CHAPTER 3 - INTERNATIONAL BUSINESS ENVIRONMENT

Objectives: After studying this chapter, you should be able to:

✓ Discuss the international business environment

✓ Recognize the socio-cultural framework,
✓ Discover the role of technological development,
✓ Examine the relevant aspects of the international economic environment, and
✓ Assess the importance of international political environment.

Introduction
Environmental factors are external effects that cannot be managed. Because environmental factors
cannot be managed they must be anticipated and analyzed. The ability to predict or “guess” the future state
of the environment enables the marketer to position the firm defensively against environmental threats or
to seize opportunities that are created by the environment.
Before entering into international market, a company must analyze the international marketing
environment very carefully because the future of the company depends on this analysis only. However, you
must note that this analysis should not be done at the beginning but throughout the life of the business as
the international marketing environment changes really fast. A company needs to analyze the political, legal
and regulatory, socio-cultural, economic, and technological environment in order to understand the
international marketing environment.
The (IBE) International Business Environment is multidimensional including the political risks,
cultural differences, exchange risks, legal & taxation issues. Therefore, (IBE) International Business
Environment comprises the political, economic, regulatory, tax, social & cultural, legal, & technological
environments.
An international business environment is the surrounding in which international companies run
their businesses. It brings along it with many differences.
Thus, it is mandatory for the people at the managerial level to work on the factors that make an
International Business Environment.
The Difference – Business Environment and International Business
International business is an exchange of goods and services that conducts its operations across
national borders, between two or more countries. International business is also known as Globalization
whereas; a Business Environment is the surrounding in which the international companies operate.
Forms of Business Environment
√ Import & Export
√ Licensing
√ Franchising
√ Joint venture
√ Foreign Direct Investment

Advantages of International Business Environment

➢ Helps in expanding the business
➢ Exposure to more customers
➢ Helps in the proper management of the product life cycle
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 ➢ Helps in mutual growth
➢ Technology advantages:
➢ New business opportunities
➢ Proper use of resources

What is environment in business?

The process by which strategies monitor the economic, governmental/legal, market/competitive,
supplier, technological, geographic, and social settings to determine opportunities and threats to their firms.
Importance of International Business Environment
Exports Increase Sales. Exporting opens new markets for a company to increase its sales. Economies
rise and fall, and a company that has a good export market is in a better position to weather an economic
downturn. Furthermore, businesses that export are less likely to fail. It's not only the exporting companies
that increase sales; the companies that supply materials to the exporters also see their revenues go up,
leading to more jobs.
Exports Create Jobs. A company that increases its exports needs to hire more people to handle the
higher workload. Businesses that export have a job growth 2 to 4 percent higher than companies that don't;
these export-related jobs pay about 16 percent more than jobs in companies with fewer exports.
Theworkers in these export-related jobs spend their earnings in the local economy, leading to a demand for
other products and creating more jobs.
Imports Benefit Consumers. Imported products result in lower prices and expand the number of
product choices for consumers. Lower prices have a significant effect, particularly for modest and low-
income households. Studies show that lower import prices save the average American family of four around
$10,000 per year. Besides lower prices, imports give consumers a wider choice of products with better
quality. As a result, domestic manufacturers are forced to lower their prices and increase product lines to
meet the competition from imports. Even further, domestic vendors may have to import more components
of their products to stay price competitive.
Improved International Relations. International business removes rivalry between different
countries and promotes international peace and harmony. Mutual trade creates a dependence on each other,
improves confidence and fosters good faith.

SOCIAL AND CULTURAL ENVIRONMENT

Social environment of business means all factors which affects business socially. Every business
works in a society, so societies has different factors like family, educational institutions and religion affects
the business. It includes the culture that the individual was educated or lives in and the people with whom
they interact. Social factor include reference groups, family, role and status in the society.

