structure – The structure of a nation’s economy is determined by the size and rate of its population growth, income levels and distribution of income, natural resources, agricultural, manufacturing and services sector. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services.

Industry structure – The structure of an industry is determined by factors such as:

ï‚·Entry and exit barriers.

ï‚·Number of competing firms.

ï‚·Market share among firms in that sector.

ï‚·Average size of competing units.

Market growth – It is measured in terms of local currency and adjusted for inflation. Local currency is used because conversions into other currencies are affected by exchange rate fluctuations.

Income levels – It is taken as the GDP per capita and GDP is directly proportional to the productivity of the country. Net income is another important variable and is without tax payments from individual gross incomes.

Sector wise trends – Growth activity in a country might vary significantly among certain industries. For example, India has a vibrant software services industry.

Openness of the economy – The ratio of a country’s imports and exports to its Gross National Product (GNP) indicates its vulnerability to fluctuations in international trade. A nation with a high foreign trade or GNP depends heavily on the economic well-being of the nations it exports to. Conversely, closed economies have a high degree of control over the economy.

International debt – An outstanding loan that one country owes to another country or institutions within that country. Foreign debt also includes due payments to international organisations. Foreign exchange reserves should

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not be less than outstanding short-term foreign debts. On the other hand, a high foreign debt servicing requirement maybe a positive indicator, suggesting that a country has borrowed heavily to invest in its future.

Degree of urbanisation – This is an important factor because there are major differences in incomes and lifestyles between urban and rural areas in most countries such as:

Shopping patterns – shopping frequency, average purchase value.

ï‚·Nature of goods bought.

ï‚·Expectations in quality and technical sophistication.

ï‚·Education levels.

ï‚·Ease of distribution.

3.2.3 Balance of payments

Importance – Balance of payments is a record of all economic transactions that occur between residents of a country and foreigners over a specific period of time. The balance is shown monthly, quarterly or annually. The accounts show the structure of the external trade, net position as a lender or borrower and trends in economic relationships with the world.

The balance of payments is a good overall indicator of a country’s economic health; the likelihood of the country’s government imposing forex controls, import restrictions and policies such as tax increments and interest rate hikes.

Balance of payment account – These accounts attempt to identify the reasons behind various categories of international receipts and payments, making it possible to establish the values of payments by domestic residents to foreigners, and vice versa, for purchase of imports, use of services, lending, or direct foreign investment.

The account is divided into categories for long and short term financial transactions, which is initiated by the national monetary body, and involves goods and services.

Deficits and surpluses – Current account deficit records physical imports and exports along with international transactions in invisibles, that is non- physical items such as residents’ pensions, interest and royalties from abroad, domestic firm’s fees for the movement of goods in other countries,

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and so on. The balance of trade within the current account is the balance on physical (visible) imports and exports.

The other major grouping is the capital account which shows the balance of transactions in financial assets, including direct investments in foreign financial instruments, movements in short-term assets, inter-governmental loans and changes in the country’s gold and forex reserves.

Reserves will decline if there is, for example, a current account deficit which in turn affects the currency rate. To prevent the local currency from depreciating too much, some foreign currency reserves will be sold, but since it is limited, this is only a temporary measure.

Self Assessment Questions 1

1.The two objectives of National economic policies are ______ and

______.

2.FDI policy is dictated by the government of the host country. (True/False)

3.Balance of payment is an indicator of a country’s _______.

3.3Political Environment

In the previous section, the economic environment of international business was discussed. Now, let us focus on the political environment.

Political factors influence the economic and legal environment in which the business operates to a larger extent, especially in contract law and rules on advertising and consumer protection. It also affects the business practices, restrictions on market entry, tariffs charged and ability to repatriate profits. Other factors include:

ï‚·Regulatory frameworks.

ï‚·Governmental control over multinational activity.

ï‚·Importance of pressure groups.

ï‚·Trade embargoes.

ï‚·Likelihood of having insurance against losses due to political risk.

ï‚·Strikes and labour unrest due to political turbulence.

Political and economic environments are often inter-related. The political environment affects the economic environment. For example, a government

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which is perceived as anti-business by the business community may lead to capital outflows resulting in the fall of the currency, lower savings and investment and hence higher interest rates and lower economic growth.

