Country Risk Analysis :

Environmental Factors
of Business
 Economic Environment

 Economic System (Centrally

Planned, Capitalist & Mixed
Economy)
 Per Capita Income (Purchasing
Power Capacity)
 Market Size (Large Population &
Age factor)
 Inflation (Cost of Production is
high, consumers’ income is
reduced)
 Economic Environment in India
 Indian Companies are embracing new
opportunities and challenges. Because:

 Technology has improved dramatically :

Some of the most advanced technologies and
skills in the world are available in the country
at a fraction of the cost of advanced nations.
• Consumer Demands is booming

 Increasing Purchasing power, as Goldman Sachs

estimated per Capita Income of about $ 9000 per
annum.
 India is giant consumer market comprising 300

million urban based middle-class consumer and

another 700 million consumers exist in rural
India.
 In urban areas, the middle-class culture is

firmly established the 3 Ms of MALLS, MOBIKES

and MOBILES to rule this class.
 Untapped rural market with millionaires is
captured by Companies like, Hero Honda,
Maruti Suzuki, Akai TV, Proctor & Gamble
and some banks like ICICI Bank, State Bank
of India.

 Worldwide and Global Opportunities

for India:
 Outsourcing Opportunity:
IT services are not only outsourced in
India even innovation and manufacturing
work is also outsourced.
 Some of the fortune 500 companies, like
Delphi, Dell, Elli Lilly, General Electric,
Hewlett Packard and Daimler Chrysler
have put up R & D facilities in India.

 GE’s Technology Centre in Bangalore is

the company’s largest such facility
outside the US with an investment of
US $ 60 million.

 The Daimler Chrysler Research Centre

in Bangalore is involved in applied
research.
 Transforming and Reinvesting Activity:

 Fifteen years ago Reliance company was into

synthetic fibres which accounted for 70
percent of the group’s turnover. Currently,
company’s area of operations are :

 Oil gas exploration, energy, infor-

mation & communication &
technology, life Sciences research
and retail.
 ITC is example of transformation by moving away
from the commodities cluster into:

 Hotels, high quality paper, packaging and

printing, lifestyle retailing, information
technology.
 Tata group of company has transformed and
encompasses more than 90 companies in diverse
sectors like–
 Automotive engineering products, metals,
energy, chemicals, hotels, property develo-
pment, financial services, and information
technology.
 Acquisition of Foreign Companies

 Indian companies are now started

acquisition of companies to gain latest
technology and cost & quality competit-
iveness. Major Acquisitions are:

 Top 10 deals itself account for nearly US $ 21,500

million since 2000.
 This is more than double the amount involved in US
companies’ acquisition of Indian counterparts.
 Top 10 acquisitions made by Indian
companies worldwide
Country Deal value ($
Acquirer Target Company targeted ml) Industry
Tata Steel Corus Group UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
Daewoo Electronics
Videocon Corp. Korea 729 Electronics
Dr. Reddy’s
Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
Kenya Petroleum
HPCL Refinery Ltd. Kenya 500 Oil and Gas
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
 Relocation of Plants
Several Firms have bought those plants
in developed countries now have been
closed because of high cost. These
Companies like:

 Essar Power relocated 1,200 MW power Plant from

Scotland to Vadinar in Gujarat at a cost of about US
$ 617.3 million.

 Arvind Mills reshifted its manufacturing plant from

Mauritius to India at an estimated cost of US $ 2.74
million.
 Political Environment:

 Currency Inconvertibility-(Host country

govt. enacts law prohibiting foreign companies
from taking their money out of the country or
exchanging the currency.

 Credit Risk- (Refusal to honour a financial

contract with a foreign company.)

