International Business Management

Unit 3

Unit 3

International Business Environment

Structure:
3.1 Introduction
Objectives
3.2 Economic Environment
National economic policies
Economic structure
Balance of payments
3.3 Political Environment
Nature of politics
Political stability
3.4 Demographic Environment
Segment selection
Branding and strategy
Market trending and comparison among products
Assumptions of country culture
Understanding demographic changes
Socio-cultural Environment
3.5 Legal Environment
Legal systems
Dispute resolution systems
3.6 Summary
3.7 Glossary
3.8 Terminal Questions
3.9 Answers
3.10 Case-let

3.1 Introduction
In the previous unit, you have studied about the evolution, advantages,
globalisation and the future of international business (IB). This unit covers
economic, political, and legal environments in which an IB operates and
gives an insight into different theories that companies adopt while going
international.

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Scanning the global business environment is a must for any firm whether
doing business domestically or internationally as the domestic markets are
now open to global competition by opening to foreign players. This analysis
is part of a companys analysis-system, involving both internal as well as
external factors. The analysis system may comprise the following areas in
order to explore the business opportunities and challenges in key markets
for any firm.

Conducting business within your own country is different than in a global

environment, where you will be dealing with international features, prospects
and challenges. It is important that managers take an active interest in these
economic, political, demographic and legal environments of a country in
order to:
Analyse market conditions of different countries.
Assess risk.
Identify growth sectors.
Make investment decisions.
In order to succeed, a company needs to gather data on national
economies, interpret and make cross border comparisons using standard
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criteria. Knowledge of the IB environment allows management to allocate

resources so that they reap the benefits and operate with high efficiencies in
any country. For instance, garment companies use manufacturing facilities
in China and save on costs, which will be higher in the nation of origin.
Objectives:
After studying this unit you should be able to:
analyse economic environment of a country for doing business.
interpret the factors affecting political environment of a country.
discuss the legal issues involved in the international trade.
explain the demographic environment and its increased utility in
intentional trade.

3.2 Economic Environment

The economic environment refers to the economic conditions under which a
business operates and takes into account all factors that have affected it. It
includes prime interest rates, legislation concerning employment of
foreigners, return of profits, safety of country, political stability and so on.
3.2.1 National economic policies
National economic policies depend on a countrys socio-economic and
cultural background. All governments aspire to achieve four major economic
objectives:
Full employment.
A high economic growth rate.
A low rate of inflation.
Absence of deficit in the countrys balance of payments.
The basic problem is that the first two objectives work against the last two.
Measures such as low interest rates, tax cuts and increase in public
spending creates jobs and stimulates growth but also causes inflation,
increase in wage, and higher imports. Due to increased consumer
expenditure the countrys balance of trade worsens.
3.2.2 Economic structure
International Business managers need to understand and assess
international economic forces at work. Key variables that need to be
examined include Gross Domestic Product (GDP) per capita, regional
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distribution of GDP, levels of investment, consumer expenditure, labour

