Economy and Business

these can be termed as international business.
Basic functions, processes and

techniques of international business are essentially the same as those involved in domestic business.
What is different is the environment within which these functions are performed and processes are carried out.
International Business environments are unfamiliar and different from the domestic environment
These variations may need adaptation for business success.

can be defined as various external actors and forces that

surround the firm and influence its decisions and operations.
The two major characteristics of the environment as pointed out by this definition are:
these actors and forces are external to the firm
these are essentially uncontrollable. The firm can do little to change them

actors in the firm's immediate environment which directly influence the

firm's decisions and operations. These include: suppliers; various market intermediaries and service organizations such as middlemen, transporters, warehouses, advertising and marketing research agencies, business consulting firms and financial institutions; competitors, customers and general public.
While the customers constitute firm's market, suppliers and market intermediaries help providing the firm with inputs and assist in production and marketing processes.
Competitors and general public also influence the way a firm conducts its business.

affect the firm as well as other actors in the

firm's micro environment.
These include factors such as geographic, economic, financial, socio-cultural, political, legal, technological and ecological forces.
Firms need to continuously monitor changes in these environmental forces and devise strategies to cope with them.

firm's business strategy and decisions with regard to production, finance,

marketing, human resources and research activities.
Since these strategies and decisions are made by the firm, they are called controllables.
Firm can change them but within the constraints of various environmental factors.

and it consists of factors such as competitive structure, economic

climate, and political and legal forces which are essentially uncontrollable by a firm.
Besides profound effect on the firm's domestic business, these factors exert influence on the firm's foreign market operations.
Lack of domestic demand or intense competition in the domestic market, for instance, have prompted many Indian firms to plunge into international business.
Export promotion measures and incentives in country have been other motivating factors for the firms to internationalize their business operations.
Since these factors operate at the national level, firms are generally familiar with them and are able to readily react to them.

consisting of factors like geographic and economic conditions, socio-cultural traits,

political and legal forces, and technological and ecological facets prevalent in a foreign country.
Because of being operative in foreign markets, firms are generally not cognizant of these factors and their influence on business activities.
The firm can neglect them only at the cost of losing business in the foreign markets.
The problem gets more complicated with increase in number of foreign markets in which a firm operates.
Differences exist not only between domestic and foreign environments, but also among the environments prevailing in different foreign markets.
Because of environmental differences, business strategies that are successful in one nation might fail miserably in other countries.
Foreign market operations, therefore, require an increased sensitivity to the environmental differences and adaptation of business strategies to suit the differing market situations.

four, represents the global environment.
Global environment transcends national boundaries and

is not confined in its impact to just one country.
Global environment exerts influence over domestic as well as foreign countries and comprises of forces like world economic conditions, international financial system, international agreements and treaties, and regional economic groupings.
World-wide economic recession; international financial liquidity or stability; working of the international organizations such as World Trade Organization (WTO), International Monetary Fund (IMF), World Bank and the United Nations Conference on Trade and Development (UNCTAD); Agreement on Textiles and Clothing (ATC); Generalized System of Preferences (GSP); International Commodity Agreements; and initiatives taken at regional levels such as European Union (EU), North American Free Trade Association (NAFTA) and Association of South East Asian Nations (ASEAN) are some of the examples of global environmental forces having world-wide or regional influences on business operations.

the conduct of business operations.
Especially in the context of international

business, environment assumes critical importance as no two countries have similar environments and demand different business strategies to cope with differing business conditions.
As the environment affects firms' strategic as well as tactical decisions, it becomes imperative for the firm to have in-depth knowledge of the domestic, foreign and global environments.

into international business, it faces two major decision problems:
Which markets

to select, and
How to enter into those markets.
Both these decisions are strategic in nature and are greatly influenced by the environmental forces.
Firms select those countries as their target markets which have sufficient market potential.
Market potential in turn depends upon geographic, economic and cultural environments prevailing in the foreign countries.
Demand for fans, for instance, will be more in countries which are geographically located in hot zones and where per capita income is high enough for the people to afford purchase of fans.
Besides climate and sufficient income, electricity should be available to make the fans workable.

