INTERNATIONAL BUSINESS ENVIRONMENT

The term 'environment' means the surroundings, external objects, Influences or

circumstances under which someone or something exists. Business environment means
all the factors, events and forces that surrounds and affects or influence the life and
development of a business. Anything that surrounds and affects business inevitably
becomes a part of its environment; the natural surroundings, the economic conditions,
the political-legal system, cultural patterns, international factors, technological factors
and society as a whole.

International business environment means the forces, factors and activities that
surrounds and influence the international business activities (that of MNCs). It includes
internal and external factors. The environment influences the organization, its structure,
strategy and operations. The global business environment can be defined as the
environment in different sovereign countries, with factors exogenous to the home
environment of the organization, influencing decision making on resource use and
capabilities. This includes the social, political, economic, regulatory, tax, cultural, legal,
and technological environments.
International business environment is complex, dynamic, uncertain
and interactive. Analysis of business environment helps to know the
opportunities and threats of international business.

Internal & External Environment

Business environmental factors can be divided into internal and external. Internal
environmental factors are controllable and include all elements within the
organization's boundaries. Important internal factors are; Organizations Structure,
vision & mission, financial marketing and operational factors, human resources etc. The
internal environment of the firm is important in the context that, its competency to do
international business (strict adherence to production and delivery schedules, quality
products and services, cost competitiveness, innovation etc) depends solely on a
number of internal factors (like vision & mission, organizational structure, financial and
other resources etc).
 The external environmental factors are uncontrollable and include all forces and
conditions outside the organization that influence the organization and its behavior.
External environment is further classified into two, viz., Micro and Macro
environment. External micro environment consists of influencing groups and
organizations like suppliers, customers, competitors, marketing intermediaries, public,
regulators etc. External macro environment encompasses a variety of factors like
global/international factors, economic factors, socio-cultural factors, political-legal
factors, demographic factors, economic factors, technological factors and natural
(ecology) factors.

As firms have no control over the external environment, their success depends upon
how well they adapt to the external environment. A firm's ability to design and adjust its
internal variables to take advantage of opportunities offered by the external
environment and its ability to control threats posed by the same environment,
determine its success.

Domestic, Foreign and International Environment

A firm operating across borders must deal with the forces of three kinds of
environments-domestic, foreign and international.

Domestic Environment-it includes all the controllable and uncontrollable forces and
factors originating in the home country (of the MNCs) that surrounds and
influences the firm's life and development.

Foreign Environment- All the uncontrollable forces originating outside the home
country that surround and influence the firm. It is the environment of the relevant
foreign market.
International Environment - All the forces and factors which are the result of
interaction between domestic and foreign environmental factors which regulate and
controls global operations. Important factors that operate at global level which have an
impact on organization are; growth of world economy; distribution of world GDP; global
demographic patterns; economic relations between nations; role of international
institutions IMF, WTO etc.

Detailed analysis of international business environment is a prerequisite for entering

international market and to do business successfully. It is a very important determinant
of business strategy. The various tools for analyzing the environment are; PEST (Political,
Economic, Social and Technological Environment) Analysis; PESTLE (Political, Economic,
Social, Technological, Legal and Environmental) Analysis; STEEPLE (S - Social, T -
Technological, E - Economic, E -Environmental, P - Political, L - Legal and E - Ethical)
Analysis etc.

ECONOMIC ENVIRONMENT

Economic conditions, economic policies and the economic system are the
important external factors that constitute the economic environment of a business.

The economic conditions of a country-for example, the nature of the economy,

the stage of development of the economy, economic resources, the level of income, the
distribution of income and assets, etc- are among the very important determinants of
business strategies.