costs, inflation and unemployment. Variables that are examined when
assessing national economic environments include:
Economic structure The structure of a nations economy is determined
by the size and rate of its population growth, income levels and distribution
of income, natural resources, agricultural, manufacturing and services
sector. Economic infrastructure is the sum of all the external facilities and
services that support the work of firms including communication,
transportation, electricity supply, banking and financial services.
Industry structure The structure of an industry is determined by factors
such as:
Entry and exit barriers.
Number of competing firms.
Market share among firms in that sector.
Average size of competing units.
Market growth It is measured in terms of local currency and adjusted for
inflation. Local currency is used because conversions into other currencies
are affected by exchange rate fluctuations.
Income levels It is taken as the GDP per capita and GDP is directly
proportional to the productivity of the country. Net income is another
important variable and is without tax payments from individual gross
incomes.
Sector wise trends Growth activity in a country might vary significantly
among certain industries. For example, India has a vibrant software services
industry.
Openness of the economy The ratio of a countrys imports and exports
to its Gross National Product (GNP) indicates its vulnerability to fluctuations
in international trade. A nation with a high foreign trade or GNP depends
heavily on the economic well-being of the nations it exports to. Conversely,
closed economies have a high degree of control over the economy.
International debt An outstanding loan that one country owes to another
country or institutions within that country. Foreign debt also includes due
payments to international organisations. Foreign exchange reserves should
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not be less than outstanding short-term foreign debts. On the other hand, a
high foreign debt servicing requirement maybe a positive indicator,
suggesting that a country has borrowed heavily to invest in its future.
Degree of urbanisation This is an important factor because there are
major differences in incomes and lifestyles between urban and rural areas in
most countries such as:
Shopping patterns shopping frequency, average purchase value.
Nature of goods bought.
Expectations in quality and technical sophistication.
Education levels.
Ease of distribution.
3.2.3 Balance of payments
Importance Balance of payments is a record of all economic transactions
that occur between residents of a country and foreigners over a specific
period of time. The balance is shown monthly, quarterly or annually. The
accounts show the structure of the external trade, net position as a lender or
borrower and trends in economic relationships with the world.
The balance of payments is a good overall indicator of a countrys economic
health; the likelihood of the countrys government imposing forex controls,
import restrictions and policies such as tax increments and interest rate
hikes.
Balance of payment account These accounts attempt to identify the
reasons behind various categories of international receipts and payments,
making it possible to establish the values of payments by domestic residents
to foreigners, and vice versa, for purchase of imports, use of services,
lending, or direct foreign investment.
The account is divided into categories for long and short term financial
transactions, which is initiated by the national monetary body, and involves
goods and services.
Deficits and surpluses Current account deficit records physical imports
and exports along with international transactions in invisibles, that is nonphysical items such as residents pensions, interest and royalties from
abroad, domestic firms fees for the movement of goods in other countries,
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and so on. The balance of trade within the current account is the balance on
physical (visible) imports and exports.
The other major grouping is the capital account which shows the balance of
transactions in financial assets, including direct investments in foreign
financial instruments, movements in short-term assets, inter-governmental
loans and changes in the countrys gold and forex reserves.
Reserves will decline if there is, for example, a current account deficit which
in turn affects the currency rate. To prevent the local currency from
depreciating too much, some foreign currency reserves will be sold, but
since it is limited, this is only a temporary measure.
Self Assessment Questions 1
1. The two objectives of National economic policies are ______ and
______.
2. FDI policy is dictated by the government of the host country.
(True/False)
3. Balance of payment is an indicator of a countrys _______.

3.3 Political Environment

In the previous section, the economic environment of international business
was discussed. Now, let us focus on the political environment.
Political factors influence the economic and legal environment in which the
business operates to a larger extent, especially in contract law and rules on
advertising and consumer protection. It also affects the business practices,
restrictions on market entry, tariffs charged and ability to repatriate profits.
Other factors include:
Regulatory frameworks.
Governmental control over multinational activity.
Importance of pressure groups.
Trade embargoes.
Likelihood of having insurance against losses due to political risk.
Strikes and labour unrest due to political turbulence.
Political and economic environments are often inter-related. The political
environment affects the economic environment. For example, a government
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which is perceived as anti-business by the business community may lead to

capital outflows resulting in the fall of the currency, lower savings and
investment and hence higher interest rates and lower economic growth.
3.3.1 Nature of politics
The nature of a government is based on the type of the government, and the
policy that the country follows. The politics of a country is concerned with:
The direction and administration of states.
The control of aggregate social relationships.
Government is involved in the formulation and implementation of laws for a
nation. The government also has control over its territory and is the only
legal representative. It can enter into or cancel any agreements with other
countries. The entire land surface on earth is controlled by nations, except
the Antarctic and Arctic regions. Thus international businesses have to deal
with nations and are subjected to their authority.
Sovereignty Sovereignty refers to the absolute power of the state. The
two problems that immediately arise in concern with sovereignty are:

The ability to make independent decisions since countries rely on each

other for goods, markets, economic assistance and defence.