3.3.1 Nature of politics

The nature of a government is based on the type of the government, and the policy that the country follows. The politics of a country is concerned with:

ï‚·The direction and administration of states.

ï‚·The control of aggregate social relationships.

Government is involved in the formulation and implementation of laws for a nation. The government also has control over its territory and is the only legal representative. It can enter into or cancel any agreements with other countries. The entire land surface on earth is controlled by nations, except the Antarctic and Arctic regions. Thus international businesses have to deal with nations and are subjected to their authority.

Sovereignty – Sovereignty refers to the absolute power of the state. The two problems that immediately arise in concern with sovereignty are:

ï‚·The ability to make independent decisions since countries rely on each other for goods, markets, economic assistance and defence.

The question of where national sovereignty lies is not clear as it may exist in the head of state, the parliament, the prime minister, the cabinet or in the ‘people’.

National interest – National interest, as defined by the government, will depend on the cultures, background, perceptions and experiences of the decision makers involved, which might change over time and according to circumstances. A nation’s ability to define its interests depends on its power, control over raw materials; scientific and technological knowledge; size, structure health and education of its population; political stability and society.

3.3.2 Political stability

Political instability may arise from revolution and insurgency, involvement in foreign wars, changes in government, bad international relations, falling national income, high inflation and rising foreign debt, resulting in the physical destruction of a firm’s assets, higher taxes, import controls and barriers on money leaving the country.

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Political risk – It may emerge from social unrest due to unevenly distributed income, competing political ideologies or ethnic groups within a nation, rise or fall of individual leaders or from international relations. In the modern world, a country’s economic prospects depend heavily on foreign investment and goodwill of the business community.

There are two types of political risks, namely macro and micro risks as explained below:

ï‚·Macro risk affects all foreign firms operating in the country equally and may include the imposition of exchange controls, special taxes, local- content rules and so on.

ï‚·Micro risk applies to a particular company industry or project. For example, import restrictions on specific products, compulsory breaking up of a firm into smaller parts, cancellation of contracts and so on.

Self Assessment Questions 2

4.Political factors define economic and legal environment in a business environment. (True/False)

5._______ refers to the absolute power of the state to coerce and control its citizens.

a)Sovereignty

b)National interest

c)Political stability

d)Political risk

6.The two types of political risks are _______ and _______.

3.4Demographic Environment

In international business; scanning of demographic environment plays an important role as it helps firm understand the various demographic factors such as gender; age; religious background and ethnicity. Firms; while appraising international markets for new business opportunity or product launch; use demographic environments to identify target markets for specific products or services it wishes to cater. There are both advantages and disadvantages in scanning the demographic environment of the country. One has to understand both sides of the demographic environment while planning strategy for international markets.

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3.4.1 Segment selection

Demographic profiling of the country helps us select the right segments for which we should offer its products or services. By properly appraising demographic factors such as age; gender; ethnicity; education background; cultural & religious background; income group, etc., the firm can plan good marketing standpoint of sales. Without proper focus on target groups the firm may end up spending on advertising, sales promotion, etc., on groups that has no interest in the product.

3.4.2 Branding and strategy

Scanning of demography provides specific information about different consumer groups. Once the firm has this data, it can develop well-defined marketing strategies to reach to target audience and position products better. Appraising of demographic environment also helps the firm to develop their brands thus generating better sales and ensuring sustainability of the product in market. For example, mobile companies are launching a series of products for the teenage group with appealing advertisement campaign and some of them have been successful to establish their products as brands.

3.4.3 Market trending and comparison among products

A firm can find out the general trends about a product in a market by collecting demographic data over extended periods of time and comparing such information at different points and angles. Firm can do generalisations based on such trends after cross comparing its product with similar products in the markets and it can plan a corrective action on time including launching of new products.

3.4.4 Assumption of country culture

Marketers face problems during the demographic profiling of customers in different cultures like the assumptions taken about consumers or predictions made about what will happen with a particular consumer group in a particular country. Reading people minds and cultural background is a tough job and it becomes even tougher if it has to be done for different global markets. A case let on assumptions of different cultures about numbers is tabled below and is self explanatory.

