MBA book international business environment

International Business Environment

MBA Second Year
(International Business)

School of Distance Education

Bharathiar University, Coimbatore - 641 046


Authors: B. Murali Krishna and V V Vara Prasad
Copyright © 2008, Bharathiar University
All Rights Reserved
Produced and Printed
by
EXCEL BOOKS PRIVATE LIMITED
A-45, Naraina, Phase-I,
New Delhi-110028
for
SCHOOL OF DISTANCE EDUCATION
Bharathiar University
Coimbatore-641046


CONTENTS

Page No.
UNIT I
Lesson 1

International Business

7

Lesson 2

Macro Environment and Micro Environment

21

UNIT II
Lesson 3

Social and Cultural Environment

35

Lesson 4

Comparison of Various Business Cultures

45

UNIT III
Lesson 5

World Financial Environment

57

Lesson 6

Convertibility, Exchange Restrictions and International Monetary System

66

UNIT IV
Lesson 7

Legal Environment International Law in International Marketing

83

Lesson 8

International Standards Organisations

99
UNIT V

Lesson 9

Environment Protection Law

121

Lesson 10

International Policy on Environment

137

Model Question Paper

149


INTERNATIONAL BUSINESS ENVIRONMENT
SYLLABUS
UNIT I
Introduction - Modes of international Business - External Influence - Internationalization
Process - Macro environment and Micro environment - Trade and Investments.
UNIT II
Social and cultural environment: Culture-Language-Aesthestics-Colour, Design, Music,
brand names, education, religion-attitude and values. Comparison of various business
cultures- Western, Eastern, Middle East countries culture. Business mannerism.
UNIT III
World Financial Environment - Working of Foreign Exchange Markets - Convertibility Exchange Restrictions- international Monetary System.
UNIT IV
Legal environmental International law in international marketing, IMF & GATT International trade agreements. Trade preference UNCIAD EEC, Customs union International Standards Organization (ISO), Regional grouping and International law,
SAARC, EEC - European Free Trade Associations, (EFTA) Latin American Free Trade
Association (LAFTA) etc.
UNIT V
Law of environment-Environmental protection - International policy on natures-land,
forest, water.


5
International Business

UNIT 1

UNIT I


6
International Business Environment


LESSON

1
INTERNATIONAL BUSINESS
CONTENTS
1.0
1.1
1.2

1.3

1.4
1.5
1.6
1.7
1.8
1.9

Aims and Objectives
Introduction
Modes of International Business
1.2.1

Exporting
1.2.2
Licensing
1.2.3
Franchising
1.2.4
Special Modes
1.2.5
Foreign Direct Investment without Alliances
1.2.6
Foreign Direct Investment with Strategic Alliance
External Influence in International Trade
1.3.1
Technology
1.3.2
Economy
1.3.3
Social Environment
1.3.4
Physical Factors
1.3.5
Legal Environment
1.3.6
Political Environment
1.3.7
Government
1.3.8
International Trade
Internationalization Process
Let us Sum up

Lesson End Activity
Keywords
Questions for Discussion
Suggested Readings

1.0 AIMS AND OBJECTIVES
After studying this lesson, you should be able to:
z

Know the concept of international business

z

Study the process of international trade

z

Know the factors influence to international trade

1.1 INTRODUCTION
We have studied the introduction to international business in the first lesson. Now, we
shift our focus from macro aspects to micro aspects of international business. Global
company has to formulate strategies based on its missions, objectives and goals.
Strategy formulation is a must for a global company to make decisions regarding the
markets to enter, product/service range to introduce in the foreign countries and the
like. Further, the severe and intensified competition in the global market makes the
strategy formulation a challenging task.

7
International Business

8
International Business Environment

The fundamental basis for strategy formulation is the environmental analysis.
Environment provides the opportunities to the business to produce and sell a particular
product. For example, the present day business environment provides wide
opportunity for internet. Similarly, environment in India provides opportunity for
production and selling of fuel saving motor bicycles. European climatic condition
provides the opportunity for woolen and leather garments.
Environment, sometimes poses threats and challenges to the business. Business should
enhance its strengths in order to face the challenges posed by the environment. For
example, china dumped steel at cheap prices in the Indian market and posed a threat to
the Indian steel industry particularly to SAIL and TISCO. Consequently, Indian steel
industry improved its technology in order to meet the challenges.
Study of environment helps the business to formulate strategies and run the business
efficiently in the competitive global market. We understand the environment has
significant and crucial impact on the business. Thus, business depends on
environmental dynamics. Now, we study the meaning of business environment.

1.2 MODES OF INTERNATIONAL BUSINESS
1.2.1 Exporting
Exporting is the simplest and widely used mode of entering foreign markets.
The advantages of exporting include:
Need for Limited Finance: If the company selects a company in the host country to
distribute, the company can enter international market with no or less financial
resources, alternatively, if the company chooses to distribute on its own, it needs to
invest financial resources, but this amount would be quite less compared to that would
be necessary under other modes.

