business environment for global firms111
TRANSCRIPT
-
8/8/2019 Business Environment for Global Firms111
1/63
Business Environment forGlobal Firms
-
8/8/2019 Business Environment for Global Firms111
2/63
Business Environment
Economic Environment;
Political Environment;
Legal and regulatory environment;
Cultural Environment;
-
8/8/2019 Business Environment for Global Firms111
3/63
Economic Environment
Economic System :
Centrally Planned Economy : where dec-isions regarding production and distributionof goods is taken by a central authority.
Market Based Economy: The decision ofproduction and distribution is taken byindividual firms based on market demandand supply.
-
8/8/2019 Business Environment for Global Firms111
4/63
Mixed Economic System:
In this case public and private sectorsexist side by side.
Whenever, a firm trades with any othercountry or whenever it tries to locate itsmanufacturing operations there, it takes
into account the existing economic sys-tem in the host country and accordinglyshapes the trade and foreign operationpolicies.
-
8/8/2019 Business Environment for Global Firms111
5/63
Consumer Behaviour
It is based on :
Preference for Price/Quality of theproduct;
Propensity to save; (Rural areas wherepeople have high propensity to save),
Quality of People; (Educated) Existence of Social Security Scheme;
-
8/8/2019 Business Environment for Global Firms111
6/63
Level of Income and Distribution
Distribution of low, medium, and high incomes.
Gross domestic product per capita.
In low income countries MNCs market ormanufacturing low priced goods.
However, MNCs would like to establish in a
low income country where 10% populationout of 500 million population capture 60%national income.
-
8/8/2019 Business Environment for Global Firms111
7/63
Inflation
Inflation has negative and positive impact Whichis based on nature of activity. Such as,
High inflation has negative impact on salariedclass people whereby Purchasing power ofcustomer depends upon level of inflation. Higher
the inflation lower the real income and lower thedemand.
-
8/8/2019 Business Environment for Global Firms111
8/63
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 setup manufacturing unit in a foreign country ithas to take into account the rate of inflation.
-
8/8/2019 Business Environment for Global Firms111
9/63
Availability of Human andPhysical Resources:
Human Resources:
It is not possible for MNCs to transport theentire labour force from the home country.
Availability of skill manpower in host
country is must.
-
8/8/2019 Business Environment for Global Firms111
10/63
Physical Resources:
Raw Material: availability of various inputsnecessary for the production. Example,vario -
us Indian firms have moved to Sri Lanka forproduction of rubber products and Nepal forproduction of herbal products.
Vocational theory of Foreign direct invest-ment is based on this concept.
-
8/8/2019 Business Environment for Global Firms111
11/63
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 isthe reason for gap between approvedFDI and actual inflow of FDI.
-
8/8/2019 Business Environment for Global Firms111
12/63
Economic Policies
Monetary Policy : If restrictive or co-
ntractionary monetary policy (Rate ofinterest will be high) is implemented tostabiles the economy, it has negativeimpact on MNCs and business men
because now credit is available at highrate of interest.
-
8/8/2019 Business Environment for Global Firms111
13/63
Fiscal Policy : If corporate taxes areat higher side it will be taken into
consideration a as negative aspect byMNCs.
If host country carries high fiscal def-icit and budgetary deficit MNC willtake it as negative point. Because ithas negative impact on externalsector and monetary sector.
-
8/8/2019 Business Environment for Global Firms111
14/63
Trade Policy :
Excise duties and import duties also
cause of concern for MNCs.
Industrial Policy :
If industrial policies are liberal forMNCs it attracts more foreigninvestment.
If these polices are restrictive foreigninvestment is also restricted.
-
8/8/2019 Business Environment for Global Firms111
15/63
Strength of External Sector
MNCs are greatly interested in repat-riating profits to their parent company.
If it easier, MNCs will attract moretowards that country.
For liberal repatriation policy, situation
of balance of Payment should be strong.
