nme business environment lesson: international environment

Institute of Lifelong Learning, University of Delhi 1

NME

Business Environment Lesson: International Environment

Lesson Developer: Ms.Reena Talwar, College/Dept: Assistant Professor in Commerce, Bharati

College Lesson Reviewer: Prof. K.M.Upadhyay


Lesson: International Environment: Redefinition of Trade and Regional Associations

Table of Contents:

1: Learning Outcomes 2: Introduction

3: Concept of International Business Environment 3.1: Significance of International Business Environment

4: Analyzing various components of International Environment 5: Redefinition of Trade from GATT to WTO

6. Regional Associations in International Environment Summary

Exercises Glossary

References

1. Learning Outcomes:

After reading this lesson, you should be able to:

understand the concept of International Business Environment;

learn about nature and characteristics of International Environment;

appreciate the significance and relevance of the study of International Environment;

identify various components of analyzing International Environment;

gain insights on definition of trade from GATT to WTO;

appreciate the significance of Regional Associations.

2. Introduction:

International Business Environment is the study of business and environmental factors

across international borders. In today‟s world, economic boundaries have disappeared and

businesses operate not only in their domestic economy but are also operating in different

countries to meet the needs of customers around the world.

Globalization has enabled the business firms to conduct cross border transactions of goods

and services between two or more countries and when business activities are performed in

more than one country, it is termed as international business.


The functions, techniques and processes involved in international business are similar to

what a business firm does in the domestic business. However, the difference lies in the

environment within which these activities are performed and carried out. A business firm

can easily scan domestic environmental factors which have an influence on its functioning.

However, it is challenging for a business firm to monitor international environment which is

quite different from the domestic environment. Therefore, to be successful internationally, it

is important that global business firms understands the significance and various elements of

international environment and change their strategies according to the changes in

environmental factors present in different countries where the firms are operating. Long-

term survival of international business firms would largely depend upon how well these

environmental factors are understood and used to their advantage.

3. Concept of International Business Environment:

We need to first understand the meaning of “international business” and “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.

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. 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. These include political, legal,

social, cultural, technological and international environment

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.


3.1. 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. Market potential, however, depends upon the economic and political factors

prevailing in those countries. Demand for air conditioners, for example, would be higher in

those countries which are situated near hot zones and where the purchasing ability of

people is high.

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. For example, a firm chooses

exporting as the mode of entry when the product can be produced at a lower cost in the

home country as compared to the foreign country and there are not much legal restrictions

on the import of the product. However, if the product involves import bans or high

transportation costs, then it might choose to set up a wholly owned subsidiary abroad

provided the same is acceptable to foreign governments.

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.

A business firm cannot be successful by replicating the domestic decisions and practices in

other nations of the world. State true or false.

Answer: True


Justification: Since the environmental factors differ from nation to nation, a business firm

has to make changes in its practices and policies depending upon the environmental factors

of each country.

4. Analyzing components of International Environment:

International environment comprises of economic, socio-cultural, geographic, financial,

political, legal and technological forces.

Figure 1: Components of International Business Environment

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

International

Business Environment

Economic Political-Legal

Socio-cultural Ecological

Geographic


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.

The various components of international business environment can be explained as follows:

1. Economic Environment:

Economic environment is the most important component of international 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.

INTERACTIVE 1

2. Socio-cultural Environment:

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:


Figure 2: Elements of Cultural Environment

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.

Value Addition 1: Did You Know?

Problems of Language Translation Whenever a dictionary translation takes place of certain brand names or advertising

messages from one language to another, serious mistakes can occur.

For example:

The advertising message of Pepsi Co. “Come Alive with Pepsi” had to face serious problems

when it got translated into German language which meant “Come out of Grave”. The same

Cross Cultural

Aspects of

Business Firm

LANGUAGE

RELIGION

EDUCATION

AESTHETICS

VALUES &

ATTITUDES

CUSTOMS &

PRACTICES

SOCIAL

GROUPS


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:

thing in Chinese meant as “Pepsi brings your ancestors back from the grave.”

