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NME
Business Environment Lesson: International Environment
Lesson Developer: Ms.Reena Talwar, College/Dept: Assistant Professor in Commerce, Bharati
College Lesson Reviewer: Prof. K.M.Upadhyay
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Lesson: International Environment: Redefinition of Trade and Regional Associations
Table of Contents:
1: Learning Outcomes 2: Introduction
3: Concept of International Business Environment 3.1: Significance of International Business Environment
4: Analyzing various components of International Environment 5: Redefinition of Trade from GATT to WTO
6. Regional Associations in International Environment Summary
Exercises Glossary
References
1. Learning Outcomes:
After reading this lesson, you should be able to:
understand the concept of International Business Environment;
learn about nature and characteristics of International Environment;
appreciate the significance and relevance of the study of International Environment;
identify various components of analyzing International Environment;
gain insights on definition of trade from GATT to WTO;
appreciate the significance of Regional Associations.
2. Introduction:
International Business Environment is the study of business and environmental factors
across international borders. In today‟s world, economic boundaries have disappeared and
businesses operate not only in their domestic economy but are also operating in different
countries to meet the needs of customers around the world.
Globalization has enabled the business firms to conduct cross border transactions of goods
and services between two or more countries and when business activities are performed in
more than one country, it is termed as international business.
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The functions, techniques and processes involved in international business are similar to
what a business firm does in the domestic business. However, the difference lies in the
environment within which these activities are performed and carried out. A business firm
can easily scan domestic environmental factors which have an influence on its functioning.
However, it is challenging for a business firm to monitor international environment which is
quite different from the domestic environment. Therefore, to be successful internationally, it
is important that global business firms understands the significance and various elements of
international environment and change their strategies according to the changes in
environmental factors present in different countries where the firms are operating. Long-
term survival of international business firms would largely depend upon how well these
environmental factors are understood and used to their advantage.
3. Concept of International Business Environment:
We need to first understand the meaning of “international business” and “environment”.
When business operations are carried out in more than one country apart from the home
nation, then it is termed as international business. A business firm is known as a
multinational enterprise (MNE) when it carries out its production or operations in more than
one country. An MNE is also referred as a multinational corporation (MNC) or transnational
corporation (TNC).
Environment refers to sum total of what is around someone which includes living things and
natural forces. It is also referred as “the conditions that affect the behavior and
development of a business enterprise.” When we combine these two words International
Business and Environment, it refers to conditions or surroundings prevalent in foreign
countries that affect the functioning of a business firm and its activities.
Environmental factors are mostly external to a firm and are largely uncontrollable. The
business environment of a firm comprises of Micro and Macro environment. Micro
environment or task environment or operating environment consists of those individuals or
groups which are very close to business and with which the organizations comes into
frequent and direct contact in its business activities. It primarily consists of customers,
suppliers, marketing intermediaries, competitors, and public. Macro Environment or remote
environment refers to factors which are external to a business enterprise and are less
controllable as compared to factors under micro environment. These include political, legal,
social, cultural, technological and international environment
The environment of each country varies from the other and if a business firm has to operate
in more than one country, then it should have a thorough understanding of differences in
environmental factors amongst nations. The strategies that work well in one country might
not work in the other country due to differences in cultural, political, legal and economic
factors.
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3.1. Significance of International Business Environment:
Whenever a business firm decides to conduct its operations internationally, it has to take
two major decisions:
1. The countries or markets suitable to enter and
2. The mode of entry for entering into these markets.
Both these are strategic and important decisions for a firm and require in depth analysis of
environmental conditions and situations of these markets. A firm would enter into those
countries or markets where there is enough market potential and scope of growth and
expansion. Market potential, however, depends upon the economic and political factors
prevailing in those countries. Demand for air conditioners, for example, would be higher in
those countries which are situated near hot zones and where the purchasing ability of
people is high.
Once the firm has identified countries with market potential, it has to decide the mode of
entry. There are various modes of entry such as exporting, franchising, licensing, joint
venture or setting up wholly owned subsidiaries. A business firm makes this important
decision only after analyzing the various environmental factors. For example, a firm chooses
exporting as the mode of entry when the product can be produced at a lower cost in the
home country as compared to the foreign country and there are not much legal restrictions
on the import of the product. However, if the product involves import bans or high
transportation costs, then it might choose to set up a wholly owned subsidiary abroad
provided the same is acceptable to foreign governments.