The cultural environment mean an environment which affect the basic values, behaviors,
preferences of the society, all of which have an effect on consumer marketing decision. Cultural aspects
include aesthetics, education, language, law and politics, religion, social organization, technology and
material culture, values and attitude.
Socio- cultural environment. A set of beliefs, customs, practices, and behavior that exist within a
population. International companies often include an examination of the socio-cultural environment prior
to entering their target markets. Socio-cultural factors are customs, lifestyles and values that characterize a
society.

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Factors which effect social and cultural environment
⦿ Demographic factor- such as the age, and sex composition of population, family size, habitant,
religion, etc., which influence the business.
⦿ Religion- different religions have different principles, rules and regulations in which they sacrifice
to use some products and eat some food.
⦿ Social responsibility- while dealing with the social environment, we must also consider the social
environment of the business which encompasses the social responsibility and the alertness or
vigilance of the consumers and of the society at large.
⦿ Education- they provide good knowledge, education awareness, thinking what should students buy
or not buy
⦿ Family- is a basic part of society from the birth of a person and up to death. He lives in family, so
personal decision of buying and selling of goods are affects from family. So businessman must
analyze different family needs.
⦿ Taste preference
⦿ Natural factor
⦿ Technological factor
⦿ Income and lifestyle
⦿ Health and safety factor

Though society and culture do not appear to be a part of business situations, yet they are actually
key elements in showing how business activities will be conducted, what goods will be produced, and
through what means they will be sold to establishing industrial and management patterns and determining
the success or failure of a local subsidiary or affiliate.
Elements of Culture
There are too many human variables and different types of international business functions for an
exhaustive discussion about culture. The main elements of culture are:
• Attitudes and Beliefs: The set of attitudes and beliefs of a culture will influence nearly all aspects
of human behavior, providing guidelines and organization to a society and its individuals.
• Attitudes towards Time: Everywhere in the world people use time to communicate with each other.
In international business, attitudes towards time are displayed in behavior regarding punctuality,
responses to business communication, responses to deadlines, and the amount of time that is spent
waiting in an outer office for an appointment.
• Attitude towards Work and Leisure: People’s attitudes towards work and leisure are indicative of
their views towards wealth and material gains. These attitudes affect the types, qualities and
numbers of individuals who pursue entrepreneurial and management careers as well.
• Attitude towards Achievement: In some cultures, particularly those with high stratified and
hierarchical societies, there is a tendency to avoid personal responsibility and to work according to
precise instructions received from supervisors that are followed by the latter. In many industrial
societies, personal responsibility and the ability to take risks for potential gain are considered
valuable instruments in achieving higher goals.
• Attitudes towards Change: The international manager must understand what aspects of a culture
will resist change and how the areas of resistance differ among cultures, how the process of change
takes place in different cultures and how long it will take to implement change.
• Attitude towards Job: The type of job that is considered most desirable or prestigious varies greatly
according to different cultures. Thus, while medical and legal professions are considered extremely

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 prestigious in the United States, civil service is considered the most prestigious occupation in
several developing countries including India.

Cultural Dimension

The influences of the religion, family, educational and social systems of a society on the
business system comprise the cultural dimension of our picture. Because cultural attitudes vary so much
among countries, it is harder to find general patterns here than for the economic dimension.

Thus, to determine the cultural aspects of markets, we must, in large measure, analyze each society
by itself without the benefit of guiding generalizations. However, a few common threads run through the
cultures of groups of countries. Religion is one, for; a few major religions have spread over large areas.

In northern Europe and the Anglo-Saxon countries (the United States, Canada, and Australia), the
Protestant influence has generally been dominant, though other religions existing alongside have moderated
its importance.

Religions are a major determinant of the moral and ethical standards that play a large part in the
Notes business process. It is difficult, however, to develop any generalizations about their nature in each
region. The basic codes of religions—the entire Bible, the Kuran, etc.— exhort their followers to be honest,
truthful and otherwise to act in a “good” manner. In practice, however, all business systems are
characterized to varying degrees by false claims, dishonesty and other moral shortcomings. So the specific
character of each society must be analyzed as a distinct entity in this regard.