Less Risk: Exporting involves less risk as the company understands the culture,
customer and the market of the host country gradually. The company can enter the
host country on a full scale, if the product is accepted by the host country’s market.
British company selected this mode to export jams to Japan.
Motivation for Exporting: Motivations for exporting are proactive and reactive.
Proactive motivations are opportunities available in the host country. San Antonio’s
pace, Inc., producing Tex-Mex food products exported its products to Mexico as
Mexicans relished the taste of its products.
Reactive motivations are those efforts taken by the company to export the product to a
foreign due to the decline in demand for its product in the home country.
Toto Ltd., of Japan started exporting its products, i.e., Porcelain bathroom fixtures to
China when the Japanese economy started slowing down in 1990s.
Forms of Exporting
Forms of exporting include: indirect exporting, direct exporting and intra corporate
transfers.
1. Indirect Exporting: Indirect exporting is exporting the products either in their
original form or in the modified form to a foreign country through another
domestic company. Various publishers in India including Himalaya Publishing
House sell their products, i.e., books to UBS publishers of India, which in turn
exports these books to various foreign countries.
2. Direct Exporting: Direct exporting is selling the products in a foreign country
directly through its distribution arrangements or through a host country’s
company. Baskin Robbins initially exported its ice-cream to Russia in 190 and


later opened 74 outlets with Russian partners. Finally in 1995 it established its ice
ream plant in Moscow.
3. Intra corporate Transfers: Inter corporate transfers are selling of products by a
company to its affiliated company in host country (another country). Selling of
products by Hindustan Lever in India to Unilever in USA. This transaction is

treated as exports in India and imports in USA.
Factors to be considered: The company, while exporting, should consider the
following factors:
z

Government policies like export policies, import policies, export financing,
foreign exchange etc.

z

Marketing factors like image, distribution net works, responsiveness to the
customer, customer awareness and customer preferences.

z

Logistical consideration: These factors include physical distribution costs,
warehousing cost, packaging, transporting, inventory carrying costs etc.

z

Distribution Issue: These include own distribution networks, networks of host
country’s companies. Japanese’s companies like Sony, Minolta and Hitachi rely
on the distribution networks of their subsidiaries in the host country.

Export Intermediaries: Export intermediaries perform a variety of functions and
enable the small companies to export their goods to foreign countries. Their functions
include: handling transportation, documentation, taking ownership of foreign-bound
goods, assuming total responsibility for exporting and financing. Types of export
intermediaries include:
z

Export management companies act as export department of the exporting firm (its
client). These companies act as commission agents for exports or they take title to
the goods.

z

Co-operative society: The domestic companies desire to export the goods form a
cooperative society, which undertakes the exporting operations of its members.

z

International Trading Company: This company is engaged in directly exporting
and importing. It buys the goods from the domestic companies and exports.
Therefore, the companies can export their goods by selling them to the
international trading company.

z

Manufacture’s Agents: They work on a commission basis. They solicit domestic
orders for foreign manufacturers.

z

Manufacture’s Export Agents: These agents also work on a commission basis.
They sell the domestic manufacturers’ products in the foreign markets and act as
their foreign sales department.

z

Export and Import Brokers: The brokers bridge the gap between exporters and
importers and bring these two parties together.

z

Freight Forwarders: Freight forwarders help the domestic manufactures in
exporting their goods by performing various functions like physical transportation
of goods, arranging customs documents and arranging transportation services.

1.2.2 Licensing
International Licensing
In this mode of entry, the domestic manufacturer leases the right to use its intellectual
property, i.e., technology, work methods, patents, copyright, brand names, trade
market etc, to a manufacturer in a foreign country for a fee. Here the manufacturer in

9
International Business


10
International Business Environment

the domestic country is called ‘licensor’ and the manufacturer in the foreign country is
called ‘licensee.’ The process of the licensing is as shown in the figure 1.1.
Licensing is popular method of entering foreign markets. The cost of entering foreign
markets through this mode is less costly. The domestic company need not invest any
capital as it has already developed intellectual property. As such, the domestic
company earns revenue without additional investment. Hence, most of the companies
prefer this mode of foreign entry.
Licensor

Licensor

Leases the Right to use the Intellectual

Receives Royalty Money

Property

Uses the Intellectual

Pays Royalty

Property to Produce

To the Licensor for

Products for Sales in his Country

Using Intellectual Property

Licensee

Licensee

Figure 1.1

The domestic company can choose any international location and enjoy the
advantages without incurring any obligations and responsibilities of ownership,
managerial, investment etc. Kirin Brewery – Japan’s largest beer producer entered

Canada by granting license to Molson and British market by granting license to
Charles Wells Brewery.
Basic Issues in International Licensing
Companies should consider various factors in deciding negotiations. Each
international licensing is unique and has to be decided separately. However, there are
certain common factors, which affect most of the international licenses. They are:
specifying the agreement’s boundaries, determining the royalty, determining right,
privileges and constraints, defining dispute resolution methods, specifying the
duration of the contract. Now, we shall discuss these factors in detail.
z
Boundaries of the Agreements: The companies should clearly define the
boundaries of agreements. They determine which rights and privileges are being
onvey4d in the agreement.
Pepsi-Cola granted license to Heineken of Netherlands with exclusive rights of
producing and selling Pepsi-Cola in Netherlands. Under this agreement the
boundaries are (i) Heineken should not export Pepsi-Cola to any other country,
(ii) Pepsi supplies concentrated cola syrup and Heineken adds carbonated water to
produce beverage, and (iii) Pepsi can grant license to other companies in
Netherlands to produce other products of Pepsi like Potato chips.
z
Determination of Royalty: The most important factor in deciding the license is
the amount of royalty. It is needless to mention that the licensor expects high rate
of royalty while the licensee would be unwilling to pay much royalty. However,
both the parties negotiate for a fair royalty for both the sides in order to implement
the contract more successfully.
z
Determining Rights, Privileges and Constraints: Another important factor, in
granting license is determining clearly and specifically the right, privilege and
constraints. For example, if the Indian licensee of Aiwa TV uses interior inputs in
order to reduce price, boost up sales and profits, the image of the Japanese

licensor would be damaged.


z

Another constraint is that the licensee may under report the volume of the sales in
order to reduce the royalty payment to the licensor. Therefore, the licensing
agreement clearly and specifically indicates the rights, privileges etc., of both the
parties and reduces the freedom of the licensee in order to reduce the hurdles in
the implementation of the agreement.

z

Dispute Settlement Mechanism: The licensee and licensor should clearly mention
the mechanism to settle the disputes as disputes are bound to crop up. This is
because, settlement of disputes in courts is costly, time consuming and hinders
business interests.

z

Agreement Duration: The two parties of the agreement specify the duration of the
agreement. Licensing cannot be a short-term strategy. Hence, the duration of the
licensing should not be of the short-term. It would always be appropriate to have
long duration of the licensing. Tokyo Disneyland demanded on a 100-year
licensing agreement with The Walt Disney Company.

z

Before, we switch over to the next mode, we shall discuss, the advantages
disadvantages of licensing.

