business environment for global firms

8/3/2019 Business Environment for Global Firms

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Country Risk Analysis:Business Environment

for Global Firms


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Business Environment

Economic Environment;

Political Environment;

Legal and regulatory environment;

Cultural Environment;


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Economic Environment

Economic System :

Centrally Planned Economy : where dec-isions regarding production and distributionof goods is taken by a central authority.

Market Based Economy: The decision ofproduction and distribution is taken byindividual firms based on market demandand supply.


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Mixed Economic System:

In this case public and private sectorsexist side by side.

Whenever, a firm trades with any othercountry or whenever it tries to locate itsmanufacturing operations there, it takes

into account the existing economic sys-tem in the host country and accordinglyshapes the trade and foreign operationpolicies.


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Consumer Behaviour

It is based on :

Preference for Price/Quality of theproduct;

Propensity to save; (Rural areas wherepeople have high propensity to save),

Quality of People; (Educated) Existence of Social Security Scheme;


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Level of Income and Distribution

Distribution of low, medium, and high incomes.

Gross domestic product per capita.

In low income countries MNCs market ormanufacturing low priced goods.

However, MNCs would like to establish in a

low income country where 10% populationout of 500 million population capture 60%national income.


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Inflation

Inflation has negative and positive impact Whichis based on nature of activity. Such as,

High inflation has negative impact on salariedclass people whereby Purchasing power ofcustomer depends upon level of inflation. Higher

the inflation lower the real income and lower thedemand.


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It has negative impact on production of pro-

duct when cost of production increases bec-ause of high inflation.

Thus, when a multinational firm decides to setup manufacturing unit in a foreign country ithas to take into account the rate of inflation.


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Availability of Human andPhysical Resources:

Human Resources:

It is not possible for MNCs to transport theentire labour force from the home country.

Availability of skill manpower in host

country is must.


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Physical Resources:

Raw Material: availability of various inputsnecessary for the production. Example,vario -

us Indian firms have moved to Sri Lanka forproduction of rubber products and Nepal forproduction of herbal products.

Vocational theory of Foreign direct invest-ment is based on this concept.


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Network of Infrastructure

Availability and quality of infrast-ructure:

Rail traffic networks for distribution

capabilities;

Communication systems for marketing;

Energy (electrical and fuel) consumption;

In India lack of proper infrastructure is thereason for gap between approved FDI andactual inflow of FDI.


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Economic Policies

Monetary Policy : If restrictive or co-

ntractionary monetary policy (Rate ofinterest will be high) is implemented tostabiles the economy, it has negativeimpact on MNCs and business men

because now credit is available at highrate of interest.


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Fiscal Policy : If corporate taxes areat higher side it will be taken into

consideration as negative aspect byMNCs.

If host country carries high fiscal def-icit and budgetary deficit MNC willtake it as negative point. Because ithas negative impact on externalsector and monetary sector.


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Trade Policy :

Excise duties and import duties also

cause of concern for MNCs.

Industrial Policy :

If industrial policies are liberal forMNCs it attracts more foreigninvestment.

If these polices are restrictive foreigninvestment is also restricted.


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Strength of External Sector

MNCs are greatly interested in repat-riating profits to their parent company.

If it easier, MNCs will attract moretowards that country.

For liberal repatriation policy, situation

of balance of Payment should be strong.

Foreign exchange reserve should belarge in size.


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Level of Economic Integration


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Free Trade Area

Eliminates tariff andquota barriers amongmember countries.

Each country is free toset its own tariff andquota barriers against

nonmember countries.


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Customs Union Area

Tariff and quota barriers among membercountries are eliminated.

Member countries establish common

tariff and trade barriers againstnonmember countries.

.


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Common Market Area

No trade barriers among membernations.

No restriction on the movement oflabor, capital, or technology acrossborders.

Member countries establish common

tariff and trade barriers againstnonmember countries.


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Economic Union

Has all the characteristics of a

common market.Harmonizes taxation.

Harmonizes monetary policies.

Establishes a common currency.


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NAFTA

The North American Free TradeAgreement (NAFTA) created theworlds largest free market.

390 million U.S., Canadian, and Mexicanconsumers and a total output of $10trillion.


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Integration in Asia

Association of Southeast Asian

Nations (ASEAN)East Asia Economic Group

Asia-Pacific Economic Cooperation(APEC)

South Asian Association forRegional Cooperation (SAARC)


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Integration in Africa and theMiddle East

Economic Community of WestAfrican States (ECOWAS)

The African Union (AU)The Arab Maghreb Union

Gulf Cooperation Council (GCC)


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Political and Legal Environment

Firms usually prefer to conduct business in a

country with a stable government in condu-

cive business environment.