Family systems fall into three general categories. One, especially prevalent in Moslem areas,
traditionally places the wife in a subordinate and secluded role, with few rights and little control over the
affairs of the family. This general pattern still prevails over much of the Middle East, though in many
Muslim countries, like Turkey and Pakistan, women have achieved a high degree of emancipation. A
second pattern is particularly common in Latin America. The wife is still definitely a junior member of the
partnership, the husband having the final authority in all but minor matters. The third type of relationship
is found in varying forms throughout most of Europe and the Anglo-Saxon countries. The basic code in this
pattern is equality, though there are many variations in actual practice. In other respects, cultural attitudes
related to the family system differ widely among countries. Such matters as the way in which the sexes
attract each other bear both on products sold and advertising methods, and they are subject to a host of local
codes.

As far as educational systems are concerned, the obvious marketing factors are the literacy rate and
the general level of education, both of which generally run parallel to the pattern of economic development.
There are also differences in educational methods common to large areas.

Marketing in Cross-cultural Context

In understanding, analyzing and predicting consumer behavior for marketing management

purposes, the role of culture has always been given a prominent role in consumer behavior studies, which
in turn are expected to facilitate the effectiveness of marketing management efforts.

Though all people have much in common as human is, there still are many differences in cultures
as we move from nation to nation. Culture is adaptive, and marketing strategies based on the values of
society must also be adaptive. When cultural changes occur, trends develop and provide marketing
opportunities to those who spot the changes before their competitors do. As culture evolves, marketers may

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associate product or brand benefits with new values, or they may have to change the product if that value
is no longer gratifying in society.

With so much diversity present among the members of just one nation, it is easy to appreciate that
numerous larger differences may exist between citizens of different nations having different cultures,
values, beliefs, and languages. If international marketers are to satisfy the needs of consumers in potentially
very distinct markets effectively, they must understand the relevant similarities and differences that exist
between the peoples of the countries they decide to target.

When consumers make purchase decisions, they seem to take into consideration the countries of
origin of the brands that they are assessing. Consumers frequently have specific attitudes or even
preferences for products made in particular countries. This country of origin influence how consumers rate
quality and sometimes, which brands they will ultimately select.

Consumer behavior has emerged as a sub-field of marketing discipline. Initially, consumer

behavior research mainly focused on the Behavioral aspects of consumers of the majority culture, and that
too was limited to domestic country context.

The theme of cultural influences in a given country has two variations. Cross-cultural
influences are norms and values of consumers in foreign markets that influence strategies of multinational
organizations marketing their products and services abroad.

The second variation refers to subcultural influences that concern differences in values among
different groups within a country that distinguish them from society as a whole.

As more foreign markets emerge and offer opportunities for growth, marketing in foreign Notes
countries is likely to increase in importance. Marketing across cultural boundaries is a difficult and
challenging task because cultures may differ in demographics, languages, values and non-verbal
communications.

Cross-cultural analysis helps marketers determine to what extent the consumers of two or more
nations are similar or different. The greater the similarity between consumers, the more feasible it is to use
relatively similar strategies in each country. In case the cross-cultural analysis reveals that there are wide
cultural differences, then a highly individualized marketing strategy may be indicated for each country.

Aspects that should be addressed:

• Approaches to society towards business in general & in specific areas;
• Influence of social, cultural & religious factors on the acceptability of the product;
• The lifestyle of people & the products used for them;
• Level of acceptance of, or resistance to change;
• Values attached to a particular product i.e. the possessive value or the functional value of the
product;
• Demand for the specific products for specific occasions;
• The propensity to consume & to save.

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TECHNOLOGICAL ENVIRONMENT
The Technological Environment comprises factors related to the materials and machines used in
manufacturing goods and services. Technology often is seen as giving firms a competitive advantage.
Nevertheless, how is this T. E. affects business?

Technology trends affect businesses on many levels. Example; when an employee is efficient, he
turns out to be productive. Additionally, when a business is more in touch with its present and potential
customers, the more chance it has to build a strong customer loyalty base.