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Cultural conundrum: Assumptions for numbers and shapes in different cultures

i.In the Japanese culture, the numbers 4 and 9 are avoided in all situations. The reason is that the number 4 is a homonym for “death,” and the number 9 for “suffering.”

ii.Number 7 is considered bad luck in Kenya, good luck in Czech Republic, and has magical connotations in Benin.

iii.The number 13 is perhaps the most hated number across different countries of the world such as Japan, Hong Kong, Korea, Taiwan, Germany, Denmark, Greece, Romania, Latin America, Malaysia, Singapore, Egypt, etc. Many people view this number, as a symbol of bad luck and exporters should avoid this number while numbering the packages.

iv.The number 17 is considered to have a negative impact in Italy.

v.The number 10 is bad luck in Korea. Hence it should be avoided in packing, labelling and marking of export consignments.

vi.Even numbers are preferred in Hong Kong, Korea and Taiwan whereas numbers like 1, 3, 5 and 8 are viewed as numbers with positive effects in Japan.

vii.Triangular shapes of packages are not preferred in Korea and Taiwan. Round and square shapes of packages are preferred in Hong Kong and amongst the people in Middle East. Egyptians prefer pyramid shaped packages.

Adapted from “The Mystery of Numbers” New York, USA: Oxford University Press” Schimmel, Annemarie (1993)

3.4.5 Understanding demographic changes

The demographic environment never remains constant as people migrate from place to place in search of better opportunity. Moreover, there will be changes in birth and death rates in due course along with economic development. Marketers; especially in international business have to constantly update such information in order to have a realistic picture of what is happening at given point in particular a market. This requires a great deal of effort and it is a constant expense to a business.

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3.4.6 Socio-cultural environment

The cultural and social norms of people differ worldwide in all key markets as they have been shaped over centuries passing from one generation to another. Language, material culture, customs, aesthetics, religious beliefs, attitudes, values and social organisation has been important for survival and development of societies globally. Due to these socio-cultural factors, the customers/consumers of a particular country/region become conditioned to accept certain things as per conditioned behaviour. The increasingly competitive international business environment necessitate the exporters/ companies doing business overseas to customize their organisational polices keeping in mind the local cultural norms. For example, Coca-Cola has to sweeten its drinks in India as Indians have an affinity towards sweet taste. Indian meat exporters export only “HALAL” meat to Arab countries with the inscription “FIT FOR ISLAMIC USE” during packing. If a firm fails to adapt their business approach to the culture and traditions of specific foreign markets or is unwillingness to do, its survival may be under danger. In the context of the socio-cultural environment, there are a number of factors that firm has to consider while foraying into international markets. The same has been explained in detail in chapter 4 entitled “Culture & International Business”.

3.5 Legal Environment

International businesses confront different sets of laws in various countries of operation. IB must not only abide by the domestic laws of each nation but also by the supranational laws which impose obligations beyond those of national legal systems. For example, the European Union. Major disparities in national law affecting business are:

ï‚·Intellectual property protection.

ï‚·Consumer protection and product liability.

ï‚·Competition among businesses.

ï‚·Payment of bribes and other practices.

ï‚·Formation and termination of contracts.

ï‚·Marketing practices.

ï‚·Carriage of goods.

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Domestic, International and supranational law

A country’s domestic law deals with aspects of IB, and foreign citizens and firms are normally regarded as the citizens of the country in question. Special laws are passed to guarantee the safety of foreign investment, but in general the ordinary law of a country is applied when conflicts arise.

International law applies to sovereign states and imposes rights and duties on nations in their dealings with each other. It is derived from international conventions which establish rules agreed by contesting states; from international customs accepted as law within all nations to internationally recognised legal principles.

An IB that is involved in a legal dispute has to seek redressal from the national courts of the country in which the action is heard and can not obtain relief from any international legal system.

The treaty of Rome changed everything by creating a new type of law that provided individual persons and businesses with the right to bring cases on their own accounts to a supranational legal body. Individuals and businesses assumed obligations extending beyond those imposed by the national legal systems of the countries in which they functioned. For example, EU companies are subject to laws on competition established at the pan-European level, while employees can appeal to the European Court of Justice on equal opportunities matters. Other regional treaties of economic and political co-operation follow the European Economic Community (EEC) in creating supranational judicial frameworks.