As an activity, think and explore some more examples of problems faced by business firms

during language translation of their advertising messages.


Impact of Religious Beliefs on Business Specific beliefs pertaining to various religions can impact business activities adversely and

can even lead to prohibition of sale of certain products in a foreign country.

For example:

1. McDonald‟s had to restrict selling beef products in India because it is against the religious

sentiments of Hindus.

2. Israeli airline company prohibited from flying on Saturday, which is the holy day in

Judaism.

3. In most of the Muslim countries, Friday is not included in workdays as it is a day of

worship.

As an activity, list down two more examples of impact of religious beliefs on business

activities.


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. For example, colors have different meanings for different people. In Asia, the

luckiest color considered is red; however, it is a color of mourning in South Africa. Symbols

also carry different meanings and are considered as a powerful communicator. For example,

for Japanese and Chinese, symbol 4 signifies death. Number 7 is considered good luck for

people in US whereas it signifies bad luck in Singapore and Kenya. 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. For example, people usually do not

prefer change and tend to avoid risk. However, people in US accept change easily and are

more risk taking in nature. 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. For example, shaking hands or gifting even number of flowers is not considered

good in Russia. Another example is of Americans who are considered as highly achievement

driven and take business decisions with great speed. On the other hand, people in Japan are

quite slow in taking decisions. 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. Family can be of different types – nuclear family, single-parent family or

extended family. While in US, nuclear family is quite common; in China and India, joint


family system is more prevalent. 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.

Research carried out by international organizations like United Nations, World Bank helps a

business firm in determining the economic viability of a country before entering into such

market for international business. State true or false.

Answer: True

Justification: 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.

3. Political-Legal Environment:

Value Addition 3: Surf and Learn

Influence of Cultural Factors on International Business Culture is the way people live their lives and do the things. Culture can be of a country

(national culture), a community (sub-culture) or an organization (corporate culture). A

person is not born with a culture; rather it includes all that we have learned from our

values, norms, customs and traditions, beliefs, religions, rituals etc.

Cultural values vary between nations and even within nations. A business manager should

be aware of these cultural differences before planning to introduce a new product or service

overseas.

For example:” In 2004, China banned a Nike television commercial showing U.S. basketball

star LeBron James in a battle with animated cartoon kung fu masters and two dragons,

because it was argued that the ad insults Chinese national dignity.”

Click on the link below to know more about the influence of various cultural factors on

international business.

Source:http://www.marketingteacher.com/international-marketing-and-culture

http://www.marketingteacher.com/international-marketing-and-culture


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:

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. 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, 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.


Impact of Political and Legal Factors on International Business It is imperative for a global business firm to understand and abide by the government rules

and regulations of the countries in which they operate.

Click on the link below to analyze the impact of political and legal factors on international

business.

Source: http://catalog.flatworldknowledge.com/bookhub/3158?e=fwk-168388-ch05_s02

http://catalog.flatworldknowledge.com/bookhub/3158?e=fwk-168388-ch05_s02




4. 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. Germany, for example, has the strictest

environmental legislations in the world. 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.

5. 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 housing, clothing, food and entertainment 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


Best Countries to do Business as per Business Environment Ranking

Index (BERI) 2014 Assessment of political environment and related risk is a major concern for companies

entering international business because governments shape and influence their national

economies. BERI evaluates and ranks countries on the basis of the extent of ease of doing

business.

As per the Economist Intelligence Unit‟s latest Business Environment Rankings, developed

economies in North America, Western Europe and Asia are the best places to do business;

Singapore being the world‟s most investor-friendly location.

Click on the link below to know more about the BERI index of various countries.

Source: http://www.iberglobal.com/files/business_climate_eiu.pdf

Value Addition 6: Case Study

Food Items Impacting International Business Environment

http://www.iberglobal.com/files/business_climate_eiu.pdf


It is not significant for international marketers to be aware of cross-cultural differences

amongst nations while creating advertising appeals and messages for their products. State

true or false.

