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International Business Environment

What is the Impact of Economy, Social, Culture, Political, Legal & Regulatory Environment on International Business?

Economic Environment Cultural Environment Demographic Environment Political Legal Environment Natural Environment Technological Environment


The Global Economic Scene When discussing the global economic scene we will look at: Recent trends Economic Systems Economic Structure Stages of Economic Growth

Recent Trends

Domestic markets are faced with increased import competition. This can be attributed to four factors:

Capital movements rather than trade have become the driving force. Production has become uncoupled from employment. Primary products have become uncoupled from the industrial economy. The world economy and not the macroeconomics of nation-state controls economic outcomes. Capitalist system has proved to be successful over the communist centrally planned model.

Economic Environment Marketing &

Economic Development

Strategy based on Country to Country Economic Risk-1997 South East Asian Currency Crisis Balance of Trade/Payments Trade Patterns Merchandise Trade, Services Trade International Trade Alliances Degree of Economic Cooperation through: Free Trade Area, Customs Union, Common Market & Economic Union The World Trade Organization and GATT Regional Economic Organizations- EU, NAFTA, ASEAN, SAARC etc

Economic Systems
Since World War II, countries have been classified according to their economic system. They were classified as:

Market Allocation System - Relies upon the consumer to allocate resources - economic democracy. Command Allocation - resource allocation decisions are made by the government planners. Mixed System

Economic Environment Economic Allocation system

Market Allocation system (Capitalist) Based on People need and want or goods of customers choice Triad countries US, EU & Japan Command Allocation system (Socialist) Command or Central plan allocation economies of shortages Cuba, Vietnam & Laos Mixed System No pure market or command allocation India etc Basis of Degree of Economy Freedom Free (HK, Spore, UK), Mostly Free (Canada, UAE), Mostly unfree (China) & Repressed (Iraq, N. Korea

Economic Structure
Shapes a countrys product and service needs, income levels, and employment levels. Subsistence economies Raw material exporting economies Industrializing economies Industrial economies

Stages of Market Development

This involves grouping countries according to GNP per capita. Low income countries Lower middle income countries Upper middle income countries High income countries

Economic Environment Stages of Market Development Based on Per Capita Income (Income & PPP)

High Income Countries >$9656 US/EU Upper-Middle Income Countries >$3126 but<$9655 - Malaysia Lower Middle Income countries >$785 but <$3125 Indonesia Low Income countries <$785 India Basket Cases Dangerous areas with socio-ecopolitical problems like Ethiopia, Mozambique, Iraq, Afghanistan etc.

Economic Policies

Industrial policy Foreign exchange policy Foreign Investment & Technology policy Fiscal policy Monetary policy

Economic Conditions

Trends in the GNP growth rate & per capita income Trends in foreign trade Domestic demand & supply conditions

Trade Patterns
Trade patterns are usually measured in terms of a countrys balance of payments. Major economic groupings can be studied to see how they are linked together economically. The balance of payments is divided into: Current Account Capital Account

The Nature and Use of the Balance Of Payments

Balance of payments detail and summarize international economic transactions and indicates the international economic health of the nation They are useful for marketing decisions - Analysis of exports and imports of its can help the international marketer to identify target markets and competing suppliers. Financial considerations - If the balance of payments reveals a chronic deficit for the country, it may indicate a tightening of restrictions on imports and foreign exchange. Pricing can be affected if the firm fears exchange controls or devaluation.

Historically, countries have been dominated by a desire to protect domestic industry from foreign competition. There have been many attempts to regulate the international economic environment in the interests of freeing up trade between countries. In recent years, trade barriers have fallen in most countries, however they have been replaced by nontariff barriers.

Justifications for protectionism:

Several justifications have been made for the practice of protectionism. Some appear to hold more merit than others:

Protection of an "infant" industry: Resistance to unfair foreign competition of a vital domestic industry Intervention into a temporary trade balance: A country may want to try to reverse a temporary decline in trade balances by limiting imports. In practice, this does not work since such moves are typically met by retaliation. Maintenance of domestic living standards and preservation of jobs. Import restrictions can temporarily protect domestic jobs, and can in the long run protect specific jobs Retaliation: The proper way to address trade disputes is now through the World Trade Organization. In the past, where enforcement was less available, this might have been a reasonable argument.


Tariff Barriers Non-tariff Barriers Monetary Barriers

Domestic Economy of Foreign Nations

Market Characteristics

Size of the Market


Population growth rate Distribution of population - Age distribution, life expectancies, household size, urbanization Distribution of low, medium, and high incomes Gross domestic product per capita Purchasing power parity


Consumption patterns

Income spent on necessities and luxuries Product saturation or diffusion Product form differences

Domestic Economy of Foreign Nations

Nature of the economy Physical endowment

Natural resources Topography Climate Rail traffic networks for distribution capabilities Communication systems for marketing Energy (electrical and fuel) consumption

Availability and quality of infrastructure

Foreign involvement in the economy

Degree of foreign direct investment in country or in a specific industry Rules governing foreign investment

Impact of the economic environment on social development

Urbanization, life expectancy, literacy rates, etc.