In a developing country, the low income may be the reason for the very low
demand for a product. The sale of a product for which the demand is income-elastic
naturally increases with an increase in income. But a firm is unable to increase the
purchasing power of the people to generate a higher demand for its product. Hence, it
may have to reduce the price of the product to increase the sales. The reduction in the
cost of production may have to be effected to facilitate price reduction. It may even be
necessary to invent or develop a new low-cost product to suit the low-income market.
Thus Colgate designed a simple, hand-driven, inexpensive ($10) washing machine for
low-income buyers in less developed countries. Similarly, the National Cash Register
Company took an innovative step backward by developing a crank-operated cash
register that would sell at half the cost of a modern cash register and this was well
received in a number of developing countries. In countries where investment and
income are steadily and rapidly rising, business prospects are generally bright, and
further investments are encouraged. There are a number of economists and
businessmen who feel that the developed countries are no longer worthwhile
propositions for investment because these economies have reached more or less
saturation levels in certain respects.

In developed economies, replacement demand accounts for a considerable part

of the total demand for many consumer durables whereas the replacement demand is
negligible in the developing economies.

The economic policy of the government, needless to say, has a very great impact
on business. Some types or categories of business are favorably affected by government
policy, some adversely affected, while it is neutral in respect of others. For example, a
restrictive import policy, or a policy of protecting the home industries, may greatly help
the import-competing industries.

Similarly, an industry that falls within the priority sector in terms of the
government policy may get a number of incentives and other positive support from the
government, whereas those industries which are regarded as inessential may have the
odds against them.

In India, the governments concern about the concentration of economic power

restricted the role of the large industrial houses and foreign concerns to the core sector,
the heavy investment sector, the export sector and backward regions.

The monetary and fiscal policies, by the incentives and disincentives they offer
and by their neutrality, also affect the business in different ways.

An industrial undertaking may be able to take advantage of external economies

by locating itself in a large city; but the Government of Indias policy was to discourage
industrial location in such places and constrain or persuade industries undertaking, a
backward area location may have many disadvantages. However, the incentives
available for units located in these backward areas many compensate them for these
disadvantages, at least to some extent.
 According to the industrial policy of the Government of India until July 1991, the
development of 17 of the most important industries were reserved for the state. In the
development of another 12 major industries, the state was to play a dominant role. In
the remaining industries, co-operative enterprises, joint sector enterprises and small
scale units were to get preferential treatment over large entrepreneurs in the private
sector. The government policy, thus limited the scope of private business. However, the
new policy ushered in since July 1991 has wide opened many of the industries for the
private sector.

The scope of international business depends, to a large extent, on the economic system.
At one end, there are the free market economies or capitalist economies, and at the
other end are the centrally planned economies or communist countries. In between
these two are the mixed economies. Within the mixed economic system itself, there are
wide variations.

The freedom of private enterprise is the greatest in the free market economy, which is
characterized by the following assumptions:

(i) The factors of production (labor, land, capital) are privately owned, and production
occurs at the initiative of the private enterprise.

(ii) Income is received in monetary form by the sale of services of the factors of
production and from the profits of the private enterprise.

(iii) Members of the free market economy have freedom of choice in so far as
consumption, occupation, savings and investment are concerned.

(iv) The free market economy is not planned controlled or regulated by the government.
The government satisfies community or collective wants, but does not compete with
private firms, nor does it tell the people where to work or what to produce.

The completely free market economy, however, is an abstract system rather than
a real one. Today, even the so-called market economies are subject to a number of
government regulations. Countries like the United States, Japan, Australia, Canada and
member countries of the EEC are regarded as market economies.

The communist countries have, by and large, a centrally planned economic

system. Under the rule of a communist or authoritarian socialist government, the state
owns all the means of production, determines the goals of production and controls the
economy according to a central master plan. There is hardly any consumer sovereignty
in a centrally planned economy, unlike in the free market economy. The consumption
pattern in a centrally planned economy is dictated by the state.

China, East Germany Soviet Union, Czechoslovakia, Hungary, Poland etc., had
centrally planned economies. However, recently several of these countries have
discarded communist system and have moved towards the market economy.