Since the environmental factors differ from nation to nation, a business firm cannot be
successful by replicating the domestic decisions and practices in other nations of the world.
A multinational firm needs to continuously monitor the changes in political, legal, cultural,
social and economic environment of foreign countries and accordingly make strategic
decisions in each country.
A business firm cannot be successful by replicating the domestic decisions and practices in
other nations of the world. State true or false.
Answer: True
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Justification: Since the environmental factors differ from nation to nation, a business firm
has to make changes in its practices and policies depending upon the environmental factors
of each country.
4. Analyzing components of International Environment:
International environment comprises of economic, socio-cultural, geographic, financial,
political, legal and technological forces.
Figure 1: Components of International Business Environment
It is not necessary that all the components of international environment are relevant for
every business firm operating globally. It depends upon the nature of firm and its
strategies.
For example, a business firm interested in exporting its products to the other nations needs
to know about the economic policies and regulations of the foreign nations. However, if a
International
Business Environment
Economic Political-Legal
Socio-cultural Ecological
Geographic
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business firm is interested in setting up a manufacturing plant in a foreign nation, then
analysis of political, cultural, legal and geographic environment would be equally important
as economic environment.
The various components of international business environment can be explained as follows:
1. Economic Environment:
Economic environment is the most important component of international environment.
Analysis of economic factors helps a business firm to make the most significant decision
whether to enter into a foreign market or not and to frame the strategies it should
implement to run its business operations successfully.
Economic environment includes three broad aspects:
a) Type of Economic systems of a foreign country which can be capitalism, socialism or
mixed economy
b) Economic conditions of a country comprising of GDP, per capita income, employment,
inflation, infrastructure, population, market, urbanization, foreign exchange reserves,
Balance of Payments etc.
c) Economic Policies comprising of fiscal, monetary, industrial, trade and foreign
investment policies of the country.
Various international organizations carry out research on economic indicators of individual
nations like United Nations, World Bank, World Economic Forum and Transparency
International etc. This helps the business firms to determine the economic viability of a
country before entering into such market for international business.
INTERACTIVE 1
2. Socio-cultural Environment:
Socio-cultural factors are another important element of business environment that has a
considerable impact on business operations especially on the international business as social
and cultural factors vary to a great extent from one country to another. These factors
considerably influence various aspects of human behavior like the products they consume;
colors, designs and symbols they like and the importance they place on religion, work,
family etc.
There are various elements of Cultural Environment that managers of international business
must be aware of. These are:
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Figure 2: Elements of Cultural Environment
a) Language:
The world has more than 3000 languages which can pose problems for marketers in
designing advertising campaigns and product labels. Therefore, a global marketer must
have in depth understanding of the language of the country where it is going to operate.
Value Addition 1: Did You Know?
Problems of Language Translation Whenever a dictionary translation takes place of certain brand names or advertising
messages from one language to another, serious mistakes can occur.
For example:
The advertising message of Pepsi Co. “Come Alive with Pepsi” had to face serious problems
when it got translated into German language which meant “Come out of Grave”. The same
Cross Cultural
Aspects of
Business Firm
LANGUAGE
RELIGION
EDUCATION
AESTHETICS
VALUES &
ATTITUDES
CUSTOMS &
PRACTICES
SOCIAL
GROUPS
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b) Religion:
Religion influences the values and attitudes of individuals and societies. It has a
considerable impact on attitude of people towards wealth, way of dressing, consumption
habits and their way of living. There are various religions in the world, for example,
Buddhism, Hinduism, Christianity, Islam, Judaism etc. Each religion has its own value
system and determines people‟s code of conduct. A thorough understanding of the religions
present in the foreign countries would help the multinational firm in understanding the
people‟s attitude towards various products and services.
c) Education:
Education is an important part of culture which leads to development of new skills, ideas,
values and attitudes amongst the members of society. Education is termed as formal when
it is taught in a particular type of environment and can be informal when the knowledge is
shared outside the classroom for developing new ideas. It is an important factor as it helps
in determination of availability of educated manpower in a country. By analyzing the types
of education in a nation, managers of international business can determine the level of
communication skills of its employees and the extent to which they would require additional
training for performing the job efficiently.
d) Aesthetics:
thing in Chinese meant as “Pepsi brings your ancestors back from the grave.”