market potentials, it needs to decide as to what mode

it should use for entering into those markets.
A wide range of options such as exporting, licensing/franchising, joint venture or setting up wholly owned subsidiaries abroad are available to firms.
Firm's actual choice of market entry mode is influenced by a variety of environmental factors.
Exporting is desirable when it is economical to produce in the home country and there are no legal restrictions on import of given product in the foreign markets.
In the case of import bans or excessive costs of transportation, a firm may choose to set up its manufacturing and marketing subsidiaries abroad. But this is feasible only when foreign governments are not averse to foreign direct investment, and necessary raw materials and labor are available locally at competitive prices in the foreign countries.
In countries where first condition is not fulfilled, the firm can go in for either licensing or joint venture as these entry modes are politically less objectionable.

role in shaping a firm's functional and tactical decisions.
What should

be the scale of production?
Should the firm employ labor or capital intensive techniques?
How to finance firm's foreign operations?
How much to repatriate?
What marketing mix should the firm use?
Should it hire local persons or employ foreign nationals?
What should be their compensation package?
Answers to these and other questions require in-depth analysis of the prevailing environments in foreign countries.
Since the environments differ, firm cannot be much successful by falling back upon its domestic decisions and practices.
Firm needs to screen the foreign country environments and accordingly decide about the best course of action in each country.

legal and ecological forces.
A firm needs to examine these components

of the environment for each one of the foreign countries in which it operates.
All the components-and elements of the foreign environment might not be relevant to a decision maker. Much depends on the nature of the firm and its decisions.
For a small firm interested in exporting, analysis of the commercial policy and the economic environment would be sufficient.
But for a multinational corporation interested in setting up a manufacturing plant in a foreign country, geographic as well as socio-cultural, legal and political environments would be as important as the economic environment.

and refers to a country's climate, topography, natural resources and

people.
Every organization engaged in international business must have some knowledge of geographic features of the Foreign country as these influence the nature and characteristics of a society.
It also affects demand pattern of the people living in the country. Geography is a major contributory factor to the development of business systems, trade centers and routes.

etc.) give rise to demand for different types of products.
It

is largely due to climatic differences that people differ in their housing, clothing, food, medical and recreational needs.
Many a time needs are same, and the same products are demanded. But because of the climatic and/or topographic differences, products need adaptation or modifications to suit local conditions.
Rolls Royce cars from Britain, for instance, required extensive body work and renovations in Canada because the salted sand, spread over streets to keep them passable throughout four or five months of virtually continuous snow in Canada, caused rusting and corrosion in the fenders and door panels; and the oil system also developed leaks.

firm prefers to set up its manufacturing plant in a

country which has favorable climatic conditions, possesses suitable topography (i.e., surface features such as hills, plains, river and sea) and where raw materials, energy and labor are cheaply and abundantly available.
Foreign country's nearness to other markets and its strategic location on major trade routes are other equally important considerations.

geographic conditions in the foreign markets.
Re-order points and safety level

stocks are kept generally higher for those countries or places which are not easily accessible and can be cut off suddenly due to bad weather.

an equally important consideration. It affects its trade prospects with

other countries.
Landlocked countries such as Bolivia, Zambia and Zimbabwe, are not only costly to reach but are also difficult to penetrate as trading with these countries depend upon their relations with neighboring countries through which goods have to cross.

attempting an economic and financial analysis include: foreign country's level

of economic development, income, expenditure pattern, infrastructure including financial institutions and system, inflation, foreign investment in the country, commercial policy, balance of payments account, accounting systems and practices, and integration of the foreign country's foreign exchange, money and capital markets with the rest of the world.

most important factor.
An analysis of economic environment enables a firm

to know how big is the market and what its nature is.
Answers to these questions in turn determine whether a firm should enter a given foreign market, and if yes, what strategies it should use to successfully run its business operations.

development of marketing in a country.
Countries characterized by high levels

of economic development not only have high demand for a variety of products, but also have better infrastructure and more developed marketing systems.
Competition is also high in these countries.
In the less developed countries, on the other hand, not only demand is low, but infrastructure is also poor. It, therefore, becomes quite difficult and more expensive to do business in such nations.