The question of where national sovereignty lies is not clear as it may

exist in the head of state, the parliament, the prime minister, the cabinet
or in the people.

National interest National interest, as defined by the government, will

depend on the cultures, background, perceptions and experiences of the
decision makers involved, which might change over time and according to
circumstances. A nations ability to define its interests depends on its power,
control over raw materials; scientific and technological knowledge; size,
structure health and education of its population; political stability and
society.
3.3.2 Political stability
Political instability may arise from revolution and insurgency, involvement in
foreign wars, changes in government, bad international relations, falling
national income, high inflation and rising foreign debt, resulting in the
physical destruction of a firms assets, higher taxes, import controls and
barriers on money leaving the country.
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Political risk It may emerge from social unrest due to unevenly distributed
income, competing political ideologies or ethnic groups within a nation, rise
or fall of individual leaders or from international relations. In the modern
world, a countrys economic prospects depend heavily on foreign investment
and goodwill of the business community.
There are two types of political risks, namely macro and micro risks as
explained below:

Macro risk affects all foreign firms operating in the country equally and
may include the imposition of exchange controls, special taxes, localcontent rules and so on.

Micro risk applies to a particular company industry or project. For

example, import restrictions on specific products, compulsory breaking
up of a firm into smaller parts, cancellation of contracts and so on.

Self Assessment Questions 2

4. Political factors define economic and legal environment in a business
environment. (True/False)
5. _______ refers to the absolute power of the state to coerce and control
its citizens.
a) Sovereignty
b) National interest
c) Political stability
d) Political risk
6. The two types of political risks are _______ and _______.

3.4 Demographic Environment

In international business; scanning of demographic environment plays an
important role as it helps firm understand the various demographic factors
such as gender; age; religious background and ethnicity. Firms; while
appraising international markets for new business opportunity or product
launch; use demographic environments to identify target markets for specific
products or services it wishes to cater. There are both advantages and
disadvantages in scanning the demographic environment of the country.
One has to understand both sides of the demographic environment while
planning strategy for international markets.
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3.4.1 Segment selection

Demographic profiling of the country helps us select the right segments for
which we should offer its products or services. By properly appraising
demographic factors such as age; gender; ethnicity; education background;
cultural & religious background; income group, etc., the firm can plan good
marketing standpoint of sales. Without proper focus on target groups the
firm may end up spending on advertising, sales promotion, etc., on groups
that has no interest in the product.
3.4.2 Branding and strategy
Scanning of demography provides specific information about different
consumer groups. Once the firm has this data, it can develop well-defined
marketing strategies to reach to target audience and position products
better. Appraising of demographic environment also helps the firm to
develop their brands thus generating better sales and ensuring sustainability
of the product in market. For example, mobile companies are launching a
series of products for the teenage group with appealing advertisement
campaign and some of them have been successful to establish their
products as brands.
3.4.3 Market trending and comparison among products
A firm can find out the general trends about a product in a market by
collecting demographic data over extended periods of time and comparing
such information at different points and angles. Firm can do generalisations
based on such trends after cross comparing its product with similar products
in the markets and it can plan a corrective action on time including launching
of new products.
3.4.4 Assumption of country culture
Marketers face problems during the demographic profiling of customers in
different cultures like the assumptions taken about consumers or predictions
made about what will happen with a particular consumer group in a
particular country. Reading people minds and cultural background is a tough
job and it becomes even tougher if it has to be done for different global
markets. A case let on assumptions of different cultures about numbers is
tabled below and is self explanatory.