As an activity, think and explore some more examples of problems faced by business firms
during language translation of their advertising messages.
Value Addition 2: Did You Know?
Impact of Religious Beliefs on Business Specific beliefs pertaining to various religions can impact business activities adversely and
can even lead to prohibition of sale of certain products in a foreign country.
For example:
1. McDonald‟s had to restrict selling beef products in India because it is against the religious
sentiments of Hindus.
2. Israeli airline company prohibited from flying on Saturday, which is the holy day in
Judaism.
3. In most of the Muslim countries, Friday is not included in workdays as it is a day of
worship.
As an activity, list down two more examples of impact of religious beliefs on business
activities.
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Aesthetics usually implies to society‟s sense of beauty related to colors, shapes, sounds,
number etc. and is reflected in the form of arts, music, drama and dance. They basically
refer to the peoples‟ attitudes and responses towards particular product, design, color or
label.
It is important for international marketers to be aware of these cultural differences while
creating advertising appeals and messages for their products so as to avoid any major
blunders. For example, colors have different meanings for different people. In Asia, the
luckiest color considered is red; however, it is a color of mourning in South Africa. Symbols
also carry different meanings and are considered as a powerful communicator. For example,
for Japanese and Chinese, symbol 4 signifies death. Number 7 is considered good luck for
people in US whereas it signifies bad luck in Singapore and Kenya. Sensitivity to the
differences in aesthetics amongst nations can greatly help the international business firm in
correctly designing their products and messages for each country.
e) Values and Attitudes:
Values are a set of beliefs or way of thinking of individuals present in a society. Values are
opinions which are reflected in an individual‟s behavior. Attitude, on the other hand, implies
tendency of an individual to behave in a particular manner towards an object or event.
Values differ between countries and these differences in values are reflected in different
behaviors relating to consumption level and risk taking. For example, people usually do not
prefer change and tend to avoid risk. However, people in US accept change easily and are
more risk taking in nature. It is important for a business manager to understand the value
system of a country where it is going to operate and ascertain the attitude of people
towards work, achievement, education change, foreign goods, risk etc.
f) Customs and Practices:
A global marketer must be familiar with long established practices and social codes of
conduct present in different countries in order to achieve desired objectives. Customs and
practices are important as they influence the usage of products and their packaging and
labelling. For example, shaking hands or gifting even number of flowers is not considered
good in Russia. Another example is of Americans who are considered as highly achievement
driven and take business decisions with great speed. On the other hand, people in Japan are
quite slow in taking decisions. Hence, a business firm dealing with people having varying
cultures should be aware of these differences while having business negotiations with them.
g) Social Groups:
Social groups are an important part of every culture and influence various aspects of
individual‟s life. Social groups primarily consist of family and reference groups. These
groups influence the pattern of living of people and their interpersonal relationships with
others in society. Family can be of different types – nuclear family, single-parent family or
extended family. While in US, nuclear family is quite common; in China and India, joint
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family system is more prevalent. Therefore, a manager of international business should
conduct a study of social groups which would help the business firm understand the way
people organize their activities.
Research carried out by international organizations like United Nations, World Bank helps a
business firm in determining the economic viability of a country before entering into such
market for international business. State true or false.
Answer: True
Justification: Various international organizations carry out research on economic indicators
of individual nations like United Nations, World Bank, World Economic Forum and
Transparency International etc. This helps the business firms to determine the economic
viability of a country before entering into such market for international business.
3. Political-Legal Environment:
Value Addition 3: Surf and Learn
Influence of Cultural Factors on International Business Culture is the way people live their lives and do the things. Culture can be of a country
(national culture), a community (sub-culture) or an organization (corporate culture). A
person is not born with a culture; rather it includes all that we have learned from our
values, norms, customs and traditions, beliefs, religions, rituals etc.
