INTERNATIONAL BUSINESS ENVIRONMENT
Introduction
International business activities take place in multiple and complex environments, a setting of a
larger system which constitutes the environment. Environment generally refers to the
surroundings, circumstances and influences on individuals or organizations. These include forces
that affect a firm’s immediate operating environment such as customer, suppliers, competitors,
labor markets among others and the broader environment that consists of political, economic,
social cultural, technological and legal considerations. The effects of the environment can either
be positive (i.e. beneficial) or negative (i.e. cost/constraints)
POLITICAL ENVIRONMENT
The international marketer’s political environment is complex and difficult due to the interaction
among domestic, foreign, and international politics.
It is also hardly uncommon for governments as well as companies to ignore politics for the purpose
of economic interests.
TYPES OF GOVERNMENT: POLITICAL SYSTEMS
One way to classify governments is to consider them as either parliamentary (open) or absolutist
(closed).
Parliamentary governments consult with citizens from time to time for the purpose of learning
about opinions and preferences. Government policies are thus intended to reflect the desire of the
majority segment of a society. Most industrialized nations and all democratic nations may be
classified as parliamentary.
In an absolutist system, the ruling regime dictates government policy without considering citizens’
needs or opinions. Another way to classify governments is by the number of political parties. This
classification results in four types of governments: two-party, multiparty, single-party, and
dominated one-party.
POLITICAL RISKS
,There are a number of political risks with which marketers must contend. Hazards based on a host
government’s actions include; confiscation, expropriation, nationalization, domestication, and
creeping expropriation.
Confiscation is the process of a government’s taking ownership of a property without
compensation.
Expropriation differs somewhat from confiscation in that there is some compensation, though not
necessarily just compensation. More often than not, a company whose property is being
expropriated agrees to sell its operations – not by choice but rather due to some explicit or implied
coercion.
Nationalization involves government ownership, and it is the government that operates the
business being taken over. Generally, this action affects a whole industry rather than only a single
company.
In domestication, foreign companies relinquish control and ownership, either completely or
partially, to the nationals. The result is that private entities are allowed to operate the confiscated
or expropriated property.
Based on this classification, four sets of political risks may be identified: general instability risk,
ownership/control risk, operation risk, and transfer risk.
General instability risk is related to the uncertainty about the future viability of a host country’s
political system.
In contrast, ownership/control risk is related to the possibility that a host government might take
action (e.g., expropriation) to restrict an investor’s ownership and control of a subsidiary in that
host country.
Operation risk proceeds from the uncertainty that a host government might constrain the
investor’s business operations in all areas, including production, marketing, and finance.
Transfer risk applies to any future acts by a host government that might constrain the ability of a
subsidiary to transfer payments, capital, or profit out of the host country back to the parent firm.
MANAGEMENT OF POLITICAL RISK
To manage political risk, an MNC can pursue a strategy of either avoidance or insurance.
Avoidance means screening out politically uncertain countries. In this, measurement and analysis
of political risk can be useful.
,Insurance, in contrast, is a strategy to shift the risk to other parties to safeguard their foreign
investments. Can be through several managerial strategies such as; A firm may try to gain “control”
or it may try to gain “cooperation”, it may pursue product and/or geographic diversification to gain
“flexibility.” It can also increase and maintain their bargaining power when their technical,
operational, and managerial complexity requirements are not within reach of a host country’s
abilities.
MEASURES TO MINIMIZE POLITICAL RISK
The several measures include;
a) Stimulation of the local economy
One defensive investment strategy calls for a company to link its business activities with the host
country’s national economic interests. One strategy may involve the company purchasing local
products and raw materials for its production and operations. A modification of this strategy would
be to use subcontractors.
b) Employment of nationals
It serves no useful purpose for a company to assume that local people are lazy, unintelligent,
unmotivated, or uneducated. Firms should also carefully weigh the impact of automation in a
cheap-labor, high-unemployment area. Automation does not go down well in India, where job
creation, not job elimination, is national policy.
c) Sharing ownership
One method is to convert from a private to a public company or from a foreign to a local company.
One of the most common techniques for shared ownership is to simply form a joint venture.
d) Being civic minded
Multinationals should combine investment projects with civic projects. A good idea is to assist in
building schools, hospitals, roads, and water systems because such projects benefit the host country
as well as the company, especially in terms of the valuable goodwill generated in the long run.
e) Political neutrality
For the best long-term interests of the company, it is not wise to become involved in political
disputes among local groups or between countries.
f) Behind-the-scenes lobby
, For example, importers must let their government know why imports are crucial to them and their
consumers. Companies may want to do the lobbying themselves, or they may let their government
do it on their behalf.
g) Observation of political mood and reduction of exposure
Marketers should be sensitive to changes in political mood. A contingency plan should be in place.
Defensive strategies may include the outflow of capital, the transfer of patents and other assets to
foreign subsidiaries, etc. to please all the people all the time, it may be desirable
h) Adopt a local personality.
A practice approach may require that the company blend in with the environment. There is not
much to be gained by a company being Ethnocentric.
PRIVATIZATION
Both multinational and local firms should notice a trend toward privatization and its competitive
implications. Government-owned enterprises are often characterized by overstaffing, poor
financial performance, dependence on subsidies, centralized and politicized organizations, and
lack of competition.
The objectives of privatization are:
• promotion of competition and efficiency,
• reduction of debt and subsidies,
• return of flight capital, and
• Broadening domestic equity ownership.
Characteristics of countries which are likely to pursue privatization include:
• high budget deficits,
• high foreign debt, and
• High dependence on such international agencies as the World Bank and the International
Monetary Fund.
