Eulogio “Amang” Rodriguez Institute of Science and Technology

Cavite Campus
General Mariano Alvarez, Cavite

ASSESSING INTERNATIONAL BUSINESS ENVIRONMENT

MBA Student Name : Marissa A. Rivera

Course Name : MBA 108- International Business
Course Facilitator : Dr. Erlinda D. Mendoza - Prof. Graduate Program

TOPIC OUTLINE
1. Concepts of International Business Environment
2. Micro and Macro Environment
3. Significance of International Business Environment
4. Components of International Business Environment
5. Regional Associations in International Environment

CONCEPTS OF INTERNATIONAL BUSINESS ENVIRONMENT

 When business operations are carried out in more than one country apart from the home
nation, then it is termed as International Business.
 A business firm is known as a Multinational Enterprise (MNE) when it carries out its
production or operations in more than one country. An MNE is also referred as a
Multinational Corporation (MNC) or Transnational Corporation (TNC).
 Environment refers to sum total of what is around someone which includes living things and
natural forces. It is also referred as “the conditions that affect the behavior and development
of a business enterprise.”
 When we combine these two words International Business and Environment, it refers to
conditions or surroundings prevalent in foreign countries that affect the functioning of a
business firm and its activities.

MICRO AND MACRO ENVIRONMENT

Environmental factors are mostly external to a firm and are largely uncontrollable. The business
environment of a firm comprises of Micro and Macro environment.
 Micro Environment or Task Environment or Operating Environment consists of those
individuals or groups which are very close to business and with which the organizations
comes into frequent and direct contact in its business activities.
o It primarily consists of customers, suppliers, marketing intermediaries, competitors,
and public.
 Macro Environment or Remote Environment refers to factors which are external to a
business enterprise and are less controllable as compared to factors under micro
environment.

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  The environment of each country varies from the other and if a business firm has to operate
in more than one country, then it should have a thorough understanding of differences in
environmental factors amongst nations.
 The strategies that work well in one country might not work in the other country due to
differences in cultural, political, legal and economic factors.

SIGNIFICANCE OF INTERNATIONAL BUSINESS ENVIRONMENT

 Whenever a business firm decides to conduct its operations internationally, it has to take two
major decisions:
1. The countries or markets suitable to enter and
2. The mode of entry for entering into these markets.
 Both these are strategic and important decisions for a firm and require in depth analysis of
environmental conditions and situations of these markets.
 A firm would enter into those countries or markets where there is enough market potential
and scope of growth and expansion.
 Once the firm has identified countries with market potential, it has to decide the mode of
entry. There are various modes of entry such as exporting, franchising, licensing, joint
venture or setting up wholly owned subsidiaries.
 A business firm makes this important decision only after analyzing the various
environmental factors.
 Since the environmental factors differ from nation to nation, a business firm cannot be
successful by replicating the domestic decisions and practices in other nations of the world.
A multinational firm needs to continuously monitor the changes in political, legal, cultural,
social and economic environment of foreign countries and accordingly make strategic
decisions in each country.