 Conflict of Interest-(Welfare of economy Vs.

maximization of corporate wealth: tax revenue
Vs. transfer pricing and balance of payment
issues)
 Regulations and Government Policy is

Changing in India

 Competition is being encouraged

 Reservations are being done away

 Inspectors Raj are being removed

 Legal Environment
Ease of … INDIA CHINA RUSSIA BRAZIL US

Doing Business 120 83 106 122 3

Starting a Business 111 135 50 122 4

Dealing with Licens 134 175 177 107 24

es
Employing Workers 85 86 101 119 1

Registering Property 112 29 45 110 10

Getting Credit 36 84 84 84 7

Protecting Investors 33 83 83 64 5

Paying Taxes 165 168 130 137 76

Trading Across Borders 79 42 155 93 15

Enforcing Contracts 177 20 19 106 8

Closing a Business 137 57 80 131 18

Source : World Bank Group (“Ease of Doing
Business” rank (Out of 178)      
 Cultural Environment

• Language (‘Come alive with Pepsi’ in German

‘Come out of the grave’, American Motor’s Matador
become killer in Spanish ).

• Cast and Religion (In Iran because of ‘Purdah’

system singer machines’ sales executive do approach
husbands not wives).

• Material Element- It is related to Economic,

financial and social infrastructure which is objected and
enjoyed by people. (Example:
German like beer while French like wine.)
 Cultural Environment
 International Business success is based on Cross-
cultural literacy.

 Cross Cultural literacy is based on :

1. Social Structure
 Religious and Ethical System
 Islam & economic Implication :
 Koran supports earning of legitimate profit through
trade and commerce.
 Those who hold property are assumed as trustee
rather than owner.
 Trustees are entitled to receive profits from
the property but should use it in a socially and
prudent manner.
 One economic principle of Islam prohibits the payment
or receipt of interest.

 It is also becoming a matter of law. In 1992, Pakistan’s

federal Shariat Court declared earning interest is illegal
and govt. should amend financial rule accordingly.
 Confucianism and its Economic Implication :
 This was the ethical system in China, it has weakened
since 1949 but still people follow this in China, Korea
and Japan.

 Three values are central to the Confucian system of

ethics:

 Loyalty, Reciprocal Obligation and honesty

2. Language

 Competitiveness of any country for entry of MNC

based on Language, if it has one spoken language,
English, it is more competitive.
 Competitiveness of MNC is based on Multi language.
some times blunder can be committed if local
language is not known by marketing department.
 Example :
 General Motor was troubled when they have
launched their Car-
with the name of “Chevrolet Nova”. Nova
means STAR but in Spanish NO VA means
“ It does not go” resultantly GM changed the
name of the car as “Caribe”.
 3. Education

 Formal Education is the medium through which individual learn

many of the language as well cultural norms which are taught
in school.

 Education is very important determinant of national compe-

titive advantage as well guiding the location choices of
international business. Because MNC give importance to the
location which has a pool of skilled and educated human
resources as well educated customers.

Example :
After second world war, Japan had almost nothing except for a
pool of skilled and educated human resources. Postwar
economic success of Japan based on education system.
Culture and Workplace
 Work Place culture is also determined by the culture
which affects operations of MNC’s in different countries.

 Greet Hofsteed had identified 5 dimensions related

workplace based on culture of that country.

 High Power Distance ( promote inequality in power

and wealth Vs. discourage inequality)
 Individualism Vs Collectivism ( less ties between
individual Vs. high ties between individual )
 Uncertainty avoidance ( readiness to take risk and
uncertainty)
 Masculinity Vs. Femininity (large Vs. little gender
differentiation in the work).
 Managerial Implications
 If culture varies because of differences in social
structure, language, education and economic
philosophy, three important implications for
International business are:

 Cross Culture Literacy:

 The biggest dangers confronting a company that goes
abroad for the first time of being ill-informed.

 To avoid mentioned problem international business

should consider employing local citizens to help in
Buusiness and should move from ethnocentric approach .
 Culture and Competitive Advantage
 In International business there is important connection
between culture and competitive advantage while making
choice of location for production facilities.

 Example :
 A and B two locations are given. Both are characterized by
low labour costs, same population size and at similar stage
of economic development.
 In country A the education system is under-developed, there
are six major linguistic groups.
 In country B, education system is well developed, there is
only one linguistic group.
 Which country is best investment site ?
 Culture and Business Ethics
 Generally ethical principles are universal but some are
culturally bound. If this is the case, International business
may be confronted with difficult ethical dilemmas.