3.5.1 Legal systems

The legal systems of some countries are much better developed than others, particularly the mechanisms for the administration of justice and the enforcement of court rulings. Most nations base their legal systems on one of the following:

Common law – Common law applies throughout the English-speaking world including most countries of the Commonwealth. These systems rely on precedent, judgements in specific cases and on ad hoc legislation to create and interpret statutes.

Code law – Countries with Code law systems have all their laws written down in Criminal, Civil and Commercial Codes which are used to

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determine all legal matters. Most continental European countries and their former colonies have Code law systems.

Although they are quite different in principle, common law and Code law systems have similarities in practice. A large part of the law in the common law countries is derived from statutes and legally binding regulations, while Code law relies heavily on judicial interpretations of the meanings of the words embodied in legislative codes.

Islamic law – This is derived directly from the Koran and typically is mixed with the pre-existing common law or civil code provisions of the concerned country. Important practical rules apply to the conduct of business in Islamic countries, including the following:

ï‚·Interest payments on financial dealings are forbidden since it is seen as improper to reward those with excess funds while penalising those who need to borrow.

The principle of profit sharing. Islamic banks do not pay interest on deposit but give investors ‘profit shares’ that are the result of the deployment of the funds deposited.

3.5.2 Dispute resolution systems

Disputes that may occur in the course of international transactions must be resolved through negotiation, arbitration or litigation. The issue arises when there is conflict of laws. Since each nation has its set of laws, interpretations and different legal methods are applied to commercial litigation, and conflicts between the legal systems of specific countries. Important differences among the business laws of various countries include:

ï‚·Laws concerning the circumstances, in which an offer may be withdrawn without penalty. It varies between countries.

ï‚·Distinguishing between commercial and non-commercial contracts in some countries. In commercial contracts, lower burden of proof is necessary to establish the existence of the commercial contracts. These disputes are heard in special courts.

The intervals beyond which cases become ‘statute barred’ differ. In

Britain, the period for most classes is six years whereas in France it can be up to 30 years. In Germany, it depends on whether the case concerns a commercial contract and if so, whether both parties are traders or not.

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ï‚·Before suing for breach of contract in certain countries, considerations are not necessary to be proved. Examples of such considerations are the price paid for goods, employee wages, hire fee paid for equipment lease and so on. Under the English law, a contract cannot exist without considerations.

ï‚·National differences occurring due to the legality of exemption clauses and penalty clauses.

The necessity to ‘protest’ unpaid debts prior to suing for payment in certain countries. This means getting a notary to ask the customer for payment or reasons for failure to do so. The latter are put into a formal deed of protest which is then used as evidence of refusal to pay.

Nationalisation of assets – Domestic laws guarantee that foreign businesses will not be taken over but there are no international laws regarding this matter. Article 2 of the United Nations Charter of Economic Rights and Duties of States adopted by the UN General Assembly in 1974, asserts that ‘every state has and shall freely exercise full permanent sovereignty including possession, use and disposal over all its wealth, natural resources and economic activity’. The UN supports the absolute right of its members to nationalise or exercise partial control over businesses operating within its borders.

Where cases are heard – It is safe to assume that each party prefers a dispute to be settled in its own country. But this is not possible when businesses from different countries are involved. Contracts often contain jurisdictional clauses which specify that the law of a certain country will apply as agreed by all parties to the contract. This ensures that both sides are aware of their legal rights and obligations.

If a contract has no jurisdictional clause, then it is heard in the defendants’ nation, since one cannot be compelled to attend the court abroad. Either the contract of sale will name a country or the country with the closest connection with the contract must be chosen.

Concept of residence – Even though an MNC operates in a global environment it cannot become an international legal entity. While its subsidiaries have to be set up through the laws of different nations, its headquarters must be incorporated under the laws of a particular state.

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Questions may arise with regard to the definition of the nationality of an MNC and these need to be answered adequately since the laws of the home country will govern many of its core activities such as responsibilities and liabilities of shareholders, taxation, availability of government grants and subsidies, and degree of employment protection for personnel. Countries apply various legal tests when determining a company’s nationality.

