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International business environment - Political, Economic and Cultural environment

The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign, and international spheres of impact.

International business environment


The environment of international business is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign, and international spheres of impact.


         The domestic environment – is familiar to managers and consists of those uncontrollable external forces that affect the firm in its home market.


          The foreign environment - can be taken as those factors which operate in those other countries within which the MNC operates.


          The international environment - is conceived as the interaction between domestic and foreign factors and indeed they cover a wide spectrum of forces


The forces:

Political environment Legal environment


Cultural environment


Technological environment Economic environment.


1 Political environment


It refers to the influence of the system of government and judiciary in a nation on international business. The type and structure of government prevailing in a country decides, promotes, fosters, encourages, shelters, directs, and controls the business of that country.


A political system is stable, honest, efficient, and dynamic and which ensures political participation to the people and assures personal security to the citizens, is a primary factor for economic development.


Democracy: refers to a political arrangement in which the supreme power is vested in the people. Democracies maintain stable business environments primarily through laws protecting individual property rights. Ex: India.



Merits of democracy:

            Need for supportive values

            Function of free speech

Classification of political risks

Legal environment


The legal system refers to the rules and laws that regulate behavior of individuals and organization

Systems of law:

There are four basic legal systems prevailing around the world.


            Islamic law: derived from the interpretation of the Quran and practiced in countries where Muslims are in majority. Ex: Saudi Arabia, Pakistan, Iran.


            Common law: derived from English law, is prevalent in countries, which were under British influence. Ex: US, Canada, England, Australia.


            Civil law or code law: derived from Roman law, practiced in Germany, Japan, France, and non - Marxist and non - Islamic countries. Ex: Germany, France, Japan.


            Marxist legal system: This has takers in communist countries. Ex: China, Vietnam, North Korea and Cuba.


Industrial disputes resolution: Legal disputes can arise in three situations: between governments, between a firm and a government, and between two firms.


Conciliation: also known as mediation, this is a nonbonding agreement between parties to resolve disputes by asking a third party to mediate.


Arbitration: is the preferred method for resolving international commercial disputes. The usual arbitration procedure is for the parties involved to select a disinterested and informed party or parties as referee to determine the merits of the case and make a judgment that both parties agree to honor.


Litigation: a wise course of action would be to seek a settlement other than by suing.




2 Cultural environment:


According to Elbert W Steward and James A Glynn “Culture consists the thought and behavioral patterns that members of a society learn through language and other forms of symbolic interaction – their customs, habits, beliefs and values, the common viewpoints that bind them together as a social entity.

Levels of culture:


1. National culture:

It is dominant culture within the political boundaries of a country.

2. Business culture:


It also provides the guides for everyday business interactions.


3. Occupational and organizational cultures:


It’s sister term is corporate culture refers to the philosophies, ideologies, values, assumptions, beliefs, expectations, attitudes and norms that knit an organization together and are shared by its employees


4. Mechanistic and organic cultures:

It exhibits the values of bureaucracy and feudalism.


5. Authoritarian and participative cultures:


Power is concentrated on the leader and obedience to orders and disciplines are stressed. Participative cultures tend to emerge where most organizational members are professionals or see themselves as equals.


6. Dominant and sub-cultures:


Dominant culture, normally referred to as the organizational culture reflects core values that are shared by the majority of the employees. By contrast, sub-cultures are found in departments, divisions and geographical areas and reflect the common problems or experiences of employees who reside in these areas.


7. Strong, Weak and Unhealthy cultures:


A Strong culture will have a significant influence on employee behavior manifesting in reduced turnover, lower absenteeism, increased cohesiveness, and positive attitudes.


A Weak culture is characterized by the presence of several sub-cultures, sharing of few values and behavioral norms by employees and existence of few sacred traditions.


One Unhealthy culture is a politicized internal environment that allows influential manager to operate autonomous “fiefdoms” and resist needed change.


Elements of culture


            Customs and manners






            Supernatural beliefs


Implications for international business



Managing multiculturalism is essential for every international firm.

            Spread cross-cultural literacy

            Compatibility between strategy and culture

            Culture and competitive advantage

            Managing diversity.




Economic implications:

Increased productivity Need to spend on R&D Jobs become intellectual


Problems of techno-structure


Increased regulation and stiff opposition


Rise and decline of products and organizations Boundaries redefined


Training of scientists and engineers.


Plant level changes:

Organization structure Resistance to change Fear of risk


E-commerce Patenting


Transportation Markets


Technology transfers Production





Operational sequences for technology transfer

Arrangements for sales & licensing


Provision of know-how & technical expertise


Provision of detailed engineering designs & installation Purchases and leases of technology elements


Technical cooperation agreements





It can help international managers, to predict how trends and events might affect performance of foreign business.


        Classification on the basis of income:

           Developing countries: share a set of common and well – defined goals. Ex: India, China.


           Developed countries: Those are highly industrialized, highly efficient. Ex: Canada, Japan, Australia, US.


           Countries classified by economic system:

           Market economy: production of goods and services is not planned by individuals


           Command economy: decisions relating to all economic activities – what to produce, how to produce.


           Mixed economy: it includes both. Ex: India.


III) Classification of countries by region:

        East Asia and Pacific

        Europe and central Asia

        Latin America and the Caribbean

        Middle east and North Africa

        South Asia

        Sub-Saharan Africa

        High income countries


IV) Economic scenario:

        Rates of growth


        Savings and investment

        Fiscal stability

        Balance of payments

        Financial system


           Economic policies:

       Industrial policy

       Monetary policy

       Fiscal policy

       Trade policy



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