1.2.3 Franchising
Now, we shall discuss the next mode of going abroad, i.e., international franchising.
International Franchising
Franchising is a form of licensing. The franchisor can exercise more control over the
franchised compared to that in licensing. International franchising is growing at a fast
rate.
Under franchising, an independent organization called the franchisee operates the
business under the name of another company called the franchisor. Under this
agreement the franchisee pays a fee to the franchisor. The franchisor provides the
following services to the franchisee:
z

Trade marks

z

Operating systems

z

Product reputations

z

Continuous support systems like advertising, employee training, reservation
services, and quality assurance programs.

Basic Issues in Franchising
z

The franchisor has been successful in his home country. McDonald was
successful in USA due to the popular menu and fast and efficient services.

z

The factors for the success of the McDonald are later transferred to other
countries.

z

The franchiser may have the experience in franchising in the home country before
going for international franchising.

z

Foreign investors should come forward for introducing the product on franchising
basis.

Franchising Agreements: The franchising agreement should contain important items
as follows:
z

Franchisee has to pay a fixed amount and royalty based on the sales to the
franchisor.

11
International Business

12
International Business Environment

z

Franchisee should agree to adhere to follow the franchisor’s requirements like
appearance, financial reporting, operating procedures, customer service etc.

z

Franchisor helps the franchisee in establishing the manufacturing facilities,
services facilities, provide expertise, advertising, corporate image etc.

z

Franchisor allows the franchisee some degree of flexibility in order to meet the
local tastes and preferences. McDonald restaurants in Germany sell beet also and
McDonald restaurants in Germany sell beet also and McDonald restaurants in
France sell wine also.

Franchising is more popular in USA. Fast food companies like McDonalds, Dairy
Queen, Domino’s Pizza Hut, KFC have franchised restaurants worldwide. NIIT has
the franchised computer training centers in entire India.
Hotels like Hilton and Marriott, rental cars like Hertz and Avis also have international
franchisees.
Like every mode, franchising also has advantages and disadvantages. Let us now
discuss the advantages and disadvantages of franchising.

1.2.4 Special Modes
Some companies cannot make long-term investments or long-term contracts to enter

foreign markets. Therefore, they may use specialized strategies.
These specialized strategies include:
z

Contract manufacturing

z

Management contract

z

Turnkey projects
Table 1.1: Advantages and Disadvantages of Franchising
Advantages
•
•

•

•

•
•

Franchisor can enter global markets
with low investment and low risks.
Franchisor can get the information
regarding the markets, culture,
customs and environment of the

host country.
Franchisor leans more lessons from
the experiences of the franchisees,
which he could not experience from
the home country’s market.
McDonald benefited from the
world wide learning phenomenon.
McDonald is convinced to open a
restaurant in inner-city office
building in Japan. This location has
become a more successful one.
Based on this lesson, McDonald
opened its restaurants in downtown
locations in various countries.
Franchisee can early start a
business with low risk as he selects
an established and proven product
and operating system.
Franchise gets the benefits of R &
D with low cost.
Franchisee escapes form the risk of
product failure.

Disadvantages
•

•

•
•

•
•

International franchising may be more
complicated than domestic franchising.
McDonald taught the Russian farmers the
methods of growing potatoes to meet its
standards.
It is difficult to control the international
franchisee. As one of the French investor
did not maintain the stores as per the
standards, McDonald did revoke the
franchise.
Franchising agents reduce the market
opportunities for both the franchisor and
franchisee.
Both the parties have the responsibilities
to maintain product quality and product
promotion.
There is scope for misunderstanding
between the parties.
There is a problem of leakage of trade
secrets.


Contract Manufacturing

13
International Business

Some companies outsource their part of or entire production and concentrate on
marketing operations. This practice is called the contract manufacturing or
outsourcing.
Nike has contracted with a number of factories in South-east Asia to produce its
athletic foot ware and it concentrates on marketing. Bata also contracted with a
number of cobblers in India to produce its foot ware and concentrate on marketing.
Mega Toys – a Los Angeles based company contracts with Chinese plants to produce
Toys and Mega Toys concentrates on marketing.
The advantages and disadvantages of contract manufacturing include:
Table 1.2: Advantages and Disadvantages of Contract Manufacturing
Advantages
z

z

z

z

International business can focus on the
part of the value chain where it has
distinctive competence.
It reduces the cost of production as the
host country’s companies with their
relative cost advantage produce at low
cost.
Small and medium industrial units in the
host country can also develop as most of
the production activities take in these
units.

The international company gets the
location advantages generated by the host
country’s production.

Disadvantages
z

z

z

Host country’s companies may take up the
marketing activities also, hindering the
interest of the international company.
Host country’s companies may not strictly
adhere to the production design, quality
standard etc. These factors result in quality
problems, design problem and other
surprises.
The poor working countries in the host
country’s companies affect the company’s
image. For example, Nike has suffered a
string of blows to its public image because of
reports of unsafe and harsh working
conditions in Vietnamese factories churning
our Nike foot ware.

