environmental factors of international business
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Country Risk Analysis : Environmental Factors
of Business
Economic Environment
Economic System (Centrally Planned, Capitalist & Mixed Economy)
Per Capita Income (Purchasing Power Capacity)
Market Size (Large Population & Age factor)
Inflation (Cost of Production is high, consumers’ income is reduced)
Economic Environment in India
Indian Companies are embracing new opportunities and challenges. Because:
Technology has improved dramatically :
Some of the most advanced technologies and skills in the world are available in the country at a fraction of the cost of advanced nations.
• Consumer Demands is booming
Increasing Purchasing power, as Goldman Sachs
estimated per Capita Income of about $ 9000 per
annum. India is giant consumer market comprising 300
million urban based middle-class consumer and
another 700 million consumers exist in rural
India. In urban areas, the middle-class culture is
firmly established the 3 Ms of MALLS, MOBIKES
and MOBILES to rule this class.
Untapped rural market with millionaires is captured by Companies like, Hero Honda, Maruti Suzuki, Akai TV, Proctor & Gamble and some banks like ICICI Bank, State Bank of India.
Worldwide and Global Opportunities for India: Outsourcing Opportunity: IT services are not only outsourced in India even innovation and manufacturing
work is also outsourced.
Some of the fortune 500 companies, like Delphi, Dell, Elli Lilly, General Electric,
Hewlett Packard and Daimler Chrysler have put up R & D facilities in India.
GE’s Technology Centre in Bangalore is the company’s largest such facility outside the US with an investment of
US $ 60 million.
The Daimler Chrysler Research Centre in Bangalore is involved in applied
research.
Transforming and Reinvesting Activity:
Fifteen years ago Reliance company was into synthetic fibres which accounted for 70 percent of the group’s turnover. Currently, company’s area of operations are :
Oil gas exploration, energy, infor-mation & communication & technology, life Sciences research and retail.
ITC is example of transformation by moving away from the commodities cluster into:
Hotels, high quality paper, packaging and printing, lifestyle retailing, information technology.
Tata group of company has transformed and
encompasses more than 90 companies in diverse sectors like–
Automotive engineering products, metals, energy, chemicals, hotels, property develo-pment, financial services, and information technology.
Acquisition of Foreign Companies
Indian companies are now started acquisition of companies to gain latest technology and cost & quality competit-iveness. Major Acquisitions are:
Top 10 deals itself account for nearly US $ 21,500
million since 2000. This is more than double the amount involved in US
companies’ acquisition of Indian counterparts.
Top 10 acquisitions made by Indian companies worldwide
Acquirer Target CompanyCountry
targetedDeal value ($
ml) Industry
Tata Steel Corus Group UK 12,000 Steel
Hindalco Novelis Canada 5,982 Steel
VideoconDaewoo Electronics
Corp. Korea 729 Electronics
Dr. Reddy’s Labs Betapharm Germany 597 Pharmaceutical
Suzlon Energy Hansen Group Belgium 565 Energy
HPCLKenya Petroleum
Refinery Ltd. Kenya 500 Oil and Gas
Ranbaxy Labs Terapia SA Romania 324 Pharmaceutical
Tata Steel Natsteel Singapore 293 Steel
Videocon Thomson SA France 290 Electronics
VSNL Teleglobe Canada 239 Telecom
Relocation of Plants Several Firms have bought those
plants in developed countries now have been closed because of high cost. These Companies like:
Essar Power relocated 1,200 MW power Plant from Scotland to Vadinar in Gujarat at a cost of about US $ 617.3 million.
Arvind Mills reshifted its manufacturing plant from Mauritius to India at an estimated cost of US $ 2.74 million.
Political Environment: Currency Inconvertibility-(Host country
govt. enacts law prohibiting foreign companies from taking their money out of the country or exchanging the currency.
Credit Risk- (Refusal to honour a financial contract with a foreign company.)