Cultural values vary between nations and even within nations. A business manager should
be aware of these cultural differences before planning to introduce a new product or service
overseas.
For example:” In 2004, China banned a Nike television commercial showing U.S. basketball
star LeBron James in a battle with animated cartoon kung fu masters and two dragons,
because it was argued that the ad insults Chinese national dignity.”
Click on the link below to know more about the influence of various cultural factors on
international business.
Source:http://www.marketingteacher.com/international-marketing-and-culture
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A business firm can operate in a foreign country only as per the rules and policies of
government of their country. The government of a nation decides the manner in which a
business firm can operate in their country. Political environment has the following elements:
a) Type of Government and Political Party:
Forms of government in a nation can be Parliamentary structure, elected monarchy or
absolute monarchy. Parliamentary form of government is formed from people‟s
representatives whereas in an absolutist government, policy making is conferred in few
hands.
b) Political Ideology:
It is important for a business manager to know and assess the government attitudes
towards foreign goods, capital and investment where it is going to operate. The ideologies
of the political parties may differ from nation to nation and it is significant to be aware of
these ideologies before negotiating business terms with foreign countries.
c) Political Stability:
Political stability is a major concern for a multinational firm. The investments made by a
firm in a host nation are huge and involve lot of capital and investment. Therefore, a
business firm would like to enter only into politically stable economies of the world.
Frequent changes in government or change in government policies can have serious
consequences for an outside firm present in their country.
Apart from political factors, it is important that an international business firm is aware of
laws prevalent in foreign nations as every business has to work within the legal framework.
Each country has its own rules and regulations related to marketing of products, location of
plant, employment of people, fund raising from people, taxation policies and intellectual
property. A business firm must have a thorough understanding of these laws before they
decide to enter into international business with a foreign country.
Value Addition 4: Surf and Learn
Impact of Political and Legal Factors on International Business It is imperative for a global business firm to understand and abide by the government rules
and regulations of the countries in which they operate.
Click on the link below to analyze the impact of political and legal factors on international
business.
Source: http://catalog.flatworldknowledge.com/bookhub/3158?e=fwk-168388-ch05_s02
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4. Ecological Environment:
Ecological environment is related to people, plants, animals and surrounding environment.
Every country has some rules and legislations concerning the preservation of natural
resources and protection of environment. Germany, for example, has the strictest
environmental legislations in the world. In today‟s competitive environment, a business firm
is assessed not only in financial parameters but also on its efforts towards conservation of
natural resources and overall reduction in pollution levels.
5. Geographic Environment:
Geographic Environment is concerned with a country‟s climatic conditions, topography and
natural resources. Every business firm entering into international business must be aware of
geographic features of a foreign nation. These factors influence the consumption patterns of
people and lead to demand for different categories of products. People of different nations
vary in their housing, clothing, food and entertainment needs due to different climatic
conditions. Geographic conditions influence a business firm‟s decision on plant location as it
prefers to set up a manufacturing plant in those countries where climatic conditions are
favorable and has easy availability of cheap raw materials and labor. A business firm‟s
distributions strategies also depend largely on the geographic conditions of foreign markets
Value Addition 5: Did You Know?
Best Countries to do Business as per Business Environment Ranking
Index (BERI) 2014 Assessment of political environment and related risk is a major concern for companies
entering international business because governments shape and influence their national
economies. BERI evaluates and ranks countries on the basis of the extent of ease of doing
business.
As per the Economist Intelligence Unit‟s latest Business Environment Rankings, developed
economies in North America, Western Europe and Asia are the best places to do business;
Singapore being the world‟s most investor-friendly location.
Click on the link below to know more about the BERI index of various countries.
Source: http://www.iberglobal.com/files/business_climate_eiu.pdf
Value Addition 6: Case Study
Food Items Impacting International Business Environment
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It is not significant for international marketers to be aware of cross-cultural differences
amongst nations while creating advertising appeals and messages for their products. State
true or false.
Answer: False
Justification: It is very important for international marketers to be aware of cross-cultural
differences while creating advertising appeals and messages for their products so as to
avoid any major blunders. For example, colors have different meanings for different people.
