1.2 The Environment of International Business

A. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the developed or industrialized countries, the developing countries or emerging economies and the least developed countries or third world. These distinctions are usually made on the basis of per capita gross domestic product (GDP). Better education, infrastructure, technology, health care, and so on are also often associated with higher levels of GDP.

Within each category there are major variations, but overall the developed countries generally have a high per capica GDP, have a high standard of living and are in the later stages of industrialization. They are characterized by advanced technology, modern production and management methods, and advanced research facilities. They have diversified economies rather than only dependent on agriculture, oil or mining alone. Today it can be said that many developed countries are entering a postindustrial economy, with declining manufacturing but a growing service sectors. The best examples of developed countries may include the United States, Canada, the European Nations, Australia, New Zealand, Israel and Japan. The developing countries usually have a lower per capita GDP than developed countries. According to a system used by the World Bank, a developing countries is one with a per capita GDP of $ 11,905 or less. Many have large agrarian populations, densely populated cities, and unskilled labor. However, the typical developing country is hard to describe. Some rely almost only on oil exports such as the oil-dependent countries of the Middle East, although wealthy but are still considered developing countries. Some are newly emerging economies like China, Brazil, Indian, Russia and South Africa. The least developed countries (LDCs) are the world's most impoverished and vulnerable countries. The criteria is based on per capita GDP averaged over three years. As of 2015, a least developed country is one with a per capita GDP of $ 1035 or less. Currently, the list of LDCs covers 48 countries including Laos, Afghanistan, Bangladesh and so on.

In addition to level of economic development, countries can be classified as free-market, centrally planned, or mixed. Free-market economies are those where government intervenes minimally in business activities, and market forces of supply and demand are allowed to determine production and prices. Centrally planned economies are those where the government determines production and prices based on forecasts of demand and desired levels of supply. Mixed economies are those where some activities are left to market forces and some, for national and individual welfare reasons, are government controlled. In the late twentieth century there has been a substantial move to free-market economies, but some countries remained largely centrally planned economies, and some government maintained control of business activities.

Clearly the level of economic activity combined with education, infrastructure, as well as the degree of government control of the economy, affect virtually all aspects of doing business, and a company needs to understand this environment if it is to operate successfully internationally.

B. The political environment is another important aspect of international business environment. It refers to the type of government, the government relationship with business, and the political risk in a country. Doing business internationally thus implies dealing with different types of governments, relationships, and levels of risk.

There are many different types of political systems, for example, multi-party democracies, one-party states, constitutional monarchies, dictatorships (military and nonmilitary). Also, governments change in different ways, for example, by regular elections, occasional elections, death or war. Government-business relationships also differ from country to country. Business may be viewed positively as the engine of growth, or may be viewed negatively as the exploiter of the workers, or somewhere in between as providing both benefits and drawbacks. Specific government-business relationships can also vary from positive to negative depending on the type of business operations involved and the relationship between the people of the host country and the people of the home country. To conduct a business successfully in a foreign country, a company needs to have a good understanding of all of these aspects of the political environment.

C. The cultural environment is one of the critical components of the international business environment. It seems more difficult to understand the cultural environment, because the cultural environment is essentially unseen. The “culture” has been described as a shared, commonly held body of general beliefs and values that determine what is right for one group. National culture is described as the body of general beliefs and values that are shared by a nation. Beliefs and values are generally seen as formed by factors such as history, language, religion, geographic location, government, and education; thus firms begin a cultural analysis by seeking to understand these factors.

Companies need to understand what beliefs and values they may find in countries where they do business. In fact, a number of models of cultural values have been proposed by scholars. The most well-known is that developed by Hofstede in 1980. This model proposes four dimensions of cultural values including individualism versus collectivism, uncertainty avoidance, power distance and masculine versus feminality. Individualism is the degree to which a nation values and encourages individual action and decision making. Uncertainty avoidance is the degree to which a nation is willing to accept and deal with uncertainty. Power distance is the degree to which a national accepts and sanctions differences in power. And masculinity is the degree to which a nation accepts traditional male values or traditional female values. This model of cultural values has been used extensively because it provides data for a wide array of countries. Many academics and managers found this model helpful in exploring management approaches that would be appropriate in different cultures. For example, in a nation that is high on individualism (such as the U.S.A.), individual goals, individual tasks, and individual reward systems to be effective, whereas the reverse would be the case in a nation that is low on individualism.

D. The competitive environment can also change from country to country. This is partly because of the economic, political, and cultural environments; these environmental factors help determine the type and degree of competition that exists in a given country. Competition can come from a variety of sources. It can be public or private sector, come from large or small organizations, be domestic or global, and stem from traditional or new competitors.

The nature of competition can also change from place to place: competition may be encouraged or discouraged in favor of cooperation; relations between buyers and sellers may be friendly or hostile; barriers to entry and exit may be low or high; regulations may permit or prohibit certain activities.

An important aspect of the competitive environment is the level and acceptance of technological innovations in different countries. The last decades of the twentieth century saw major advances technology, and this is continuing in the twenty-first century. Technology often is seen as giving firms a competitive advantage; hence, firms compete for access to the newest technology, and international firms transfer technology to be globally competitive. It is easier than ever for even small businesses to have a global presence thanks to the internet, which greatly expands their exposure, their market, and their potential customer base. For economic, political, and cultural reasons, some countries are more accepting of technological innovations, others less accepting. To do international business effectively, companies need to understand these competitive issues and assess their impact.