In between the capitalist system and the centrally planned system falls the
system of the mixed economy, under which both the public and private sectors co-exist,
as in India. The extent of state participation varies widely between the mixed
economies. However, in many mixed economies, the strategic and other nationally very
important industries are fully owned or dominated by the state.

The economic system, thus, is a very important determinant of the scope of

private business. The economic system and policy are, therefore, very important
external constraints on business.

POLITICAL AND LEGAL ENVIRONMENT

Political and government environment has close relationship with the economic
system and economic policy. For example, the communist countries had a centrally
planned economic system. In most countries, apart from those laws that control
investment and related matters, there are a number of laws that regulate the conduct
of the business. These laws cover such matters as standards of products, packaging,
promotion etc.

In many countries, with a view to protecting consumer interests, regulations have

become stronger. Regulations to protect the purity of the environment and preserve the
ecological balance have assumed great importance in many countries.

Some governments specify certain standards for the products (including

packaging) to be marketed in the country; some even prohibit the marketing of certain
products. In most nations, promotional activities are subject to various types of controls.
Media advertising is not permitted in Libya. Several European countries restrain the use
of children in commercial advertisements. In a number of countries, including India, the
advertisement of alcoholic liquor is prohibited. Advertisements, including packaging, of
cigarettes must carry the statutory warning that cigarette smoking is injurious to
health. Similarly, advertisements of baby food must necessarily inform the potential
buyer that breast-feeding in the best. In countries like Germany, product comparison
advertisements and the use of superlatives like best or excellent in advertisements is
not allowed In the United States, the Federal Trade Commission is empowered to
require a company to provide the quality, performance or comparative prices of its
products.

What is being asked of the drug industry and of American business in general is a
fuller disclosure of the relevant facts about products. For drugs, food additives, some
cosmetic preparations, and so forth, a full disclosure requires more knowledge of the
long-range side effects of materials ingested into the complex human body. For
American industry as a whole, greater candour has been called for under such
legislation as Truth in Lending and Fair Packaging Act, under administrative decrees such
as the warning requirement on cigarette packages and advertising, under the threats of
private damage suits using the common-law concepts of warranty, and under voluntary
programmes such as unit pricing and listing nutritional content of foods. The increasing
complexity of products and the variety of product choices suggest further moves away
from caveat emptor or let the buyer beware doctrines, moves which on the whole
should prove a welcome although sometimes inconvenient challenge for business.

There are a host of statutory controls on business in India. If the MRTP

companies wanted to expand their business substantially, they had to convince the
government that such expansion was in the public interest. Indeed, the Government in
India has an all-pervasive and predominantly restrictive influence over various aspects
of business, e.g, industrial licensing which decides location, capacity and process; import
licensing for machinery and materials; size and price of capital issue; loan finance;
pricing; managerial remuneration; expansion plans; distribution restrictions and a host
of other enactments. Therefore, a considerable part of attention of a Chief Executive
and his senior colleagues has to be devoted to a continuous dialogue with various
government agencies to ensure growth and profitability within the framework of
controls and restraints.

Many countries today have laws to regulate competition in the public interest.
Elimination of unfair competition and dilution of monopoly power are the important
objectives of these regulations. In India, the monopolistic undertakings, dominants
undertakings and large industrial houses are subject to a number of regulations which
prevent the concentration of economic power to the common detriment. The MRTP Act
also controls monopolistic, restrictive and unfair trade practices which are prejudicial to
public interest. Such regulations brighten the prospects of small and new firms. They
also increase the scope of some of the existing firms to venture into new areas of
business. The special privileges available to the small scale sector have also contributed
to the phenomenal success of the Nirma.

Certain changes in government policies such as the industrial policy, fiscal policy,
tariff policy etc. may have profound impact on business. Some policy developments
create opportunities as well as threats. In other words, a development which brightens
the prospects of some enterprises may pose a threat to some others. For example, the
industrial policy liberalizations in India, particularly around the mid-eighties have
opened up new opportunities and threats. They have provided a lot of opportunities to
a large number of enterprises to diversify and to make their product mix better. But
they have also given rise to serious threat to many existing products by way of increased
competitions; many sellers markets have given way to buyers markets. Even products
which were seldom advertised have come to be promoted very heavily. This battle for
the market has provided a splendid opportunity for the advertising industry. Advertising
billing has been increasing substantially.