In Asia, the luckiest color considered is red; however, it is a color of mourning in South
Africa. Symbols also carry different meanings and are considered as a powerful
communicator.
Cultural taboos affect consumption of goods and therefore business of such goods.
Governments and societies ban and promote the same food items. In Vietnam, Korea and
some other Asian countries dog meat is a delicacy on the food menu. In many countries
dog is a pet and consumption of dog- meet is hated.
A cultural threat is posed by tomato ketchup for French cuisine and so it is banned in
France. Because it is fortified with vitamins, marmite is banned in Denmark. European
Union bans Jelly sweet as it presents a choking hazard through its thickening agents used in
coating, elsewhere this is freely available and consumed. The USA has banned haggis which
is a delicacy in Scotland. Because its shape resembles Christian symbols, an extremist
group has banned Samosa in Somalia.
People have started disliking oversized, obese vegetables due to use of harmful fertilizers
and chemicals; there is growing demand for organically grown food articles even at high
prices. In the USA, some states ban consumption of goose liver while other states have no
restriction on its business. In order to keep the city neat and clean Singapore has banned
chewing gum.
Based on the above case study, identify political –legal and socio-cultural factors influencing
international business environment and possible impact on business of some multinational
companies conducting related business.
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5. Redefinition of Trade from GATT to WTO:
The international business environment of today has become far more complex and inter-
related than in the past. It is greatly influenced by a number of international institutions like
World Trade Organization (WTO) that facilitate international business governance.
International trade and business amongst nations would have been difficult without their
presence.
GATT
The General Agreement on Tariffs and Trade (GATT) was formed in 1948 with an objective
to liberalize international trade.
The Bretton Woods Conference of 1944 had recommended the formation of an International
Trade Organization (ITO). The same conference had also recommended the establishment
of IMF and World Bank. The IMF and World Bank were formed in 1946. However, the ITO
charter never came into existence. Instead, the GATT came into being in 1948 which
became the framework for international trading system. Since then, the rules and principles
of GATT agreement facilitated the international trading system.
Following were the main objectives of GATT:
1. To raise standard of living.
2. To ensure full employment , steady growth of real income and effective demand
3. To develop effective utilization of resources of the world.
4. To ensure expansion in international trade.
The countries that adhered to the GATT agreement had to follow its rules and conventions
which were:
1. Any changes in the tariff or other commercial policy instruments of one member country
require prior consultation from other parties to the agreement.
2. All the member nations that adhere to GATT must work towards facilitating international
trade amongst themselves through reduction of tariffs and removal of other barriers in
trade.
To ensure that these objectives were achieved, GATT adopted the following principles:
1. Non-discrimination:
The principle of non-discrimination signifies that one member country shall not discriminate
with other member nations in the process of international trade. It requires member nations
to apply the principle of most favored nation (MFN) rule. The MFN rule implies that there
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should be no discrimination between a product of one nation and similar product made in
another nation.
2. Prohibition of Quantitative Restrictions:
Another principle of GATT was to prohibit quantitative restrictions on trade to the minimum.
However, countries that faced balance of payment difficulties and developing countries were
granted an exception to this prohibition.
3. Consultation:
One of the major objectives of GATT was the formation of a forum to resolve disagreements
through consultation. Till now, eight rounds of trade negotiations have been held under the
GATT. The Uruguay Round, the latest one, was concluded after seven years of trade
negotiations.
GATT and WTO
The GATT was converted into a formal international organization named as World Trade
Organization (WTO) with effect from January, 1995. WTO framework now encompasses
GATT and all the results of the Uruguay round.
In the previous system, there were two GATTs: (i) GATT agreement – between the member
nations which set out rules governing international trade; (ii) GATT organization - an
international forum formed to facilitate discussions and resolve disagreements. With the
establishment of WTO, GATT the organization ceased to exist. However, the GATT
agreement with certain amendments continues to exist under WTO umbrella along with two
new agreements i.e. General Agreement on Trade in Services (GATS) and General
Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs).
“The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is
an international agreement administered by the World Trade Organization (WTO) that sets
down the minimum standards for many forms of intellectual property (IP) regulation as
applied to nationals of other WTO Members.”