Conflict of Interest-(Welfare of economy Vs. maximization of corporate wealth: tax revenue Vs. transfer pricing and balance of payment issues)
Regulations and Government Policy is
Changing in India
Competition is being encouraged
Reservations are being done away
Inspectors Raj are being removed
Legal EnvironmentEase 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
• Language (‘Come alive with Pepsi’ in German ‘Come out of the grave’, American Motor’s Matador become killer in Spanish ).
• Cast and Religion (In Iran because of ‘Purdah’ system singer machines’ sales executive do approach husbands not wives).
• Material Element- It is related to Economic, financial and social infrastructure which is objected and enjoyed by people. (Example:
German like beer while French like wine.)
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”.
3. Education
Formal Education is the medium through which individual learn many of the language as well cultural norms which are taught in school.
Education is very important determinant of national compe-titive advantage as well guiding the location choices of international business. Because MNC give importance to the location which has a pool of skilled and educated human resources as well educated customers.
Example : After second world war, Japan had almost nothing except for a
pool of skilled and educated human resources. Postwar economic success of Japan based on education system.
Culture and Workplace
Work Place culture is also determined by the culture which affects operations of MNC’s in different countries.
Greet Hofsteed had identified 5 dimensions related workplace based on culture of that country.
High Power Distance ( promote inequality in power and wealth Vs. discourage inequality)
Individualism Vs Collectivism ( less ties between individual Vs. high ties between individual )
Uncertainty avoidance ( readiness to take risk and uncertainty)
Masculinity Vs. Femininity (large Vs. little gender differentiation in the work).
Managerial Implications
If culture varies because of differences in social structure, language, education and economic philosophy, three important implications for International business are:
Cross Culture Literacy: The biggest dangers confronting a company that goes
abroad for the first time of being ill-informed.
To avoid mentioned problem international business should consider employing local citizens to help in Buusiness and should move from ethnocentric approach .
Culture and Competitive Advantage
In International business there is important connection between culture and competitive advantage while making choice of location for production facilities.
Example : A and B two locations are given. Both are characterized by
low labour costs, same population size and at similar stage of economic development.
In country A the education system is under-developed, there are six major linguistic groups.
In country B, education system is well developed, there is only one linguistic group.
Which country is best investment site ?
Culture and Business Ethics Generally ethical principles are universal but some are
culturally bound. If this is the case, International business may be confronted with difficult ethical dilemmas.
Example : Chinese culture is based on “guanxi”, which is based on
networking and supported by the idea of gift giving. On the other hand western culture assumed it as bribery.
How to go ethically in this condition?
There is thin line between corruption and legitimate gift giving to support business transaction.
Thomas Donaldson has suggested three guiding principles to deal with ethical dilemma in international business:
1. Respect for human rights which determines the absolute moral threshold for all business.
2. Respect for local tradition
3. The belief that context matters when deciding what is right and what is wrong.
Gift giving does not violate human rights and is important in the context of some cultures like China and Japan.
Employing Child labour at less than minimum wages would be unethical.
Cultural Implication: Failure of Wal-Mart
The company had toiled for 8 years struggling to make its South Korean and German stores compete against strong, established local retailers.
In July 2006, Wal-Mart announced its withdrawal of operations from Germany because the firm was losing some $250 million per year on sales of $2.5 billion.
Wal-Mart's 85 big-box stores were sold to German company METRO AG, a much bigger
player with 550 stores in Germany. The sale of Wal-Mart's 85 German stores resulted in a $1-billion loss,
Main problem was competitive prices from national discounters as well as German consumer rejection of American-style signa-ture features such as stores outside of town centers, employees required to smile and heartily greet customers.
On May 22, 2006, the American retailer withdrew from the South Korean market
when it agreed to sell all 16 of its Wal-Mart Korea stores to Shinsegae, South Korea's top discount chain.
The deal was for $882 million. Wal-Mart Korea had lost $10 million on sales of some $800 million in 2005. Wal-Mart's "warehouse-style" environment proved unfriendly to the needs of Korean shoppers. In particular, housewives were dissatisfied with food and beverage offerings.
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 Impact 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.
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