That an estimated cost savings of about Rs. 200 crores per year have accrued to
the Reliance Industries as a result of the changes in duties on some of the material
inputs used by them is just an indication of the tremendous impact the fiscal and tariff
policies can have on the business.

SOCIO-CULTURAL ENVIRONMENT

The socio-cultural fabric is an important environmental factor that should be

analyzed while formulating business strategies. The cost of ignoring the customs,
traditions, taboos, tastes and preferences, etc., of people could be very high.

The buying and consumption habits of the people, their language, beliefs and
values, customs and traditions, tastes and preferences, education are all factors that
affect business.
 For a business to be successful, its strategy should be the one that is appropriate
in the socio-cultural environment. The marketing mix will have to be so designed as best
to suit the environmental characteristics of the market. In Thailand, Helene Curtis
switched to black shampoo because Thai women felt that it made their hair look
glossier. Nestle, a Swiss multinational company, today brews more than forty varieties
of instant coffee to satisfy different national tastes. Even when people of different
cultures use the same basic product, the mode of consumption, conditions of use,
purpose of use or the perceptions of the product attributes may vary so much so that
the product attributes method of presentation, positioning, or method of promoting the
product may have to be varied to suit the characteristics of different markets. For
example, the two most important foreign markets for Indian shrimp are the U.S and
Japan.
The product attributes for the success of the product in these two markets differ.
In the U.S. market, correct weight and bacteriological factors are more important rather
than eye appeal, colour, uniformity of size and arrangement of the shrimp which are
very important in Japan. Similarly, the mode of consumption of tuna, another seafood
export from India, differs between the U.S. and European countries. Tuna fish
sandwiches, an American favourite which accounts for about 80 per cent of American
tuna consumption, have little appeal in high tuna consumption European countries
where people eat it right from the can. A very interesting example is that of the Vicks
Vaporub, the popular pain balm, which is used as a mosquito repellant in some of the
tropical areas.

The differences in languages sometimes pose a serious problem, even

necessitating a change in the brand name. Preett was, perhaps, a good brand name in
India, but it did not suit in the overseas market; and hence it was appropriate to adopt
Prestige for the overseas markets. Chevrolets brand name Nova in Spanish means it
doesnt go. In Japanese, General Motors Body by Fisher translates as corpse by
Fisher. In Japanese, again, 3Ms slogan sticks like crazy translates as sticks foolishly. In
some languages, Pepsi-Colas slogan come alive translates as come out of the grave.

The values and beliefs associated with colour vary significantly between different
cultures. Blue, considered feminine and warm in Holland, is regarded as masculine and
cold in Sweden. Green is a favourite colour in the Muslim world; but in Malaysia, it is
associated with illness. White indicates death and mourning in China and Korea; but in
some countries, it expresses happiness and is the colour of the wedding dress of the
bride. Red is a popular colour in the communist countries; but many African countries
have a national distaste for red colour.

Social inertia and associated factors come in the way of the promotion of certain
products, services or ideas. We come across such social stigmas in the marketing of
family planning ideas, use of bio-gas for cooking, etc. In such circumstances, the success
of marketing depends, to a very large extent, on the success in changing social attitudes
or value systems.

There are also a number of demographic factors, such as the age, and sex
composition of population, family size, habitat, religion, etc., which influence the
business.

While dealing with the social environment, we must also consider the social
environment of the business which encompasses its social responsibility and the
alertness or vigilance of the consumers and of society at large.