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Cultural conundrum: Assumptions for numbers and shapes in

different cultures
i. In the Japanese culture, the numbers 4 and 9 are avoided in all
situations. The reason is that the number 4 is a homonym for death,
and the number 9 for suffering.
ii. Number 7 is considered bad luck in Kenya, good luck in Czech
Republic, and has magical connotations in Benin.
iii. The number 13 is perhaps the most hated number across different
countries of the world such as Japan, Hong Kong, Korea, Taiwan,
Germany, Denmark, Greece, Romania, Latin America, Malaysia,
Singapore, Egypt, etc. Many people view this number, as a symbol of
bad luck and exporters should avoid this number while numbering the
packages.
iv. The number 17 is considered to have a negative impact in Italy.
v. The number 10 is bad luck in Korea. Hence it should be avoided in
packing, labelling and marking of export consignments.
vi. Even numbers are preferred in Hong Kong, Korea and Taiwan
whereas numbers like 1, 3, 5 and 8 are viewed as numbers with
positive effects in Japan.
vii. Triangular shapes of packages are not preferred in Korea and Taiwan.
Round and square shapes of packages are preferred in Hong Kong
and amongst the people in Middle East. Egyptians prefer pyramid
shaped packages.
Adapted from The Mystery of Numbers New York, USA: Oxford University
Press Schimmel, Annemarie (1993)
3.4.5 Understanding demographic changes
The demographic environment never remains constant as people migrate
from place to place in search of better opportunity. Moreover, there will be
changes in birth and death rates in due course along with economic
development. Marketers; especially in international business have to
constantly update such information in order to have a realistic picture of
what is happening at given point in particular a market. This requires a great
deal of effort and it is a constant expense to a business.

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3.4.6 Socio-cultural environment

The cultural and social norms of people differ worldwide in all key markets
as they have been shaped over centuries passing from one generation to
another. Language, material culture, customs, aesthetics, religious beliefs,
attitudes, values and social organisation has been important for survival and
development of societies globally. Due to these socio-cultural factors, the
customers/consumers of a particular country/region become conditioned to
accept certain things as per conditioned behaviour. The increasingly
competitive international business environment necessitate the exporters/
companies doing business overseas to customize their organisational
polices keeping in mind the local cultural norms. For example, Coca-Cola
has to sweeten its drinks in India as Indians have an affinity towards sweet
taste. Indian meat exporters export only HALAL meat to Arab countries
with the inscription FIT FOR ISLAMIC USE during packing. If a firm fails to
adapt their business approach to the culture and traditions of specific foreign
markets or is unwillingness to do, its survival may be under danger. In the
context of the socio-cultural environment, there are a number of factors that
firm has to consider while foraying into international markets. The same has
been explained in detail in chapter 4 entitled Culture & International
Business.

3.5 Legal Environment

International businesses confront different sets of laws in various countries
of operation. IB must not only abide by the domestic laws of each nation but
also by the supranational laws which impose obligations beyond those of
national legal systems. For example, the European Union. Major disparities
in national law affecting business are:

Intellectual property protection.

Consumer protection and product liability.

Competition among businesses.

Payment of bribes and other practices.

Formation and termination of contracts.

Marketing practices.
Carriage of goods.

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Domestic, International and supranational law

A countrys domestic law deals with aspects of IB, and foreign citizens and
firms are normally regarded as the citizens of the country in question.
Special laws are passed to guarantee the safety of foreign investment, but
in general the ordinary law of a country is applied when conflicts arise.
International law applies to sovereign states and imposes rights and duties
on nations in their dealings with each other. It is derived from international
conventions which establish rules agreed by contesting states; from
international customs accepted as law within all nations to internationally
recognised legal principles.
An IB that is involved in a legal dispute has to seek redressal from the
national courts of the country in which the action is heard and can not obtain
relief from any international legal system.
The treaty of Rome changed everything by creating a new type of law that
provided individual persons and businesses with the right to bring cases on
their own accounts to a supranational legal body. Individuals and
businesses assumed obligations extending beyond those imposed by the
national legal systems of the countries in which they functioned. For
example, EU companies are subject to laws on competition established at
the pan-European level, while employees can appeal to the European Court
of Justice on equal opportunities matters. Other regional treaties of
economic and political co-operation follow the European Economic
Community (EEC) in creating supranational judicial frameworks.
3.5.1 Legal systems
The legal systems of some countries are much better developed than
others, particularly the mechanisms for the administration of justice and the
enforcement of court rulings. Most nations base their legal systems on one
of the following:

Common law Common law applies throughout the English-speaking

world including most countries of the Commonwealth. These systems
rely on precedent, judgements in specific cases and on ad hoc
legislation to create and interpret statutes.

