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International Business Environment

Updated on :  

08 min read.

International business refers to trading services and goods in a worldwide market. It can also be recognised as the globalisation of trade. An International Business Environment (IBE) refers to the surroundings in which international companies carry on their businesses. It plays a critical role in the development and growth of a country.

An International Business Environment (IBE) involves different aspects like political risks, cultural differences, exchange risks, and legal and taxation issues. Thus, it is mandatory for the people at the managerial levels to work on factors comprising the international business environment as it is crucial for a country’s economy.

Forms of International Business Environment

  • Cross border trading (Import and export)
  • Franchising
  • Licensing
  • Joint venture
  • Foreign Direct Investment (FDI)

Types of International Business Environment

The various types or aspects of the international business environment are provided below.

Political Environment in International Business

The political environment means the political risk, the government’s relationship with a business, and the type of government in the country. Conducting business internationally implies dealing with different kinds of governments, levels of risk and relationships.

There are different types of political systems, such as one-party states, multi-party democracies, dictatorships (military and non-military) and constitutional monarchies. Thus, an organisation needs to take into account the following aspects while planning a business plan for the overseas location:

  • Political system of the business
  • Approach of the government towards business, i.e. facilitating or restrictive
  • Incentives and facilities offered by the government
  • Legal restrictions for licensing requirements and reservations to a specific sector like the private, public or small-scale sector
  • Restrictions on importing capital goods, technical know-how and raw materials
  • Restrictions on exporting services and products
  • Restrictions on distribution and pricing of goods
  • Required procedural formalities in setting the business

Economic Environment in International Business

The economic environment refers to the factors contributing to the country’s attractiveness to foreign businesses. It can differ from one nation to another. Better infrastructure, education, healthcare, technology, etc., are also often associated with high levels of economic development. The levels of economic activities combined with infrastructure, education, and the degree of government control affect the facets of doing a business.

Usually, countries are divided into three main economic categories, i.e. more industrialised or developed, less developed or third world, and the newly emerging or industrialising economies. There are significant variations within each economic category. Overall, the more developed countries are rich, the less developed are poor, and the newly industrialising are those moving from poor to rich. These distinctions are made based on the Gross Domestic Product per capita (GDP/capita). 

A business needs to recognise the economic environment to operate in international markets successfully. While analysing the economic environment, an organisation intending to work in a particular business sector should consider the following aspects:

  • Economic system to enter the business sector
  • Stage and pace of economic growth 
  • Level of national GDP and per capita income
  • Incidents of taxes, direct and indirect tax
  • Available infrastructure facilities and the difficulties 
  • Availability of components, raw materials and their cost 
  • Sources of financial resources and their costs
  • Availability of workforce, managerial and technical workers, their salary and wage structures

Technological Environment in International Business

The technological environment includes factors related to the machines and materials used in manufacturing services and goods. As organisations do not have control over the external environment, their success depends on how they will adapt to the external environment. A significant aspect of the international business environment is the level and acceptance of technological innovation in countries.

The last decade of the twentieth century saw significant advances in technology, and it is also continuing in the twenty-first century. Technology often gives organisations a competitive advantage. Hence, organisations compete to access the latest technology, and international organisations transfer technology to be globally competitive.

Due to the internet, it is easier even for a small business plan to have a global presence, which grows its exposure, market, and potential customer base. For political, economic and cultural reasons, some countries are more accepting of technological innovations, while others are less accepting. In analysing the technological environment, the organisations should consider the following aspects:

  • Level of technological developments in the country as a whole and specific business sector
  • Pace of technological changes and obsolescence
  • Sources of technology
  • Facilities and restrictions for technology transfer 
  • Time taken for the absorption of technology

Cultural Environment in International Business

The cultural environment is one of the crucial components of the international business environment. It is the most difficult to understand as the cultural environment is unseen. It has been described as a commonly held and shared body of general values and beliefs that determine what is right for one group, according to Kluckhohn and Strodtbeck.

National culture is defined as the body of general values and beliefs shared by a nation. Beliefs and values are usually formed by factors such as language, history, geographic location, religion, education and government. Thus, organisations begin a cultural analysis by understanding these factors. The well-known model is the one developed by Hofstede in 1980.

The model by Hofstede proposes four dimensions of cultural values, which are as follows:

  • Individualism – It is the degree to which a nation encourages and values individual decision making and action
  • Uncertainty avoidance – It is the degree to which a nation is willing to deal with and accept uncertainty
  • Power distance – It is the degree to which a nation sanctions and accepts differences in power
  • Masculinity – It is the degree of the gender gap in a society

Hofstede’s model of cultural values has been extensively used as it provides data for a wide array of countries. Many managers and academics found this model helpful in exploring management approaches appropriate in different cultures.

For example, in a country that is high on individualism, one expects individual tasks, goals and individual reward systems to be effective, while the reverse would be the case in a country that is low on individualism. While analysing cultural factors, the organisation should consider the following aspects:

  • Approaches to society towards business in specific and general areas
  • Influence of cultural, social, and religious factors on the acceptability of the product
  • Lifestyle of people and the products used by them
  • Level of acceptance and resistance to change
  • Demand for a specific product for a specific occasion
  • Values attached to particular products, i.e. possessive or the functional value of products
  • Consumption pattern of the buyers

Competitive Environment

The competitive environment differs from country to country. The political, economic, and cultural environmental factors help determine the degree and type of competition that exists in a country. The most likely sources of competition can be well understood for a domestic organisation, but it isn’t the case when an organisation moves to compete in a new environment.

Competition can come from various sources, such as it can come from the private or public sector, large or small organisations, domestic or global organisations and traditional or new competitors.

Benefits of the International Business Environment

  • It unites and brings countries together, making the world a big global village
  • It increases employment opportunities as it results in the exchange of information, ideas, capital across borders and services
  • There is equal growth in wealth, availability of goods and services and price stability
  • It brings a new environment of development, alliance, affluence, stability, modernisation, and technology across the globe

Disclaimer: The materials provided herein are solely for information purposes. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

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