Effects of foreign environment on international business operations
Components of Foreign Environment
Foreign environment consists of geographical, economic, financial, socio-cultural, political, legal and ecological forces. A firm needs to examine these components of the environment for each one of the foreign countries in which it operates.
* GEOGRAPHIC ENVIRONMENT
The foreign environment, which includes a nation's climate, topography, natural resources, and population, is influenced by geography. Everybody doing business internationally needs to be somewhat familiar with the geographical characteristics of the other nation because these impact the traits and nature of a community. It also has an impact on the demand patterns of the local population. One of the main factors influencing the development of business systems, trade centres, and routes is geography.
Demand for various products is influenced by a variety of climatic factors, including temperature, humidity, wind, rain, snowfall, and so forth. People's needs for housing, clothes, food, healthcare, and recreation vary greatly depending on their climate. Frequently, the same products are demanded and the same needs exist. However, due to topographic and climatic variations, products must be modified or adapted to local conditions. For example, the salted sand that was spread over the streets to keep them passable during four or five months of almost constant snow in Canada caused rusting and corrosion in the fenders and door panels, and the oil system also developed leaks. As a result, English Rolls-Royce cars needed extensive body work and renovations in Canada.
A company's choice of plant location is also influenced by geographic factors. A business would rather locate its manufacturing facility in a nation with favorable climate, appropriate topography (i.e., surface features like hills, plains, rivers, and seas), and inexpensive, plentiful labor, raw materials, and energy. Other equally significant factors are the foreign nation's strategic location on important trade routes and its proximity to other markets.
Geographical conditions in overseas markets have a direct impact on the distribution and logistical strategies of businesses. For countries or locations that are difficult to reach and that are susceptible to abrupt and severe weather disruptions, reorder points and safety level stocks are typically maintained at higher levels.
The position of a nation on the global map is another crucial factor. It has an impact on its international trade prospects. In addition to being expensive to travel to, landlocked nations like Bolivia, Zambia, and Zimbabwe are also challenging to enter because trade with them depends on their relationships with neighboring nations, which goods must pass through.
The demand from consumers for many inexpensive and necessary products is directly correlated with a nation's population. Large populations are the main reason why multinational companies are targeting nations like China and India in their competition to establish a presence in these markets. However, other factors like population growth, density, and distribution by age, income, location, and occupation must also be considered in order to arrive at an accurate estimate of the market size. When combined, these factors offer more accurate projections of the market's potential both now and in the future. They also aid in the provision of pertinent data for decisions about pricing, distribution, communication, and product quality.
* ECONOMIC AND FINANCIAL ENVIRONMENT
The economic environment is arguably the most significant of all the uncontrollables. A company can determine the size and nature of the market by conducting an analysis of the economic environment. In turn, the answers to these questions dictate whether a company should enter a particular foreign market and, if so, what tactics it should employ to conduct business successfully. The financial environment, which influences a company's capital structure, investment choices, and accounting procedures, is closely tied to the economic environment.
When conducting an economic and financial analysis, one must take into account a number of factors, such as the degree of economic development of the foreign nation, income, spending patterns, infrastructure, including financial institutions and systems, inflation, foreign investment in the nation, commercial policy, balance of payments account, accounting systems and practices, and integration of the foreign exchange, money, and capital markets with the global economy. Let's take a closer look at these financial and economic conditions.
* Economic Environment
The most significant indicator of the analysis of the global market is the economic environment. Let's talk about the main economic indicator that affects decisions made by foreign markets.
Economic Development: A nation's marketing development is closely tied to its economic development. In addition to having a high demand for a wide range of goods, nations with advanced economies also tend to have better infrastructure and more sophisticated marketing strategies. In these nations, competition is also fierce. Conversely, in less developed nations, infrastructure is also subpar in addition to low demand. As a result, doing business in these countries becomes more challenging and costly.
Income: Both the size of the market and the degree of development of the nation are significantly influenced by income. Among the primary indicators of income are per capita income and gross national product (GNP). The demand for consumer goods is influenced by per capita income, whereas sales of the majority of industrial goods and capital equipment typically correlate with GNP.
In addition to income, one should learn about the sectoral distribution of the GNP since it plays a significant role in determining the types of goods that are in demand in a foreign nation. A nation is likely to be agrarian and have a strong demand for agricultural inputs like seeds, fertilizer, pesticides, and agricultural equipment and tools if the majority of its gross national product is derived from this sector. On the other hand, an industrialized country that relies more on manufacturing will have a robust market for raw materials, equipment, and machinery as well as a wide range of consumer durables and non-durables.
