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How Political, Legal, Economic and Technological Systems Affect International Business

Political-Legal Environment
Political Considerations Perhaps the most important considerations for global business firms are the political and legal forces operative in the countries in which they plan to conduct business. Some foreign governments are unstable, that is, there maybe frequent, dramatic and unpredictable regime changes and/or political unrest. When this occurs industries may be nationalized; private property may be seized or destroyed; normal business operations may be suspended, the workforce may go on strike. For example, during the recent unrest in Venezuela banks were shut down for months, workers were on strike, rioting broke out, food stuffs were seized from private companies. Even within relatively stable governments, as different administrations come to power different business regulations and attitudes may be adopted. Among the available resources, the United States government provides several comprehensive sources of information on the political structures of the world's nations.

Legal Considerations - Local Firms involved in global business must be familiar with and obey the laws of their home country, the local laws of each country in which they do business, and international laws.. For example, countries may well have different laws covering employees such as minimum wages, overtime, insurances, maximum work weeks, and so on. There are also often differing rules regarding product testing and safety. Business practices which are common in one country may be illegal in another, for example, the bribing of public officials. Some specific examples of differing local laws which can have a major impact on international business are as follows.

Local content: It is not unusual to face with local laws that stipulate that a certain amount of a good or service is supposed to be supplied by local producers, this is referred to as local content requirement. Under such laws, companies are required to use locally available raw materials, local labor resources, or purchase parts from local suppliers. The purpose of such a measure is to foster greater local economic activities that spur more jobs for the citizens of the host country. However, among many complexities that may arise, multinational firms need to watch for two potential problems in adhering to local content rule. o The quality of local raw materials: A lot of companies rely on the quality of their products in order to retain the loyalty of their customer base or maintain or increase market share. With that said, it is imperative to obtain quality parts and quality raw materials to use in assembling a final product to satisfy customers. Consider, for instance, the dififculty a company such as Toyota could face. Customers purchase Toyota models because of their renowned quality. If they start to experience a denigration in quality with a model due to some required local low-quality parts, they

may stay away from that model. Hence,if the requirements of local content laws mean purchasing lower quality, local raw materials or parts this may affect the quality of the final product and that will, in turn, diminish market share. o The low-skilled labor force: By the same token, when multinational corporations are forced to use the local labor force, they may face a problem if that workforce is lowskilled. The low-skilled labor force may cost less, but it may also translate into a lowquality product or defective product. In the case of low-quality product, market share can be lost to competitors with better products. As for defective products, the company and its officials can be held liable for damages resulting from product use. The other option may be to train the local employees to bring them to a productive level. However, the training can be costly, the learning curve may be steep, and once the employees are well trained, there is no guarantee that they will stay as your employees. Consequently, this requirement may hamper efficiency, as well as the quality of the product, resulting in loss of revenue for the company involved. Product safety: Product liability allows consumers to hold manufacturers, sellers, even some company officials liable for death, personal damage or injury caused by defective products. Countries usually enact product safety laws to protect their citizens and set up the standards to manufacture the products. In order to avoid retaliation and lawsuits, it is of crucial importance to familiarize the enforcement of local product liability laws. Taxation: Countries always have some sort of system for tax collection purposes. Governments levy taxes for various reasons. For instance, a tax can be levied on imported products to make the products more expensive than similar products manufactured locally, this is referred to as an import tax. Taxes are also a great source of revenue for governments to pay their employees and to finance and maintain specific projects. In addition, many governments collect a value added tax (VAT). The VAT system works by charging a tax at each stage a value is added to a product.