Therefore, advancement of technology can make this possible. Strategic leaders are constantly
looking for development and updates within the technological environment. In this way, they not only
improve their operations but they will also be well aware of business transformational phase. They will
derive groundbreaking strategies to grow exponentially.

The technological environment of business has changed the way in which businesses function.
Advancements in information technology have almost taken over every department of the organization.
Technology has brought in a transformation through which companies collect, record, retrieve and utilize
data and which also helps them in coming up with ground breaking business strategies. Through available
data, companies are able to monitor and evaluate customer trends and their demands for a particular product.

Technology is not only useful for collecting and using data but it is also being used by organizations
to analyze data and make meaningful conclusions as well as informed decisions. Having more focus on the
customers, business strategies will certainly prove out to be effective for the success of an organization.
Changes in technology affect how a company will do business. A business may have to change their
operating strategy as a result of changes in the technological environment.

Pervasive are diversified in scope, technological changes affect many parts of societies. These
effects occur primarily through new products, processes, and materials. The technological segment includes
the institutions and activities involved with creating new knowledge and translating that knowledge into
new outputs, products, processes and materials. Given the rapid pace of technological change, it is vital that
firms carefully study different elements in the technological segment. The marketers need to identify the
speed with which substitute technologies are likely to emerge and the timing of any major technological
changes. Some new technologies that have helped international marketers are discussed below.

Internet. A technology with important implications for business in the Internet sometimes referred
to as “the information superhighway.” The Internet is a global web of more than 25,000 computer networks.
It provides a quick, inexpensive means of global communication (i.e. with strategic alliance partners) and
access to information.

Modems. Modems are important for connecting personal computers to phone lines that help gain
access to the Internet. The technology in the manufacture of modems has advanced rapidly. Their speed
may only be curtailed by the limits of conventional phone lines. Encyclopedia Britannica Inc. is using the
Internet to revive its business.

High Speed Digital Stream. To obtain technology to deliver a high-speed digital stream that can
be viewed as movies, Web sites or advertising on televisions with its equipment.

Satellite Imaging. Another new technology that is gaining rapid popularity is satellite imaging.
Several aerospace companies have invested up to $1 billion in corporate earth imaging systems.

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The Impact of Technology on a Business Environment
Impact on Human Resources. Experts have long predicted technology will someday replace
many of the jobs done by humans. However, history has shown that as jobs become obsolete, new
opportunities open up. Technology has also transformed hiring, with the internet allowing workers to
complete their duties from home or another remote location. This has the added benefit of giving businesses
access to a global talent pool that allows them to hire specialized, experienced workers at affordable rates.
Impact on Customer Outreach. Thanks to social media and the internet, reaching consumers is
easier than ever. Using a do-it-yourself website tool and various social platforms, even the newest small
business can post content that helps interested customers find them. Instead of paying third parties for
advertising in print or electronic media, today’s businesses are in charge of their own customer outreach.
The result is a reduced cost that levels theplaying field between large corporations and startups.
Impact on Operating Costs. Another area where the technological environment has evened things
out is the overhead associated with running a business. Companies sell their items online, which means
they do not need a brick-and-mortar storefront. The cost of starting a new business has dropped dramatically
in recent years, since founders can now launch a venture from home as a side gig. There is no need to travel
to land new clients, because researching and reaching out to potential customers can all be done online.
Moreover, instead of hiring a bookkeeper or an assistant, entrepreneurs find that software handles all of the
early-stage functions they need.
Impact on Security. One area where the impact of technology on business has brought both
positives and negatives is security. Having so much information on internet-connected server’s means, it is
susceptible to theft. Data breaches can be devastating to a new business without the resources to handle it,
with the average incident costing small businesses about $36,000. Businesses now need to put significant
effort into securing their networks and all connected devices, which often means paying a monthly fee for
top-tier cloud hosting and software to keep equipment safe. This has also opened up opportunities for tech
specialists in the cybersecurity arena, where experts are in high demand.
The Day-to-Day Impact on Business. Today's technology has completely changed some
businesses as well as creating entire business niches that never even existed before. Business owners run
their companies from laptops, tablets and smartphones, never even considering opening a brick-and-mortar
presence.
The daily environment in existing businesses has changed immensely, too. Office workers often
spend part of their week working remotely from home or on the road. Business meetings no longer mean
driving long distances as teleconferencing means getting everyone together online. Many offices are now
paperless, keeping all their documents in the cloud, while others use online chat technology to keep teams
in constant communication.