Foreign exchange reserve should belarge in size.
-
8/8/2019 Business Environment for Global Firms111
16/63
Level of Economic Integration
-
8/8/2019 Business Environment for Global Firms111
17/63
Free Trade Area
Eliminates tariff andquota barriers amongmember countries.
Each country is free toset its own tariff andquota barriers against
nonmember countries.
-
8/8/2019 Business Environment for Global Firms111
18/63
Customs Union Area
Tariff and quota barriers among membercountries are eliminated.
Member countries establish common
tariff and trade barriers againstnonmember countries.
.
-
8/8/2019 Business Environment for Global Firms111
19/63
Common Market Area
No trade barriers among membernations.
No restriction on the movement oflabor, capital, or technology acrossborders.
Member countries establish common
tariff and trade barriers againstnonmember countries.
-
8/8/2019 Business Environment for Global Firms111
20/63
-
8/8/2019 Business Environment for Global Firms111
21/63
NAFTA
The North American Free TradeAgreement (NAFTA) created theworlds largest free market.
390 million U.S., Canadian, and Mexicanconsumers and a total output of $10trillion.
-
8/8/2019 Business Environment for Global Firms111
22/63
Integration in Asia
Association of Southeast Asian
Nations (ASEAN)East Asia Economic Group
Asia-Pacific Economic Cooperation(APEC)
South Asian Association forRegional Cooperation (SAARC)
-
8/8/2019 Business Environment for Global Firms111
23/63
Integration in Africa and theMiddle East
Economic Community of WestAfrican States (ECOWAS)
The African Union (AU)The Arab Maghreb Union
Gulf Cooperation Council (GCC)
-
8/8/2019 Business Environment for Global Firms111
24/63
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.
-
8/8/2019 Business Environment for Global Firms111
25/63
Resultantly, there is always some risk involved inaccount of differing political scenario, which isknown as Political Risk.
Political Risk :
It is the risk of loss in investment being made ina given country because of change in countryspolitical structure or policies. Such as:
Tax law, tariffs, and restriction in repatriationof profits.
-
8/8/2019 Business Environment for Global Firms111
26/63
Currency Inconvertibility:
Sometimes the host government enacts law
prohibiting foreign companies from taking theirmoney out of the country or exchanging thehost 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 toserve it economic and political objectives.
-
8/8/2019 Business Environment for Global Firms111
27/63
Credit Risk Refusal to honor a financial contract with foreign
company or to honor foreign debt comes underthe form of political risk.
Conflict of Interest:
The interest of MNCs is normally different frominterest of the host country.
The MNCSs manifest in the maximization ofcorporate wealth;
The host country is evident in the welfare ofeconomy;
-
8/8/2019 Business Environment for Global Firms111
28/63
Example :
Transfer of funds by MNCs may influence themoney supply which may cause deflation;
Similarly the payment of exorbitant amount ofroyalty and other such dues by subsidiary mayworsen the balance of payment;
It is not economic issue that are the source ofconflict but also non-economic such as nationalsecurity;
-
8/8/2019 Business Environment for Global Firms111
29/63
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 ofpolitical risk is useful.
-
8/8/2019 Business Environment for Global Firms111
30/63
Insurance:
It is a strategy to shift the risk to other
parties. Insurance coverage can beobtained from a number of sources:
Private Insurance
Government Insurance
-
8/8/2019 Business Environment for Global Firms111
31/63
-
8/8/2019 Business Environment for Global Firms111
32/63
Example :
Overseas Private Investment Corpo-ration (OPIC), U.S. governmentagency, which is business oriented
agency whose purpose is to supportU.S. private investments. It receives nopublic funds.
OPIC provided $ 8 million in insuranceagainst political risk.
-
8/8/2019 Business Environment for Global Firms111
33/63
Legal Environment
From an international business perspective
host countries may adopt a number of law
that affect a companys 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.