The following table explains the difference between GATT and WTO.
Table 1: Difference between GATT and WTO
GATT WTO
GATT was adhoc, provisional and political in
nature
WTO is permanent and legal in nature
GATT rules were restricted to trade in
goods only.
WTO rules are extended to trade in services
and protection of intellectual property rights
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GATT system allowed existing domestic
legislation to continue
WTO does not allow domestic legislation
GATT was a weak organization, less
powerful with non-binding dispute
settlement
WTO is more powerful than GATT and has
binding dispute settlement mechanism.
The decision making at GATT was flexible
and there were fewer countries with less
complex problems
Decision-making at WTO is more
complicated than at GATT as there are many
countries in action
WTO was formed in 1995 as a replacement for GATT with the major objective of liberalizing
international trade. It had a permanent structure as compared to GATT and the scope of
WTO was enlarged from monitoring of trade in goods to trade in services as well as trade
related aspects of intellectual property rights.
WTO was formed with the following major functions:
1. To facilitate and administer various trade agreements among the member nations.
2. To provide a forum for negotiations among its members on trade-related policies.
3. To administer the „Trade Review Mechanism‟.
4. To cooperate with other international organizations like IMF and IBRD to ensure
international cooperation.
5. To work towards reduction in import duties and elimination of quantitative and other
trade barriers.
WTO has been able to achieve its objectives of trade liberalization and elimination of
discrimination over the last so many years. Almost all the countries of the world have joined
WTO and follow its rules and principles. It has been successful in promoting peace among
the nations and disputes are being solved in a more efficient manner. Thus, WTO has
certainly helped member nations on various fronts and has done a commendable job since
its formation.
A business firm can operate in a foreign country only as per the rules and policies of
government of their country. State true or false.
Answer: True
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Justification: The government of a nation decides the manner in which a foreign firm can
operate in their country and therefore, a business firm can operate in a foreign country only
as per the rules and regulations framed by the government of that country.
6. Regional Associations in International Environment:
The world is divided into various regions which have different cultures, geography and
history. Some nations are fully industrialized whereas others are at varied stages of
development. If we look at the world closely, the major regions can be categorized as
Africa, Latin America, Middle East, Asia, Central and Eastern Europe, Western Europe and
North America.
Regional Economic Cooperation has gained importance in today‟s international environment
as it eliminates restrictions on international trade, factor mobility and payments between
two or more nations. It helps two or more countries to economically unite into a region.
Regional cooperation amongst the nations can be through different forms like free trade
area, customs union, common market, economic union and political union. The benefits of
regional associations are numerous as listed below in table 2.
Value Addition 7: Did You Know?
Things that WTO Can do…
The WTO is a powerful organization that is run by its member nations. It provides a forum
for member nations to negotiate on various matters and settle trade disputes.
The various things that WTO can achieve are:
Help in cutting costs and improve living standards
Forum for settlement of disputes and reduction in tensions amongst nations
Help in economic growth and development
Promote good governance
Help weaker nations to develop and grow
Promote peace and stability
Work towards environment and health.
Learn more about WTO, its objectives, membership and decision-making by clicking on the
website given below.
Source: www.wto.org
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Table 2: Economic Benefits of Regionalism
Leads to economies of scale
Provides opportunities for deeper integration
Leads to enhanced attractiveness to foreign investors
Domestic manufacturers gets exposed to foreign competition
Helps to attain concessions that are not available
Following are few examples of regional associations:
The European Union (EU) is a political and economic arrangement between 28
member countries in Europe. Its members are: Austria, Belgium, Bulgaria, Croatia, Republic
of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
The two World Wars of 1914-18 and 1939-45 created panic and instability amongst the
west European countries. Therefore, various policymakers concluded that in order to have
peace and political stability, West European integration was required. The EU was, thus,
formed as a political project to encourage economic cooperation among member nations
and to avoid war amongst them. The formation of EU has led to abolition of trade barriers,
adoption of a common currency and has improved the living standards of member
countries.
EFTA (European Free Trade Association) is another example of regional trade
association in Europe. Its members are Iceland, Liechtenstein, Norway and Switzerland.