Code law Countries with Code law systems have all their laws written
down in Criminal, Civil and Commercial Codes which are used to

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determine all legal matters. Most continental European countries and

their former colonies have Code law systems.
Although they are quite different in principle, common law and Code law
systems have similarities in practice. A large part of the law in the
common law countries is derived from statutes and legally binding
regulations, while Code law relies heavily on judicial interpretations of
the meanings of the words embodied in legislative codes.

Islamic law This is derived directly from the Koran and typically is
mixed with the pre-existing common law or civil code provisions of the
concerned country. Important practical rules apply to the conduct of
business in Islamic countries, including the following:

Interest payments on financial dealings are forbidden since it is seen

as improper to reward those with excess funds while penalising
those who need to borrow.

The principle of profit sharing. Islamic banks do not pay interest on

deposit but give investors profit shares that are the result of the
deployment of the funds deposited.

3.5.2 Dispute resolution systems

Disputes that may occur in the course of international transactions must be
resolved through negotiation, arbitration or litigation. The issue arises when
there is conflict of laws. Since each nation has its set of laws, interpretations
and different legal methods are applied to commercial litigation, and
conflicts between the legal systems of specific countries. Important
differences among the business laws of various countries include:
Laws concerning the circumstances, in which an offer may be withdrawn
without penalty. It varies between countries.
Distinguishing between commercial and non-commercial contracts in
some countries. In commercial contracts, lower burden of proof is
necessary to establish the existence of the commercial contracts. These
disputes are heard in special courts.
The intervals beyond which cases become statute barred differ. In
Britain, the period for most classes is six years whereas in France it can
be up to 30 years. In Germany, it depends on whether the case
concerns a commercial contract and if so, whether both parties are
traders or not.
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Before suing for breach of contract in certain countries, considerations

are not necessary to be proved. Examples of such considerations are
the price paid for goods, employee wages, hire fee paid for equipment
lease and so on. Under the English law, a contract cannot exist without
considerations.

National differences occurring due to the legality of exemption clauses

and penalty clauses.

The necessity to protest unpaid debts prior to suing for payment in

certain countries. This means getting a notary to ask the customer for
payment or reasons for failure to do so. The latter are put into a formal
deed of protest which is then used as evidence of refusal to pay.

Nationalisation of assets Domestic laws guarantee that foreign

businesses will not be taken over but there are no international laws
regarding this matter. Article 2 of the United Nations Charter of Economic
Rights and Duties of States adopted by the UN General Assembly in 1974,
asserts that every state has and shall freely exercise full permanent
sovereignty including possession, use and disposal over all its wealth,
natural resources and economic activity. The UN supports the absolute
right of its members to nationalise or exercise partial control over
businesses operating within its borders.
Where cases are heard It is safe to assume that each party prefers a
dispute to be settled in its own country. But this is not possible when
businesses from different countries are involved. Contracts often contain
jurisdictional clauses which specify that the law of a certain country will
apply as agreed by all parties to the contract. This ensures that both sides
are aware of their legal rights and obligations.
If a contract has no jurisdictional clause, then it is heard in the defendants
nation, since one cannot be compelled to attend the court abroad. Either the
contract of sale will name a country or the country with the closest
connection with the contract must be chosen.
Concept of residence Even though an MNC operates in a global
environment it cannot become an international legal entity. While its
subsidiaries have to be set up through the laws of different nations, its
headquarters must be incorporated under the laws of a particular state.
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Questions may arise with regard to the definition of the nationality of an