-
8/8/2019 Business Environment for Global Firms111
34/63
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 controlthe supply, such as, cigarettes and alcohol.
-
8/8/2019 Business Environment for Global Firms111
35/63
Taxation :
This is very important legal issue for Internationalfirms which move from one country to other andadopts transfer pricing.
Example: if any firm is established in the countrywhere corporate tax rate is very high, firm adoptstransfer pricing in order to siphon-off the profit or
dividend before imposition of tax to the subsidiarywhich is located on tax heaven country. In this case
host country with high corporate tax has to faceloss.
-
8/8/2019 Business Environment for Global Firms111
36/63
Corporate Governance andResponsibility:
In this system the decisions are made andinterests are represented properly for all
stake-holdrs. Key elements are :
Transparency of a firms operation;
Transparency in financial results;
Assurance of Stake-holder's Right;
-
8/8/2019 Business Environment for Global Firms111
37/63
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 unethicalissue 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.
-
8/8/2019 Business Environment for Global Firms111
38/63
Issue of Corruption
In western countries bribery is highly unethical. InU.S., there is a foreign Corrupt Practices Act whichprohibits companies from bribing any foreign official.
However, international manager must carefullydistinguish between reasonable ways of doingbusiness internationally by maintaining balance.
The problem for international marketers is how tomaintain consistency because some of the ethicalissues like, global warming and pollution but someissues do not have same standard rule in everycountry.
-
8/8/2019 Business Environment for Global Firms111
39/63
Example:
In Brazil cutting down the rain forest may beacceptable to the Brazilian government but asper scientists and environmentalist it hasaffect on global warming and other climaticchanges.
China may use prison labour in producingproducts for export but U.S. law prohibits theimportation of such products.
-
8/8/2019 Business Environment for Global Firms111
40/63
Issue of Consumerism:
Generally, in developed countries a lot of co-nsumer protection activities take place. Butin developing countries, they are lacking.
Resultantly, a lot of Multinational companiessell harmful product in emerging economies.
Example: Companies market a number ofmedicinal products that are banned in theirhome country.They should care for socialresponsibility wherever they operate.
-
8/8/2019 Business Environment for Global Firms111
41/63
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)
http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/DealingLicenses/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/RegisteringProperty/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/GettingCredit/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/TradingAcrossBorders/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EnforcingContracts/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/TradingAcrossBorders/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/ProtectingInvestors/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/GettingCredit/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/RegisteringProperty/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/EmployingWorkers/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/DealingLicenses/Details.aspx?economyid=89http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=89 -
8/8/2019 Business Environment for Global Firms111
42/63
Cultural Environment
International Business success is based onCross-cultural literacy.
Cross Cultural literacy is based on :
1. Social Structure
Religious and Ethical System Islam & economic Implication :
Koran supports earning of legitimate profitthrough 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 andprudent manner.
-
8/8/2019 Business Environment for Global Firms111
43/63
One economic principle of Islam prohibitsthe payment or receipt of interest.
It is also becoming a matter of law. In1992, Pakistans federal Shariat Courtdeclared earning interest is illegal andGovt. should amend financialrule accordingly.
-
8/8/2019 Business Environment for Global Firms111
44/63
Confucianism and its EconomicImplication :
This was the ethical system in China, it hasweakened since 1949 but still people follow thisin China, Korea and Japan.
Three values are central to the Confuciansystem of ethics:
Loyalty, Reciprocal Obligation andhonesty
-
8/8/2019 Business Environment for Global Firms111
45/63
2. Language
Competitiveness of any country forentry of MNC based on Language, if ithas one spoken language, English, it is
more competitive.
Competitiveness of MNC is based onMulti language. some times blundercan be committed if local language isnot known by marketing department.
-
8/8/2019 Business Environment for Global Firms111
46/63
-
8/8/2019 Business Environment for Global Firms111
47/63
Why Cultural Diversity Exists?
A Dutch scientist, Greet Hofstede hasdeveloped a model to explain the culturaldiversity.