In the host country environment both political

and legal affects the international marketing

and business operations of a firm in various

ways.


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Resultantly, there is always some risk involved inaccount of differing political scenario, which isknown as Political Risk.

Political Risk :

It is the risk of loss in investment being made ina given country because of change in countryspolitical structure or policies. Such as:

Tax law, tariffs, and restriction in repatriationof profits.


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Currency Inconvertibility:

Sometimes the host government enacts law

prohibiting foreign companies from taking theirmoney out of the country or exchanging thehost country currency for any other currency.

This is a financial form of political risk.

The reasons are both economic and political.Economic factors are concerned mainly with

balance of payment problem. Example: The govt. of Nigeria imposed such

restrictions a couple of decade back in order toserve it economic and political objectives.


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Credit Risk Refusal to honor a financial contract with foreign

company or to honor foreign debt comes underthe form of political risk.

Conflict of Interest:

The interest of MNCs is normally different frominterest of the host country.

The MNCSs manifest in the maximization ofcorporate wealth;

The host country is evident in the welfare ofeconomy;


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Example :

Transfer of funds by MNCs may influence themoney supply which may cause deflation;

Similarly the payment of exorbitant amount ofroyalty and other such dues by subsidiary mayworsen the balance of payment;

It is not economic issue that are the source ofconflict but also non-economic such as nationalsecurity;


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Management of Political

Risk

MNCs can pursue a strategy of either avoi-

dance or insurance.

Avoidance : Screening out political unce-rtain countries.

In this case, measurement and analysis ofpolitical risk is useful.


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Insurance:

It is a strategy to shift the risk to other

parties. Insurance coverage can beobtained from a number of sources:

Private Insurance

Government Insurance


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Example

In 1993, Motorola won bid to install,operate and maintain cellular telephone

service in Nicaragua.

Nicaragua has a crumbling infrastructure

and a very poor land-line telephonesystem.

Motorolas cellular service was one of the

biggest private foreign investor.


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Example :

Overseas Private Investment Corpo-ration (OPIC), U.S. governmentagency, which is business oriented

agency whose purpose is to supportU.S. private investments. It receives nopublic funds.

OPIC provided $ 8 million in insuranceagainst political risk.


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Legal Environment

From an international business perspective

host countries may adopt a number of law

that affect a companys ability to market.

Such as :

Antidumping Law : It prohibitsbelow cost

sales of product. Licensing: In this case company has to hold

export and import license.


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Restriction on Genetic Modefied

Food: At this front governments increas-ingly devising new rules that affect trade in

genetically modified products. For example,

Australia introduced a mandatory standards

for food.

Tariffication: In thiscase, tariff on those

goods are high where govt. want to controlthe supply, such as, cigarettes and alcohol.


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Taxation :

This is very important legal issue for Internationalfirms which move from one country to other andadopts transfer pricing.

Example: if any firm is established in the countrywhere corporate tax rate is very high, firm adoptstransfer pricing in order to siphon-off the profit or

dividend before imposition of tax to the subsidiarywhich is located on tax heaven country. In this case

host country with high corporate tax has to faceloss.


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Corporate Governance andResponsibility:

In this system the decisions are made andinterests are represented properly for all

stake-holdrs. Key elements are :

Transparency of a firms operation;

Transparency in financial results;

Assurance of Stake-holder's Right;


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Safety, Environment and Labour Stand-ards: In this case entry of those foreign goods

which do not meet these standard are prohib-ited.

Employment of child labour is also unethicalissue as some developed countries.

Example : Japan has particularly strict health

standards which affect the import of Parma-

ceutical.

Sometime, Japanese government insists to conduct

its own test, which are time consuming and costly.


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Issue of Corruption

In western countries bribery is highly unethical. InU.S., there is a foreign Corrupt Practices Act whichprohibits companies from bribing any foreign official.

However, international manager must carefullydistinguish between reasonable ways of doingbusiness internationally by maintaining balance.

The problem for international marketers is how tomaintain consistency because some of the ethicalissues like, global warming and pollution but someissues do not have same standard rule in everycountry.


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Example:

In Brazil cutting down the rain forest may beacceptable to the Brazilian government but asper scientists and environmentalist it hasaffect on global warming and other climaticchanges.

China may use prison labour in producingproducts for export but U.S. law prohibits theimportation of such products.


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Issue of Consumer Protection

Generally, in developed countries a lot of co-nsumer protection activities take place. Butin developing countries, they are lacking.