ECONOMIC ENVIRONMENT
Perhaps the most important characteristic of the international market environment is the economic
dimension. With money, all things (well, almost all!!) are possible. Without money, many things are
impossible for the marketer. Luxury products, for example, cannot be sold to low-income consumers.

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Hypermarkets for food, furniture, or durables require a large base of consumers with the ability to make
large purchases of goods and the ability to drive away with those purchases.

The economic environment refers to all the economic factors that affect commercial and consumer
behavior. The economic environment consists of all the external factors in the immediate marketplace and
the broader economy. These factors can influence a business, i.e., how it operates and how successful it
might become.
The economic environment consists of microeconomic and macroeconomic factors.

A. Microeconomic factors. The microeconomic environment refers to things that happen at the
individual company or consumer level. Microeconomic factors do not affect the whole economy.
Below are some microeconomic factors that may influence a business: Competitors, Demand,
Market size, Suppliers, and Supply

B. Macroeconomic factors. The macroeconomic environment, on the other hand, refers to things that
affect the entire economy. Macroeconomics is concerned with general or large-scale economic
factors, such as Unemployment, Inflation, Interest rates, GDP growth (Gross Domestic
Product), Taxes, Exchange rates, Levels of consumer confidence, and Savings rates.

Why Is the Economic Environment Important?

The economic environment of a business will play a pivotal role in determining the success or
failure of a business. Let us first consider some macroeconomic factors. If interest rates are too high, the
cost of borrowing may not permit a business to expand. Sophisticated industrial products require
sophisticated industries as buyers. Let us learn more about economic environment, discussed in the
following sub-sections:

Economic Systems. There are three types of economic systems: capitalist, socialist, and mixed.
This classification is based on the dominant method of resource allocation: market allocation,
command or central plan allocation, and mixed allocation, respectively.

Market Allocation. A market allocation system is one that relies on consumers to allocate
resources. Consumers “write” the economic plan by deciding what will be produced by whom. The role
of the state in a market economy is to promote competition and ensure consumer protection.

Command Allocation. In a command allocation system, the state has broad powers to serve the
public interest. These include deciding which products to make and how to make them. Consumers are
free to spend their money on what is available, but state planners make decisions about what is produced
and, therefore, what is available. Because demand exceeds supply, the elements of the marketing mix are
not used as strategic variables.

Mixed System. There are, in reality, no pure market or command allocation systems among the world’s
economies. All market systems have a command sector and all command systems have a market sector; in
other words, they are “mixed”. In a market economy, the command allocation sector is the proportion of
Gross Domestic Product (GDP).

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The International Economic System. Several factors have contributed to the growth of the international
economy post World War II. The principal forces have been the development of economic blocs like the
European Union (EU) and then the “economic pillars”– the World Bank (or International Bank for
Reconstruction and Development to give its full name), the International Monetary Fund (IMF) and the
evolution of the World Trade Organization from the original General Agreement on Tariffs and Trade
(GATT).

Income and Purchasing Power Parity around the Globe. When a company charts a plan for global
market expansion, it often finds that, for most products, income is the single most valuable economic
variable. After all, a market can be defined as a group of people willing and able to buy a particular product.
Ideally, GNP and other measures of national income converted to U.S. dollars should be calculated on the
basis of purchasing power parities (i.e. what the currency will buy in the country of issue) or through direct
comparisons of actual prices for a given product. This would provide an actual comparison of the standards
of living in the countries of the world.

