1. Main Factors in World Economic Environment Faced by International Business
A. Economic Environment in Host Countries
When it comes to the economic factors faced by international business, one of the major considerations is the economic environment in host countries where the international organization aims to operate. The economic environment has much to do with the scope of business, business prospects and business strategy. The nature and level of development of the economy, economic resources, size of the economy, economic system and economic policies, economic conditions, trends in the GNP growth rate and per capita income, nature of and trends in foreign trade, domestic supply and demand conditions are all factors relevant to business (Cherunilam, 2007).
B. Exchange Rates
One of the important problems, a firm with international business may encounter is the currency exchange rate risk. Exchange risk is the probability that a company will be unable to adjust prices and costs to offset changes in the exchange rate. There are two types of foreign exchange risks or exposures: economic exposure and accounting exposure. Economic exposure refers to the risks arising from economic factors through economic transactions and other economic activities. Accounting exposure arises from the need, for purposes of reporting and consolidation, to convert the financial statements of foreign operations, from the local currencies involved, to the home currency (Cherunilam, 2008).
C. Inflation
Inflation is also a big factor to consider by international businesses. This is because the purchasing power of the consumers depends on their real income. The higher the level of inflation, the lower is the real income and the purchasing power of the consumers. Because of this, when an international firm decides to operate in a foreign country, it has to take into account the rate of inflation in the host country. The rate of inflation is also important from the viewpoint of cost production. If it is high in the host country, the production cost of the host country plant will be higher.
D. Availability of Human and Physical Resources
Availability of human and physical resources makes the manufacturing process easier and at the same time lowers the cost of production so as to confer upon the firm a competitive edge. This is because if such resources are in abundance, they are available with no difficulty and at a lower cost. It is not feasible for a multinational firm to transport the entire labor force from the home country, It normally employs its own men at the very senior positions and employs the rest of persons from the local manpower market. But this is possible only if skilled manpower is available locally. This is why a multinational firm looks at the availability of technical and managerial personnel whenever it analyzes the economic environment in the host country.
E. Fiscal, Monetary, and Industrial Policies
Various forms of economic policies pursued in the host country make the economic environment either congenial or act as a deterrent to the operation of a multinational firm. A firm never relishes a high rate of corporate income tax, as it lowers the net profit. Sometimes firms employ various techniques, for example transfer pricing devices, to lower the incidence tax, but the management is not very easy. Beside the corporate income tax and excise duties, there is tariff or import duty. Such duties are either ad valorem, based on the value of the import, or specific, based on the quantity of the specific import, or mixed, combining both of them.
2. Roles of International Trade Organizations
A. World Trade Organization (WTO)
The WTO has a number of functions. It is charged with facilitating the implementation and operation of the Multilateral Trade Agreements, providing a forum for negotiations, administering the dispute settlement mechanism, providing multilateral surveillance of trade policies, and cooperating with the World Bank and the International Monetary Fund (IMF) to achieve greater coherence in global economic policy-making. Between meetings of the Ministerial Conference the organization is managed by a General Council at the level of officials. Three subsidiary councils operate under the general guidance of the General Council: the Council for Trade in Goods; the Council for Trade in Services; and the Council for Trade-Related Aspects of Intellectual Property Rights. Separate committees deal with the interests of developing countries; surveillance of trade restrictions actions taken for balance of payment purposes; surveillance of regional trade agreements; trade-environment linkages; and the WTO’s finances and administration (Hoekman & Kostecki, 2001).
B. World Bank
The World Bank is made up of two unique development institutions owned by 184 member countries – the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). Each institution plays a different but supportive role in the mission of global poverty reduction and the improvements of living standards. The IBRD focuses on middle income and creditworthy poor countries, while IDA focuses on the poorest countries in the world. Together they provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes. When it comes to international trade, the World Bank can be a source of relevant information and statistics about a given country, especially in the area of economics.
C. World Customs Organization (WCO)
The World Customs Organization (WCO) is the only intergovernmental organization exclusively focused on Customs matters. With its worldwide membership, the WCO is now recognized as the voice of the global Customs community. It is particularly noted for its work in areas covering the development of global standards, the simplification and harmonization of Customs procedures, trade supply chain security, the facilitation of international trade, the enhancement of Customs enforcement and compliance activities, and piracy initiatives, public-private partnerships, integrity promotion, and sustainable Customs capacity building programs.