COMPONENTS OF INTERNATIONAL BUSINESS ENVIRONMENT

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  International environment comprises of economic, socio-cultural, geographic, financial,
political, legal and technological forces.
 It is not necessary that all the components of international environment are relevant for
every business firm operating globally. It depends upon the nature of firm and its strategies.
 For example, a business firm interested in exporting its products to the other nations needs
to know about the economic policies and regulations of the foreign nations.
 However, if a business firm is interested in setting up a manufacturing plant in a foreign
nation, then analysis of political, cultural, legal and geographic environment would be
equally important as economic environment.
ECONOMIC ENVIRONMENT
 ECONOMIC ENVIRONMENT is the most important component of international business
environment.
 Analysis of economic factors helps a business firm to make the most significant decision
whether to enter into a foreign market or not and to frame the strategies it should implement
to run its business operations successfully.
 Economic Environment includes three broad aspects:
a) Type of Economic Systems of a foreign country which can be capitalism, socialism or
mixed economy
b) Economic Conditions of a country comprising of GDP, per capita income, employment,
inflation, infrastructure, population, market, urbanization, foreign exchange reserves,
balance of payments etc.
c) Economic Policies comprising of fiscal, monetary, industrial, trade and foreign investment
policies of the country.
 Various international organizations carry out research on economic indicators of individual
nations like United Nations, World Bank, World Economic Forum and Transparency
International etc.
 This helps the business firms to determine the economic viability of a country before entering
into such market for international business.
SOCIO-CULTURAL ENVIRONMENT
 International business means operating in a cross cultural environment. This makes the
business more complex because the business firm must appreciate how different the foreign
culture is from their own and how this difference is to be reflected in their business strategies.
 Socio-cultural factors are another important element of business environment that has a
considerable impact on business operations especially on the international business as social
and cultural factors vary to a great extent from one country to another.
 These factors considerably influence various aspects of human behavior like the products
they consume; colors, designs and symbols they like and the importance they place on
religion, work, family etc.
 There are various elements of Cultural Environment that managers of international business
must be aware of. These are:

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a) Language:
 The world has more than 3000 languages which can pose problems for marketers in
designing advertising campaigns and product labels.
 Therefore, a global marketer must have in depth understanding of the language of the
country where it is going to operate.
b) Religion:
 Religion influences the values and attitudes of individuals and societies. It has a considerable
impact on attitude of people towards wealth, way of dressing, consumption habits and their
way of living.
 There are various religions in the world, for example, Buddhism, Hinduism, Christianity,
Islam, Judaism etc.
 Each religion has its own value system and determines people’s code of conduct.
 A thorough understanding of the religions present in the foreign countries would help the
multinational firm in understanding the people’s attitude towards various products and
services.
c) Education:
 Education is an important part of culture which leads to development of new skills, ideas,
values and attitudes amongst the members of society.
 Education is termed as formal when it is taught in a particular type of environment and can
be informal when the knowledge is shared outside the classroom for developing new ideas.
 It is an important factor as it helps in determination of availability of educated manpower in
a country.
 By analyzing the types of education in a nation, managers of international business can
determine the level of communication skills of its employees and the extent to which they
would require additional training for performing the job efficiently.
d) Aesthetics:
 Aesthetics usually implies to society’s sense of beauty related to colors, shapes, sounds,
number etc. and is reflected in the form of arts, music, drama and dance.
 They basically refer to the peoples‟ attitudes and responses towards particular product,
design, color or label.
 It is important for international marketers to be aware of these cultural differences while
creating advertising appeals and messages for their products so as to avoid any major
blunders.

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  Sensitivity to the differences in aesthetics amongst nations can greatly help the international
business firm in correctly designing their products and messages for each country.
e) Values and Attitudes:
 Values are a set of beliefs or way of thinking of individuals present in a society.
 Values are opinions which are reflected in an individual’s behavior.
 Attitude, on the other hand, implies tendency of an individual to behave in a particular
manner towards an object or event.
 Values differ between countries and these differences in values are reflected in different
behaviors relating to consumption level and risk taking.
 It is important for a business manager to understand the value system of a country where it
is going to operate and ascertain the attitude of people towards work, achievement, education
change, foreign goods, risk etc.
f) Customs and Practices:
 A global marketer must be familiar with long established practices and social codes of
conduct present in different countries in order to achieve desired objectives. Customs and
Practices are important as they influence the usage of products and their packaging and
labelling.
 Hence, a business firm dealing with people having varying cultures should be aware of these
differences while having business negotiations with them.
g) Social Groups:
 Social Groups are an important part of every culture and influence various aspects of
individual’s life.
 Social groups primarily consist of family and reference groups. These groups influence the
pattern of living of people and their interpersonal relationships with others in society.
 Therefore, a manager of international business should conduct a study of social groups which
would help the business firm understand the way people organize their activities.