The North American Free Trade Agreement (NAFTA) was formed on Januray1,
1994 between United States of America, Canada and Mexico. NAFTA led to creation of a free
trade area between two richest countries (US and Canada) and an underdeveloped country
(Mexico).
The important objectives of this agreement include:
Elimination of trade barriers and investment between the three countries.
Protection of intellectual property rights
Majority of the restrictions on foreign direct investment and portfolio investment to be
removed.
Establishment of a dispute settlement system.
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ASEAN (Association of Southeast Asian Nations) was formed in 1967 by five
member nations i.e. Indonesia, Malaysia, Philippines, Singapore and Thailand. The countries
which joined ASEAN later on were Brunei, Cambodia, Laos, Myanmar and Vietnam.
ASEAN is a political and economic association of ten countries now which are located in
Southeast Asia and the objectives of ASEAN include:
Promoting economic growth among member countries
Ensuring regional peace and stability
Ensuring social progress.
The other example of regional association in Asia Pacific region is of APEC (Asia-
Pacific Economic Cooperation). APEC was formed in 1989 with an objective to accelerate
economic growth, prosperity and overall development of Asia-Pacific region. It consists of
21 member countries which together account for around 40 percent of the world‟s
population and 54 percent of the world‟s GDP. APEC has helped in reducing tariffs and other
trade barriers among the member countries and has played a significant role in increasing
exports.
Apart from APEC, EFTA, the EU, ASEAN and NAFTA, there are nearly 30 active or inactive
regional trading arrangements among nations. These include the African Economic
Community, the Andean Community (CAN), the Arab Maghreb Union, , the Caribbean
Community and Common Market (Caricom), the Central American Common Market (CACM),
the Central European Free Trade Area, the Common Market of the South (Mercosur), the
Common Market for Eastern and Southern Africa, and the Gulf Cooperation Council.
Value Addition 8: Surf and Learn
Case Studies on International Business Environment Click on the link below to read various case studies on International business environment
and its significance for business firms.
Source: http://www.wiwi.uni-siegen.de/wiwi/vwl-
tpa/internationales/kursmaterialien_von_gastdozenten/ditter/010-ibe-case_studies.pdf
Regional Economic Cooperation has gained importance in today‟s international environment.
State true or false.
Answer: True
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Justification: Regional Economic Cooperation has gained importance in today‟s
international environment as it eliminates restrictions on international trade, factor mobility
and payments between two or more nations. It helps two or more countries to economically
unite into a region.
Summary:
Concept: When business operations are carried out in more than one country apart
from the home nation, then it is termed as international business.
Features: International business environment comprises of both external and internal
factors which are dynamic in nature, create uncertainty, pose threats and opportunities
for global managers. International business marketers always try to reduce the
uncertainty by forecasting the future changes in environmental forces.
Components of International Business Environment: Economic, Socio-Cultural,
Political-Legal, Ecological and Geographic Environment.
Components of Socio-Cultural Environment: Language, religion, Education,
Aesthetics, Values and Attitudes, Customs and Practices, Social groups and Material
Culture.
Formation of GATT: The General Agreement on Tariffs and Trade (GATT) was formed
in 1948 with an objective to liberalize international trade.
Principles of GATT: Non-discrimination, prohibition of quantitative restrictions and
consultation.
WTO: The GATT was converted into a formal international organization named as World
Trade Organization (WTO) with effect from January, 1995. WTO framework now
encompasses GATT and all the results of the Uruguay round.
Regionalism: It helps two or more countries to economically unite into a region.
Forms of Regional cooperation: Regional cooperation amongst nations can be
through different forms like free trade area, customs union, common market, economic
union and political union.
Examples of Integration among countries: European Union (in Europe), NAFTA (in
North America), ASEAN and APEC (in Asia-Pacific region).
Exercises:
A. Objective Type Questions:
I. State True or False.
1. A business firm must monitor domestic environmental factors which have an influence
on its functioning.
2. An MNE is also referred as a multinational corporation (MNC) or transnational
corporation (TNC).
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3. Macro environment consists of those individuals or groups which are very close to
business and with which the organizations comes into frequent contact in its business
activities.