Management Contracts
The companies with low level technology and managerial expertise may seek the
assistance of a foreign company. Then the foreign company may agree to provide

technical assistance and managerial expertise. This agreement between these two
companies is called the management contract.
A management contract is an agreement between two companies, whereby one
company provides managerial assistance, technical expertise and specialized services
to the second company of the argument for a certain agreed period in return for
monetary compensation. Monetary compensation may be in the form of:
z

A flat fee,

z

Percentage over sales and

z

Performance bonus based on profitability, sales growth, production or quality
measures.

Management contracts are mostly due to governmental inventions. The Government
of the Kingdom of Saudi Arabia nationalized Armco and requested the former owners
to mange the company. Exxon and other former owners of Armco accepted the offer.
Delta, Air France and KLM often provide technical and managerial assistance to the
small airlines companies owned by the Governments.
Turnkey Project
Indonesian Government during 1974 invited global tenders for construction of a sugar
factory in the country. Indonesia government received the tenders from the companies


14

International Business Environment

of USA, UK, France, Germany and Japan. One of the Japanese Company quoted
highest price compared to all other companies.
Indonesian Government studied the quotation of this Japanese company. This
quotation includes: development of the fields for growing sugarcane, development of
seedlings, construction of sugar factory, roads, communication, power, water etc.,
connecting the factory, train the local people, development of the distribution channels
in Indonesia, production of by-products and their market, plans for the export of
surplus sugar etc. it also made a provision for the transfer of the factory along with the
tool package to the Indonesian Government and follow-up the activities after it is
transferred to the Indonesian Government.
Indonesian Government was very much satisfied with the total package and invited
the Japanese company to implement the project. The Japanese company and
Indonesian Government entered and agreement for implantation of this project by the
Japanese company for a price. This project is called ‘Turnkey Project.”
A turnkey project is a contract under which a firm agrees to fully design, construct
and equip a manufacturing/business/service facility and turn the project over to the
purchaser when it is ready for operation for remuneration. The form of remuneration
includes:
z

A fixed price (firm plans to implement the project below this price)

z

Payment on cost plus basis (i.e., total cost incurred plus profit)

This form of pricing allows the company to shift the risk of inflation/enhanced costs
to the purchaser.

International turnkey projects include nuclear power plants, airports, oil refinery,
national highways, railway lines etc. Hence, they are large and multiyear projects.
International companies involve in such projects include: Bechtel, Brown and Root,
Hyundai Group, Kennengen, Friedrich Krupp Gmb H. etc.
The companies normally approach the host country’s Governments or International
Finance Corporations, Export-import Bank of USA and the like for financial
assistance, as the turnkey projects require huge finances.
The recent approach of turnkey projects is Build, Operate and Transfer (B-O-T). The
company builds the manufacturing/services facility, operates it for some time and then
transfers it to the host country’s Government. In this approach, the contractor will not
be paid the remuneration. Government of Gabon and the Electricity Supply Board
International of Ireland and Campagnic General des Eaux of France agreed to
establish electric supply system and water system in Gabon and operate for twenty
five years and then transfer the ownership of these projects to the Government of
Gabon.
So far, we have discussed the various indirect methods of entering foreign markets.
Now, we shall discuss the direct method, i.e., Foreign Direct Investment.

1.2.5 Foreign Direct Investment without Alliances
Some companies, enter the foreign markets through exporting, licensing, franchising
etc., get the knowledge and awareness of the foreign markets, culture of the country,
customers’ preferences, political situation of the country etc., and then establish
manufacturing facilities by ownership in the foreign countries. Baskin-Robbins’ in
Russia followed this strategy. In contrast, some other companies enter the foreign
market through ownership and control of assets in host countries.
Companies, which enter the international markets though Foreign Direct Investment
(FDI), invest their money, establish manufacturing and marketing facilities though
ownership and control.

Foreign firm needs to control the operations when:

15
International Business

z

It has foreign firm’s need to control the operations when it has subsidiaries to
achieve strategic synergies.

z

The technology, manufacturing expertise, intellectual property rights have
potentialities and their full utilization needs planned exploitation.

The US companies transferred their managerial expertise and technological skills to
their subsidiaries operating in UK and hence these subsidiaries have become
successful competitors to the UK companies.
Now we analyze the advantages and disadvantages of FDI.
Table 1.3: Advantages and Disadvantages of FDI
Advantages
•

•

•

Mostly, the customers of the host country
prefer the products produced in their
country like—‘be American, buy

American,’ Be Indian,’ ‘be Indian, Buy
Indian in such cases FDI helps the
company to gain market through this
mode rather than other modes.
Purchase mangers of most of the
companies prefer to buy local production
in order to ensure certainty of supply,
faster services, quality dependability and
better communication with the suppler.
The company can produce based on the
local
environment
and
changing
preferences of the customers.

Disadvantages
•
•
•
•
•

FDI exposes the company (to a fullest extent)
to the host country’s political, and economic
risks.
FDI also exposes the company to the
exchange-rate fluctuations.
Some countries discourage the entry of
foreign companies through FDI in order to

protect the domestic industry.
Changing Government policies of the host
country may create uncertainties to the
company.
Host country Governments, sometime, ban
the acquisition of local companies by foreign
companies,
impose
restrictions
on
repatriation of dividends and capital. India
has allowed 100% convertibility.

