Business Environment for

Global Firms
 Business Environment
 Economic Environment;

 Political Environment;

 Legal and regulatory environment;

 Cultural Environment;
 Economic Environment

 Economic System :
 Centrally Planned Economy : where dec-
isions regarding production and distribution
of goods is taken by a central authority.

 Market Based Economy: The decision of

production and distribution is taken by
individual firms based on market demand
and supply.
 Mixed Economic System:

 In this case public and private sectors

exist side by side.

 Whenever, a firm trades with any other

country or whenever it tries to locate its
manufacturing operations there, it takes
into account the existing economic sys-
tem in the host country and accordingly
shapes the trade and foreign operation
policies.
Consumer Behaviour
 It is based on :

 Preference for Price/Quality of the

product;
 Propensity to save; (Rural areas where
people have high propensity to save),
 Quality of People; (Educated)
 Existence of Social Security Scheme;
 Level of Income and Distribution
 Distribution of low, medium, and high incomes.
 Gross domestic product per capita.

 In low income countries MNCs market or

manufacturing low priced goods.

 However, MNCs would like to establish in a

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

 Inflation has negative and positive impact Which

is based on nature of activity. Such as,

 High inflation has negative impact on salaried

class people whereby Purchasing power of
customer depends upon level of inflation. Higher
the inflation lower the real income and lower the
demand.
 It has negative impact on production of pro-

duct when cost of production increases bec-

ause of high inflation.

 Thus, when a multinational firm decides to set

up manufacturing unit in a foreign country it
has to take into account the rate of inflation.
Availability of Human and
Physical Resources:

 Human Resources:

 It is not possible for MNCs to transport the

entire labour force from the home country.
Availability of skill manpower in host
country is must.
 Physical Resources:

 Raw Material: availability of various inputs

necessary for the production. Example,vario -
us Indian firms have moved to Sri Lanka for
production of rubber products and Nepal for
production of herbal products.

 Vocational theory of Foreign direct invest-

ment is based on this concept.
 Network of Infrastructure
 Availability and quality of infrast-
ructure:
 Rail traffic networks for distribution
capabilities;
 Communication systems for marketing;
 Energy (electrical and fuel) consumption;
 In India lack of proper infrastructure is
the reason for gap between approved
FDI and actual inflow of FDI.
 Economic Policies

 Monetary Policy : If restrictive or co-

ntractionary monetary policy (Rate of
interest will be high) is implemented to
stabiles the economy, it has negative
impact on MNCs and business men
because now credit is available at high
rate of interest.
 Fiscal Policy : If corporate taxes are
at higher side it will be taken into

consideration a as negative aspect by

MNCs.

 If host country carries high fiscal def-

icit and budgetary deficit MNC will
take it as negative point. Because it
has negative impact on external
sector and monetary sector.
 Trade Policy :
 Excise duties and import duties also

cause of concern for MNCs.

 Industrial Policy :

 If industrial policies are liberal for

MNCs it attracts more foreign
investment.

 If these polices are restrictive foreign

investment is also restricted.
 Strength of External Sector
 MNCs are greatly interested in repat-
riating profits to their parent company.
If it easier, MNCs will attract more
towards that country.

 For liberal repatriation policy, situation

of balance of Payment should be strong.
Foreign exchange reserve should be
large in size.
Level of Economic Integration
Free Trade Area

 Eliminates tariff and

quota barriers among
member countries.
 Each country is free to
set its own tariff and
quota barriers against
nonmember countries.
Customs Union Area
Tariff and quota barriers among member
countries are eliminated.

Member countries establish common

tariff and trade barriers against
nonmember countries.
.
Common Market Area
No trade barriers among member
nations.
No restriction on the movement of
labor, capital, or technology across
borders.
Member countries establish common
tariff and trade barriers against
nonmember countries.
Economic Union

Has all the characteristics of a

common market.
Harmonizes taxation.
Harmonizes monetary policies.
Establishes a common currency.
NAFTA

The North American Free Trade

Agreement (NAFTA) created the
world’s largest free market.
 390 million U.S., Canadian, and Mexican
consumers and a total output of $10
trillion.
Integration in Asia

 Association of Southeast Asian

Nations (ASEAN)
 East Asia Economic Group
 Asia-Pacific Economic Cooperation
(APEC)
 South Asian Association for
Regional Cooperation (SAARC)
Integration in Africa and the
Middle East
Economic Community of West
African States (ECOWAS)
The African Union (AU)
The Arab Maghreb Union
Gulf Cooperation Council (GCC)
 Political and Legal Environment

 Firms usually prefer to conduct business in a

country with a stable government in condu-
cive business enbironment.