Answer: False

Justification: It is very important for international marketers to be aware of cross-cultural

differences while creating advertising appeals and messages for their products so as to

avoid any major blunders. For example, colors have different meanings for different people.

In Asia, the luckiest color considered is red; however, it is a color of mourning in South

Africa. Symbols also carry different meanings and are considered as a powerful

communicator.

Cultural taboos affect consumption of goods and therefore business of such goods.

Governments and societies ban and promote the same food items. In Vietnam, Korea and

some other Asian countries dog meat is a delicacy on the food menu. In many countries

dog is a pet and consumption of dog- meet is hated.

A cultural threat is posed by tomato ketchup for French cuisine and so it is banned in

France. Because it is fortified with vitamins, marmite is banned in Denmark. European

Union bans Jelly sweet as it presents a choking hazard through its thickening agents used in

coating, elsewhere this is freely available and consumed. The USA has banned haggis which

is a delicacy in Scotland. Because its shape resembles Christian symbols, an extremist

group has banned Samosa in Somalia.

People have started disliking oversized, obese vegetables due to use of harmful fertilizers

and chemicals; there is growing demand for organically grown food articles even at high

prices. In the USA, some states ban consumption of goose liver while other states have no

restriction on its business. In order to keep the city neat and clean Singapore has banned

chewing gum.

Based on the above case study, identify political –legal and socio-cultural factors influencing

international business environment and possible impact on business of some multinational

companies conducting related business.


5. Redefinition of Trade from GATT to WTO:

The international business environment of today has become far more complex and inter-

related than in the past. It is greatly influenced by a number of international institutions like

World Trade Organization (WTO) that facilitate international business governance.

International trade and business amongst nations would have been difficult without their

presence.

GATT

The General Agreement on Tariffs and Trade (GATT) was formed in 1948 with an objective

to liberalize international trade.

The Bretton Woods Conference of 1944 had recommended the formation of an International

Trade Organization (ITO). The same conference had also recommended the establishment

of IMF and World Bank. The IMF and World Bank were formed in 1946. However, the ITO

charter never came into existence. Instead, the GATT came into being in 1948 which

became the framework for international trading system. Since then, the rules and principles

of GATT agreement facilitated the international trading system.

Following were the main objectives of GATT:

1. To raise standard of living.

2. To ensure full employment , steady growth of real income and effective demand

3. To develop effective utilization of resources of the world.

4. To ensure expansion in international trade.

The countries that adhered to the GATT agreement had to follow its rules and conventions

which were:

1. Any changes in the tariff or other commercial policy instruments of one member country

require prior consultation from other parties to the agreement.

2. All the member nations that adhere to GATT must work towards facilitating international

trade amongst themselves through reduction of tariffs and removal of other barriers in

trade.

To ensure that these objectives were achieved, GATT adopted the following principles:

1. Non-discrimination:

The principle of non-discrimination signifies that one member country shall not discriminate

with other member nations in the process of international trade. It requires member nations

to apply the principle of most favored nation (MFN) rule. The MFN rule implies that there


should be no discrimination between a product of one nation and similar product made in

another nation.

2. Prohibition of Quantitative Restrictions:

Another principle of GATT was to prohibit quantitative restrictions on trade to the minimum.

However, countries that faced balance of payment difficulties and developing countries were

granted an exception to this prohibition.

3. Consultation:

One of the major objectives of GATT was the formation of a forum to resolve disagreements

through consultation. Till now, eight rounds of trade negotiations have been held under the

GATT. The Uruguay Round, the latest one, was concluded after seven years of trade

negotiations.

GATT and WTO

The GATT was converted into a formal international organization named as World Trade

Organization (WTO) with effect from January, 1995. WTO framework now encompasses

GATT and all the results of the Uruguay round.

In the previous system, there were two GATTs: (i) GATT agreement – between the member

nations which set out rules governing international trade; (ii) GATT organization - an

international forum formed to facilitate discussions and resolve disagreements. With the

establishment of WTO, GATT the organization ceased to exist. However, the GATT

agreement with certain amendments continues to exist under WTO umbrella along with two

new agreements i.e. General Agreement on Trade in Services (GATS) and General

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs).