Despite its usefulness, per capita income is not a perfect indicator of a nation's level of development and prosperity. The income distribution is more important. The distribution of income is extremely skewed in developing nations, but it is comparatively more even in developed nations. Since only a small percentage of the population contributes 60–70% of the nation's gross national product (GNP) and the majority of people live in poverty in developing nations, only a select few wealthy people can afford expensive and non-essential goods.
Expenditure Pattern: Information about spending trends is helpful in determining how much money is spent on various goods and which ones are given more importance.
Infrastructure: Another essential component of the nation's economic environment, infrastructure has a direct bearing on its economic growth. Transportation, telecommunications, commercial and financial services like advertising, marketing research, media, warehousing, insurance, distribution, credit, and banking facilities are all considered forms of infrastructure. Inadequate infrastructure affects businesses' costs and ability to reach different market segments in addition to impeding the nation's development. In nations with inadequate communication infrastructure, businesses struggle to manage and coordinate their operations.
* Financial Environment
Strong demand potential is reflected in the nation's sound financial position and favorable investment policies. Let's review some key financial indicators.
Fiscal and Monetary Policies: The factors pertaining to the nation's monetary and fiscal policies include inflation, interest rates, different types of duties, and exchange rates have a significant effect on business operations' expenses and profitability. These factors also affect a company's choice to transfer money between countries.
Commercial and Foreign Investment Policies: To determine a nation's openness to trade and investment with other nations, it is necessary to thoroughly examine its own commercial and foreign investment policies. Determining what tariff and non-tariff barriers the specific nation employs to shield its domestic industry from international competition can be made much easier with a thorough understanding of these policies. The nation may make plans to reduce the frequency of these trade restrictions.
Balance of Payments Account: Another important source of data regarding a nation's foreign exchange reserves and international trade is its balance of payments account. The country's imports and exports, as well as the main import sources and export destinations, are all revealed by the current account. Stocks of foreign investments, borrowings, lending, and foreign exchange reserves are displayed in the capital account. An international business needs to be properly informed about the exchange controls that are in place in other nations. Generally speaking, nations with balance of payments deficits restrict the flow of foreign currency into and out of their economies. Due to these restrictions, multinational firms are forced to use transfer pricing, which involves overcharging for imports and undercharging for exports in order to exit the market.
* SOCIO-CULTURAL ENVIRONMENT
Business is both an economic activity and a sociocultural phenomenon. Even though two nations have the same per capita income, their consumption habits may vary. Products people buy, the designs, colors, and symbols they like, the clothes they wear, and the importance they place on religion, employment, entertainment, family, and other social relationships are all greatly influenced by sociocultural factors. The sociocultural environment permeates every facet of business operations and affects every facet of human behavior.
The "sum total of man's knowledge, beliefs, art, morals, laws, customs and any other capabilities and habits acquired by man as a member of society" is the definition of culture. It is a group of people's unique way of life, their entire way of living. Therefore, culture encompasses a person's entire social heritage, a society's unique way of life, and its entire set of values, all of which are closely linked to the way that people consume as well as management philosophies and practices. Examine the box that provides you with information about the sociocultural setting.
Additionally, there are numerous subcultures within each culture that may be significant from a business standpoint. For example, in a nation like the United States, different subcultures are more prevalent in the midwestern, northeastern, or southern regions. Every national culture has subcultures, and if they are not acknowledged, it could lead to perceptions of similarity that aren't there. A single cultural entity is not always associated with a single national and political boundary. For example, Canada has both French and English ancestry, despite being a single nation politically. A marketing strategy that works well with French Canadians may not work well with English Canadians due to this clear cultural divide, or vice versa. Similarly a single personnel policy may not work with workers employed in two different plants if they belong to different subcultural groups and differ in their work habits and underlying motivations.
* Elements of Culture
Language, aesthetics, education, religions and superstitions, attitudes and values, material culture, social groups and organizations, and business customs and practices are some of the key components that make up a nation's culture.
Language: The majority of communications occur through language, which is a crucial component of culture. The language of the market should be thoroughly understood by an international marketer, especially the idiomatic nuances and semantic differences that are fundamental to all languages worldwide. The idiomatic interpretation of a language may differ significantly from dictionary translation. Serious errors can happen when people who are familiar with the language but not the culture translate brand names or advertising messages literally from one language to another.