level of development and also its market size.
Gross national product

(GNP) and per capita income are among the major measures of income.
While sales of most of the industrial goods and capital equipment generally co-relate with GNP, demand for consumer products depends on per capita income.
Though per capita income is a useful measure, it is not a full-proof measure of the country's development and prosperity. What is more relevant is the distribution of income. While in the developed countries income distribution is relatively more even, it is highly skewed in the developing countries. Since only a small portion of the population accounts for 60 to 70 percent of the country's GNP and the rest are poor in the developing countries, market for high priced product and non-essential products is limited only to select rich people.

distribution of the GNP as it is an important determinant

of kinds of goods in demand in a foreign country.
If the majority of a country's GNP comes from agriculture, it implies that the country is agriculture based and it shall have a good demand for agricultural inputs such as seeds, fertilizers, pesticides and agricultural machinery and tools.
An industrial nation with relatively higher dependence on manufacturing, on the other hand, shall have a good market for raw materials, plant and machinery, and also for a variety of consumer durables and non-durables.

judging as to how the money is spent on different

item and which products receive more weightage.
Infrastructure: Infrastructure is another vital dimension of the country's economic environment and is directly related to the country's economic development.
Infrastructure refers to various social overheads such as transportation, telecommunications, commercial and financial services like advertising, marketing research, various media, warehousing, insurance, distribution, credit and banking facilities.
Absence of adequate infrastructure not only hinders country's development but also affects firms' costs and capacity to reach various market segments.
Companies find it difficult to co-ordinate and control their business in countries with poor communication systems.

of duties and exchange rates are the variables related to

the country's monetary and fiscal policies and have a substantial impact on the costs and profitability of business operations.
These variables also Influence a firm's decision to move funds from one nation to another.

own commercial and foreign investment policies which must be studied

in detail to ascertain country's openness for trade and investment with other countries.
A proper understanding of these policies can be quite helpful in ascertaining what tariff and non-tariff barriers the particular country uses to protect its domestic industry from foreign competition.
The country may plan to minimize the incidence of these trade measures.

account is another major source of' information about the country's

foreign trade and foreign currency reserves.
The current account throws light on the country's exports and imports as well as its major sources of imports and destinations of exports.
Capital account reveals stocks of foreign investments, borrowings, lending and foreign exchange reserves.
An international firm must be duly aware of exchange controls prevalent in the foreign countries.
Countries running deficits in their balance of payment accounts generally impose controls on movement of foreign exchange into and out of their economies.
These controls prompts the multinational corporations to resort to transfer pricing mechanism, i.e., over invoicing of imports and under pricing of exports so as to move out more than permitted funds from such countries.

is an economic activity.
Per capita income in two countries may

be the same, yet the consumption patterns in these countries may differ.
Socio-cultural forces have considerable impact on products people consume; designs, colors and symbols they like; dresses they wear and emphasis they place on religion, work, entertainment, family and other social relations.
Socio-cultural environment influences all aspects of human behavior and is pervasive in all facets of business operations.

knowledge, beliefs, art, morals, laws, customs and any other capabilities

and habits acquired by man as a member of society.“
It is a distinctive way of life of a group of people, their complete design of living.
Culture thus refers to a man's entire social heritage - a distinctive life style of a society and its total value system which is intricately related to the consumption pattern of the people and management philosophies and practices.

business significance.
Subcultures are found in all national cultures and failure

to recognize them may create impressions of sameness which in reality may not exist.
A single national and political boundary does not necessarily mean a single cultural entity.
Canada, for instance, is divided between its French and English heritages, although politically the country is one.
Because of such distinctive cultural division, a successful marketing strategy among the French Canadians might not effectively work among the English Canadians or vice-versa.
Similarly a single personnel policy may not work with workers employed in two different plants if they belong to different sub cultural groups and differ in their work habits and underlying motivations.

are: language, aesthetics, education, religions and superstitions, attitudes and values,

material culture, social groups and organizations, and business customs and practices.