Greenfield Strategy
The term Greenfield refers to starting with a virgin green site and then building on it.
Thus, Greenfield strategy is starting of the operations of a company from form scratch
in a foreign market. The company conducts the market survey, elects the location,
buys or leases land, creates the new facilities, erects the machinery, remits or transfers
the human resources and starts the operations and marketing activities. This strategy is
followed by Fuji in locating its manufacturing facilities in South Carolina, by
Mercedes-Benz in locating automobile assembly plant in Alabama and by Nissan in
locating its factory in Sunderland, England.
Disney management faced the problems in building Disneyland in Paris.
These problems include:
z

Problems in dealing with French construction contractors.

z

Communication difficulties with painters.

z

Local contractors demanded $ 150 million extra at the time of opening and
threatened the opening.

z

Local employees resisted the firm’s attempt to impose its US work values.

The next one is the FDI with strategic alliances.
Now, we discuss the advantages and disadvantages of Greenfield strategy.


16
International Business Environment

Table 1.4: Advantages and Disadvantages of Greenfield Strategy
Advantages
ƒ
ƒ

ƒ
ƒ

Disadvantages

The company selects the best location
from all viewpoints.

The company can avail the incentives,
rebates and concessions offered by the
host governments including local
government
The company can have latest models
of the buildings, machinery and
equipment technology.
The company can have its gestation
period to understand and adjust of the
new culture of the host country. Thus,
it can avoid the cultural shock.

ƒ
ƒ
ƒ

ƒ

This strategy results in a longer gestation period
as the successful implementation takes time and
patience.
Some companies may not get the land in the
location of its choice.
The company has to follow the rules and
regulations imposed by the host country’s
Government in case of construction of the
factory buildings.
Host country’s Government may impose
conditions that the company should recruit local
people and train them, if necessary, to meet the

company’s requirements.

1.2.6 Foreign Direct Investment with Strategic Alliances
Innovations, creations, productivity, growth, expansions and diversifications, in the
recent years, are mostly accomplished by the strategic alliances adopted by various
companies like mergers, acquisitions, and joint-ventures.
Strategic alliance is a co-operative and collaborative approach to achieve the larger
goals. Strategic alliance takes different forms like licensing, franchising, contract
manufacturing, joint-ventures etc. alliance is a strategy to explore a new market,
which the companies individually cannot do. For example, Xerox of USA and Fuji of
Japan collaborated to explore new markets in Europe and Pacific Rim.
Two companies join hands in order to align their distinctive and different strengths.
Dunlop and Pirelli—the two type making corporations—joined together in order to
synergies the strength of marketing capabilities of Dunlop and R&D capabilities of
Pirelli.
Check Your Progress 1
Define the following:
1. Franchising
……………………………………………………………………………...
……………………………………………………………………………...
2. Turnkey project
……………………………………………………………………………...
……………………………………………………………………………...
3. Greenfield strategy
……………………………………………………………………………...
……………………………………………………………………………...

1.3 EXTERNAL INFLUENCE IN INTERNATIONAL TRADE
There are different factors (variables) in the macro environment that have an influence
on the business. Some of these variables are: technology, the economy, social

activities, physical factors, legal issues, politics, the government and international
trade.
Let’s look at each of these variables individually:

1.3.1 Technology
It is very important for the business to make effectively use of advance technology.
Sophisticated electronics and computers to produce the necessary products and


services replace machinery and some labour. Businesses cannot control this variable
but only adjust to changes in this environment.

1.3.2 Economy
Forces such as levels of employment, interest rates, the economic growth rate and
exchange rates cannot be controlled by a business. The business can however have
some influence on this environment by creating jobs and help with the increase in the
economic growth rate.

1.3.3 Social Environment
Businesses need to get involve in social responsibility programmes. E.g. A company
sponsoring food and blankets to a poverty stricken community.

1.3.4 Physical Factors
The business also has a responsibility regarding its physical environment. It needs to
minimize or avoid pollution, and implement waste management. Remember, there are
only limited resources available, so therefore we need to manage it well!

1.3.5 Legal Environment
This environment includes all the rules, laws and restrictions that all business and
individuals need to adhere to. Some of these laws (Acts) are: the Labour Relations

Act, the Employment Equity Act etc.

1.3.6 Political Environment
During elections citizens of the country elect certain individuals to form a government
to represent them. All businesses need to adhere to all legislation set by this elected
government.

1.3.7 Government
This is also known as the institutional environment. They play an important role in the
economic and social environment of the country. The government has certain
objectives for the country such as: sustainable economic growth increase in the
employment rate etc. All businesses need to support the government in these
objectives.

1.3.8 International Trade
This variable includes trade with other countries. South Africa needs to import certain
products from other countries and we earn foreign currency by exporting products to
other countries. All businesses need to make sure that they produce good quality
products and build good relationships with foreign businesses.
Check Your Progress 2
Fill in the blanks:
1. Franchising is a form of ………………….
2. Export and Import Brokers are the brokers’ bridge the gap between
…………………. and bring these two parties together.
3. Freight forwarders help the …………………. manufacturers in exporting
their goods by performing various functions like physical transportation
of goods, arranging customs documents and arranging transportation
services.

1.4 INTERNATIONALIZATION PROCESS

"Internationalization is a process that prepares the community for successful
participation in an increasingly interdependent world...The process should infuse all

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International Business


18
International Business Environment

facets of the post-secondary system, fostering global understanding and developing
skills for effective living and working in a diverse world”.
The two principles of effective internationalization:
1. The internationalization process gathers momentum and achieves greater stability
when a number of different international activities, programs and initiatives work
together in a mutually strengthening ways.
2. The internationalization process is effective and sustained to the degree it is
integrated with the institution's primary functions of teaching, research and
service.
The Mechanisms of Internationalization include:
Mechanism

Facilitates Internationalization by:

Curriculum Development

Infusing an international/multicultural dimension across the
curriculum; internationalizing general education in order to expose
more students to the international dimensions of their studies;
addressing international aspects of academic disciplines,

professional, technical, and vocational training.