Key Economic Issues that Influence International Business

The key economic issues that influence international business are discussed below:

Inflation. Inflation is the pervasive and sustained rise in the aggregate level of prices measured by an index
of the cost of various goods and services. Inflation results when aggregate demand grows faster than
aggregate supply- essentially, too many people are trying to buy too few goods, thereby creating demand
that pushes prices up faster than incomes grow. Consider the impact of inflation on the cost of living. Rising
prices make it more difficult for consumers to buy products unless their incomes rise at the same or faster
pace. Sometimes it is practically impossible. Either alone or together, these measures slow or stop economic
growth.

Unemployment. The unemployment rate is the number of unemployed workers divided by the total civilian
labor force, which includes both the unemployed and those with jobs. In practice, measuring the number of
unemployed workers actually seeking work in various countries is difficult given the lack of a standard
measurement method. Generally, people out of work and unable to find jobs depress economic growth,
create social pressure, and provoke political uncertainty.

Debt. Debt, the sum total of government’s financial obligations, measures the state’s borrowing from its
population, from foreign organizations, from foreign governments, and from international institutions.
More recently, many countries have borrowed from international lenders to finance their movement to freer
markets, a process of economic transition. Many countries that began with this ambition but that eventually
failed then increasingly had to rely on foreign debt.

Income Distribution. GNI or PPP, even weighted by the size of the population, can misestimate the relative
wealth of a nation’s citizens. Uneven income distribution is not a problem of poorer nations. There is a
strong relationship between skewed income distributions and the split between those who live in urban
settings versus those who live in rural areas.

Poverty. A related but separate issue concerns poverty- the state of having little or no money, few or no
material possessions, and little or no resources to enjoy a reasonable standard of life. In many parts of the
world, workers and consumers struggle for food, shelter, clothing, and clean water, health services, to say
nothing of safety, security, and education. Failure results in suffering, malnutrition, mental illness, death
epidemics, famine, and war.

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The Balance of Payments. The Balance of Payments (BOP), officially known as the statement of
International Transactions, records a country’s international transactions that take place between
companies, governments, or individuals. Managers use the BOP as a comprehensive indicator of a country’s
economic stability.

Main Sectors of Industry

The Philippines' economy is based on food processing; production of cement, iron, and steel; and
telecommunications, among others. The agricultural sector employs 25% of the labour force but contributes
only 9.3% of GDP. The sector only grew by 0.9% in 2018, showing signs of stagnation. The Philippines is
the second largest producer of coconuts. However, the agricultural sector suffers from low productivity,
weak economies of scale and inadequate infrastructure. President Duterte ordered government lands to be
converted to agriculture use. As for mining, Philippines is one of the richest countries of the world in terms
of minerals with an unexploited mineral wealth estimated at more than USD 840 billion. The Philippines
reserves of copper, gold and zinc are also among the largest in the world.
The industry sector contributes 30.7% of GDP and employs 18.4% of the population. Industrial
food processing is one of the Philippines' main manufacturing activities. The big industries are dominated
by production of cement, glass, chemicals products and fertilizers, iron, steel and refined oil products. In
2018, the growth rate for the industrial sector was 6.7%.
The tertiary sector - which represents 59.9% of GDP and employs 56.7% of the country’s workforce
- has developed substantially, particularly in telecommunications, call centres and finance. Service sectors
government goals include attracting investments in human resource development, design, R&D, finance,
and infrastructure; bolstering manufacturing-derived services; and establishing new ecosystems linked with
manufacturing (Department of Trade and Industry and Board of Investments). The sector grew by 7.4% in
2018. Thanks to a rapid productivity growth in construction, real estate activities are expected to grow in
2019.

POLITICAL ENVIRONMENT
The political environment can influence business organizations in many ways. It could add a risk
factor and lead to a major loss. You should understand that the political factors have the power to change
results. It can also affect government policies at local to federal level. Companies should be ready to deal
with the local and international outcomes of politics.