POLITICAL-LEGAL ENVIRONMENT
 A business firm can operate in a foreign country only as per the rules and policies of
government of their country. The government of a nation decides the manner in which a
business firm can operate in their country.
 Political environment has the following elements:
a) Type of Government and Political Party:
b) Political Ideology:
c) Political Stability:

A) TYPE OF GOVERNMENT AND POLITICAL PARTY:

 Forms of government in a nation can be Parliamentary Structure, Elected Monarchy or
Absolute Monarchy.
 Parliamentary form of government is formed from people’s representatives whereas in
an absolutist government, policy making is conferred in few hands.
B) POLITICAL IDEOLOGY:
 It is important for a business manager to know and assess the government attitudes
towards foreign goods, capital and investment where it is going to operate.

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 The ideologies of the political parties may differ from nation to nation and it is significant
to be aware of these ideologies before negotiating business terms with foreign countries.
C) POLITICAL STABILITY:
 Political Stability is a major concern for a multinational firm. The investments made by
a firm in a host nation are huge and involve lot of capital and investment.
 Therefore, a business firm would like to enter only into politically stable economies of the
world.
 Frequent changes in government or change in government policies can have serious
consequences for an outside firm present in their country.
 Apart from political factors, it is important that an international business firm is aware
of laws prevalent in foreign nations as every business has to work within the legal
framework.
 Each country has its own rules and regulations related to marketing of products, location
of plant, and employment of people, fund raising from people, taxation policies and
intellectual property.
 A business firm must have a thorough understanding of these laws before they decide to
enter into international business with a foreign country.

ECOLOGICAL ENVIRONMENT
 Ecological Environment is related to people, plants, animals and surrounding environment.
Every country has some rules and legislations concerning the preservation of natural
resources and protection of environment.
 In today’s competitive environment, a business firm is assessed not only in financial
parameters but also on its efforts towards conservation of natural resources and overall
reduction in pollution levels.

GEOGRAPHIC ENVIRONMENT
 Geographic Environment is concerned with a country’s climatic conditions, topography and
natural resources. Every business firm entering into international business must be aware of
geographic features of a foreign nation.
 These factors influence the consumption patterns of people and lead to demand for different
categories of products. People of different nations vary in their various needs due to different
climatic conditions.
 Geographic conditions influence a business firm’s decision on plant location as it prefers to
set up a manufacturing plant in those countries where climatic conditions are favorable and
has easy availability of cheap raw materials and labor.
 A business firm’s distributions strategies also depend largely on the geographic conditions
of foreign markets.

REGIONAL ASSOCIATIONS IN INTERNATIONAL ENVIRONMENT

 The world is divided into various regions which have different cultures, geography and
history. Some nations are fully industrialized whereas others are at varied stages of
development.

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  If we look at the world closely, the major regions can be categorized as Africa, Latin
America, Middle East, Asia, Central and Eastern Europe, Western Europe and North
America.
 Regional Economic Cooperation has gained importance in today’s international
environment as it eliminates restrictions on international trade, factor mobility and
payments between two or more nations. It helps two or more countries to economically unite
into a region.
 Regional cooperation amongst the nations can be through different forms like free trade
area, customs union, common market, economic union and political union.
 The benefits of regional associations are numerous as listed below in table 2.

FOLLOWING ARE FEW EXAMPLES OF REGIONAL ASSOCIATIONS:

1. The European Union (EU) is a political and economic arrangement between 28 member
countries in Europe. Its members are: Austria, Belgium, Bulgaria, Croatia, Republic of
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
2. EFTA (European Free Trade Association) is another example of regional trade association
in Europe. Its members are Iceland, Liechtenstein, Norway and Switzerland.
3. The North American Free Trade Agreement (NAFTA) was formed on January 1, 1994
between United States of America, Canada and Mexico.
4. ASEAN (Association of Southeast Asian Nations) was formed in 1967 by five member nations
i.e. Indonesia, Malaysia, Philippines, Singapore and Thailand. The countries which joined
ASEAN later on were Brunei, Cambodia, Laos, Myanmar and Vietnam.
5. The other example of regional association in Asia Pacific region is APEC (Asia-Pacific
Economic Cooperation). It was formed in 1989 with an objective to accelerate economic
growth, prosperity and overall development of Asia-Pacific region. It consists of 21 member
countries which together account for around 40 percent of the world’s population and 54
percent of the world’s GDP.

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