For example:

ï‚·Place of incorporation.

ï‚·The nationality of owners or majority of shareholders.

ï‚·Where decisions concerning the worldwide business are taken.

Arbitration – This refers to the process of settlement of disputes by having independent referees, who are agreeable to both sides, adjudicate the matter.

Arbitration vs. litigation

Litigation has the advantage that the rights and duties of the parties are determined by known and definite laws and that aggrieved parties can obtain redress that is legally enforceable. There is however a number of issues related to litigation including:

ï‚·Long delays.

ï‚·High costs.

ï‚·Possible bad publicity from the case.

ï‚·Fear of discrimination by the courts against foreigners.

ï‚·Businesses may have to be suspended while the case is being heard.

ï‚·Lack of business experience of the judges.

Matching words across the languages and accurately translating legal concepts are difficult tasks. The meaning of words change during translation and the intentions of the parties may become unclear. Hence, an important practical problem is of proper translation of documents into a foreign language for consideration by the court.

Arbitration is faster and cheaper than litigation and cases are heard in secret so that neither party loses public goodwill through adverse publicity. The arbitrators are themselves business people, advised by legal experts, with practical experience of the commercial world. No problems arise from the conflict of international laws since common sense approaches are applied to

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issues. Cases are heard on neutral ground and not in the national courts of one of the parties. However, arbitration lacks legal precision and still costs time and money.

Arbitration bodies – The main arbitration bodies are the International Chamber of Commerce, the American Arbitration Association, the London Court of Arbitration and the International Centre for the Settlement of Investment Disputes (ICSID). The ICSID, based in Paris is the most preferred, and offers arbitration facilities to members and non-member companies alike.

The International Court of Justice (ICJ), based at The Hague, is a UN body that adjudicates between states and only states that have agreed to accept the court’s jurisdiction can participate in cases.

Self Assessment Questions 3

7.Three of the most used legal systems are _____, _____ and ______.

8.Scanning of demography provides specific information about different consumer groups(True/ False)

9.Few of the international arbitration bodies are _____, ___, __ and ___.

Activity

Interpret the business environment of Sri Lanka by analysing the economic, political and legal environments of that country.

Hint: Refer section 3.4 and 3.5

Technology environment – Technology has been the driving force in speeding the process of globalisation of world markets. Innovations such as

“internet” have changed the face of global business. Connectivity through increased sources of cheap telecommunication has brought people closer to each other. US/Europe and Australia can drive India’s BPO industries from thousand miles away using the latest technology. Now; more and more people are doing business online. Science and medicine are also part of technology factors affecting global business landscape.

After the emergence of the complex TRIPs regime, Ranbaxy was acquired by Daiichi of Japan. Japan found this as a lucrative business opportunity. Cloud computing is redefining the IT and ITes Industry. Challenge for any company today is to keep up with innovation and offer new cost competitive products.

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To promote innovation, firms should conduct technological environmental scanning of its key markets and analyze all types of relevant information including technology gaps in key markets. This will help a firm to design a technology strategy for a firm/region for surviving, expanding or entering new markets. In simple words, appraisal of technology environment help firms understands the external or internal happenings including technology turbulence in key markets. Such an exercise helps the firm to develop new products in order to fulfil the needs of such new markets. Process of new product development for global markets through technological interventions can be understood as under:

There are rapid technological changes creating opportunities for new products and services in global markets. Country as well as company spending on R&D is an important variable that determines development of new technologies. Companies from countries such as South Korea, Israel, Taiwan, China, Norway, Australia, Poland along with US and Europe are leading in research and development and are also doing good accordingly in international trade. Marketers, in globalised era, should promote R&D activities, both at company level and university levels through government funds. Following can be opportunities for any firm operating in global markets from technological environment.

ï‚·Although there are varying R&D budgets of both countries and companies, it should be considered under the context of the country in which the research is being done. For example, the cost of doing a research in India is a fraction of what in US. The cost of Chip Design

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research in India is a fraction of the cost in the US. Similarly, ISRO can launch the same capacity of satellite at a fraction of cost of Europe, US and South Korea.