“The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is

an international agreement administered by the World Trade Organization (WTO) that sets

down the minimum standards for many forms of intellectual property (IP) regulation as

applied to nationals of other WTO Members.”

The following table explains the difference between GATT and WTO.

Table 1: Difference between GATT and WTO

GATT WTO

GATT was adhoc, provisional and political in

nature

WTO is permanent and legal in nature

GATT rules were restricted to trade in

goods only.

WTO rules are extended to trade in services

and protection of intellectual property rights

http://en.wikipedia.org/wiki/International_agreement

http://en.wikipedia.org/wiki/World_Trade_Organization

http://en.wikipedia.org/wiki/Intellectual_property


GATT system allowed existing domestic

legislation to continue

WTO does not allow domestic legislation

GATT was a weak organization, less

powerful with non-binding dispute

settlement

WTO is more powerful than GATT and has

binding dispute settlement mechanism.

The decision making at GATT was flexible

and there were fewer countries with less

complex problems

Decision-making at WTO is more

complicated than at GATT as there are many

countries in action

WTO was formed in 1995 as a replacement for GATT with the major objective of liberalizing

international trade. It had a permanent structure as compared to GATT and the scope of

WTO was enlarged from monitoring of trade in goods to trade in services as well as trade

related aspects of intellectual property rights.

WTO was formed with the following major functions:

1. To facilitate and administer various trade agreements among the member nations.

2. To provide a forum for negotiations among its members on trade-related policies.

3. To administer the „Trade Review Mechanism‟.

4. To cooperate with other international organizations like IMF and IBRD to ensure

international cooperation.

5. To work towards reduction in import duties and elimination of quantitative and other

trade barriers.

WTO has been able to achieve its objectives of trade liberalization and elimination of

discrimination over the last so many years. Almost all the countries of the world have joined

WTO and follow its rules and principles. It has been successful in promoting peace among

the nations and disputes are being solved in a more efficient manner. Thus, WTO has

certainly helped member nations on various fronts and has done a commendable job since

its formation.

A business firm can operate in a foreign country only as per the rules and policies of

government of their country. State true or false.

Answer: True


Justification: The government of a nation decides the manner in which a foreign firm can

operate in their country and therefore, a business firm can operate in a foreign country only

as per the rules and regulations framed by the government of that country.

6. 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. 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.


Things that WTO Can do…

The WTO is a powerful organization that is run by its member nations. It provides a forum

for member nations to negotiate on various matters and settle trade disputes.

The various things that WTO can achieve are:

Help in cutting costs and improve living standards

Forum for settlement of disputes and reduction in tensions amongst nations

Help in economic growth and development

Promote good governance

Help weaker nations to develop and grow

Promote peace and stability

Work towards environment and health.

Learn more about WTO, its objectives, membership and decision-making by clicking on the

website given below.

Source: www.wto.org

http://www.wto.org/


Table 2: Economic Benefits of Regionalism

Leads to economies of scale

Provides opportunities for deeper integration

Leads to enhanced attractiveness to foreign investors

Domestic manufacturers gets exposed to foreign competition

Helps to attain concessions that are not available

Following are few examples of regional associations:

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.

The two World Wars of 1914-18 and 1939-45 created panic and instability amongst the

west European countries. Therefore, various policymakers concluded that in order to have

peace and political stability, West European integration was required. The EU was, thus,

formed as a political project to encourage economic cooperation among member nations

and to avoid war amongst them. The formation of EU has led to abolition of trade barriers,

adoption of a common currency and has improved the living standards of member

countries.

EFTA (European Free Trade Association) is another example of regional trade

association in Europe. Its members are Iceland, Liechtenstein, Norway and Switzerland.