4. The environment of all the countries is same.
5. Changes in environmental factors create uncertainty, threats and opportunities for all
business firms.
6. Socio-cultural factors are another important element of business environment that has a
considerable impact on business operations.
II. Fill in the Blanks:
1. _______________ has enabled the business firms to conduct cross border transactions
of goods and services between two or more countries.
2. When business operations are carried out in more than one country apart from the home
nation, then it is termed as ____________________.
3. Global marketers always try to reduce the ___________ by forecasting the future
changes in environmental forces.
4. _________ implies to society‟s sense of beauty related to colors, shapes, sounds,
number etc. and is reflected in the form of arts, music, drama and dance.
5. ________ refers to the tendency of an individual to behave in a particular manner
towards an object or event.
B. Short Answer Type Questions:
1. Define „International business environment‟.
2. What is the significance of international business environment?
3. Briefly explain the importance of socio-cultural factors on international business?
4. What were the main objectives of GATT?
5. Differentiate between GATT and WTO.
C. Long Answer Type Questions:
1. Explain the concept of international business environment. Why is the study of
international business environment significant for global business firms?
2. Explain in detail the various components of International Business Environment.
3. “Socio-cultural factors have a considerable influence on business operations especially in
international business”. Elucidate and explain with examples.
4. When was GATT formed? What were the objectives of GATT?
5. Why was WTO formed? What were its main functions?
6. Explain few examples of regional associations in international business.
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(Answers to Objective Type Questions)
I. True and False:
1. True; 2. True; 3. False; 4. False; 5. True; 6.True.
Fill in the Blanks:
1. Globalization; 2. International business; 3.Uncertainty;
4. Aesthetics; 5. Attitude.
Glossary:
Domestic business: It refers to the business activities that are carried out within a
country.
Exporting: Exporting or Export refers to selling of goods or rendering of services
produced in the home country to other countries of the world.
Franchising: Franchising is a form of arrangement wherein one party provides rights to
another one to use its trademarks, trade names or certain processes for producing and
marketing a good or service.
Globalization: It refers to integration and interdependence of national market and
business worldwide.
Intellectual Property Rights: It refers to the legal rights provided to protect the
innovative creations of mind, for example, new inventions, artistic works, designs,
symbols etc. These rights include patents, copyright and trademarks.
International Business: It refers to conduct of business transactions in more than one
country.
Joint Venture: It refers to sharing of ownership interest and other working
arrangements between two (or more) companies (or other operating units), whether
belonging to the same country or to different countries.
Licensing: Licensing is a form of arrangement wherein one party (licensor) grants
permission to another (licensee) for use of intellectual property rights i.e. patents,
trademarks or technology.
Strategy: A strategy is an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.
Wholly-owned subsidiary: It is a subsidiary company of a parent firm wherein the
parent company owns 100% of the stock of the subsidiary firm.
References:
1. Work Cited:
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Cherunilam Francis (2013): Business Environment – Text & Cases, Himalaya Publishing
House, New Delhi, India
Gupta C.B.(2013): Essentials of Business Environment, Sultan Chand & Sons, New Delhi,
India
Dhingra I.C. & Dhingra Nitin (2014): Concise Business Environment, Book Age
Publications, New Delhi
Hill Charles W.L. & Jain Arun K. (2009): International Business, Tata McGraw-Hill, New
Delhi.
Maheshwari Rajendra P. & Prakash Surya (2014): Fundamentals of International
Business, International Book House Pvt. Ltd., New Delhi.
2. Web Links:
http://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nations
http://www.apec.org/About-Us/About-APEC.aspx
http://en.wikipedia.org/wiki/Asia-Pacific_Economic_Cooperation
http://www.wiwi.uni-siegen.de/wiwi/vwl-
tpa/internationales/kursmaterialien_von_gastdozenten/ditter/010-ibe-case_studies.pdf
http://www.marketingteacher.com/international-marketing-and-culture
www.wto.org
http://diplomatie.belgium.be/en/policy/european_union/european_institutions/actions_a
nd_realisations/
http://www.iberglobal.com/files/business_climate_eiu.pdf