International Chamber of Commerce (ICC)
The International Chamber of Commerce (ICC) was founded in Atlantic City in 1919; its headquarters are based in Paris. It is a non-governmental organization of thousands of companies and business organizations in more than 130 countries. One of its main objectives is to harmonize trade practices and to promote trade, investment and free market. It also draws up voluntary codes, which set ethical standards and offers a number of practical services to businesses. In the international financial services sector, the ICC Commission on Financial Services aims to monitor, report on and make policy recommendations, especially as regards deposit banking and investment banking, and their implications for businesses.
United Nations Conference on Trade and Development (UNCTAD)
UNCTAD was created in 1964 as an expression of the belief that a cooperative effort of the international community was required to bring about changes in the world economic order that would allow developing countries to participate more fully in a prospering world economy. The themes addressed by UNCTAD over the years have included:
· Expanding and diversifying the exports of goods and services of developing countries, which are their main sources of external finance for development
· Encouraging developed countries to adopt supportive polices, particularly by opening their markets and adjusting their productive structures
· Strengthening international commodity markets on which most developing countries depend for export earnings and enhancing such earnings through their increased participation in the processing, marketing and distribution of commodities, and the reduction of that dependence through the diversification of their economies
· Expanding the export capacity of developing countries by mobilizing domestic and external resources, including development assistance and foreign investment
· Strengthening technical capabilities and promoting appropriate national policies
· Alleviating the impact of debt on the economies of developing countries and reducing their debt burden
· Supporting the expansion of trade and economic cooperation among developing countries as a mutually beneficial complement to their traditional economic linkages with developed countries
3. Political Risk
Political risk is defined by Kobrin (1982) as politically generated circumstances which may have significant implications or management Jodice (1985) defines political risk as changes in the operating conditions of foreign enterprises that arise out of the political process that affect ownership and behavior of the firm. Political risk according to this definition can be conceptualized as events, or a series of events, in the national and international environments that can affect physical assets, personnel and operations of foreign firms (cited in Rugman & Brewer, 2001).
A major nonfinancial risk is political risk. Companies know in advance that they must operate in accordance with government regulations. Where these are known, there is no risk. Risk is the unexpected imposition of regulations and controls not originally known or anticipated, including burdensome regulations, interference in the operations of an affiliate, and confiscation of property. Burdensome regulations can take the form or limitations on employment by setting quotas for the number of local employees and managers that have to be hired, degree of local ownership or local content of a product, and restrictions on profit remittances and investment. Restrictions on investment can take the form of a denial, or limitation, on additional investment with a high potential return, or a requirement to increase investment in something with a low return. Operational interference includes any government activity that hampers operational efficiency. Examples are forced unionization of workers, mandated purchases of needed supplies from local companies that may not be competitive in price and quality, excessive training requirements for local workers, and redundant or ineffectual safety and operating requirements. Operational interference can be external to the business, such as a government providing unmerited support to a competitor. An example of this is a locally owned company being awarded a contract even though the company may not be competitive on price or performance with a globally owned affiliate. Confiscation can be in the form of expropriation, where a single company is taken over by the government, or nationalization, where an entire industry is taken over. International law generally empowers governments to take these actions as long as fair and equitable payment is promptly made (Feist et al, 1999).
4. The Role of Culture
There are different challenges and threats that an international business faces when it decides to pursue markets abroad. These challenges can be legal, economic, social, technological or cultural. Of significant interest among managers is the impact of culture on the operations and success of an international company. Culture has different impacts on how people interact and in many cases, it can affect the organization and its people. Cultural differences are found in areas such as language, values, and behaviors. According to Graham (2001) problems arising from cultural differences are often neglected but they have a huge impact on the performance and success of the international organization and on how its people can be managed.