Culture and a solid understanding of culture is essential in international business.. Definition: Culture prescribes the forms of behaviour that are acceptable to people in a specific community. It is an integrated sum total of learned behavior traits that are shared by members of any given society.

Culture is learned Culture is dynamic Culture is subjective

The Elements of Culture

Material Elements Language - verbal and non-verbal Aesthetics Education Religion Values and Attitudes Manners and Customs Social Institutions

Cultural Traits

High Context & Low Context Culture Masculine & Feminine Culture Universalism Vs Particularism Individualism Vs Communitarianism Neutral Vs Emotional

Assignment Country Analysis

For the Country you have selected, research the following information: Social Structure: Role of individuals, families and groups Language(s) Religion(s) Non-verbal communication Gift giving and hospitality Trade& Business Opportunities Risks, Logistics, Communication & Transport, Environment, LPG & PEST Analysis Attitudes about:

time age genders power and status

How you will enter and market your product, Licensing, Franchising, M & A (FII/FDI/Venture Capital Fund etc)


When greeting a person in France, should you address the person by their first name or last name? Are flowers considered a good gift for a hostess in Germany? Is it polite to inquire about the family in Saudi Arabia? In Sweden, if you are invited to a business dinner, should the spouse accompany you?


An important part of any business decision is assessing the political environment in which the firm operates. Civil wars, assassinations, kidnapping of foreign businesspeople, and expropriation of a firms property are dangerous to the viability of a firms foreign operations

Role of Government in the Economy

Participator - commercial activities undertaken by government to some degree Facilitator - overseas governments may attract new foreign investment and technology Regulator - Regulation may be thru taxes; embargoes; boycotts; import/export controls; and joint venture law

Marketing is affected by nationalism Where nationalism is high, foreign firms tend to be regarded with suspicion and their products discriminated against

Sources of Political Instability

Degree of social unrest Frequency of changes in the regime Extent to which the country is divided culturally and/or ethnically Religious division Linguistic diversity Political sovereignty Political conflict Political intervention

Political risks

Political risks are defined as any changes in the political environment that may adversely affect the value of the firms business activities Most political risks can be divided into three categories:

Ownership risk, where the property of the firm is threatened through confiscation or expropriation Operating risk, in which the ongoing operations of the firm and/or the safety of its employees are threatened Transfer risk, in which the government interferes with the firms ability to shift funds into and out of the country

Managing the Overseas Political Environment

Political neutrality Companies should be conscious of which political labels are acceptable and which are not Combination investment/civic projects

Contributions to local infrastructure development are likely to benefit not only the community but also the company

Political risk in home country vs. foreign country (e.g. sanctions) Lobbying to influence political decisions Awareness of impact of a firms operations on alternative governments policies The linking of a firms commercial activities to the host nations economic interests and planned developments

Managing the Overseas Political Environment

alternative courses of action for disengagement

Leave the country altogether Totally indigenize operations to become a local company Negotiate an arrangement under the new law Take pre-emptive action in advance of announced changes Generate sizable exports for the country to step up the host government dependency on the operation

The Legal Environment

The global legal environment is dynamic, complex and varies significantly from one country to another Legal Systems

Common law- based on tradition, past practices, legal precedent, and interpretation via court decision Code law- based on an all-inclusive system of written rules of law Islamic law- based on the Koran, and applied by Islamic countries Other legal codes- include tribal (or indigenous) law, and socialist laws

Legal Issues for Global Marketers


which countrys laws apply?

Dispute Resolution (Intl Court of Justice) Intellectual Property

Patents, Trademarks and Copyright issues

Antitrust Laws Licensing and Trade Secrets Marketing Laws Bribery and Corruption

Marketing Laws

Does the product comply with national rules regarding:

technical regulations, standards, labeling, packaging restrictions, etc. product claims, comparative advertising coupons, contests, gifts, etc often motivated by a desire to protect consumers interests or control inflation a desire to ensure price competition in the market


Promotional restrictions

Government price controls

Marketing Lawscontd.

Laws on distribution

Laws in most countries cover:

Shipping Regulation of airline services Rights of carriage by air and sea Liabilities for loss and damage to cargo

Channel activities Foreign/local agency termination arrangements

Contracts and Dispute Resolution


The best approach if at all possible

Least likely to close the door on future business

Sometimes necessary to seek the intervention of a third party Saves face for both parties in a dispute


Advantages of arbitration :

Increases the ability of parties to enforce judgements Sensitive matters remain confidential to the parties concerned Likely to be quicker than litigation Judges may be chosen by both parties An arbitration judgement is unlikely to be appealed and more likely to be treated as final

Contracts and Dispute Resolution


Should be used only as a last resort Disadvantages of litigation are:

Usually closes the door on future business Can create a poor image and damage public relations There is the risk of unfair treatment at the hands of a foreign court There may be difficulty in collecting the judgement There is considerable opportunity cost

Regulatory Environment Consists of a variety of agencies that enforce laws or set guidelines for conducting business (WHO, Food & Agriculture, UN, etc.)

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