"Corpse by Fisher" is what General Motors of the United States meant when they literally translated their marketing slogan, "Body by Fisher," into Flemish. Similar issues arose when the slogan "Come alive with Pepsi" was rephrased as "Come out of grave" in German advertisements or as "Pepsi brings your ancestors back from the grave" in Chinese. Sales of the American car known as "Nova" in Puerto Rico were low until the company discovered that the word was pronounced "No ye," which translates to "does not go" in Spanish. When the name was changed to "Cathie," sales improved.
Aesthetics: A culture's sense of beauty and taste is known as its aesthetics, and it is expressed through the arts, theater, music, dance, folklore, and other mediums. International business executives are particularly interested in aesthetics because it helps them understand the meanings of different artistic expressions, colors, shapes, forms, and symbols in a given culture, as well as governing the standards of beauty in a society. For example, different people have different meanings for the same color. In the Far East, mounting is white, but in the United States, it is black. Americans find green to be a calming color, but Malaysians dislike it because it is associated with illness and death. Correct interpretation of symbols is also necessary. For example, the number seven represents good fortune in the United States, but the opposite is true in Singapore, Ghana, and Kenya. Since the number four is pronounced as "shi," which in Japanese means "death," it should not be used in that country. Avoiding socially awkward situations and properly designing products and messages can be made much easier by being sensitive to a society's aesthetics and symbolic expressions.
Education: Formal schooling is the most common definition of education. It is preferable, however, to take a more comprehensive view and characterize education as any formal or informal process that imparts knowledge, abilities, and attitudes. Education is significant because it influences not only educational attainment but also the growth of different skills and mental abilities. It has been discovered that educated people are generally more sophisticated, discriminating, and open to new ideas and products. The availability of educated workers, such as technicians and skilled labor and professional is also influenced by the level of education in the nation. A company's choice of media to advertise its goods and services also depends on the national average for educational attainment. For example, traditional printed communication methods are ineffective in nations with low literacy rates.
Religions and Superstitions: Religions have a significant impact on moral and ethical values as well as people's attitudes, behaviors, and life perspectives, all of which are reflected in their professional lives.
habits and patterns of consumption. According to Dr. Ernest Dichter, "cleanliness is typically thought of as being next to godliness in puritanical cultures." However, being too careless with one's body to overindulge in bathing or toiletries has the opposite meaning in Catholic and Latin American countries. It is that kind of behavior that is deemed immoral and inappropriate.
The world is home to many different religions and faiths, but some of the most well-known ones are Buddhism, Christianity, Hinduism, Islam, Shinto, and animism. Everybody has their own set of values and standards for behavior. Understanding people's work habits, underlying motivations, and consumption behaviors is made easier with a basic understanding of the religions practiced in the target markets.
People's superstitions are equally significant in a society. In some cultures, people's beliefs in ghosts, astrology, hand reading, lucky days, and locations are fundamental. Because it is deemed bad to have someone else's foot on one's head, single-story homes are preferred in some nations. In many Asian nations, the location of a building and its design are determined by "vastushastra" principles rather than just geographic and economic considerations.
Attitudes and Values: In addition to religions and superstitions, one must be aware of the attitudes, values, and beliefs that are common in a community. These values and attitudes could have to do with material belongings, risk-taking, change, and consumption level. A society's attitudes and values greatly influence what is considered important and desirable, which varies from society to society. While people in many societies are resistant to change and taking risks, Americans are generally more open to these things. They favor doing things the old-fashioned and secure way. New products are not allowed unless local authorities approve them.
Material Culture: Ball and McCulloch define material culture as all man-made objects, and the study of it focuses on how, by whom, and why people make things. While the "how" question is related to technology, the "who," "what," and "why" questions are related to economics.
"Technology encompasses the methods and tools used to create tangible products." It is the technical know-how that members of a society possess. The type and quantity of workers to be employed, the size of the investment, and the scale of operations are all impacted by the technology choice. In the past, technology transfer has been a contentious topic. Many developing nations have strict laws governing the import and payment of technology due to the availability of outdated or inappropriate technology.
Multinational corporations are advised to have appropriate action plans to counteract the resistance to change and public criticism that frequently accompany the transfer of new technology.