through language that most of the communications take place.
An international

marketer should have a thorough understanding of the language of the market - particularly the semantic differentials and idiomatic nuances which are essential characteristics of all languages of the world.
Dictionary translation could be quite different from the idiomatic interpretation of a language. When literal translations are made of brand names or advertising messages from one language to another by people who know the language but not the culture, serious mistakes may occur.
When General Motors of the United States literally translated its marketing phrase 'Body by Fisher' into Flemish language, it meant 'Corpse by Fisher'. Similarly, the phrase "Come alive with Pepsi" faced problems when it was translated into German advertisements as "Come out of grave" or in Chinese as "Pepsi brings your ancestors back from the grave".
When the American car called 'Nova' was introduced in Puerto Rico, sales were poor until the company realized that the word Nova was pronounced as 'No va' - which literally meant in Spanish "does not go". Sales were better when the name was changed to 'Carbie'.

taste, and is expressed in arts, drama, music, folklore, dance

and the like.
Aesthetics are of special interest to the international business executives for these govern the norms of beauty in a society and are helpful in correctly interpreting meanings of various methods of artistic expressions, colors, shapes, forms and symbols in a particular culture.
Colors, for instance, mean different things to different people. The color of mourning is black in the United States, but it is white in the Far East. Green is restful color to Americans, but it is disliked by people in Malaysia where it connotes illness and death.
Symbols also need to be interpreted correctly. Seven, for instance, signifies good luck in the United States but just opposite in Singapore, Ghana and Kenya. Use of number four should be avoided in Japan because it is pronounced as 'shi' which in Japanese means death.
Sensitivity to the aesthetics of a society and their symbolic expressions can greatly help in avoiding socially embarrassing situations and correctly designing the products and messages.

to adopt a broader perspective and define education as any

process, formal or informal, through which one learns skills, ideas and attitudes.
Education is important as it affects not only the education levels but also the development of mental faculties and various skills.
In general, educated people have been found to be more sophisticated, discriminating and receptive to new products and ideas.
Availability of educated manpower like skilled labor, technicians and professionals is also dependent on the country's education level.
Media to be used by a company for promoting its products and services are also dependent on education level prevailing in the country.
The conventional forms of printed communications, for instance, do not work in countries where literacy rates are low.

ethical values and influence people's attitudes, habits and outlook on

life which are reflected in their work habits and consumption patterns.
Dr. Ernest Dichter observed: "In puritanical cultures, it is customary to think of cleanliness as being next to godliness. But in Catholic and Latin American countries, to fool too much with one's body to overindulge in bathing or toiletries, has the opposite meaning. It is that type of behavior which is considered immoral and improper".
There are numerous religions and faiths in the world, with prominent ones being : Animism, Buddhism, Christianity, Hinduism, Islam and Shinto. Each one has its own morals and codes of conduct.
A working knowledge of the religions prevalent in the target markets helps in understanding people's work habits, underlying motivations and consumption behaviors.

in a society.
People's beliefs in astrology, hand reading, ghosts, lucky

days and places are integral part of certain cultures.
In some countries, single storey houses are preferred because it is considered bad to have another's foot on ones head.
Location of a building and its architecture in many Asian countries is governed by the principles of 'vastushastra' and ‘Feng Shui’ rather than purely geographical and economic considerations.

of attitudes, values and beliefs prevalent in a society.
These attitudes

and values may relate to consumption level, material possessions, risk taking and change.
'What is important and desirable' differs from society to society and is largely governed by the attitudes and values existing in a society.
Americans in general are more receptive to change and risk taking, but people in many societies are averse to change and risk taking. They prefer doing what is traditional and safe.
New products are not accepted unless these have the approval of local chiefs or religious leaders.

material goods.
It is technical know-how in possession of the people

of a society.
Choice of technology has its repercussions on the size of investment, scale of operations as well as type and number of workers to be employed.
Technology transfer has been a highly controversial issue in the past.
Because of supply of obsolete or inappropriate technology, many developing countries have laid down stringent rules and regulations concerning technology imports and payments.
Since transfer of new technology is often riddled with workers' resistance to change and public criticisms, multinational corporations generally have suitable action plans to counter such opposition.

all manmade objects and its study is concerned with how

man makes things and who makes what and why.
While the question 'how?’ relates to technology, other questions 'who', 'what' and 'why' are part of economics.
These elements influence the level of demand as well as types and quality of goods in demand, and consumption pattern in a society.
Business implications of material culture of a society are obviously many.
The goods and services that are acceptable in one market may not be acceptable in another market because of differences in material cultures of two societies.
For example, sophisticated electronic appliances widely in demand in the technologically and economically advanced Western countries may not find a market in the less developed countries of Asia, Africa or Latin America.

