INTERNATIONAL BUSINESS -

INTRODUCTION
DR. JAYITA BIT
St. Xavier’s College, Kolkata
 Political, economic, legal, socio-
cultural and psychological
dimensions
UNIT II: – impact of legal and political
Dimensions system, culture, language and
consumption patterns of global
of World business
Business – Types of risk in International
Business – country risk, political
Environment risk, currency risk,
- Risk management and
- role of ECGC
Importance of understanding International Business Environment
§ The strategic concept of marketing has shifted the focus of marketing from the customer or the product to
the customer in the context of the broader external environment.
§ To succeed in business today marketers must know the customer in a context including the competition,
government policy and regulation and the broader economic, social and political macro forces that shape
the evolution of markets.
§ In global marketing, this may mean working closely with home country government, trade negotiations and
other officials and industry competitors to gain access to a target country market.
§ If it is the environmental orientation that is the essence of strategy, then what makes the international
business strategy is different from the domestic business strategy is obviously the differences in the
business environment.
§ Therefore, the question is not whether the market is foreign or domestic but whether the business
environment is same or different.
§ If the foreign and domestic business environments are same, there is no need for different strategies. On the
other hand, if there are substantial differences in the business environment within the domestic market,
different strategies are needed then.
§ However, in many cases, the differences in business environment between nations are often more
substantial than within a country.
§ A detailed analysis of the business environment of the foreign countries is therefore an essential pre-
requisite for formulating international business strategies.
Environment of International Business

Internal Domestic

International
Business

Foreign Global
Internal Environment

§ The competence of a firm to do international business depends on a number of

internal factors like the mission and vision of the firm, the attitude, capabilities
and commitment of the top management and the entire people in the
organization, organizational structure and decision taking and implementing
factors, financial and other resources and capabilities.
§ International business demands strict adherence to production and delivery
schedules, commitment to quality, quick and effective response to customer
requirements, cost competitiveness, innovativeness, etc. The internal
environment has a lot of bearing on all these.
Domestic Environment

§ Domestic Environment consists of both micro and macro environments.

