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
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 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
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
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
Protectionism
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.
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.
TRADE BARRIERS
Population
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
Income
Consumption patterns
Income spent on necessities and luxuries Product saturation or diffusion Product form differences
Natural resources Topography Climate Rail traffic networks for distribution capabilities Communication systems for marketing Energy (electrical and fuel) consumption
Degree of foreign direct investment in country or in a specific industry Rules governing foreign investment
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
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:
How you will enter and market your product, Licensing, Franchising, M & A (FII/FDI/Venture Capital Fund etc)
QUIZ
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
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
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
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
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 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
Jurisdiction
Antitrust Laws Licensing and Trade Secrets Marketing Laws Bribery and Corruption
Marketing Laws
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
Advertising
Promotional restrictions
Marketing Lawscontd.
Laws on distribution
Shipping Regulation of airline services Rights of carriage by air and sea Liabilities for loss and damage to cargo
Conciliation
Sometimes necessary to seek the intervention of a third party Saves face for both parties in a dispute
Arbitration
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
Litigation
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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