His model is based on a study conductedfor 1,17,000 employees in 88 countries.
Greet Hofstede has explained thatcultural diversity among nations has fourdimensions.
-
8/8/2019 Business Environment for Global Firms111
48/63
Dimensions of Cultural Diversity
1.Individualism /Collectivism: In individualistic countries (France,
Germany, South Africa, Canada, etc.),
people are expected to look out forthemselves.
Typical values are personal time,freedom, and challenge.
C ti
-
8/8/2019 Business Environment for Global Firms111
49/63
Continue
In collectivist cultures (India, Japan,Mexico, Korea, Greece) individuals are
bounded through strong personal andprotective ties based on loyalty to thegroup during ones lifetime.
Values and the use of skills.
Continue
-
8/8/2019 Business Environment for Global Firms111
50/63
2. Femininity versus Masculinity
Greet Hofstedes study suggested that mens goalswere significantly different from womens goals.
Feminine values are more important in countries likeSweden, France, Israel, Denmark and Indonesia.
Femininity tend to value a good working relationship,
security and avoiding conflicts.
-
8/8/2019 Business Environment for Global Firms111
51/63
Masculinity as a situation in which success,money and material things dominates thesociety.
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.
di
-
8/8/2019 Business Environment for Global Firms111
52/63
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 Africancountries), subordinates tend to be afraid oftheir bosses.
In low-power distance countries (the US,Britain, most of the rest of Europe), subor-dinates are more likely to challenge bossesand bosses tend to use a consultativemanagement style.
-
8/8/2019 Business Environment for Global Firms111
53/63
-
8/8/2019 Business Environment for Global Firms111
54/63
Making Culture Work for MarketingSuccess
Adapt Products and process to LocalMarket :
Example : 3M is a United States basedcompany in diversified area of home cleaningproduct, electronic and office product.
Before starting of marketing of home clean-ing product (scotchbrite (cleaning pad)
-
8/8/2019 Business Environment for Global Firms111
55/63
-
8/8/2019 Business Environment for Global Firms111
56/63
Cultural Implication : IslamicBanking
Koran clearly prohibits interest,which is called riba.
There are now 170 Islamic financialinstitutions world-wide managingover $150 billion in assets and
making an average return on capitalof more than
16 percent.
-
8/8/2019 Business Environment for Global Firms111
57/63
-
8/8/2019 Business Environment for Global Firms111
58/63
Similarly, when a business (or individual)deposits money at an Islamic bank in asaving account, the deposit is treated as anequity investment in whatever activity the
bank uses the capital for.
Thus the depositors receives a share in theprofit from the banks investment.
-
8/8/2019 Business Environment for Global Firms111
59/63
Second method is
Murabaha Contract :
When a firm wishes to purcahse any equipm-
ent that costs $ 1,000, the firm tells the bankafter having negotiated the price with themanufacture.
Initially, bank buys the equipment for $1,000and later on borrowers buy back from bank in$ 1,100, it can be assumed as interest.
-
8/8/2019 Business Environment for Global Firms111
60/63
Environment Threat and OpportunityProfile (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 betterinformed, overall industry growth
not so encouraging, Growth ratefor niche segment like sports,trekking and racing is high.
-
8/8/2019 Business Environment for Global Firms111
61/63
E i N I f h
-
8/8/2019 Business Environment for Global Firms111
62/63
Envir. Nature Impact of each sectorSect. Of Impact
Social Environment and health friendlytransportation. Wide usage forphysical fitness equipment .
Supplier Mostly ancillaries and associatedcompanies in small scale sectorsupply parts and components,
rising steel prices, increasing useof aluminum
-
8/8/2019 Business Environment for Global Firms111
63/63
Envir. Nature Impact of each sector
Sect. Of Impact
Technological Technological upgradation
of industry in progress,import of machinery is
simple, product innovationsongoing such as battery-operated and lightweightfoldable cycles.