Political Environment is the state, government and its institutions and legislations and the public
and private stakeholders who operate and interact with or influence the system. The political atmosphere
should be good and very stable for a firm to operate successfully. Political Environment forms the basis
of business environment in a country. If the policies of government are stable and better then businesses
would get impacted in a positive way and vice versa.
Why is political environment important?
Changes in the government policy make up the political factors. The change can be economic, legal
or social. It could also be a mix of these factors.
Increase or decrease in tax could be an example of a political element. Your government might
increase taxes for some companies and lower it for others. The decision will have a direct effect on your

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businesses. So, you must always stay up-to-date with such political factors. Government interventions like
shifts in interest rate can have an effect on the demand patterns of company.
What Political Factors Affect Business Environment
With a change in administration policies, there arise political factors that can change the entire
business scenario. These changes can be economic, legal or social and can include the following factors:
Tax and economic policies: Increasing or decreasing rate of taxes is a good example of a political
component. Government regulations may raise the tax rate for some businesses and can lower the same for
others due to specific reasons. This decision will directly impact businesses. This is why maintaining a
strategy which can deal with such situations is very important.

Political stability: Lack of political stability within a country can significantly impact the operations of a
business. This can especially be true for businesses that are operating on the global scale. For instance, a
hostile takeover can take over a government. Eventually, such a situation will lead to looting, riots and
general disorder within the environment. Such situations can disrupt business operations and activities
which can have a major impact on its bottom line.

Foreign Trade Regulations: Every business has a need to expand business operation to other countries.
However, political background of a country can influence the desire for a business to expand its operations.
Tax policies that are particularly controlled by the government can induce a particular business to expand
operations in different regions whereas; other tax policies can hinder the process of business expansion for
some industries.

Employment Laws: Employment laws are made to protect the rights of employees and include every
aspect of employer/employee relationship. Employment law is an aspect that is very complex and involves
several pitfalls as well. When businesses’ are in touch with the latest developments in this law, they can
manage to take their business in the right direction however, those who get it wrong needs to be completely
prepared for the expensive results it will generate.

Majority of the MNCs have to face complex political environmental problems because they must
cope with the politics of more than one nation. That complexity forces MNCs to consider three types of
political environment: foreign, domestic and international.

The developing countries and the less Developed Countries (LDCs) often view foreign firms and
foreign capital investment with distrust and even resentment, owing primarily to a concern over potential
foreign exploitation of local natural resources. Dependency Theory explains why Latin American countries
are reluctant to welcome foreign-based MNCs. According to this theory, the ongoing economic, political
and social transformations have made it necessary for Latin America to rely on the capitalistic system. Let
us know some more about political environment, discussed in following subsections.

Political Systems

In order to appraise the political environment of a country, the knowledge of the form of
government of that country is essential. Basically, the government can be classified into two categories –
parliamentary (open) or absolutist (closed). In the parliamentary form of government, the citizens are
supposed to be consulted from time to time for learning about their opinions and preferences. In this type
of government the policies are thus intended to reflect the desire of the majority segment of society. Most
of the industrialized nations and democratic countries can be classified as parliamentary.

The absolutist governments include monarchies and dictatorships. In the absolutist system, the
ruling regime dictates government policies without considering citizens’ needs or opinions. The United

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Kingdom is a good example of a constitutional hereditary monarchy. Despite the monarch, the government
is still classified as parliamentary.

Political system of many countries does not fall neatly into these two categories. Some monarchies
and dictatorships like Saudi Arabia and North Korea have parliamentary elections. The erstwhile Soviet
Union had elections and mandatory voting but was not classified as parliamentary because the ruling party
never allowed any alternative on the ballot. Countries such as the Philippines under Marcos and Nicaragua
under Somoza held elections but the results were suspect because of the government’s involvement in fraud.

At the international political level, the governments can be classified in a number of ways.
However, the best way to classify the government is through the political parties. The classification could
be based on four types of governments (i) Two party, (ii) Multiple party, (iii) Single party, and (iv)
Dominated by one party.

In a two party system, there are mainly two parties that control the government, turn by turn, which-
so-ever in a majority and the other parties are also allowed to support any one of the two parties.