In the host country environment both political

and legal affects the international marketing
and business operations of a firm in various
ways.
 Resultantly, there is always some risk involved in
account of differing political scenario, which is
known as ‘Political Risk’.

 Political Risk :

 It is the risk of loss in investment being made in

a given country because of change in country’s
political structure or policies. Such as:

 Tax law, tariffs, and restriction in repatriation

of profits.
 Currency Inconvertibility:
 Sometimes the host government enacts law

prohibiting foreign companies from taking their

money out of the country or exchanging the
host country currency for any other currency.
 This is a financial form of political risk.
 The reasons are both economic and political.
Economic factors are concerned mainly with
balance of payment problem.
 Example: The govt. of Nigeria imposed such
restrictions a couple of decade back in order to
serve it economic and political objectives.
 Credit Risk
 Refusal to honor a financial contract with foreign

company or to honor foreign debt comes under

the form of political risk.

 Conflict of Interest:
 The interest of MNCs is normally different from
interest of the host country.
 The MNCSs manifest in the maximization of
corporate wealth;
 The host country is evident in the welfare of
economy;
 Example :

 Transfer of funds by MNCs may influence the

money supply which may cause deflation;

 Similarly the payment of exorbitant amount of

royalty and other such dues by subsidiary may
worsen the balance of payment;

 It is not economic issue that are the source of

conflict but also non-economic such as national
security;
 Management of Political Risk

MNCs can pursue a strategy of either avoi-

dance or insurance.

 Avoidance : Screening out political unce-

rtain countries.

 In this case, measurement and analysis of

political risk is useful.
 Insurance:
 It is a strategy to shift the risk to other
parties. Insurance coverage can be
obtained from a number of sources:

 Private Insurance
 Government Insurance
 Example
 In 1993, Motorola won bid to install,
operate and maintain cellular telephone
service in Nicaragua.
 Nicaragua has a crumbling infrastructure
and a very poor land-line telephone
system.
 Motorola’s cellular service was one of the
biggest private foreign investor.
 Example :

 Overseas Private Investment Corpo-

ration (OPIC), U.S. government
agency, which is business oriented
agency whose purpose is to support
U.S. private investments. It receives no
public funds.
 OPIC provided $ 8 million in insurance
against political risk.
 Legal Environment

 From an international business perspective

host countries may adopt a number of law
that affect a company’s ability to market.
Such as :

 Antidumping Law : It prohibits below cost

sales of product.
 Licensing: In this case company has to hold
export and import license.
 Restriction on Genetic Modefied

Food: At this front governments increas-

ingly devising new rules that affect trade in
genetically modified products. For example,
Australia introduced a mandatory standards
for food.
 Tariffication: In this case, tariff on those
goods are high where govt. want to control
the supply, such as, cigarettes and alcohol.
 Taxation :

 This is very important legal issue for International

firms which move from one country to other and
adopts transfer pricing.

 Example: if any firm is established in the country

where corporate tax rate is very high, firm adopts
transfer pricing in order to siphon-off the profit or
dividend before imposition of tax to the subsidiary
which is located on tax heaven country. In this case
host country with high corporate tax has to face
loss.
 Corporate Governance and
Responsibility:

 In this system the decisions are made and

interests are represented properly for all
stake-holdrs. Key elements are :

 Transparency of a firm’s operation;

 Transparency in financial results;
 Assurance of Stake-holder's Right;
 Safety, Environment and Labour Stand-
ards: In this case entry of those foreign goods
which do not meet these standard are prohib-
ited.
 Employment of child labour is also unethical
issue as some developed countries.