Introduction
International business activities take place in multiple and complex environments, a setting of a
larger system which constitutes the environment. Environment generally refers to the
surroundings, circumstances and influences on individuals or organizations. These include forces
that affect a firm’s immediate operating environment such as customer, suppliers, competitors,
labor markets among others and the broader environment that consists of political, economic,
social cultural, technological and legal considerations. The effects of the environment can either
be positive (i.e. beneficial) or negative (i.e. cost/constraints)
POLITICAL ENVIRONMENT
The international marketer’s political environment is complex and difficult due to the interaction
among domestic, foreign, and international politics.
It is also hardly uncommon for governments as well as companies to ignore politics for the purpose
of economic interests.
TYPES OF GOVERNMENT: POLITICAL SYSTEMS
One way to classify governments is to consider them as either parliamentary (open) or absolutist
(closed).
Parliamentary governments consult with citizens from time to time for the purpose of learning
about opinions and preferences. Government policies are thus intended to reflect the desire of the
majority segment of a society. Most industrialized nations and all democratic nations may be
classified as parliamentary.
In an absolutist system, the ruling regime dictates government policy without considering citizens’
needs or opinions. Another way to classify governments is by the number of political parties. This
classification results in four types of governments: two-party, multiparty, single-party, and
dominated one-party.
POLITICAL RISKS
,There are a number of political risks with which marketers must contend. Hazards based on a host
government’s actions include; confiscation, expropriation, nationalization, domestication, and
creeping expropriation.
Confiscation is the process of a government’s taking ownership of a property without
compensation.
Expropriation differs somewhat from confiscation in that there is some compensation, though not
necessarily just compensation. More often than not, a company whose property is being
expropriated agrees to sell its operations – not by choice but rather due to some explicit or implied
coercion.
Nationalization involves government ownership, and it is the government that operates the
business being taken over. Generally, this action affects a whole industry rather than only a single
company.
In domestication, foreign companies relinquish control and ownership, either completely or
partially, to the nationals. The result is that private entities are allowed to operate the confiscated
or expropriated property.
Based on this classification, four sets of political risks may be identified: general instability risk,
ownership/control risk, operation risk, and transfer risk.
General instability risk is related to the uncertainty about the future viability of a host country’s
political system.
In contrast, ownership/control risk is related to the possibility that a host government might take
action (e.g., expropriation) to restrict an investor’s ownership and control of a subsidiary in that
host country.
Operation risk proceeds from the uncertainty that a host government might constrain the
investor’s business operations in all areas, including production, marketing, and finance.
Transfer risk applies to any future acts by a host government that might constrain the ability of a
subsidiary to transfer payments, capital, or profit out of the host country back to the parent firm.
MANAGEMENT OF POLITICAL RISK
To manage political risk, an MNC can pursue a strategy of either avoidance or insurance.
Avoidance means screening out politically uncertain countries. In this, measurement and analysis
of political risk can be useful.
,Insurance, in contrast, is a strategy to shift the risk to other parties to safeguard their foreign
investments. Can be through several managerial strategies such as; A firm may try to gain “control”
or it may try to gain “cooperation”, it may pursue product and/or geographic diversification to gain
“flexibility.” It can also increase and maintain their bargaining power when their technical,
operational, and managerial complexity requirements are not within reach of a host country’s
abilities.
MEASURES TO MINIMIZE POLITICAL RISK
The several measures include;
a) Stimulation of the local economy
One defensive investment strategy calls for a company to link its business activities with the host
country’s national economic interests. One strategy may involve the company purchasing local
products and raw materials for its production and operations. A modification of this strategy would
be to use subcontractors.
b) Employment of nationals
It serves no useful purpose for a company to assume that local people are lazy, unintelligent,
unmotivated, or uneducated. Firms should also carefully weigh the impact of automation in a
cheap-labor, high-unemployment area. Automation does not go down well in India, where job
creation, not job elimination, is national policy.
c) Sharing ownership
One method is to convert from a private to a public company or from a foreign to a local company.
One of the most common techniques for shared ownership is to simply form a joint venture.
d) Being civic minded
Multinationals should combine investment projects with civic projects. A good idea is to assist in
building schools, hospitals, roads, and water systems because such projects benefit the host country
as well as the company, especially in terms of the valuable goodwill generated in the long run.
e) Political neutrality
For the best long-term interests of the company, it is not wise to become involved in political
disputes among local groups or between countries.
f) Behind-the-scenes lobby
, For example, importers must let their government know why imports are crucial to them and their
consumers. Companies may want to do the lobbying themselves, or they may let their government
do it on their behalf.
g) Observation of political mood and reduction of exposure
Marketers should be sensitive to changes in political mood. A contingency plan should be in place.
Defensive strategies may include the outflow of capital, the transfer of patents and other assets to
foreign subsidiaries, etc. to please all the people all the time, it may be desirable
h) Adopt a local personality.
A practice approach may require that the company blend in with the environment. There is not
much to be gained by a company being Ethnocentric.
PRIVATIZATION
Both multinational and local firms should notice a trend toward privatization and its competitive
implications. Government-owned enterprises are often characterized by overstaffing, poor
financial performance, dependence on subsidies, centralized and politicized organizations, and
lack of competition.
The objectives of privatization are:
• promotion of competition and efficiency,
• reduction of debt and subsidies,
• return of flight capital, and
• Broadening domestic equity ownership.
Characteristics of countries which are likely to pursue privatization include:
• high budget deficits,
• high foreign debt, and
• High dependence on such international agencies as the World Bank and the International
Monetary Fund.