is important as it determines how people relate to one

another and organize their activities.
The size and cohesiveness of the family, role of men and women in society, and positions of different social classes differ from country to country.
Social groups and organizations mould the pattern of living and interpersonal relationships of people in a society.
They influence the behavioral norms, codes of social conduct, value systems, etc., that may be of relevance to the international business managers in their decision making.

practices prevalent in different countries is a must to avoid

business blunders.
An international business manager must have necessary knowledge about how business is conducted and what importance business people in a foreign country attach to work, time, formality, change and achievement.
American managers, for instance, are by nature highly work oriented and attach utmost importance to speed and punctuality in business dealings. They are, moreover, highly achievement oriented and fond of new things.
But people in other parts of the world do not share these values and beliefs.
Japanese, for instance, are also workaholics but they are very slow in decision making
Latin Americans too do not believe in haste and spend considerable time in socializing and developing friendships before coming to business transactions.
A person dealing with people from different cultures should be well aware of differences in the number and nature of stages involved in business negotiations and formalities to be observed in concluding business contracts.
While in countries like the United States it is necessary to have final agreement in writing, this practice is not much appreciated in many West Asian countries where oral agreement alone is considered more than sufficient.

operates only as a guest and at the convenience of

the host country government.
The government reserves the right of allowing a foreign firm to operate in the country as well as laying down the manner in which a foreign firm can conduct business.
To gain an insight into a foreign country's political environment, one needs to analyze factors such as current form of government and political party system, role of government in the economy, political encouragement to foreign firms, political stability, and political risks to business.

foreign country can be either parliamentary or absolutist.
While the parliamentary

type of government is run by people's representatives selected from time to time, the absolutist government assumes the form of absolute monarchies or dictatorships, and only a select few make policies.
In the case of parliamentary government, one needs to know whether it is a single party system or multiparty government system.
Single party government is considered to be more stable than the multiparty government.
However, multiparty system brings in checks and balances to authoritarianism of single party system.

one must have knowledge about the political ideology and government

attitudes toward foreign business and investment.
In addition to regulatory role, government itself can be directly involved in business.
In such cases, government enterprises emerge as dominant players in the market and pose tough competition to the foreign firms.
Even supplying goods and services to the agencies is not hassle free. Because of monopsonic power of the government organizations, it becomes quite arduous to negotiate prices and other terms with them.

a major concern for the international firm.
Since business decisions, these

days involve huge investments and are irreversible, what the foreign firms look in for is politically stable countries.
Political instability can result from either change in the type of government, a shift in political parties that form the government or change in the government policies without change in the government or shifts in political parties.

of a project to the political acts of a sovereign

government is a big threat to foreign business.
The political acts leading to political risks can range from confiscation, expropriation, nationalization, domestication to restrictions on transfer of finds.
Confiscation occurs when a foreign investment is taken over by a government without any compensation.
Expropriation takes place when the government takes over foreign investment but some compensation is paid. The compensation may or may not equate with the market value of a firm.
Nationalization affects the entire industry rather than a single company, and involves transferring ownership of the confiscated or expropriated business to a national firm or government entity.

involves transfer of control of foreign investment to national ownership

to bring the firm's activities in line with national interest.
It differs from expropriation in the sense that it is gradual encroachment of the freedom of operation of a foreign operator.
Domestication can be either firm initiated, government initiated or predetermined.
Whereas firm initiated and predetermined domestication entail low levels of risk, government initiated domestication is quite risky and is ranked equal with expropriation in risk.

or permanent blocking of finds.
Unlike other kinds of risks, a

business firm under blockage of funds owns the funds and property rights but it cannot remit the funds or earnings back to home country.
This was a common problem faced by Indians during Idi Amin's rule in Uganda. Although the government did not formally make any announcements regarding takeover of property, it became almost impossible for the firms to repatriate their earnings in any form.
No doubt black money market operations may exist in any country, it is difficult for such operations to handle large scale of funds involved.