Professional Development of
Faculty, Staff and
Administrators

Increasing international experience/expertise of faculty, staff, and
administrators; enhancing their ability to function and communicate
in an international setting; providing support and incentives for
faculty to internationalize courses, programs, participate in
international exchange, teach overseas, engage in international
development projects, or international research.

International Development
Projects

Providing international experience for faculty, staff and students in
developing countries in areas of technology transfer, human resource
development, institutional strengthening, international consultancies;
can lead to further collaborations in international research,
development of joint courses or programs, and new institution-toinstitution linkages.

Institutional Linkages

Establishing international partnerships to promote inter-institutional
exchanges of students, faculty, scholars; may also lead to
development of international practicums, joint courses,
collaborations in research, publications; enhances international
prestige and reputation of both institutions.

Community Linkages

Forming partnerships with individuals, local businesses, agencies, or
organizations for overseas missions and projects; internationalizing
continuing education courses; establishing international student
home stay programs; organizing an international speaker's bureau;
drawing on knowledge and experience of multicultural and First
Nations community groups to support campus-wide
internationalization.

International Student
Programs

Supporting and integrating a geographically and culturally diverse
corps of international students and scholars into campus life to
enhance education for all students; providing opportunities for
international understanding and cross-cultural/intercultural learning
in the classroom; internationalizing wider community via home stay
and host family programs.

Exchange Programs

Providing opportunities for study/work abroad for domestic students,
scholars, faculty and staff; promoting access to international
practicums and co-op placements; can lead to development of
international diplomas, joint degrees and other forms of international
collaboration and exchange.


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International Business

1.5 LET US SUM UP
International trade is the exchange of capital, goods and services across international
boundaries or territories. In most countries, it represents a significant share of GDP.
While international trade has been present throughout much of history, its economic,
social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations,
and outsourcing are all having a major impact on the international trade system.
Increasing international trade is crucial to the continuance of globalization.
International trade is a major source of economic revenue for any nation that is
considered a world power. Without international trade, nations would be limited to the
goods and services produced within their own borders.
International trade is in principle not different from domestic trade as the motivation
and the behavior of parties involved in a trade does not change fundamentally
depending on whether trade is across a border or not. The main difference is that
international trade is typically more costly than domestic trade. The reason is that a
border typically imposes additional costs such as tariffs, time costs due to border
delays and costs associated with country differences such as language, the legal
system or a different culture.

1.6 LESSON END ACTIVITY
Prepare a study note on the process of internationalization.

1.7 KEYWORDS
International Trading Company: This company is engaged in directly exporting and
importing. It buys the goods from the domestic companies and exports. Therefore, the
companies can export their goods by selling them to the international trading
company.
Manufacture’s Agents: They work on a commission basis. They solicit domestic

orders for foreign manufacturers.
Manufacture’s Export Agents: These agents also work on a commission basis. They
sell the domestic manufacturers’ products in the foreign markets and act as their
foreign sales department.

1.8 QUESTIONS FOR DISCUSSION
1. What are the different modes of international trade?
2. What are the factors influence the trade?
3. Explain about the internationalization process.

Check Your Progress: Model Answers
CYP 1
1. Franchising: Under franchising, an independent organization called the
franchisee operates the business under the name of another company
called the franchisor. Under this agreement the franchisee pays a fee to
the franchisor.
2. Turnkey Project: A turnkey project is a contract under which a firm
agrees to fully design, construct and equip a manufacturing
/business/service facility and turn the project over to the purchaser when
it is ready for operation for remuneration.
Contd…


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International Business Environment

3. Greenfield Strategy: The term Greenfield refers to starting with a virgin
green site and then building on it. Thus, Greenfield strategy is starting of
the operations of a company from form scratch in a foreign market.
CYP 2

1.

Licensing

2. Exporters and importers
3. Domestic

1.9 SUGGESTED READINGS
Daniels, D. and Radebangh H., “International Business”, Pearson Education Asia, New Delhi,
2002.
Griffin and Pustay, “International Business”, Pearson Education Asia, New Delhi, 2002.
Subba Rao, “International Business”, Himalaya, Mumbai, 2001.
Schaffer, “International Business Law and its Environment”, Thomson, 2002.
Onkwist and Shaw, “International Marketing”
Philip R. Careora, “International Marketing”.


21
Macro Environment
and Micro Environment

LESSON

2
MACRO ENVIRONMENT AND MICRO ENVIRONMENT
CONTENTS
2.0

Aims and Objectives

2.1

Introduction

2.2

2.1.1

Concept of Economic Advancement

2.1.2

Structure of Consumption

2.1.3

Economic Systems

2.1.4

Mutual Economic Dependence

Micro Economic Environment
2.2.1

Sources of Competition

2.2.2

Competitive Advantage

2.3

Macro Environment

2.4

Trade and Investments

2.5

Let us Sum up

2.6

Lesson End Activity

2.7

Keywords

2.8

Questions for Discussion

2.9

Suggested Readings

2.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z

Understand the micro and macro environment

z

Study the trade investment

z

Know the difference between the micro and macro

2.1 INTRODUCTION
A country’s economy includes sources of domestic livelihood and the allocation of
resources. Because not all of the world’s economies operate at the same level of
efficiency, it is necessary to form a clear idea of the economic situation of a particular
host country in order to develop an appropriate marketing strategy.