MNC and these need to be answered adequately since the laws of the
home country will govern many of its core activities such as responsibilities
and liabilities of shareholders, taxation, availability of government grants and
subsidies, and degree of employment protection for personnel. Countries
apply various legal tests when determining a companys nationality.
For example:
Place of incorporation.
The nationality of owners or majority of shareholders.
Where decisions concerning the worldwide business are taken.
Arbitration This refers to the process of settlement of disputes by having
independent referees, who are agreeable to both sides, adjudicate the
matter.
Arbitration vs. litigation
Litigation has the advantage that the rights and duties of the parties are
determined by known and definite laws and that aggrieved parties can
obtain redress that is legally enforceable. There is however a number of
issues related to litigation including:
Long delays.
High costs.
Possible bad publicity from the case.
Fear of discrimination by the courts against foreigners.
Businesses may have to be suspended while the case is being heard.
Lack of business experience of the judges.
Matching words across the languages and accurately translating legal
concepts are difficult tasks. The meaning of words change during translation
and the intentions of the parties may become unclear. Hence, an important
practical problem is of proper translation of documents into a foreign
language for consideration by the court.
Arbitration is faster and cheaper than litigation and cases are heard in secret
so that neither party loses public goodwill through adverse publicity. The
arbitrators are themselves business people, advised by legal experts, with
practical experience of the commercial world. No problems arise from the
conflict of international laws since common sense approaches are applied to
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issues. Cases are heard on neutral ground and not in the national courts of
one of the parties. However, arbitration lacks legal precision and still costs
time and money.
Arbitration bodies The main arbitration bodies are the International
Chamber of Commerce, the American Arbitration Association, the London
Court of Arbitration and the International Centre for the Settlement of
Investment Disputes (ICSID). The ICSID, based in Paris is the most
preferred, and offers arbitration facilities to members and non-member
companies alike.
The International Court of Justice (ICJ), based at The Hague, is a UN body
that adjudicates between states and only states that have agreed to accept
the courts jurisdiction can participate in cases.
Self Assessment Questions 3
7. Three of the most used legal systems are _____, _____ and ______.
8. Scanning of demography provides specific information about different
consumer groups(True/ False)
9. Few of the international arbitration bodies are _____, ___, __ and ___.
Activity
Interpret the business environment of Sri Lanka by analysing the
economic, political and legal environments of that country.
Hint: Refer section 3.4 and 3.5
Technology environment Technology has been the driving force in
speeding the process of globalisation of world markets. Innovations such as
internet have changed the face of global business. Connectivity through
increased sources of cheap telecommunication has brought people closer to
each other. US/Europe and Australia can drive Indias BPO industries from
thousand miles away using the latest technology. Now; more and more
people are doing business online. Science and medicine are also part of
technology factors affecting global business landscape.
After the emergence of the complex TRIPs regime, Ranbaxy was acquired
by Daiichi of Japan. Japan found this as a lucrative business opportunity.
Cloud computing is redefining the IT and ITes Industry. Challenge for any
company today is to keep up with innovation and offer new cost competitive
products.
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To promote innovation, firms should conduct technological environmental

scanning of its key markets and analyze all types of relevant information
including technology gaps in key markets. This will help a firm to design a
technology strategy for a firm/region for surviving, expanding or entering
new markets. In simple words, appraisal of technology environment help
firms understands the external or internal happenings including technology
turbulence in key markets. Such an exercise helps the firm to develop new
products in order to fulfil the needs of such new markets. Process of new
product development for global markets through technological interventions
can be understood as under:

There are rapid technological changes creating opportunities for new

products and services in global markets. Country as well as company
spending on R&D is an important variable that determines development of
new technologies. Companies from countries such as South Korea, Israel,
Taiwan, China, Norway, Australia, Poland along with US and Europe are
leading in research and development and are also doing good accordingly in
international trade. Marketers, in globalised era, should promote R&D
activities, both at company level and university levels through government
funds. Following can be opportunities for any firm operating in global
markets from technological environment.

Although there are varying R&D budgets of both countries and

companies, it should be considered under the context of the country in
which the research is being done. For example, the cost of doing a
research in India is a fraction of what in US. The cost of Chip Design

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research in India is a fraction of the cost in the US. Similarly, ISRO can
launch the same capacity of satellite at a fraction of cost of Europe, US
and South Korea.

Accelerating the pace of technological change in new markets in order

to beat competitors and garner higher market share. As physical
environment in world market is different globally; the firm has to adapt
their products as per local markets requirement.