Example : Japan has particularly strict health

standards which affect the import of Parma-
ceutical.

 Sometime, Japanese government insists to conduct

its own test, which are time consuming and costly.
 Issue of Corruption

 In western countries bribery is highly unethical. In

U.S., there is a foreign Corrupt Practices Act which
prohibits companies from bribing any foreign official.

 However, international manager must carefully

distinguish between reasonable ways of doing
business internationally by maintaining balance.

 The problem for international marketers is how to

maintain consistency because some of the ethical
issues like, global warming and pollution but some
issues do not have same standard rule in every
country.
 Example:

 In Brazil cutting down the rain forest may be

acceptable to the Brazilian government but as
per scientists and environmentalist it has
affect on global warming and other climatic
changes.

 China may use prison labour in producing

products for export but U.S. law prohibits the
importation of such products.
 Issue of Consumerism:

 Generally, in developed countries a lot of co-

nsumer protection activities take place. But
in developing countries, they are lacking.

 Resultantly, a lot of Multinational companies

sell harmful product in emerging economies.

 Example: Companies market a number of

medicinal products that are banned in their
home country.They should care for social
responsibility wherever they operate.
 Legal Environment
Ease of … INDIA CHINA RUSSIA BRAZIL US

Doing Business 120 83 106 122 3

Starting a Business 111 135 50 122 4

Dealing with Licenses 134 175 177 107 24

Employing Workers 85 86 101 119 1

Registering Property 112 29 45 110 10

Getting Credit 36 84 84 84 7

Protecting Investors 33 83 83 64 5

Paying Taxes 165 168 130 137 76

Trading Across Borders 79 42 155 93 15

Enforcing Contracts 177 20 19 106 8

Closing a Business 137 57 80 131 18

Source : World Bank Group (“Ease of Doing
Business” rank (Out of 178)
 Cultural Environment
 International Business success is based on
Cross-cultural literacy.
 Cross Cultural literacy is based on :
1. Social Structure
 Religious and Ethical System
 Islam & economic Implication :
 Koran supports earning of legitimate profit
through trade and commerce.
 Those who hold property are assumed as
trustee rather than owner.
 Trustees are entitled to receive profits from
the property but should use it in a socially and
prudent manner.
 One economic principle of Islam prohibits
the payment or receipt of interest.

It is also becoming a matter of law. In

1992, Pakistan’s federal Shariat Court
declared earning interest is illegal and
Govt. should amend financial
rule accordingly.
Confucianism and its Economic
Implication :
 This was the ethical system in China, it has
weakened since 1949 but still people follow this
in China, Korea and Japan.
•Three values are central to the Confucian
system of ethics:

Loyalty, Reciprocal Obligation and

honesty
2. Language

 Competitiveness of any country for

entry of MNC based on Language, if it
has one spoken language, English, it is
more competitive.

 Competitiveness of MNC is based on

Multi language. some times blunder
can be committed if local language is
not known by marketing department.
 Example

 General Motor was troubled when they

have launched their Car-
with the name of “Chevrolet Nova”.
Nova means STAR but in Spanish NO
VA means “ It does not go” resultantly
GM changed the name of the car as
“Caribe”.
 Come alive with Pepsi‟ in German
„Come out of the grave‟, American
Motor‟s Matador become killer in
Spanish
 Why Cultural Diversity Exists?
 A Dutch scientist, Greet Hofstede has
developed a model to explain the cultural
diversity.

 His model is based on a study conducted

for 1,17,000 employees in 88 countries.

 Greet Hofstede has explained that

cultural diversity among nations has four
dimensions.
Dimensions of Cultural Diversity

1. Individualism /Collectivism:
 In individualistic countries (France,
Germany, South Africa, Canada, etc.),
people are expected to look out for
themselves.

 Typical values are personal time,

freedom, and challenge.
Continue……

 In collectivist cultures (India, Japan,

Mexico, Korea, Greece) individuals are
bounded through strong personal and
protective ties based on loyalty to the
group during one’s lifetime.

 Values and the use of skills.

Continue…

2. Femininity versus Masculinity

 Greet Hofstede‟s study suggested that men‟s goals

were significantly different from women‟s goals.