The North American Free Trade Agreement (NAFTA) was formed on Januray1,

1994 between United States of America, Canada and Mexico. NAFTA led to creation of a free

trade area between two richest countries (US and Canada) and an underdeveloped country

(Mexico).

The important objectives of this agreement include:

Elimination of trade barriers and investment between the three countries.

Protection of intellectual property rights

Majority of the restrictions on foreign direct investment and portfolio investment to be

removed.

Establishment of a dispute settlement system.


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.

ASEAN is a political and economic association of ten countries now which are located in

Southeast Asia and the objectives of ASEAN include:

Promoting economic growth among member countries

Ensuring regional peace and stability

Ensuring social progress.

The other example of regional association in Asia Pacific region is of APEC (Asia-

Pacific Economic Cooperation). APEC 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. APEC has helped in reducing tariffs and other

trade barriers among the member countries and has played a significant role in increasing

exports.

Apart from APEC, EFTA, the EU, ASEAN and NAFTA, there are nearly 30 active or inactive

regional trading arrangements among nations. These include the African Economic

Community, the Andean Community (CAN), the Arab Maghreb Union, , the Caribbean

Community and Common Market (Caricom), the Central American Common Market (CACM),

the Central European Free Trade Area, the Common Market of the South (Mercosur), the

Common Market for Eastern and Southern Africa, and the Gulf Cooperation Council.


Case Studies on International Business Environment Click on the link below to read various case studies on International business environment

and its significance for business firms.

Source: http://www.wiwi.uni-siegen.de/wiwi/vwl-

tpa/internationales/kursmaterialien_von_gastdozenten/ditter/010-ibe-case_studies.pdf

Regional Economic Cooperation has gained importance in today‟s international environment.

State true or false.

Answer: True

http://www.britannica.com/EBchecked/topic/744592/Andean-Community

http://www.britannica.com/EBchecked/topic/95814/Caribbean-Community-CARICOM



http://www.britannica.com/EBchecked/topic/102239/Central-American-Common-Market-CACM

http://www.wiwi.uni-siegen.de/wiwi/vwl-tpa/internationales/kursmaterialien_von_gastdozenten/ditter/010-ibe-case_studies.pdf



Justification: 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.

Summary:

Concept: When business operations are carried out in more than one country apart

from the home nation, then it is termed as international business.

Features: International business environment comprises of both external and internal

factors which are dynamic in nature, create uncertainty, pose threats and opportunities

for global managers. International business marketers always try to reduce the

uncertainty by forecasting the future changes in environmental forces.

Components of International Business Environment: Economic, Socio-Cultural,

Political-Legal, Ecological and Geographic Environment.

Components of Socio-Cultural Environment: Language, religion, Education,

Aesthetics, Values and Attitudes, Customs and Practices, Social groups and Material

Culture.

Formation of GATT: The General Agreement on Tariffs and Trade (GATT) was formed

in 1948 with an objective to liberalize international trade.

Principles of GATT: Non-discrimination, prohibition of quantitative restrictions and

consultation.

WTO: The GATT was converted into a formal international organization named as World

Trade Organization (WTO) with effect from January, 1995. WTO framework now

encompasses GATT and all the results of the Uruguay round.

Regionalism: It helps two or more countries to economically unite into a region.

Forms of Regional cooperation: Regional cooperation amongst nations can be

through different forms like free trade area, customs union, common market, economic

union and political union.

Examples of Integration among countries: European Union (in Europe), NAFTA (in

North America), ASEAN and APEC (in Asia-Pacific region).

Exercises:

A. Objective Type Questions:

I. State True or False.

1. A business firm must monitor domestic environmental factors which have an influence

on its functioning.

2. An MNE is also referred as a multinational corporation (MNC) or transnational

corporation (TNC).


3. Macro environment consists of those individuals or groups which are very close to

business and with which the organizations comes into frequent contact in its business

activities.

4. The environment of all the countries is same.

5. Changes in environmental factors create uncertainty, threats and opportunities for all

business firms.

6. Socio-cultural factors are another important element of business environment that has a

considerable impact on business operations.