ï‚·Accelerating the pace of technological change in new markets in order to beat competitors and garner higher market share. As physical environment in world market is different globally; the firm has to adapt their products as per local markets requirement.

There are unlimited opportunities from “innovation”. When doing business globally; firm can pool the best of manpower and other resources in order to enhance its focus on constantly improving its products and services through innovation.

ï‚·Different countries have different norms and procedures for regulation of technological changes, clinical trial, R&D procedures, etc. There may be complexities involved at times due to safety concerns/cultural and ethical issues. For example, procedure for clinical drug trail in India is different from that of US and Europe.

3.6 Summary

Let us now summarise the silent features discussed in this unit about international business environment:

ï‚·The different factors affecting the environment of IB like political, economical and legal are discussed.

Scanning the global business environment is must for any firm whether doing business domestically or internationally as the domestic markets are now open to global competition by opening to foreign players. This analysis is part of a company’s analysis-system, involving both internal as well external factors.

ï‚·The economic environment refers to the conditions under which a business operates and takes into account all factors that have affected it. Economic infrastructure is the sum of all the external facilities and services that support the work of firms including communication, transportation, electricity supply, banking and financial services.

ï‚·In international business; scanning of demographic environment plays an important role as it helps firm understand the various demographic factors such as gender; age; religious background and ethnicity.

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ï‚·Human beings differ worldwide in all key markets as they have essentially created their own cultural and social norms which may have been shaped over centuries passing from one generation to another. Language, Material Culture, Customs, Aesthetics, Religious Beliefs, Attitudes, Values and Social Organisation has been important for survival and development of societies globally. Due to these socio- cultural factors, the customers / consumers of a particular country/ region become conditioned to accept certain things as per conditioned behaviour.

ï‚·Political factors influence the economic and legal environment in which the business operates to a larger extent, especially in contract law and rules on advertising and consumer protection.

ï‚·The legal systems of some countries are much better developed than others, particularly the mechanisms for the administration of justice and the enforcement of court rulings. Most nations base their legal systems on common law, code law or Islamic law.

3.7Glossary

Political factors: They influence the economic and legal environment in which the business operates to a larger extent, especially in contract law and rules on advertising and consumer protection.

Economic environment: It refers to the conditions under which a business operates and takes into account all factors that have affected the business.

Arbitration: The process of having a mediator to settle a dispute without going to the court.

Islamic law: This is derived directly from the Koran and typically is mixed with the pre-existing common law or civil code provisions of the country concerned.

GNP: Gross National Product is the total value of goods and services that the country’s citizens produced irrespective of their location in a year.

Litigation: The process of taking a party to court to settle a legal matter.

Nationalisation: The process by which a government of a country takes over control of a business that operates within that country.

Sovereignty: The power of a state over its citizens and land.

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3.8Terminal Questions

1.Explain factors that affect the international business environment.

2.Evaluate the importance of political stability for conducting international business.

3.Why do firms pay so much attention for economic factors while entering particular markets? Justify your answer by quoting practical examples.

4.What aspects of demographic environment; companies must scan while doing international business?

5.What are the different options available for settling disputes?

3.9Answers

Self Assessment Questions 1

1.Full employment, a high economic growth rate.

2.True.

3.Economic health.

Self Assessment Questions 2

4.True.

5.a) Sovereignty.

6.Macro and micro risk.

Self Assessment Questions 3

7.Common law, code law and Islamic law.

8.True.

9.International Chamber of Commerce, the American Arbitration Association, the London Court of Arbitration and the International Centre for the Settlement of Investment Disputes (ICSID).

Terminal Questions

1.The factors that affect the international business environment include the economic, political and legal. These factors are important as they help to assess risk, establish sizes and characteristics of various markets, identify growth sectors, make investment decisions and also help in using the company resources effectively, that is explained in section 3.1 of this unit. Refer the same for details.

2.Political and economic environments are often inter-related. The political environment affects the economic environments, while economic

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hardship may trigger political change. Political stability is important for conducting international business because political instability arises from revolution and insurgency, involvement in foreign wars, changes in government, bad international relations, falling national income, high inflation and rising foreign debt that are explained in section 3.3 of this unit. Refer the same for details.