There are undoubtedly numerous business ramifications of a society's material culture. Due to the disparities in the material cultures of the two societies, products and services that are deemed acceptable in one market might not be in another. For instance, the less developed nations of Asia, Africa, or Latin America might not have a market for sophisticated electronic devices that are in high demand in the technologically and economically developed Western countries.
Social Groups and Organisations: Studying social groups and organizations is crucial because it establishes how individuals interact with one another and plan their activities. The roles of men and women in society, the size and cohesiveness of families, and the status of various social classes vary from one nation to the next. A society's interpersonal relationships and way of life are shaped by social groups and organizations. They influence the behavioral standards, social conduct codes, value systems, etc. that could be important to the decision-making of international business managers.
Business Customs and Practices: To prevent business blunders, it is essential to be aware of the business customs and practices that are common in various nations. An international business manager needs to be knowledgeable about how business is done and the significance of time, formality, change, and achievement for businesspeople in a foreign country. For example, American managers are naturally very goal-oriented and place a high value on speed and timeliness in business transactions. They also enjoy trying new things and are very achievement-oriented. However, these ideals and characteristics are not shared by people in other parts of the world. For example, Japanese people are also workaholics, but they are extremely slow at making decisions. Latin Americans do not think that I act hurriedly and spend a lot of time interacting with people and building relationships before engaging in business dealings.
A person working with individuals from diverse cultural backgrounds should be well aware of the variations in the number and type of steps involved in business negotiations as well as the formalities that must be followed when signing contracts. In many West African countries, oral agreements are deemed more than adequate, but in countries such as the United States, it is required to have a final agreement in writing.
* POLITICAL ENVIRONMENT
It is true that an overseas company only operates for the benefit of the host county government and as a guest. The government retains the authority to permit a foreign company to conduct business in the nation and to establish guidelines for how such companies may do so. One needs to examine elements such as the current political party system and form of government, the role of the government in the economy, political encouragement for organizations, practical ability, and political risks for businesses in order to obtain insight into a foreign political environment.
Political Party System and Form of Government: In a foreign country, the government may be either absolutist or parliamentary. In contrast, "people's representatives chosen from me" govern the legislative form of government. Only a small number of people make policies under an authoritarian government, which typically takes the shape of absolute monarchies or dictatorships. One must ascertain whether the primary government is a single pay system or a multiparty government system. In my opinion, one-party governments are more stable than multiparty ones.
Political Ideology and Government Role: In addition to political party affiliation, one needs to be aware of the government's policies regarding foreign investment and business. The government can also have a direct role in business in addition to regulating it. In these situations, government-owned businesses become market leaders and fierce rivals to foreign companies. Even providing goods and services to the "Government agencies" is not free. It is very difficult to negotiate prices and other terms with government organizations due to their monopsonic power.
Political Stability: The international company is very concerned about the stability of the government and its policies. Foreign companies seek out politically stable nations because business decisions nowadays entail significant financial outlays and cannot be reversed. A change in the type of government, a change in the political parties that make up the government, or a change in the policies of the government without a change in the government or political parties can all lead to political instability.
Political Risk: A major danger to international business is political risk, which is the project's susceptibility to the political actions of a sovereign government. Political acts that pose political risks include domestication, nationalization, expropriation, confiscation, and limitations on the transfer of finds. When a government seizes a foreign investment without paying any compensation, this is known as confiscation. When the government appropriates foreign investment but pays some compensation, this is known as expropriation. The pay may or may not be in line with a company's market value. Transferring ownership of the seized or expropriated company to a national company or government body is known as nationalization, and it impacts the entire industry rather than just one company.
In order to align the company's operations with the interests of the country, domestication, a mild form of intervention, entails transferring control of foreign investment to national ownership. It is different from expropriation in that it involves a slow invasion of a foreign operator's freedom of operation. Domestication may be government-initiated or firm-initiated either started or planned. Government initiated domestication is quite safe and is ranked with expropriation, whereas firm-mated and predetermined domestication entails low levels of risk.
A temporary or permanent blocking of finds is another kind of risk. A business firm under a financial blockage owns the money and property rights, but it is unable to send the money or profits back to its home country, in contrast to other types of risks. During Amin's rule in Uganda, this was a common issue for Indians. The government made no official announcements about the takeover of property, but it made it nearly impossible for businesses to return any kind of their profits home. Although there are undoubtedly black money market activities in every nation, they find it challenging to manage the substantial sums of money involved.
To manage political risks, multinational corporations must take a proactive stance. Recognizing the existence of different political risks and their effects, as well as creating suitable plans and policies to address them, are essential components of effective risk management.