Political Risks Defined

Political risk, sometimes called “sovereign risk,” has several elements. First, it is found whenever
a government prevents a private sector debtor from repaying its obligations. Second, it occurs when the
foreign government is itself a debtor and defaults on its own obligations due to its own volition. Third,
political risk is present when a government repossesses the assets of a private entity (sometimes referred to
as “confiscation,” or “expropriation”). Other examples of political risks include imposition of new controls
(such as trade restrictions, exchange limitations or monetary controls), and war, revolution or insurrection.
Ultimately, the exact definition of “political risk” will be listed in any insurance or guarantee
documentation.

Political Risk Analysis

There are a number of political risks which are to be faced by international marketers. The risks,
which the marketers face from the host government, are:

Confiscation is the process of a government’s taking ownership of a property without

compensation.

Expropriation differs from confiscation in that there is some compensation though not necessarily
just compensation. More often than not, a company whose property is being expropriated agrees to sell its
operations – not by choice but rather because of some explicit or implied coercion.

Nationalization involves government ownership and it is the government that operates the business
being taken over.

In domestication, foreign companies relinquish control and ownership either completely or partially
to the nationals. The result is that private entities are allowed to operate the confiscated or expropriated
properties.

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Indicators of Political Instability

To assess a potential marketing environment, a company should identify and, evaluate the relevant
indicators of political difficulty. Potential sources of political complication include social unrest, the
attitudes of nationals, and the policies of the host government.

Social Unrest. Social disorder is caused by such underlying conditions as economic hardship, internal
dissension and insurgency, and ideological, religious, racial, and cultural differences.

Attitudes of Nationals. An assessment of the political climate is not complete without an investigation of
the attitudes of the citizens and government of the host country. The nationals’ attitude toward foreign
enterprises and citizens can be quite inhospitable. Nationals are often concerned with foreigners’ intentions
concerning exploitation and colonialism, and these concerns are often linked to concerns over foreign
governments’ actions that may be seen as improper. Such attitudes may arise out of local socialist or
nationalist philosophies, which may be in conflict with the policy of the company’s home country
government.

Policies of the Host Government. Unlike citizens’ inherent hostility, a government’s attitude toward
foreigners is often relatively short-lived. The mood can change either with time or change in leadership,
and it can change for either the better or the worse. The impact of a change in mood can be quite dramatic,
especially in the short run. Government policy formulation can affect business operations either internally
or externally. The effect is internal when the policy regulates the firm’s operations within the home country.
The effect is external when the policy regulates the firm’s activities in another county.

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Sources:

Political Environment in International Business: Definition, Factors, Impact – Video and Lesson Transcript,
retrieved from https://study.com/academy/lesson/political-environment-in-international-business-
definition-factors-impact.html on February 1, 2020

Introduction and Types of International Business Environment, retrieved from

https://enterslice.com/learning/international-business-environment-ibe/ on February 2, 2020

Macro Environment – Political-Legal and Social Environment, Retrieved from

https://www.toppr.com/guides/commercial-knowledge/business-environment/macro-political-legal-
social-environment/ on February 3, 2020.

Embassy of Japan in the Philippines, Retrieved from https://www.ph.emb-japan.go.jp/bilateral/oda/aid.htm

on February 9, 2020.

https://www.vskills.in/certification/blog/technological-environment/
https://www.google.com/amp/s/marketbusinessnews.com/financial-glossary/economic-environment/
https://www.google.com/amp/s/pestleanalysis.com/technological-factors-affecting-business/
https://en.m.wikipedia.org/wiki/environmental_technology
https://study.com/academy/lesson/what-is-the-economic-environment-in-business-definition-importance-
factors.html
https://www.google.com/amp/s/marketbusinessnews.com/financial-glossary/economic-environment/
https://pestleanalysis.com/political-factors-affecting-business/amp/
https://enterslice.com/learning/international-business-environment-ibe/
https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/2515-political-
environment.html

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