3.International Business managers need to understand and assess international economic forces at work. Key variables that need to be examined include Gross Domestic Product (GDP) per capita, regional distribution of GDP, levels of investment, consumer expenditure, labour costs, inflation and unemployment. All this may affect a firm’s operation and profits. Refer to section 3.2.

4.In international business, scanning of demographic environment plays an important role as it helps the firm to understand the various demographic factors such as gender, age, religious background and ethnicity. Refer to section 3.4

5.International businesses confront different sets of laws in the various countries they operate in. The different options available for settling disputes are through domestic, international and supranational laws that are explained in section 3.6 of this unit. Refer the same for details.

3.10Case-Let

Maruti Suzuki India Ltd (MSIL)

In 1983, Maruti Udyog Ltd entered into a joint venture with Suzuki Motor Corporation (SMC) of Japan to manufacture cars for the Indian market by utilising technology to make low-cost cars in large numbers. The launch model was the Maruti 800, which brought about a revolution in the Indian automobile industry.

Now, renamed as Maruti Suzuki India Ltd (MSIL), it has two manufacturing facilities in Northern India with a capacity of 1.2 million cars annually. MSIL offers 14 brands in over 150 variants ranging from Maruti 800, people movers to SUV Grand Vitara.

SMC, which had an established market in Europe, started sourcing cars from MSIL, manufactured in India under the Suzuki brand name, thus taking advantage of the low cost manufacturing in India. In 1987, 500

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cars were exported by the MSIL to Hungary and in 2009-10, sales volume crossed 1 million cars, out of which around 1,47,000 cars were exported to other countries.

MSIL exports to the more than 100 countries including Poland, Finland, Iceland, Switzerland, Netherlands, Algeria and Italy.

In this process, MSIL became the only Indian company to manufacture and sell 1 million cars in a year and is the largest passenger car manufacturer with over 45% market share in India.

MSIL’s revenue has grown constantly over the years:

Table 3.3: Maruti Sales 2006 to 2009-10

Year

Net sales (Rs. in

Year

Net sales (Rs. in

million)

million)

 

 

 

 

 

 

2006-07

1,45,922

2009-10

3,01,198

 

 

 

 

2007-08

1,78,603

 

 

 

 

 

 

2008-09

2,03,583

 

 

 

 

 

 

The government of Japan has honoured MSIL with a METI award for promotion of Japanese brand in India. Maruti Suzuki is one of the six companies, and one of the two companies outside Japan, to have received this award.

Discussion Questions

1.Which business theory will you associate with this case? (Hint: Porter’s diamond model)

2.What kind of approach did SMC adopt to make an entry into Indian market? (Hint: SMC utilised technology to make low-cost cars in large numbers taking advantage of the low cost manufacturing in India).

Source: http://www.marutisuzuki.com retrieved on 20 September 2010

References:

Bhalla V. K. and Shiva Ramu S. (2008). International Business – Environment and Management, Anmol Publications.

ï‚·Batra G. S. (2006). Liberalisation, Globalisation and International Business, Deep and Deep Publications.

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ï‚·Cherunilam Francis. (2010). International Business Environment, Himalaya Publishing House.

ï‚·McDonald Frank and Burton Fred. (2002) International Business, International Thomson Computer Press.

ï‚·Bennet Roger (2006). International Business, Pearson Education Ltd.

ï‚·Paul Justin (2009). International Business, Prentice Hall of India Pvt. Ltd.

ï‚·Czinkota Michael R, Ronkainen Llkka A, Moffett Michael H. (2002). International Business, PWS South Western Duxbury Cole Onwo.

Nelson Carl A. (1999). International Business - A Manager’s guide to Strategy in the Age of Globalism, PWS South Western Duxbury Cole Onwo.

ï‚·Chauhan PL, Kakkad Ratish, Patel Rupal H. (2006). International Business, Shanthi Prakashan.

ï‚·Aswathappa K. (2010). International Business, Tata McGrawhill Publications Co Ltd.

E-References:

ï‚·http://www.economywatch.com, retrieved on 15 November 2010

ï‚·http://www.marutisuzuki.com, retrieved on 20th September 2010

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