§ For a company which does not manufacture or source any thing domestically
for the foreign business, the domestic micro-environment may not be very
relevant. In such cases, macro environment is the most relevant.
§ It may be noted that in several cases, the decision to manufacture
domestically any thing for the foreign market is based on an assessment of
the domestic micro-environment too.
 Global Environment
§ The global environment refers to those global factors which are relevant to
business, such as
§ the WTO principles and agreements;
§ other international conventions/treaties/agreements/declarations/protocols,
etc.;
§ economic and business conditions/sentiments in other countries, etc.
§ Similarly, there are certain developments, like a hike in the crude oil price
which have global impact;
Foreign Environment
§ Foreign environment refers to the environment of the relevant foreign market.
§ The Domestic and Foreign Environments need to be studied based on the following 3
components:
§ 1. Economic Environment;
§ 2. Socio-cultural Environment;
§ 3. Political-legal Environment
1.Economic Environment
§ The economic environment has much to do with the scope of business, business prospects
and business strategy.
§ Economic factors like the nature and level of development of the economy, economic
resources, size of the economy, economic system and economic policies, economic
conditions, trends in the GNP growth rate and per capita income, nature of and trends in
foreign trade, foreign exchange factors, domestic supply and demand conditions are all
relevant to business;
 Important Factors of Economic Environment
Structure and nature of Economic conditions Economic policies Global linkages
economy
Level of development of Income levels Industrial policy Magnitude and nature of
the economy cross-border:
Trade flows
Resource flows
Sectoral composition of Distribution of income Trade policy Membership of WTO, IMF,
output World Bank, Trade blocs,
etc.
Inter-sectoral linkages GDP trends Monetary policy
Sectoral growth trends Fiscal policy
Demand and Supply Foreign exchange policy
trends
Price trends Foreign investment and
technology policy
Trade and BOP trends
Foreign exchange
reserves position
Global economic trends
2. Social/Cultural Environment
§ The social or cultural environment encompassing the religious aspects; language; customs,
traditions and beliefs; tastes and preferences; social stratification; social institutions; buying
and consumption habits, etc. are all very important factors for business;
§ What is liked by people of one culture may not be liked by those of some other culture;
§ Culture, which is a very intriguing and complex factor, is often, a very critical component of
business environment;
§ Proper understanding of the cultural dimensions is very important for product development,
promotion, business negotiations, human resource management, management of the social
and political environment, etc.;
§ This is because several dimensions of culture are not easily explicit. A company which sets
out to do business in unfamiliar cultural environment say, therefore, encounter several
problems if proper homework is not done;
§ One of the most important reasons for the failure of a number of companies in foreign
markets is their failure to understand the cultural environment of these markets and to
suitably formulate their business strategies.
3.(i) Political Environment
§ The political environment including the characteristics and policies of the political parties, the
nature of the constitution and government system and the government environment
encompassing the economic and business policies and regulations are among the factors of
utmost importance in the market selection and business strategy formulation;
§ In fact, the political environment and the economic policy environment are intricately
intertwined. Like, Prohibition of alcohol is a political decision, but it affects the alcohol and
related business.
§ Major economic policy changes often have political underpinnings. Important economic
policies are indeed often political decisions.
§ They include the following:
§ Industrial policy
§ Policy towards foreign capital and technology
§ Fiscal policy
§ Export-import policy
 3.(ii) Legal Environment
§ For international business, there are three sets of laws and regulations relevant to International
Business:
§ A. International laws, treaties, conventions, etc. – The Uniform Law on International Sale Goods and
the Uniform Law on the Formation of Contract for the International Sale of Goods aim at the
unification of the substantive law of international sales, in particular the obligations of the buyer and
seller and the passing of the risk.
§ B. Laws of foreign countries – laws related to product packaging, labelling, price, promotion, etc. are
different in different countries and hence are among the important regulations which the exporter
should consider.
§ C. Laws of home country (India) related to foreign trade – The most important law regulating the
foreign trade of India is the Foreign Trade Act, 1992 whose objective is to provide for the
development and regulation of foreign trade by facilitating imports into, and augmenting imports
from India and matters connected therewith or incidental thereto.
 Psychological Dimension of IB (1)
§ THE PSYCHOLOGICAL DIMENSIONS OF GLOBALIZATION (January 2001)
§ Yeni Symposium and Kemal Sayar
§ Abstract
§ Globalization is defined as the flow of knowledge, commodities, finance and human beings across
borders and boundaries. With globalization our perception of physical space also changes. The
world turns into a global village, time and space is compressed. The economical and cultural
aspects of globalization also have reflections in the mental health field. Economically the poor
are pushed more into poorness and the access of the poor to health resources becomes more
difficult. The economical injustice fueled by globalization disseminates unrecoverable social
conflicts throughout the world. Culturally, it is stated that, the world is homogenized and
hegemonized by the Western culture.
§ Capitalism is no longer selling only commodities but also voices, pictures, images and links. The
flood of images and voices generated with the help of advertisement is standardizing life-styles,
diminishing differences, likening the attitudes and behaviors. With globalization, collective
identities and traditional cultures tend to vanish. In the global process cultural and technological
transformations devastate sources of security such as nation and family.
 Psychological Dimension of IB (2)
§ Solidarity is replaced by opportunism, sincerity in human relations is replaced by
superficiality and fractionality. The compression of space intensifies demographic
movements, thereby leading to hybridization. Anthropological circles state that