 Feminine values are more important in countries like

Sweden, France, Israel, Denmark and Indonesia.

 Femininity tend to value a good working relationship,

security and avoiding conflicts.
 Masculinity as a situation in which success,
money and material things dominates the
society.

 Masculine index is high in India, US, Japan,

Mexico, Hong Kong, Italy, Great Britain

 People tend to value assertiveness and mat-

erialism. Promote competition, meritocracy,
decisiveness and strong leadership.
3. Power distance

 Power distance index measures how subor-

dinates respond to power and authority.

 In high-power distance index countries

(India, South Korea, Mexico and African
countries), subordinates tend to be afraid of
their bosses.

 In low-power distance countries (the US,

Britain, most of the rest of Europe), subor-
dinates are more likely to challenge bosses
and bosses tend to use a consultative
management style.
4. Uncertainty avoidance

 When uncertainty avoidance is strong, a

culture tends to perceive unknown situations
as threatening so that people tend to avoid
them. Examples include South Korea, Japan,
and Latin America.

 In countries where uncertainty avoidance is

weak (the US; the Netherlands; Singapore;
Hong Kong, Britain) people feel less threa-
tened by unknown situations. Therefore, they
tend to be more open to innovations, and risk,
etc.
 Making Culture Work for Marketing
Success
 Adapt Products and process to Local
Market :

 Example : 3M is a United States based

company in diversified area of home cleaning
product, electronic and office product.

 Before starting of marketing of home clean-

ing product (scotchbrite (cleaning pad)
they came to know that traditionally floors
are scrubbed with the help of The rough

shells of coconuts.
 3M responded by making its cleaning pads
brown and shaping them like foot.
 Employ locals to gain cultural knowledge

 As a matter of fact, of the 34,000 3M

employees outside of the United States,
only 1 percent are from home country.
 Cultural Implication : Islamic
Banking

 Koran clearly prohibits “interest”,

which is called “riba”.

 There are now 170 Islamic financial

institutions world-wide managing
over $150 billion in assets and
making an average return on capital
of more than
16 percent.
 Two of the largest banks are entering
into the market – Citigroup and
HSBC.
 Islamic Banking is based on two
different methods :

 Mudarabah : It is a profit sharing

scheme.
 When Islamic bank lends money to a
business, rather than charging interest
on loan, it takes a share in the profits
that are derived from that investment.
 Similarly, when a business (or individual)
deposits money at an Islamic bank in a
saving account, the deposit is treated as an
equity investment in whatever activity the
bank uses the capital for.

 Thus the depositors receives a share in the

profit from the bank’s investment.
 Second method is –

 Murabaha Contract :

 When a firm wishes to purcahse any equipm-

ent that costs $ 1,000, the firm tells the bank
after having negotiated the price with the
manufacture.

 Initially, bank buys the equipment for $1,000

and later on borrowers buy back from bank in
$ 1,100, it can be assumed as interest.
 Environment Threat and Opportunity
Profile (ETOP) for a Bicycle Company

 Envir. Nature Status of each sector

Sect. Of Impact____________________
Economic Rising disposable income and
Living Standard

Market Organized sector a virtual oligo-

poly, buyers critical and better
informed, overall industry growth
not so encouraging, Growth rate
for niche segment like sports,
trekking and racing is high.
 Envir. Nature Impact of each sector
Sect. Of Impact

International India is second global expo-

rter after China, India’s share
is shrinking due to cheap
Chinese imports.

Regulatory Parts and components rese-

rved for small scale industry,
regulatory restrictions heavy,
it is thrust area for exports.
 Envir. Nature Impact of each sector
Sect. Of Impact

Social Environment and health friendly

transportation. Wide usage for
physical fitness equipment .

Supplier Mostly ancillaries and associated

companies in small scale sector
supply parts and components,
rising steel prices, increasing use
of aluminum
 Envir. Nature Impact of each sector
Sect. Of Impact

Technological Technological upgradation

of industry in progress,
import of machinery is
simple, product innovations
ongoing such as battery-
operated and lightweight
foldable cycles.