II. Fill in the Blanks:

1. _______________ has enabled the business firms to conduct cross border transactions

of goods and services between two or more countries.

2. When business operations are carried out in more than one country apart from the home

nation, then it is termed as ____________________.

3. Global marketers always try to reduce the ___________ by forecasting the future

changes in environmental forces.

4. _________ 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.

5. ________ refers to the tendency of an individual to behave in a particular manner

towards an object or event.

B. Short Answer Type Questions:

1. Define „International business environment‟.

2. What is the significance of international business environment?

3. Briefly explain the importance of socio-cultural factors on international business?

4. What were the main objectives of GATT?

5. Differentiate between GATT and WTO.

C. Long Answer Type Questions:

1. Explain the concept of international business environment. Why is the study of

international business environment significant for global business firms?

2. Explain in detail the various components of International Business Environment.

3. “Socio-cultural factors have a considerable influence on business operations especially in

international business”. Elucidate and explain with examples.

4. When was GATT formed? What were the objectives of GATT?

5. Why was WTO formed? What were its main functions?

6. Explain few examples of regional associations in international business.


(Answers to Objective Type Questions)

I. True and False:

1. True; 2. True; 3. False; 4. False; 5. True; 6.True.

Fill in the Blanks:

1. Globalization; 2. International business; 3.Uncertainty;

4. Aesthetics; 5. Attitude.

Glossary:

Domestic business: It refers to the business activities that are carried out within a

country.

Exporting: Exporting or Export refers to selling of goods or rendering of services

produced in the home country to other countries of the world.

Franchising: Franchising is a form of arrangement wherein one party provides rights to

another one to use its trademarks, trade names or certain processes for producing and

marketing a good or service.

Globalization: It refers to integration and interdependence of national market and

business worldwide.

Intellectual Property Rights: It refers to the legal rights provided to protect the

innovative creations of mind, for example, new inventions, artistic works, designs,

symbols etc. These rights include patents, copyright and trademarks.

International Business: It refers to conduct of business transactions in more than one

country.

Joint Venture: It refers to sharing of ownership interest and other working

arrangements between two (or more) companies (or other operating units), whether

belonging to the same country or to different countries.

Licensing: Licensing is a form of arrangement wherein one party (licensor) grants

permission to another (licensee) for use of intellectual property rights i.e. patents,

trademarks or technology.

Strategy: A strategy is an integrated and coordinated set of commitments and actions

designed to exploit core competencies and gain a competitive advantage.

Wholly-owned subsidiary: It is a subsidiary company of a parent firm wherein the

parent company owns 100% of the stock of the subsidiary firm.

References:

1. Work Cited:


Cherunilam Francis (2013): Business Environment – Text & Cases, Himalaya Publishing

House, New Delhi, India

Gupta C.B.(2013): Essentials of Business Environment, Sultan Chand & Sons, New Delhi,

India

Dhingra I.C. & Dhingra Nitin (2014): Concise Business Environment, Book Age

Publications, New Delhi

Hill Charles W.L. & Jain Arun K. (2009): International Business, Tata McGraw-Hill, New

Delhi.

Maheshwari Rajendra P. & Prakash Surya (2014): Fundamentals of International

Business, International Book House Pvt. Ltd., New Delhi.

2. Web Links:

http://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nations

http://www.apec.org/About-Us/About-APEC.aspx

http://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperation

http://www.wiwi.uni-siegen.de/wiwi/vwl-

tpa/internationales/kursmaterialien_von_gastdozenten/ditter/010-ibe-case_studies.pdf


www.wto.org

http://diplomatie.belgium.be/en/policy/european_union/european_institutions/actions_a

nd_realisations/


http://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nations

http://www.apec.org/About-Us/About-APEC.aspx

http://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperation




http://www.wto.org/

http://diplomatie.belgium.be/en/policy/european_union/european_institutions/actions_and_realisations/

http://diplomatie.belgium.be/en/policy/european_union/european_institutions/actions_and_realisations/


nme business environment lesson: international environment

Documents