Framework for Understanding International Business Environment: Analysis of Physical, Demographic, Economic, Socio-cultural, Political, Legal and Technological
The (IBE) International Business Environment is multidimensional including the political risks, cultural differences, exchange risks, legal & taxation issues. Therefore (IBE) International Business Environment comprises the political, economic, regulatory, tax, social & cultural, legal, & technological environments.
The political environment refers to the type of the government, the government relationship with a business, & the political risk in the country. Doing business internationally, therefore, implies dealing with a different type of governments, relationships, & levels of risk.
There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military & non-military). Therefore, in analyzing the political-legal environment, an organization may broadly consider following aspects:
- The Political system of the business;
- Approaches to the Government towards business i.e. Restrictive or facilitating;
- Facilities & incentives offered by the Government;
- Legal restrictions for instance licensing requirement, reservation to a specific sector like public sector, private or small-scale sector;
- The Restrictions on importing technical know-how, capital goods & raw materials;
- The Restrictions on exporting products & services;
- Restrictions on pricing & distribution of goods;
- Procedural formalities required in setting the business
The economic environment relates to all the factors that contribute to a country’s attractiveness for foreign businesses. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed or industrialized, the less developed or third world, & the newly industrializing or emerging economies. Within each category, there are major variations, but overall the more developed countries are the rich countries, the less developed the poor ones, & the newly industrializing (those moving from poorer to richer). These distinctions are generally made on a basis of the gross domestic product per capita (GDP/capita). Better education, infrastructure, & technology, healthcare, & so on are also often associated with higher levels of economic development. Clearly, the level of economic activity combined with education, infrastructure, & so on, as well as the degree of government control of the economy, affect virtually all facets of doing business, & a firm needs to recognize this environment if it is to operate successfully internationally. While analyzing the economic environment, the organization intending to enter a particular business sector may consider the following aspects:
- An Economic system to enter the business sector.
- Stage of economic growth & the pace of growth.
- Level of national & per capita income.
- Incidents of taxes, both direct & indirect tax.
- Infrastructure facilities available & the difficulties thereof.
- Availability of raw materials & components & the cost thereof.
- Sources of financial resources & their costs.
- Availability of manpower-managerial, technical & workers available & their salary & wage structures.
The technological environment comprises factors related to the materials & machines used in manufacturing goods & services. Receptivity of organizations to new technology & adoption of new technology by consumers influence decisions made in an organization. As firms do not have any control over the external environment, their success depends on how well they adapt to the external environment. An important aspect of the international business environment is the level, & acceptance, of technological innovation in different countries. The last decades of the twentieth century saw major advances in technology, & this is continuing in the twenty-first century. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest in technology, & international firms transfer technology to be globally competitive. It is easier than ever for even small business plan to have a global presence thanks to the internet, which greatly grows their exposure, their market, & their potential customer base. For the economic, political, & cultural reasons, some countries are more accepting of technological innovations, others less accepting. In analyzing the technological environment, the organization may consider the following aspects:
- Level of technological development in the country as a whole & specific business sectors.
- The pace of technological changes & technological obsolescence.
- Sources of technology.
- Restrictions & facilities for technology transfer & time taken for absorption of technology.
The cultural environment is one of the critical components of the international business environment & one of the most difficult to understand. This is because the cultural environment is essentially unseen; it has been described as a shared, commonly held body of general beliefs & values that determine what is right for one group, according to Kluckhohn & Strodtbeck. National culture is described as the body of general beliefs & the values that are shared by the nation. Beliefs & the values are generally seen as formed by the factors such as the history, language, religion, geographic location, government, & the education; thus firms begin a cultural analysis by seeking to understand these factors. The most well-known is that developed by Hofstede in1980.
His model proposes four dimensions of cultural values including individualism, uncertainty avoidance, power distance & masculinity.
Individualism is the degree to which a nation values & encourages individual action & decision making.
Uncertainty avoidance is the degree to which a nation is willing to accept & deal with uncertainty.
Power distance is the degree to which a national accepts & sanctions differences in power.
This model of the cultural values has been used extensively because it provides data for the wide array of countries. Many academics & the managers found that this model helpful in exploring management approaches that would be appropriate in different cultures.
For example, in a nation that is high on individualism one expects individual goals, individual tasks, & individual reward systems to be effective, whereas the reverse would be the case in a nation that is low on individualism.
- While analyzing social & cultural factors, the organization may consider the following aspects:
- Approaches to the society towards business in general & in specific areas;
- Influence of social, cultural & religious factors on acceptability of the product;
- Lifestyle of people & the products used for them;
- Level of acceptance of, or resistance to change;
- Values attached to a particular product i.e. the possessive value or the functional value of the product;
- Demand for the specific products for specific occasions;
- The propensity to consume & to save.
The competitive environment also changes from country to country. This is partly because of the economic, political, & cultural environments; these environmental factors help determine the type & degree of competition that exists in a given country. Competition can come from a variety of sources. It can be a public or a private sector, come from the large or the small organizations, be domestic or global, & stem from traditional or new competitors, gst registration. For a domestic firm, the most likely sources of competition might be well understood. The same isn’t the case when a person moves to compete in the new environment.