2.1.1 Concept of Economic Advancement
Developing countries are becoming important markets. According to the concept of
international product life cycle more and more and more developing countries may be
expected to become significant markets. It would be desirable for a marketer,
therefore, to keep abreast of countries slowly reaching that point where market
potential becomes worthwhile. GNP per capita should not be relied on as the sole


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International Business Environment

measure of the economic viability of a market, although it does provide a resole
estimate of the market in cases where detailed analysis is not feasible.
Economic advancement is characterized by such factors as comparatively small
allocation of labor force to agriculture; energy available in large amounts at low cost
per unit; high level of gross national product and income; high levels of per capita
consumption; relatively low rates of population growth; complex modern facilities for
transportation, communication, and exchange; a substantial amount of capital for
investment; urbanization based on production as well as exchange; diversified
manufacturing that accounts for an important share of the labor force; numerous
tertiary occupations; specialization of both physical and mental labor; surpluses of
both goods and services; and a highly developed technology that includes ample
media and methods for experiment. These factors can be utilized to examine economic
standing. Needless to say a large variety of information is needed to categorize
countries on an economic development scale. For many characteristics, hard data may
not be available and judgment becomes the determining factor.
As a generalization, the conditions in underdeveloped economies would be the mirror
image, or reverse, of those that characterizes economic advancement. This raises an
interesting question. Can poor countries be converted into advanced countries through
reversing the conditions that hamper economic progress the answer to such a question
is far from simple because economic development is not a simple, discrete process?
Many historical, geographic, political, and cultural factors are intimately related to the
economic well being of nation. For example extent helped the United States Achieve
its present economic greatness. The impact of this factor has been thoroughly covered
elsewhere.

2.1.2 Structure of Consumption
Nations’ overall patterns of consumption can be viewed not only on the basis of
potential but also on the basis of structure. While it is important to measure the
volume of consumption among various cultures, nations, and societies, the
characteristics of the consumption reveal its structures. Particularly conspicuous in

this respect are differences in emphasis. Depending on economic factors, a country
may have to emphasize producer goods over consumer goods. Also, what are
considered necessities in one economy may be luxuries in another? In addition,
consumption in most advanced countries is characterized by a higher proportion of
expenditures devoted to capital goods than consumption in poor countries, where
substantially more is spent on consumer goods.
However, proportionate expenditures for producer goods within a given economy are
only moderately high if that economy enjoys the benefits of past (preferably longterm) capital accumulation. When a less-developed economy decides to become
technically and economically more advanced, an extraordinary percentage of national
income must be diverted to producer goods, especially if that economy is unable to
attract substantial amounts of foreign currency in the form of direct investment, loans,
or other aid. This is one important reason why less developed economies find the
transition period to technical advancement so difficult.
The structural differences with regard to expenditures among nations can be explained
by a theory propounded by the German statistician Engle. The law of consumption
(Engle’s law) States that poorer families and societies tend to spend a greater
proportion of their incomes on food than well-to-do people. It shown is the percentage
of per capita income spent for food, housing, clothing, and other purposes in selected
countries. Third World Countries like the Philippines and Kenya are shown to spend a
larger percentage on food than countries like the United States. Further, in any
country, rural people spend a larger percentage on food than urban dwellers. Housing,


in particular, receives a much smaller share of income in underdeveloped countries
than in the advanced nations.
The structure of consumption varies among developed countries too. While the
average American home covers 1583 square feet and the typical European dwelling is
more than 1050 square feet, Japanese families manage with 925 square feet. The U.S.
nuclear family boasts 2.2 cars on average; comparable households in the European
community average 1.3 cars. In Japan, the average is 0.88. And while food costs

absorb 26 percent of the typical Japanese household’s income, the amount is less than
15 percent for the average American family, and about 20 percent for the Europeans.

2.1.3 Economic Systems
The economic system of a country is another important economic factor that a
marketer must understand. Traditionally, there are two types of economic systems,
capitalist systems and state-owned systems. The United States comes close to being a
pure capitalist system. The state-owned, or Marxist, system is pursued in communist
countries where all activities related to production and distributions are controlled by
the state. Between the two extremes are many countries that flow mixed economic
systems where certain industries are allowed to run freely while others are strictly or
partially controlled.
The nature of economic systems affects the political/regulatory control of the
economy. Today, the pure capitalistic system propounded by Adam Smith is a thing of
the past. Even in the United States, there are some laws and conditions imposed on
various businesses. The nature of the laws and other government regulations and
controls will be examined.
An interesting development of the recent past appears to have given rise to an
economic system that is new to the modern would and links economic life with
religion. Some Moslem countries have adopted a national economic perspective based
on Islam. While the trend, led by Iran, is still emerging, it is difficult to say how far it
will go or what impact it will have on marketer interested in doing business with
Moslem countries, although insights into the Islamic type of economic system are
provided by Pakistan’s efforts.

2.1.4 Mutual Economic Dependence
The U.S. economy is profoundly related to the economies of other nations,
particularly those of the advanced countries. The U.S. market is so large that despite
its ability to supply most of its needs from domestic output, it is also a dominant factor
in international trade. For example, what happens in Western Europe cannot be

ignored by the United States. While there may be a time lag, happenings there are
bound ultimately to affect the U.S economy. It has been estimated that a recession in
Western Europe affects the United States after a lag of about six months. Thus, when
performing an economic analysis, an international marketer needs to consider the
economic perspectives of the overall world economy, particularly those of its major
trading partners and the host country.
The depth of economic analysis varies from case to case. For example, if the
enterprise concerns Saudi Arabia, economic development in the Pacific region can be
discounted. On the other hand, if a project is related to Japanese industries, the
economic environment in emerging countries of Southeast Asia must be reviewed.

2.2 MICRO ECONOMIC ENVIRONMENT
Microeconomic environment refer to the environment surrounding a product and or
market of interest to accompany. An examination of microenvironment indicates

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Macro Environment
and Micro Environment


24
International Business Environment

whether the company can successfully enter the market. Essentially the micro
economic environment concerns competition.