Resultantly,a lot of Multinational companiessell harmful product in emerging economies.

Example: Companies market a number ofmedicinal products that are banned in theirhome country. They should care for socialresponsibility wherever they operate.


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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 Licenses 134 175 177 107 24

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)
http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/DealingLicenses/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/RegisteringProperty/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/GettingCredit/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/TradingAcrossBorders/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/TradingAcrossBorders/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/GettingCredit/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/RegisteringProperty/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/DealingLicenses/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=89


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Cultural Environment

International Business success is based onCross-cultural literacy.

Cross Cultural literacy is based on :

1. Social Structure

Religious and Ethical System Islam & economic Implication :

Koran supports earning of legitimate profitthrough 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 andprudent manner.


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One economic principle of Islam prohibitsthe payment or receipt of interest.

It is also becoming a matter of law. In1992, Pakistans federal Shariat Courtdeclared earning interest is illegal andGovt. should amend financialrule accordingly.


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Cultural Implication : IslamicBanking

Koran clearly prohibits interest,which is called riba.

There are now 170 Islamic financialinstitutions world-wide managingover $150 billion in assets and

making an average return on capitalof more than

16 percent.


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Two of the largest banks are enteringinto the market Citigroup and

HSBC. Islamic Banking is based on two

different methods :

Mudarabah : It is a profit sharingscheme.

When Islamic bank lends money to a

business, rather than charging intereston loan, it takes a share in the profitsthat are derived from that investment.


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Similarly, when a business (or individual)deposits money at an Islamic bank in asaving account, the deposit is treated as anequity investment in whatever activity the

bank uses the capital for.

Thus the depositors receives a share in theprofit from the banks investment.


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Second method is

MurabahaContract :

When a firm wishes to purcahse any equipm-

ent that costs $ 1,000, the firm tells the bankafter having negotiated the price with themanufacture.

Initially, bank buys the equipment for $1,000and later on borrowers buy back from bank in$ 1,100, it can be assumed as interest.


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Confucianism and its EconomicImplication :

This was the ethical system in China, it hasweakened since 1949 but still people follow thisin China, Korea and Japan.

Three values are central to the Confuciansystem of ethics:

Loyalty, Reciprocal Obligation andhonesty


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2. Language

Competitiveness of any country forentry of MNC based on Language, if ithas one spoken language, English, it is

more competitive.

However, Competitiveness of MNC isbased more on Multi language . sometimes blunder can be committed if locallanguage is not known by marketingdepartment.


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Example

General Motor was troubled when theyhave launched their Car-

with the name of Chevrolet Nova.

Nova means STAR but in Spanish NOVA means It does not go resultantlyGM changed the name of the car asCaribe.

Come alive with Pepsiin GermanCome out of the grave, AmericanMotors Matador become killer inSpanish


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Why Cultural DiversityExists?

A Dutch scientist, Greet Hofstede hasdeveloped a model to explain the culturaldiversity.

His model is based on a study conductedfor 1,17,000 employees in 88 countries.

Greet Hofstede has explained thatcultural diversity among nations has fourdimensions.


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Dimensions of Cultural Diversity

1.Individualism /Collectivism: In individualistic countries (France,

Germany, South Africa, Canada, etc.),

people are expected to look out forthemselves.

Typical values are personal time,freedom, and challenge.

C ti


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Continue

In collectivist cultures (India, Japan,Mexico, Korea, Greece) individuals are

bounded through strong personal andprotective ties based on loyalty to thegroup during ones lifetime.

Values and the use of skills.

Continue


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2. Femininity versus Masculinity

Greet Hofstedes study suggested that mens goalswere significantly different from womens goals.

Feminine values are more important in countries likeSweden, France, Israel, Denmark and Indonesia.

Femininity tend to value a good working relationship,

security and avoiding conflicts.


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Masculinity as a situation in which success,money and material things dominates thesociety.

Masculine index is high in India, US, Japan,

Mexico, Hong Kong, Italy, Great Britain

People tend to value assertiveness and mat-

erialism. Promote competition, meritocracy,decisiveness and strong leadership.

3 P di t


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3. Power distance

Power distance index measures how subor-dinates respond to power and authority.

In high-power distance index countries

(India, South Korea, Mexico and Africancountries), subordinates tend to be afraid oftheir bosses.

In low-power distance countries (the US,Britain, most of the rest of Europe), subor-dinates are more likely to challenge bossesand bosses tend to use a consultativemanagement style.


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4. Uncertainty avoidance

When uncertainty avoidance is strong, aculture tends to perceive unknown situationsas threatening so that people tend to avoidthem. Examples include South Korea, Japan,

and Latin America.