Legal Considerations - International Businesses must also follow those international laws which govern international trade. For example, dumping which is a practice of selling exported products at a very low price, in some instance, lower than the cost of production with the ultimate intention to drive local competitors out of the market. Under the pressure of local companies, governments may find it necessary to intervene to prevent such practice by adopting antidumping laws and regulations. Back to Top

Economic Environment
Global Business Economic Activities Governments of different countries use various techniques to encourage and discourage global transactions. When governments favor international trade, they create a friendly environment in the form of free trade zones, free trade agreements and trading blocs. On the contrary, when they want to shield their countries from international competition, they institute trade barriers and protectionist measures such as tariffs, quotas, even licensing requirements. Exchange Rates Transactions between different countries around the world create a need for money exchange. This need comes into play because each country has its own currency system. When exporters from France sell goods or services to Brazil, they need to be paid in Euro. A company usually likes to receive its payment in its home currency. As a result, companies need to convert currencies by buying or selling the currency of one country to another. This is done by using the exchange rate of different available markets such as the spot market, forward market and the future market depending

on the ultimate goals. At this stage, the success of an international company is relative to the currency of the country where it operates. If the currency of that country is soft which means it is not easily convertible, it may present a problem. On the other hand, it can also be a hard currency, which means it can be exchanged with no difficulty. Economic Systems When approaching a host country, it is essential to determine the tendency of the economic system of that country. This can very well determine the economic success of a company in that country because some economic systems value individual goals better than collective goals and vice versa. This tendency can create environments where one type of business can be more welcomed than another. Although there are different types of economic systems around the world such as centrally planned economy, market economy, countries that lean more toward our free market economic systems have been proven to be working better. The economic conditions of any country fluctuate regularly Economic Stability When we considering doing business in another country it is important to be knowledgeable about the stability of its economic system. By stability we mean several things. One key factor is the rate of inflation. We know thatinflation is an overall rise in prices without a commensurate raise in productivity. Sometimes governments are unable to control the rate of inflation through monetary policy and other times they even exacerbate inflation but printing too much currency. Another factor is the relative value of one currency versus another. When the relationship changes it may cost more or less - to do business. For example, when the currency of the other country devalues relative to your own (it is weaker than yours) it could be an advantage to you if you wish to produce in the other country and sell at home. If currency values fluctuate dramatically and rapidly it is very difficult to plan. The International Monetary Fund (IMF) was established to monitor the exchange rates among currencies and intervene when there is a currency crisis. For example, we have seen the IMF step into Argentina when the ARS (peso) experienced runaway inflation. Level of Development Although a company is supposed to stay socially responsible, the management of a company must evaluate the impact of a capital investment on the bottom line. That is to say, by investing in a specific country, is it the best place in terms of infrastructures or development. The major impacts of a countrys economic development and infrastructure levels are: Education level, production level and technological and infrastructural level. Education A company can benefit in hiring employees from another country with the same level of education from the home country for a lower compensation package. For that reason, it is crucial to determine the level of literacy of a chosen country because countries with better-educated people can produce better goods and services. Productivity Every company would like to reach a level of efficiency in productivity. This also leads to a result of economies of scale where competition can be more effective. This can be possible by having as mentioned-above a better-educated workforce that can help to achieve that level of effi

Technological Environment and Infrastructure


A nation s transportation, communication, and utility systems are referred to as its infrastructure. In the past, it is used to be imperative to have the persons who were working on the same project in neighboring cubicles. Now, the person who is working on the same project can be located in China, the United States, or India while you are in England. With that said, it is a matter of importance to evaluate a host country's communications systems to ensure that it can support the type of highspeed international communications necessary. Moreover, the quick diffusion of ideas to create a market for goods and services is dependent on adequate communications. The physical distribution of products is also dependent on infrastructure. Are there sufficient facilities for safe and timely distribution of products and movement of personnel such as roads, ports, airports, etc. For some additional information on infrastructure see the following.

Sociocultural Environment
A societys culture can tremendously affect its economic activities and its culture is in turn affected by its economic activites. Culture is characterized by the acceptable ways in terms of behaviors, customs, and values of a specific society. Hence, a good understanding of the culture of a nation will enhance greatly the chances of your business succeeding. It is important, therefore, to acknowledge and take into consideration the main cultural and social factors such behaviors, education, language, values, customs, as well as religion when conducting international business. Some sources of information about culture are as follows.