Every country has a different culture that sets it apart from the rest. Every country has a different history, government and laws. The more countries with which a firm interacts, the more complex and difficult conducting business becomes. According to Briscoe and Schuler (2004) the primary cause of this complexity and high level of difficulty has to do with the importance and critical nature of the differences between various countries’ cultures (p. 114). International businesses are now increasingly interacting with various countries and cultures. The impact of culture, that is, a group of people’s values, beliefs, and behavior patterns are of utmost significance in the achievement of success. Different aspects of the international business such as cross-national negotiations, sales interactions between people from different countries, management of the performance of employees from different countries, and the understanding and treatment of contracts from different countries are, in one way or another, affected by culture. In addition, Human Resources responsibilities, such as staffing, compensation, training, labor relations and performance appraisal are affected by culture (Briscoe and Schuler 2004, p. 114).
Geert Hofstede (1984) conducted what is considered as the most influential work on business cultures. Hofstede identified five cultural dimensions that affect international businesses. These dimensions are:
1. Power Distance
This dimension is about the degree of hierarchy and inequality in power between the superiors and subordinates in a given group, organization or society. There is a bigger gap between people in power or position and those who are not in power or position in countries where the power distance is large. In this type of group, organization and society, people see themselves as unequal. In countries where there is a huge power distance, most of the subordinates rely on the superiors for decision-making, planning and management. Most of the time, the subordinates are just following the orders of the superiors. In those countries where there is little power distance, on the other hand, subordinates may take an active role in decision-making, planning and management. And they may sometimes question the leadership.
2. Uncertainty Avoidance
This dimension of culture is about how the people in a given culture view uncertainties or risks and how they deal with them. Those countries or organizations with high uncertainty avoidance will often avoid risks or will likely steer clear of ambiguities. People in high uncertainty avoidance culture will often rely on heavily formalized structures and will not tolerate ideas and actions that deviate from the established standards. Those people in a low uncertainty avoidance culture are often more open for changes and challenges. They work in a more informal environment.
3. Individualism vs. Collectivism
This is the dimension of culture that is concern about which people in a given culture value more – the individual or the group. In high individualism culture, the goals and aspirations as well as the interests of the individual is given more importance that the interests of the group in which he or she belongs. In a high collectivism culture, the interests of the group is of higher importance than the interest of the individual members. The social framework in an individualistic society is looser than that of a more collectivist society and individuals take responsibility for themselves and their immediate as opposed to extended families. Individualist societies demonstrate a greater regard for individual rights and freedoms and tend to be characterized by assertiveness and competitiveness rather than by teamwork and cooperation. In more collectivist societies, it is the group that looks after the interest of individuals and gives them their sense of identity. In return for this protection, individuals offer the group loyalty and the work towards the attainment of goals determined by and for the good of the group, organization, tribe or society.
4. Masculinity – Femininity
Societies that place a high premium on assertiveness, achievement and the acquisition of material possessions are exhibiting aggressive or masculine goal behavior. Masculine environments also favor conflict and competition in the workplace. Cultures that place high value on social relationships, quality of life and sensitivity demonstrate passive or feminine goal behavior. Cultures and workplaces scoring high on the femininity dimension exhibit high degrees of cooperation, negotiation and compromise (Johnson and Turner 2003).
5. Short-term vs. Long-term Orientation
In countries with a short-term orientation the emphasis is on the immediate gratification of needs, a focus on the present and the attainment of short-term goals. In cultures with a more long-term orientation the satisfaction of needs is deferred for the sake of long-term benefits and growth.
References
Briscoe, D. & Schuler, R. (2004). International human resource management: Policies and practices for the global enterprise. New York: Routledge.
Cherunilam, F. (2007). International business: Text and Cases. PHI Learning.
Cherunilam, F (2008). International economics. Tata MacGraw-Hill.
Hoekman, B. M. & Kostecki, M. M. (2001). The political economy of the world trading system: The WTO and beyond. Oxford: Oxford University Press.
Jodice, D. (1985). Political risk assessment: An annotated bibliography. Westport Connecticut: Greenwood Press.
Kobrin, S. J. (1982). Managing political risk assessment. Brekeley California: University of California Press.
Proctor, T. (2000). Strategic marketing: An introduction. London: Routledge.
Rugman, A. M. & Brewer, T. L. (Eds.) (2001). The Oxford handbook of international business. Oxford: Oxford University Press.
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