Example :
 Chinese culture is based on “guanxi”, which is based on
networking and supported by the idea of gift giving.
 On the other hand western culture assumed it as bribery.

How to go ethically in this condition?

 There is thin line between corruption and legitimate gift
giving to support business transaction.

 Thomas Donaldson has suggested three guiding principles

to deal with ethical dilemma in international business:

1. Respect for human rights which determines the

absolute moral threshold for all business.

2. Respect for local tradition

3. The belief that context matters when deciding what is

right and what is wrong.
 Gift giving does not violate human rights and is
important in the context of some cultures like
China and Japan.
 Employing Child labour at less than minimum
wages would be unethical.
 Cultural Implication:
Failure of Wal-Mart
 The company had toiled for 8 years struggling
to make its South Korean and German stores
compete against strong, established local
retailers.

 In July 2006, Wal-Mart announced its

withdrawal of operations from Germany
because the firm was losing some $250
million per year on sales of $2.5 billion.
 Wal-Mart's 85 big-box stores were sold to
German company METRO AG, a much bigger
player with 550 stores in Germany. The sale
of Wal-Mart's 85 German stores resulted
in a $1-billion loss,

 Main problem was competitive prices from

national discounters as well as German
consumer rejection of American-style signa-
ture features such as stores outside of
town centers, employees required to
smile and heartily greet customers.
 On May 22, 2006, the American retailer
withdrew from the South Korean market

when it agreed to sell all 16 of its Wal-Mart

Korea stores to Shinsegae, South Korea's
top discount chain.

 The deal was for $882 million. Wal-Mart

Korea had lost $10 million on sales of some
$800 million in 2005. Wal-Mart's "warehouse-
style" environment proved unfriendly to the
needs of Korean shoppers. In particular,
housewives were dissatisfied with food
and beverage offerings.
Cultural Implication : Islamic Banking
 Koran clearly prohibits “interest”, which
is called “riba”.

 There are now 170 Islamic financial

institutions world-wide managing over
$150 billion in assets and making an
average return on capital of more than
16 percent.
 Two of the largest banks are entering
into the market – Citigroup and HSBC.

 Islamic Banking is based on two

different methods :

 Mudarabah : It is a profit sharing

scheme.
 When Islamic bank lends money to a
business, rather than charging interest on
loan, it takes a share in the profits that are
derived from that investment.
 Similarly, when a business (or individual)
deposits money at an Islamic bank in a
saving account, the deposit is treated as an
equity investment in whatever activity the
bank uses the capital for.

 Thus the depositors receives a share in the

profit from the bank’s investment.
 Second method is –

 Murabaha Contract :

 When a firm wishes to purcahse any equipm-

ent that costs $ 1,000, the firm tells the bank
after having negotiated the price with the
manufacture.

 Initially, bank buys the equipment for $1,000

and later on borrowers buy back from bank in
$ 1,100, it can be assumed as interest.
 Environment Threat and Opportunity
Profile (ETOP) for a Bicycle Company

 Envir. Nature Impact of each sector

Sect. Of Impact____________________
Economic Rising disposable income and
Living Standard

Market Organized sector a virtual oligo-

poly, buyers critical and better
informed, overall industry growth
not so encouraging, Growth rate
for niche segment like sports,
trekking and racing is high.
 Envir. Nature Impact of each sector
Sect. Of Impact

International India is second global expo-

rter after China, India’s share
is shrinking due to cheap
Chinese imports.

Regulatory Parts and components rese-

rved for small scale industry,
regulatory restrictions heavy,
it is thrust area for exports.
 Envir. Nature Impact of each sector
Sect. Of Impact

Social Environment and health friendly

transportation. Wide usage for
physical fitness equipment .

Supplier Mostly ancillaries and associated

companies in small scale sector
supply parts and components,
rising steel prices, increasing use
of aluminum
 Envir. Nature Impact of each sector
Sect. Of Impact

Technological Technological upgradation

of industry in progress,
import of machinery is
simple, product innovations
ongoing such as battery-
operated and lightweight
foldable cycles.