* LEGAL ENVIRONMENT
Every company operates under the legal system's jurisdiction. This holds true for both domestic and foreign businesses. However, the challenge for multinational corporations is that the laws they encounter in their home countries may differ from those in their host countries. For example, West German advertising regulations are so stringent that it is best for foreign marketers to obtain competent legal advice before drafting their advertising strategy in that country. In a similar vein, laws in European nations prohibit the promotion of goods through price reductions. These regulations are predicated on the idea that these actions set buyers apart.
There are laws governing not only the marketing mix variables but also other business decisions such as plant location, production level, employment, market financing, accounting and taxes, property rights, including immovable property, patents, trade marks, and agreement cancellation.
In addition to having a direct impact on a company's operations, laws also have an impact on the environment in which a company operates abroad. For example, while one nation's legal system may encourage competition in its markets, another may attempt to safeguard its industry and thereby limit competition. For example, in the US, antitrust laws affect all takeovers, mergers, and business practices that restrict trade; court decisions in this area are governed by paragraph one of the Sherman Act. For instance, Gillette's attempt to acquire West German electric razor manufacturer Braun A.G. was blocked on the grounds that it would disrupt competition.
The fact that the legal systems of the world are not unified and are instead founded on conflicting legal philosophies is a significant issue with laws in various nations. One of the two legal philosophies—common law or code law—has its roots in the legal systems found in various nations throughout the world. Common law has its origins in Britain and is currently applied in the US, UK, and Canada. Common law is based on custom, previous decisions, and practices of higher courts that consider related issues within the recognized body of law. In contrast, code law is founded on Roman law and is a comprehensive set of written regulations that cover every scenario. The two legal philosophies have significant business implications, one of which is that the verdicts rendered in a commercial dispute may differ significantly. Let's use the interpretation of a contract's failure to meet necessary conditions as an "act of god" to demonstrate. What is considered an "act of god" in common law may not be the same in code law. Therefore, even though a worker strike might be considered an "act of god" under code law, it will most certainly not be grounds for non-fulfillment of the contract under common law.
International laws deal with upholding orders, and efforts have been made to evolve them over the past few decades. These laws now also take into account the role that individuals play, whereas at first they only recognized nations as entities. A collection of guidelines that nations deem obligatory for themselves is known as international law. This definition highlights two key aspects of international law. In the first place, there is no comprehensive legal system. Because, as previously mentioned, international commercial law is relatively new, there isn't a truly comprehensive body of law. This has directly affected the current administering authorities. Currently, the number of international organizations that administer justice is quite small. These include the World Court at Hague and the International Court of Justice, which was established in 1946. The second feature of international law is that, as the phrase "consider binding upon them" states, no country can be coerced into following these rules. International rulings are therefore founded on the idea of good humanity rather than the legal system of any one nation since all countries acknowledge the sovereignty of legal systems.
One of the main issues faced by multinational corporations in the absence of laws with jurisdiction over sovereign nations is determining which country's laws—that is, the laws of the home country, the home country, or the third country—will apply in the event of a dispute. Businesses must also understand the various ways that trade disputes are resolved and the function of the International Chamber of Commerce's Court of Arbitration.
* ECOLOGICAL ENVIRONMENT
The pattern and balance of interactions between people, animals, plants, and their surroundings are referred to as ecology. In the past, environmental pollution and resource depletion were hardly a concern. As a necessary cost of the development, the smoke from the chimneys and the dust and grime from the factories were accepted.
However, in recent years, the scope and character of the "pollution overload" have grown to such concerning levels that there is pressure on everyone in the world to act quickly to prevent things from getting out of hand. In practically every nation, there has to do something immediately to prevent things from getting out of hand. There are laws and codes of conduct in place in practically every nation today to protect the planet's limited resources and stop environmental degradation. Industrial firms' business operations are no exception and are now subject to these rules. The United States government recently banned the export of marine products from nations like India that lacked specialized equipment on fishing trawlers to rescue trapped tortoises throughout fishing trips. Similarly, exports of clothing made with fabric treated with AZO dyes are now subject to restrictions. Germany may have the strictest environmental regulations in the world right now.
There have been paradigm shifts in the idea of industrial progress and development as well.
In addition to financial returns, corporations are now evaluated on their ability to conserve the environment and lower pollution levels. In today's global marketplace, green technologies, green goods, and green businesses are highly prized.
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