There are unlimited opportunities from innovation. When doing

business globally; firm can pool the best of manpower and other
resources in order to enhance its focus on constantly improving its
products and services through innovation.

Different countries have different norms and procedures for regulation of

technological changes, clinical trial, R&D procedures, etc. There may be
complexities involved at times due to safety concerns/cultural and
ethical issues. For example, procedure for clinical drug trail in India is
different from that of US and Europe.

3.6 Summary
Let us now summarise the silent features discussed in this unit about
international business environment:
The different factors affecting the environment of IB like political,
economical and legal are discussed.
Scanning the global business environment is must for any firm whether
doing business domestically or internationally as the domestic markets
are now open to global competition by opening to foreign players. This
analysis is part of a companys analysis-system, involving both internal
as well external factors.
The economic environment refers to the conditions under which a
business operates and takes into account all factors that have affected
it. Economic infrastructure is the sum of all the external facilities and
services that support the work of firms including communication,
transportation, electricity supply, banking and financial services.
In international business; scanning of demographic environment plays
an important role as it helps firm understand the various demographic
factors such as gender; age; religious background and ethnicity.
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Human beings differ worldwide in all key markets as they have

essentially created their own cultural and social norms which may have
been shaped over centuries passing from one generation to another.
Language, Material Culture, Customs, Aesthetics, Religious Beliefs,
Attitudes, Values and Social Organisation has been important for
survival and development of societies globally. Due to these sociocultural factors, the customers / consumers of a particular country/
region become conditioned to accept certain things as per conditioned
behaviour.

Political factors influence the economic and legal environment in which

the business operates to a larger extent, especially in contract law and
rules on advertising and consumer protection.

The legal systems of some countries are much better developed than
others, particularly the mechanisms for the administration of justice and
the enforcement of court rulings. Most nations base their legal systems
on common law, code law or Islamic law.

3.7 Glossary
Political factors: They influence the economic and legal environment in
which the business operates to a larger extent, especially in contract law
and rules on advertising and consumer protection.
Economic environment: It refers to the conditions under which a business
operates and takes into account all factors that have affected the business.
Arbitration: The process of having a mediator to settle a dispute without
going to the court.
Islamic law: This is derived directly from the Koran and typically is mixed
with the pre-existing common law or civil code provisions of the country
concerned.
GNP: Gross National Product is the total value of goods and services that
the countrys citizens produced irrespective of their location in a year.
Litigation: The process of taking a party to court to settle a legal matter.
Nationalisation: The process by which a government of a country takes
over control of a business that operates within that country.
Sovereignty: The power of a state over its citizens and land.
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3.8 Terminal Questions

1.
2.
3.
4.
5.

Explain factors that affect the international business environment.

Evaluate the importance of political stability for conducting international
business.
Why do firms pay so much attention for economic factors while entering
particular markets? Justify your answer by quoting practical examples.
What aspects of demographic environment; companies must scan while
doing international business?
What are the different options available for settling disputes?

3.9 Answers
Self
1.
2.
3.

Assessment Questions 1
Full employment, a high economic growth rate.
True.
Economic health.

Self Assessment Questions 2

4. True.
5. a) Sovereignty.
6. Macro and micro risk.
Self Assessment Questions 3
7. Common law, code law and Islamic law.
8. True.
9. International Chamber of Commerce, the American Arbitration
Association, the London Court of Arbitration and the International
Centre for the Settlement of Investment Disputes (ICSID).
Terminal Questions
1. The factors that affect the international business environment include
the economic, political and legal. These factors are important as they
help to assess risk, establish sizes and characteristics of various
markets, identify growth sectors, make investment decisions and also
help in using the company resources effectively, that is explained in
section 3.1 of this unit. Refer the same for details.
2. Political and economic environments are often inter-related. The political
environment affects the economic environments, while economic
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hardship may trigger political change. Political stability is important for