The societal environment has assumed great importance in recent years. As

Barker observes, business traditionally has been held responsible for quantities-for
the supply of goods and jobs, for costs, prices, wages, hours of works, and for standards
of living. Today, however, business is being asked to take a responsibility for the quality
of life in our society. The expectation is that business- in addition to its traditional
accountability for economic performance and results will concern itself with the
health of the society, that it will come up with the cures for the ills that currently beset
us and, indeed, will find ways of anticipating and preventing future problems in these
areas.

As Stern succinctly points out, the more educated the society becomes, the
more interdependent it becomes, and the more discretionary the use of its resources,
the more marketing will become enmeshed in social issues. Marketing personnel are at
interface between company and society. In this position, they have the responsibility
not merely for designing a competitive marketing strategy, but for sensitizing business
to the social, as well as the product demand of society.

DEMOGRAPHIC ENVIRONMENT
 Demographic factors like the size, growth rate, age composition, sex composition,
etc. of the population, family size, economic stratification of the population, educational
levels, languages, caste, religion etc. Are all factors that are relevant to business?

Demographic factors such as size of the population, population growth rate, age
composition, life expectancy, family size, spatial dispersal, occupational status,
employment pattern etc, affect the demand for goods and services. Markets with
growing population and income are growth markets. But the decline in the birth rates in
countries like the United States have affected the demand for baby products. Johnson
and Johnson have overcome this problem by repositioning their products like baby
shampoo and baby soap, promoting them also to the adult segment, particularly to the
females.

A rapidly increasing population indicates a growing demand for many products.

High population growth rate also indicates an enormous increase in labour supply.
When the Western countries experienced the industrial revolution, they had the
problem of labour supply, for the population growth rate was comparatively low. Labour
shortage and rising wages encouraged the growth of labour-saving technologies and
automation. But most developing countries of today are experiencing a population
explosion and a situation of labour surplus. The governments of developing countries,
therefore, encourage labour intensive methods of production. Capital intensive
methods, automation and even rationalization are opposed by labour and many
sociologists, politicians and economists in these countries. The population growth rate,
thus, is an important environmental factor which affects business. Cheap labour and a
growing market have encouraged many multinational corporations to invest in
developing countries.

The occupational and spatial mobilities of population have implications for

business. If labour is easily mobile between different occupations and regions, its supply
will be relatively smooth, and this will affect the wage rate.

If labour is highly heterogeneous in respect of language, caste and religion,

ethnicity, etc., personnel management is likely to become a more complex task. The
heterogeneous population with its varied tastes, preferences, beliefs, temperaments,
etc. gives rise to differing demand patterns and calls for different marketing strategies.
 References to a number of demographic factors that have business implications
have already been made under socio-cultural environment.

NATURAL ENVIRONMENT

Geographical and ecological factors, such as natural resource endowments,

weather and climatic conditions, topographical factors, locational aspects in the global
context, port facilities, etc., are all relevant to business.

Differences in geographical conditions between markets may sometimes call for

changes in the marketing mix. Geographical and ecological factors also influence the
location of certain industries. For example, industries with high material index tend to
be located near the raw material sources. Climatic and weather conditions affect the
location of certain industries like the cotton textile industry. Topographical factors may,
affect the demand pattern. For example, in hilly areas with a difficult terrain, jeeps may
be in greater demand than cars.

Ecological factors have recently assumed great importance. The depletion of

natural resources, environmental pollution and the disturbance of the ecological
balance has caused great concern. Government policies aimed at the preservation of
environmental purity and ecological balance, conservation of non-replenishale
resources, etc., have resulted in additional responsibilities and problems for business,
and some of these have the effect of increasing the cost of production and marketing.
Externalities have become an important problem the business has to confront with.

PHYSICAL AND TECHNOLOGICAL ENVIRONMENT

Physical Factors, such as geographical factors, weather and climatic conditions

may call for modifications in the product, etc., to suit the environment because these
environmental factors are uncontrollable. For example, Esso adapted its gasoline
formulations to suit the weather conditions prevailing in different markets.
 Business prospects depend also on the availability of certain physical facilities.
Some products, like many consumer durables, have certain use facility characteristics.
The sale of television sets, for example, is limited by the extent of the coverage of the
telecasting. Similarly, the demand for refrigerators and other electrical appliances is
affected by the extent of electrification and the reliability of power supply. The demand
for LPG gas stoves is affected by the rate of growth of gas connections.