culture can no longer be studied as an isolated and a homogenous element but rather
be conceptualized within the interactional matrix of the local and the global. Cultural
idioms through which emotional distress is expressed are also influenced by this
hybridization.
§ This process may invoke a reevaluation of theories of psychopathology in near future.
The economical injustice also shows itself through the increased prevalence of
mental disorders in developing countries. World Mental Health Report documents
high levels of psychiatric disorders and distress in the developing world. Mental
health disciplines should generate knowledge pertaining the impact of global
transformation on individual humans and communities.
Risk in IB (Source: Cavusgil, Rammal, and Freeman (2014))
 Currency Risk
§ Currency risk (also referred to as financial risk) refers to the risk of adverse fluctuations in
exchange rates.
§ Fluctuation is common for exchange rates, or the value of one currency in terms of another.
§ Currency risk arises because international transactions are often conducted in more than one
national currency.
§ When Frankfort, Michigan based fruit processor Graceland Fruit, Inc. exports dried cherries to
confectioneries in Japan, it will normally be paid in Japanese yen.
§ When currencies fluctuate significantly, however, the value of the firm’s assets, earnings, and
operating income can be reduced.
§ The cost of importing parts or components used in manufacturing finished products can increase
dramatically if the value of the currency in which the imports are denominated rises sharply.
§ Inflation and other harmful economic conditions experienced in one country may have immediate
consequences for exchange rates due to the growing interconnectedness of national
economies.(Cavusgil, Rammal, & Freeman, 2011, p.11)
 Cross-cultural Risk
§ Cross-cultural risk refers to a situation or event where a cultural miscommuni- cation puts some
human value at stake.
§ Cross-cultural risk is posed by differences in language, lifestyles, mindsets, customs, and/or religion.
§ Values unique to a culture tend to be long-lasting and transmitted from one generation to the next.
§ These values influence the mindset and work style of employees and the shopping patterns of buyers.
§ Foreign customer characteristics differ significantly from those of buyers in the home market.
§ Language is a critical dimension of culture. In addition to facilitating communication, language is a
window on people’s value systems and living conditions. For example, Eskimo languages have various
words for “snow” while the South American Aztecs used the same basic word stem for snow, ice, and
cold.
§ When translating from one language to another, it is often difficult to find words that convey the same
meanings. For example, a one-word equivalent to aftertaste does not exist in many languages. Such
challenges impede effective communication and cause misunderstandings.
§ Miscommunication due to cultural differences gives rise to inappropriate business strategies and
ineffective relations with customers. (Cavusgil, Rammal, & Freeman, 2011, p.12)
 Commercial Risk
§ Commercial risk refers to the firm’s potential loss or failure from poorly developed
or executed business strategies, tactics, or procedures.
§ Managers may make poor choices in such areas as the selection of business partners,
timing of market entry, pricing, creation of product features, and promotional themes.
While such failures also exist in domestic business, the consequences are usually
more costly when they are committed abroad.
§ For example, in domestic business a company may terminate a poorly performing
distributor simply with advance notice. In a foreign market, however, terminating
business partners can prove costly due to regulations that protect local firms.
Marketing inferior or harmful products, falling short of customer expectations, or
failing to provide adequate customer service may harm the firm’s reputation and
international performance (Cavusgil, Rammal, & Freeman, 2011, p.12).
 Country Risk
§ Country risk (also known as political risk) refers to the potentially adverse effects on company
operations and profitability caused by developments in the political, legal, and economic environment
in a foreign country. Country risk includes the possibility of foreign government intervention in firms’
business activities.
§ For example, governments may restrict access to markets, impose bureaucratic procedures on
business transactions, and limit the amount of earned income that firms can bring home from foreign
operations.
§ The degree of government intervention in commercial activities varies from country to country. For
instance, Singapore and Ireland are characterized by substantial economic freedom—that is, a fairly
liberal economic environment. By contrast, the Chinese and Russian governments intervene regularly
in business affairs.
§ Country risk also includes laws and regulations that potentially hinder company operations and
performance. Critical legal dimensions include property rights, intellectual property protection,
product liability, and taxation policies. Nations also experience potentially harmful economic
conditions, often due to high inflation, national debt, and unbalanced international trade (Cavusgil,
Rammal, & Freeman, 2011, p.13).
 Risk Management
§ PDF
 Role of ECGC
§ Export Credit Guarantee Corporation of India Limited
§ The ECGC Ltd. wholly owned by government of India, was set up in 1957 with the objective of
promoting exports from the country by providing credit risk insurance and related services for
exports. Over the years it has designed different export credit risk insurance products to suit the
requirements of Indian exporters. ECGC is essentially an export promotion organisation, seeking to
improve the competitiveness of the Indian exports by providing them with credit insurance covers.
ECGC Ltd. also administers the National Export Insurance Account (NEIA) Trust which caters to project
exports of strategic and national importance.
§ The Corporation has introduced various export credit insurance schemes to meet the requirements of
commercial banks extending export credit. The insurance covers enable the banks to extend timely and
adequate export credit facilities to the exporters. ECGC keeps its premium rates at the optimal level.
§ ECGC provides (i) a range of insurance covers to Indian exporters against the risk of non-realization of
export proceeds due to commercial or political risks (ii) different types of credit insurance covers to
banks and other financial institutions to enable them to extend credit facilities to exporters and (iii)
Export Factoring facility for MSME sector which is a package of financial products consisting of
working capital financing, credit risk protection, maintenance of sales ledger and collection of export
receivables from the buyer located in overseas country.