with political risks.
An effective management of risks calls for recognizing

the existence of various kinds of political risks and their consequences, and developing appropriate plans and policies to deal with such risks.

system.
This is true of domestic as well as international firms.
But

the problem for the international firms is that the laws that they face in their home countries might be different from those encountered in the host countries.
Advertising laws in Germany, for instance, are so strict that is it best advised for the international marketer to get himself good legal counsel before framing his advertising strategy.
Similarly there exist laws in European countries preventing promotion of products through price discounting. These laws are based on the premise that such practices differentiate buyers.

the area of marketing mix variables but also for other

business decisions like location of plant, level of production, employment of people, raising money from the market, accounting and taxation, property rights including immovable property and patent and trade marks, cancellation of agreements.

environment within which a firm operates in the foreign country.
Thus

while one country may promote competition within its markets through its legal system, another country might try to protect its industry and thereby restrain competition.
In the United States, for instance, anti-trust legislation influences all mergers, takeovers, and business practices which are in restraint of trade. Court's verdicts in this respect are governed by paragraph one of Sherman Act.
Gillette, for example, was prevented from taking over Braun A.G. of Germany which was an electric razor manufacturer on the grounds that it would distort competition.

that the legal systems of the world are not harmonized

and are in fact based on contradicting legal philosophies.
The legal systems that exist in different countries of the world are antecedents of one of the two legal philosophies ,viz., common law and code law.
Common law finds it roots in Britain and is practiced today in the United States, United Kingdom and Canada. The basis of common law is tradition, past practices and past rulings of higher courts who look upon similar problems within the accepted set of laws.
Code law, on the other hand, is based on Roman law and is an all inclusive system of written rules that encompass all eventualities.

is that the judgements awarded in the case of a

commercial dispute can be radically different.
To illustrate, let us take the interpretation of non-fulfillment of required conditions of a contract under 'act of god'.
What constitutes an 'act of god' in code law is not necessarily the same under common law.
Thus while strike by workers may be looked upon as an 'act of god' in code law, it will definitely not be a reason for non-fulfillment of the contract under the common law.

to evolve international laws
International laws deal with upholding orders.
Originally these

laws recognized only nations as entities, but today these laws also incorporate role played by individuals.

rules and regulations which the nations consider binding upon themselves.
This

definition brings out two important characteristics of international law.
One there is absence of the existence of a comprehensive legal system. There is truly no comprehensive body of law because as stated earlier international commercial law is of recent birth. This has had a direct bearing upon the existing administering authorities. As of today, there are only a few international bodies for administering justice. These include International Court of Justice founded in 1946 and the World Court at Hague.
Second characteristic of the international law relates to the fact that no nation can be forced into these rules as stated in the phrase 'consider binding upon them'. Since all nations recognize the sovereignty of the legal systems, international judgements are, therefore, based on the premise of good humanity and not on the basis of any particular country's legal system.

countries, a major problem faced by the international business firms

is which country's laws, viz.. host country's or home country's or third country's laws, shall be binding in the case of a dispute.
Firms also need to be aware of different modes of the settlement of trade disputes and role of International Chamber of Commerce' Court of Arbitration.

between plants, animals, people and their environment.
Earlier there was hardly

any concern for the depletion of resources and pollution of the environment.
Smoke stemming from the chimneys and the dust and grime associated with factories were accepted as a necessary price to be paid for the development.
But in recent years, the magnitude and nature of the 'pollution overload' have assumed such alarming proportions that pressures have built up all over the world to do something urgently lest the situation gets out of control.

and codes of conduct to preserve the earth's scarce resources

and put a halt to any further deterioration in the environment.
Business operations of the international firms are no exceptions and have been brought under such regulations.
Very recently, the United States government imposed a ban on exports of marine products from countries including India which did not have special devices fitted into fishing trawlers to free the tortoises trapped during fishing expeditions.
Similarly, restrictions have been put on garment exports using cloth processed through the use of AZO dyes.
Germany today is perhaps the country with most stringent environmental laws in the world.

undergone paradigm shifts.
Corporations today are judged in terms of not

only financial returns, but also conservation of environmental resources and reduction in pollution levels.
Green technologies, green products and green companies are highly valued in today's global market place.