The Environment of International Business
International managers face intense and constant challenges that require training and understanding of the foreign environment. Managing a business in a foreign country requires managers to deal with a large variety of cultural and environmental differences. As a result, international managers must continually monitor the political, legal, sociocultural, economic, and technological environments.
The political environment
The political environment can foster or hinder economic developments and direct investments. This environment is ever‐changing. As examples, the political and economic philosophies of a nation’s leader may change overnight. The stability of a nation’s government, which frequently rests on the support of the people, can be very volatile. Various citizen groups with vested interests can undermine investment operations and opportunities. And local governments may view foreign firms suspiciously.
Political considerations are seldom written down and often change rapidly. For example, to protest Iraq’s invasion of Kuwait in 1990, many world governments levied economic sanctions against the import of Iraqi oil. Political considerations affect international business daily as governments enact tariffs (taxes), quotas (annual limits), embargoes (blockages), and other types of restriction in response to political events.
Businesses engaged in international trade must consider the relative instability of countries such as Iraq, South Africa, and Honduras. Political unrest in countries such as Peru, Haiti, Somalia, and the countries of the former Soviet Union may create hostile or even dangerous environments for foreign businesses. In Russia, for example, foreign managers often need to hire bodyguards; sixteen foreign businesspeople were murdered there in 1993. Civil war, as in Chechnya and Bosnia, may disrupt business activities and place lives in danger. And a sudden change in power can result in a regime that is hostile to foreign investment; some businesses may be forced out of a country altogether. Whether they like it or not, companies are often involved directly or indirectly in international politics.
The legal environment
The American federal government has put forth a number of laws that regulate the activities of U.S. firms engaged in international trade. However, once outside U.S. borders, American organizations are likely to find that the laws of the other nations differ from those of the U.S. Many legal rights that Americans take for granted do not exist in other countries; a U.S. firm doing business abroad must understand and obey the laws of the host country.
In the U.S., the acceptance of bribes or payoffs is illegal; in other countries, the acceptance of bribes or payoffs may not be illegal—they may be considered a common business practice. In addition, some countries have copyright and patent laws that are less strict than those in the U.S., and some countries fail to honor these laws. China, for example, has recently been threatened with severe trade sanctions because of a history of allowing American goods to be copied or counterfeited there. As a result, businesses engaging in international trade may need to take extra steps to protect their products because local laws may be insufficient to protect them.
The economic environment
Managers must monitor currency, infrastructure, inflation, interest rates, wages, and taxation. In assessing the economic environment in foreign countries, a business must pay particular attention to the following four areas:
- Average income levels of the population. If the average income for the population is very low, no matter how desperately this population needs a product or service, there simply is not a market for it.
- Tax structures. In some countries, foreign firms pay much higher tax rates than domestic competitors. These tax differences may be very obvious or subtle, as in hidden registration fees.
- Inflation rates. In the U.S., for example, inflation rates have been quite low and relatively stable for several years. In some countries, however, inflation rates of 30, 40, or even 100 percent per year are not uncommon. Inflation results in a general rise in the level of prices, and impacts business in many ways. For example, in the mid‐1970s, a shortage of crude oil led to numerous problems because petroleum products supply most of the energy required to produce goods and services and to transport goods around the world. As the cost of petroleum products increased, a corresponding increase took place in the cost of goods and services. As a result, interest rates increased dramatically, causing both businesses and consumers to reduce their borrowing. Business profits fell as consumers’ purchasing power was eroded by inflation. High interest rates and unemployment reached alarmingly high levels.
- Fluctuating exchange rates. The exchange rate, or the value of one country’s currency in terms of another country’s currency, is determined primarily by supply and demand for each country’s goods and services. The government of a country can, however, cause this exchange rate to change dramatically by causing high inflation—by printing too much currency or by changing the value of the currency through devaluation. A foreign investor may sustain large losses if the value of the currency drops substantially.
When doing business abroad, business people need to recognize that they cannot take for granted that other countries offer the same things as are found in industrialized nations. A country’s level of development is often determined in part by its infrastructure. The infrastructure is the physical facilities that support a country’s economic activities, such as railroads, highways, ports, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems. When doing business in less developed countries, a business may need to compensate for rudimentary distribution and communication systems.
The socio-cultural environment
Cultural differences, which can be very subtle, are extremely important. An organization that enters the international marketplace on virtually any level must make learning the foreign country’s cultural taboos and proper cultural practices a high priority. If a business fails to understand the cultural methods of doing business, grave misunderstandings and a complete lack of trust may occur.
Management differences also exist. In China, a harmonious environment is more important than day‐to‐day productivity. In Morocco, women can assume leadership roles, but they are usually more self‐conscious than American women. In Pakistan, women are not often found in management positions, if they’re in the workplace at all.
In addition, the importance of work in employees’ lives varies from country to country. For example, the Japanese feel that work is an important part of their lives. This belief in work, coupled with a strong group orientation, may explain the Japanese willingness to put up with things that workers in other countries would find intolerable.
Likewise, culture may impact what employees find motivating, as well as how they respond to rewards and punishments. For example, Americans tend to emphasize personal growth, accomplishment, and “getting what you deserve” for performance as the most important motivators. However, in Asian cultures, maintaining group solidarity and promoting group needs may be more important than rewarding individual achievements.
Finally, language differences are particularly important, and international managers must remember that not all words translate clearly into other languages. Many global companies have had difficulty crossing the language barrier, with results ranging from mild embarrassment to outright failure. For example, in regards to marketing, seemingly innocuous brand names and advertising phrases can take on unintended or hidden meanings when translated into other languages. Advertising themes often lose or gain something in translations. The English Coors beer slogan “get loose with Coors” came out as “get the runs with Coors” in Spanish. Coca‐Cola’s English “Coke adds life” theme translated into “Coke brings your ancestors back from the dead” in Japanese. In Chinese, the English Kentucky Fried Chicken slogan “finger‐lickin’ good” came out as “eat your fingers off.”
Such classic boo‐boos are soon discovered and corrected; they may result in little more than embarrassments for companies. Managers should keep in mind that countless other, more subtle blunders may go undetected and damage product performance in less obvious ways.
The Technological environment
The technological environment contains the innovations, from robotics to cellular phones, that are rapidly occurring in all types of technology. Before a company can expect to sell its product in another country, the technology of the two countries must be compatible.
Companies that join forces with others will be able to quicken the pace of research and development while cutting the costs connected with utilizing the latest technology. Regardless of the kind of business a company is in, it must choose partners and locations that possess an available work force to deal with the applicable technology. Many companies have chosen Mexico and Mexican partners because they provide a willing and capable work force. GM’s plant in Arizpe, Mexico, rivals its North American plants in quality.
Consumer safety in a global marketplace
The United States leads the world in spending on research and development. As products and technology become more complex, the public needs to know that they are safe. Thus, government agencies investigate and ban potentially unsafe products. In the United States, the Federal Food and Drug Administration has set up complex regulations for testing new drugs. The Consumer Product Safety Commission sets safety standards for consumer products and penalizes companies that fail to meet them. Such regulations have resulted in much higher research costs and in longer times between new product ideas and their introduction. This is not always true in other countries.