conducting international business because political instability arises from
revolution and insurgency, involvement in foreign wars, changes in
government, bad international relations, falling national income, high
inflation and rising foreign debt that are explained in section 3.3 of this
unit. Refer the same for details.
3. International Business managers need to understand and assess
international economic forces at work. Key variables that need to be
examined include Gross Domestic Product (GDP) per capita, regional
distribution of GDP, levels of investment, consumer expenditure, labour
costs, inflation and unemployment. All this may affect a firms operation
and profits. Refer to section 3.2.
4. In international business, scanning of demographic environment plays
an important role as it helps the firm to understand the various
demographic factors such as gender, age, religious background and
ethnicity. Refer to section 3.4
5. International businesses confront different sets of laws in the various
countries they operate in. The different options available for settling
disputes are through domestic, international and supranational laws that
are explained in section 3.6 of this unit. Refer the same for details.

3.10 Case-Let
Maruti Suzuki India Ltd (MSIL)
In 1983, Maruti Udyog Ltd entered into a joint venture with Suzuki Motor
Corporation (SMC) of Japan to manufacture cars for the Indian market by
utilising technology to make low-cost cars in large numbers. The launch
model was the Maruti 800, which brought about a revolution in the Indian
automobile industry.
Now, renamed as Maruti Suzuki India Ltd (MSIL), it has two
manufacturing facilities in Northern India with a capacity of 1.2 million
cars annually. MSIL offers 14 brands in over 150 variants ranging from
Maruti 800, people movers to SUV Grand Vitara.
SMC, which had an established market in Europe, started sourcing cars
from MSIL, manufactured in India under the Suzuki brand name, thus
taking advantage of the low cost manufacturing in India. In 1987, 500
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cars were exported by the MSIL to Hungary and in 2009-10, sales

volume crossed 1 million cars, out of which around 1,47,000 cars were
exported to other countries.
MSIL exports to the more than 100 countries including Poland, Finland,
Iceland, Switzerland, Netherlands, Algeria and Italy.
In this process, MSIL became the only Indian company to manufacture
and sell 1 million cars in a year and is the largest passenger car
manufacturer with over 45% market share in India.
MSILs revenue has grown constantly over the years:
Table 3.3: Maruti Sales 2006 to 2009-10
Year

Net sales (Rs. in

million)

Year

Net sales (Rs. in

million)

2006-07

1,45,922

2009-10

3,01,198

2007-08

1,78,603

2008-09

2,03,583

The government of Japan has honoured MSIL with a METI award for
promotion of Japanese brand in India. Maruti Suzuki is one of the six
companies, and one of the two companies outside Japan, to have
received this award.
Discussion Questions
1. Which business theory will you associate with this case? (Hint: Porters
diamond model)
2. What kind of approach did SMC adopt to make an entry into Indian
market? (Hint: SMC utilised technology to make low-cost cars in large
numbers taking advantage of the low cost manufacturing in India).
Source: http://www.marutisuzuki.com retrieved on 20 September 2010

References:

Bhalla V. K. and Shiva Ramu S. (2008). International Business

Environment and Management, Anmol Publications.

Batra G. S. (2006). Liberalisation, Globalisation and International

Business, Deep and Deep Publications.

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Unit 3

Cherunilam Francis. (2010). International Business Environment,

Himalaya Publishing House.

McDonald Frank and Burton Fred. (2002) International Business,

International Thomson Computer Press.

Bennet Roger (2006). International Business, Pearson Education Ltd.

Paul Justin (2009). International Business, Prentice Hall of India Pvt.

Ltd.

Czinkota Michael R, Ronkainen Llkka A, Moffett Michael H. (2002).

International Business, PWS South Western Duxbury Cole Onwo.

Nelson Carl A. (1999). International Business - A Managers guide to

Strategy in the Age of Globalism, PWS South Western Duxbury Cole
Onwo.

Chauhan PL, Kakkad Ratish, Patel Rupal H. (2006). International

Business, Shanthi Prakashan.

Aswathappa K. (2010). International Business, Tata McGrawhill

Publications Co Ltd.

E-References:

http://www.economywatch.com, retrieved on 15 November 2010

http://www.marutisuzuki.com, retrieved on 20th September 2010

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