In countries where uncertainty avoidance isweak (the US; the Netherlands; Singapore;

Hong Kong, Britain) people feel less threa-tened by unknown situations. Therefore, theytend to be more open to innovations, and risk,etc.


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Making Culture Work forMarketing Success

Adapt Products and process to LocalMarket :

Example : 3M is a United States basedcompany in diversified area of home cleaningproduct, electronic and office product.

Before starting of marketing of home clean-ing product (scotchbrite (cleaning pad)


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they came to know that traditionally floors

are scrubbed with the help of The rough

shells of coconuts.

3M responded by making its cleaning pads

brown and shaping them like foot. Employ locals to gain cultural knowledge

As a matter of fact, of the 34,000 3Memployees outside of the United States,

only 1 percent are from home country.

C lt l I li ti


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Cultural Implication:Failure of Wal-Mart

The company had toiled for 8 yearsstruggling to make its South Korean andGerman stores compete against strong,

established local retailers.

In July 2006, Wal-Mart announced its

withdrawal of operations from Germanybecause the firm was losing some $250million per year on sales of $2.5 billion.


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Wal-Mart's 85 big-box stores were sold toGerman company METRO AG, a much

bigger player with 550 stores in Germany.The sale of Wal-Mart's 85 German storesresulted in a $1-billion loss,

Main problem was competitive pricesfrom national discounters as well asGerman consumer rejection of American-

style signature features such as storesoutside of town centers, employeesrequired to smile and heartily greetcustomers.

O M 22 2006 th A i t il


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On May 22, 2006, the American retailerwithdrew from the South Korean market

when it agreed to sell all 16 of its Wal-MartKorea stores to Shinsegae, South Korea'stop discount chain.

The deal was for $882 million. Wal-MartKorea had lost $10 million on sales of some$800 million in 2005. Wal-Mart's "warehouse-

style" environment proved unfriendly to theneeds of Korean shoppers. In particular,housewives were dissatisfied with food

and beverage offerings.

Managerial Implications


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Managerial Implications

If culture varies because of differences in social

structure, language, education and economicphilosophy, three important implications forInternational business are:

Cross Culture Literacy:

The biggest dangers confronting a company thatgoes abroad for the first time of being ill-informed

To avoid mentioned problem international businessshould consider employing local citizens to help inBusiness and should move from ethnocentric

approach .


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Culture and Competitive Advantage

In International business there is importantconnection between culture and competitiveadvantage while making choice of location forproduction facilities.

Example :A and B two locations are given. Both are characterized bylow labour costs, same population size and at similar stage ofeconomic development.

In country A the education system is under-developed, thereare six major linguistic groups.In country B, education system is well developed, there is onlyone linguistic group.

Which country is best investment site?


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Culture and Business Ethics

Generally ethical principles are universal but some areculturally bound. If this is the case, International businessmay be confronted with difficult ethical dilemmas.

Example :

Chinese culture is based on guanxi, which is based onnetworkingandsupported by the idea of gift giving.

On the other hand western culture assumed it as bribery.

How to go ethically in this condition?


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There is thin line between corruption and legitimate giftgiving to support business transaction.

Thomas Donaldson has suggested three guiding principles to dealwith ethical dilemma in international business:

1. Respect for human rights which determines the absolutemoral threshold for all business.

2. Respect for local tradition

3. The belief that context matters when deciding what is rightand what is wrong.

Gift giving does not violate human rights and is importantin the context of some cultures like China and Japan.

Employing Child labour at less than minimum wages wouldbe unethical.


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Environment Threat and OpportunityProfile (ETOP) for a Bicycle Company

Envir. Nature Status of each sector

Sect. Of Impact____________________

Economic Rising disposable income and

Living Standard

Market Organized sector a virtual oligo-

poly, buyers critical and betterinformed, overall industry growth

not so encouraging, Growth ratefor niche segment like sports,trekking and racing is high.


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Envir. Nature Impact of each sector

Sect. Of Impact

International India is second global expo-rter after China, Indias 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


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Envir. Nature Impact of each sectorSect. Of Impact

Social Environment and health friendlytransportation. Wide usage forphysical fitness equipment .

Supplier Mostly ancillaries and associatedcompanies in small scale sectorsupply parts and components,

rising steel prices, increasing useof aluminum

i f h


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Envir. Nature Impact of each sector

Sect. Of Impact

Technological Technological upgradation

of industry in progress,import of machinery is

simple, product innovationsongoing such as battery-operated and lightweightfoldable cycles.

business environment for global firms

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