2.2.1 Sources of Competition
A U.S. company may face competition in an international market from three different
sources: local business, other U.S. corporations, and other foreign companies. For
example, if Chrysler Corporation were to consider entering the German market, it

would compete against General Motors, Volkswagen, and Honda Motors of Japan,
Different competitors, however, may satisfy different type demand existing demand,
latent demand, or incipient demand. Existing demand refers to a product bought to
satisfy a particular need. Latent demand applies in a situation where a particular need
has been recognized, but no products have been offered. Incipient demand describes a
projected need that will emerge when customers become aware of it sometime in the
future. To illustrate the point, consider demand in the computer industry. Overall,
IBM may be strong in, let us say, Spain. But a firm like Next Inc. avoids direct
confrontation with IBM and Apple, at least in the short run.
Competition can also be analyzed by the characteristics of products. Three product
categories are considered here breakthrough products. Competitive products, and
improved products. A breakthrough product is a unique innovation that is mainly
technical in nature, such as a digital watch, a color television ort a jet plane. A
competitive product is one of many brands currently available in the market and has
no special advantage over the competing products. An improved product is not unique
but is generally superior to many existing brands.
The nature of the competition that a company faces in entering an overseas market can
be determined by relating the three types of products to the three type of demand.
Upon examining the competition, a company should be able to ascertain which
product/market it is most capable of pursuing. For example, let us assume Procter &
Gamble is interested in manufacturing hair shampoo in Egypt and seeks entry into the
emerging Arab market. The company finds that in addition to a number of local
brands, Johnson & Johnson’s baby shampoo and Helene Curtis Industries Suave
shampoo are the competitive products in the is considered an improved product. Most
of the competition appears to be addressing the existing demand. No attempts have
been made to satisfy latent demand or incipient demand. After reviewing various
considerations, Procter & Gamble may decide to fulfill latent demand with an
improved offering through its Head & Shoulder brand. Based on market information,
the company reasons No brand had addressed itself to that problem. Even Gillette’s
new entry mainly emphasizes silkiness of hair. Thus, analysis of the competition with

reference to product offerings and demand enables Procter & Gamble to determine its
entry point into the Arab market.

2.2.2 Competitive Advantage
The above analysis indicates an open space in the market for entry. But this in itself is
not enough. Competitors may follow right on the heels of Procter & Gamble’s entry
steps. Thus, further analysis is needed to figure out the competitive advantage the
company has over rivals, existing and potential. The following questions could be
raised to analyze the competition:
z

Who are the competition now, and who will they be in the future?

z

What are the key competitor’s strategies, objectives, and goals?

z

How important is a specific market to the competitors, and are they committed
enough to continue to invest?

z

What unique strengths do the competitors have?

z

Do they have any weaknesses that make them vulnerable?

z

What changes are likely in the competitors’ future strategies?

z

What are the implications of competitors’ strategies on the market, the industry,
and one’s own company?

While it may be relatively easy to pinpoint current competition in an international
market, analysis of competition in the future is difficult because there is no way to
figure out which companies from different parts of the world may become interested
in the market in the future. In any event, the best way to examine competition is to
draw up a demographic profile of the industry. Markets dominated by small singleindustry businesses or small national competitors differ significantly from those
dominated by multi-industry companies, and those in turn are different from those
controlled by multinational or foreign companies.
Obviously a U.S. MNC with multi-industry interests would have certain inherent
strengths that a single-industry foreign national company could not match. For
example, MNC’s can often provide consumers with better and cheaper products or
services, react faster to changing economic conditions, and more adroitly overcome or
capitalize on market distortions created by governments than can national firms.
These large companies have the resources to sacrifice profits in one country in order
to penetrate or gain position there while using profits from another country to support
this aggressiveness. They have the ability to work with governments, select the least
costly source of supply, and even negotiate favorable trade concessions.
However, it is a mistake to believe that MNCs always have superior leverage. Local
foreign competitors may be small, but they can be helped by their governments. For
example, governments can require that foreign competitors reduce profitability in
order to increase local employment levels or maintain the balance of trade.

Governments can also ban a multinational firm from obtaining supplies in low-cost
areas. Further discussion on the role of the government will be takes up.
A simple listing of major competitors is no enough. It is also important to learn about
their goals and aspirations. In fact, an attempt should be made to know competitors
total financial situations, including their serious problems as well as their advantages
and opportunities.
Further, the competitor’s relative strengths and weaknesses should be examined. Note
that most areas of strength either are related to the excellence of personnel or are
resource based. Not all factors have the same the critical factors that could directly or
indirectly bear on a product’s performance in a given market. For example, adequate
distribution may be critical in a developing country with inadequate means of
transportation and communications, while research and development would be
strategic to gain the competitive edge in Western Europe.
An example of strength is provided by BMW Car Company. It is commonly know
that selling foreign cars in Japan is not easy. Yet, in 1987, BMW sold almost 50,000
cars to the Japanese, and the number was expects to be four times as high in 1990.
With Japanese consumers’ increasing interest in luxury car, a new market segment has
been emerging that was not being tapped by the Japanese companies. BMW took
advantage of the situation. Avoiding the pitfalls that make doing business in Japan
difficult, it established a comfortable in niche for itself. After buying its won dealer
network and expanding it, the company advertised heavily, set up a service-and-parts
system, and lowered interest rates to single digits (5 %), when consumer interest rates
were 15 percent. In brief, despite the fact that Japan is difficult market to enter,
analysis of the microeconomic environment showed that BMW could successfully
seek entry into the Japanese market.
Japanese auto companies, in turn, have captured a major share (in 1985,
approximately 24 percent) of the U.S. auto market. Let us assume Ford Motor
Company decides to retaliate by exploring the possibility of entering the Japanese

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Macro Environment
and Micro Environment