Technological factors sometimes pose problems. A firm, which is unable to cope

with the technological changes, may not survive. Further, the differing technological
environment of different markets or countires may call for product modifications. For
example, many appliances and instruments in the U.S.A. are designed for 110 volts but
this needs to be converted into 240 volts in countries which have that power system.
Technological developments may increase the demand for some existing products. For
example, voltage stabilisers help increase the sale of electrical appliances in markets
characterised by frequent voltage fluctuations I power supply. However, the
introduction of TVs, Fridges etc, with in built voltage stabilizer adversely affects the
demand for voltage stabilizers.

Advances in the technologies of food processing and preservation, packaging etc.,

have facilitated product improvements and introduction of new products and have
considerably improved the marketability of products.

The television has added a new dimension to product promotion. The advent of
TV and VCP/VCR has, however, adversely affected the cinema theatres.
 The fast changes in technologies also create problems for enterprises as they
render plants and products obsolete quickly. Product-market-technology matrix
generally has a much shorter life today than in the past. It is particularly so in the
international marketing context. It may be interesting to note that almost half of
Hindustan Levers 1980 export business did not exist in 1987. In fact, as much as a third
of the companys 1987 turnover was from products and markets, which were under
three years of age.

INTERNATIONAL ENVIRONMENT

The international environment is very important from the point of view of certain
categories of business. It is particularly important for industries directly depending on
imports or exports and import-competing industries. For example, a recession in foreign
markets, or the adoption of protectionist policies by foreign nations, may create
difficulties for industries depending on exports. On the other hand, a boom in the export
market or a relaxation of the protectionist policies may help the export-oriented
industries. A liberalization of imports may help some industries which use imported
items, but may adversely affect import-competing industries.

It has been observed that major international developments have their spread
effects on domestic business. The Great Depression in the United States sent its shock
waves to a number of other countries. Oil price hikes have seriously affected a number
of economies. These hikes have increased the cost of production and the prices of
certain products, such as fertilizers, synthetic fibres, etc. The high oil price has led to an
increase in the demand for automobile models that economise energy consumption.
The demand for natural fibres increased because of the oil crisis.

The oil crisis also prompted some companies to resort to demarketing.

Demarketing refers to the process of cutting consumer demand for a product back to
level that can be supplied by the firm. Some oil companies-the Indian Oil Corporation,
for example-have publicized tips o how to cut oil consumption.
 When the fertilizer price shot up following the oil crisis, some fertilizer companies
appealed to the farmers to use fertilizers only for important and remunerative crops.
The importance of natural manure like compost as a substitute for chemical fertilizers
was also emphasized.

The oil crisis led to a reorientation of the Government of Indias energy policy.
Such developments affect the demand, consumption and investment pattern.

A good export market enables a firm to develop a more profitable product mix
and to consolidate its position in the domestic market. Many companies now plan
production capacities and investment taking into account also the foreign markets.
Export marketing facilitates the attainment of optimum capacity utilization; a company
may be able to mitigate the effects of domestic recession by exporting. However, a
company which depends on the export market to a considerable extent has also to face
the impact of adverse developments in foreign markets.

SUMMARY

International business is a necessity in todays world. The gains for greater

awareness and knowledge of international business fare immense for nations, multi-
national enterprises, trading companies, exporters and even individuals. To go global,
the first step would be to understand the international business environment.
International business in nothing but extending the areas of activities of business across
the boundaries. We have discussed about the importance of understanding
international business environment in detail. The concepts of microenvironment and
macro environment with reference to the political, legal, economical and cultural
background are also discussed. Understanding international business environment
requires greater research and information. The fulfillment of this research could happen
with greater understanding of the framework for analyzing the international business
environment.