ECONOMIC ENVIRONMENT Economic environment refers to the aggregate of the nature of the economic system of the country, the

economic policies of the govt., the organization of the capital market, the nature of factor endowment, business cycles, the socio-economic infrastructure, etc. The successful businessman visualizes the external factors affecting the business and makes suitable to get the maximum with minimum cost. The attractiveness of a country as a place to do business and then, once there, making prudent investment and operational decisions depends on how well managers understand economic performance and trends. Globalization connects countries in many ways. A countries economic policies are a leading indicator of governments goals and its planned use of economic tools and market reforms.

ELEMENTS OF THE ECONOMIC ENVIRONMENT Gross national income (GNI): the income generated both by total domestic production as well as the international production activities of national companies. Gross domestic product (GDP): the total value of all goods and services produced within a nations borders over one year, no matter whether domestic or foreign-owned companies make the product. Example: almost 90% of Irish exports are made by foreign owned firms. The absolute size of GNI reveals a lot about the market opportunity in a country.

OTHER FEATURES OF ECONOMIC ENVIRONMENT Inflation Unemployment Debt

 Income distribution Poverty Labor costs Productivity Balance of payments

TYPES OF ECONOMIC SYSTEM

Capitalism Socialism Mixed Economy

THE ECONOMIC FREEDOM INDEX Approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond the basic need to protect property, liberty, citizen safety, and market efficiency Countries with the freest economies have had the highest annual growth and a greater degree of wealth creation.

DIMENTIONS OF EFI Business freedom Trade freedom Monetary freedom Freedom from government Fiscal freedom Property rights Investment freedom

 Financial freedom Freedom from corruption Labor freedom

POLITICAL ENVIRONMENT Political environment includes the complete set of institutions, political organizations and interest groups as well as the relationships among institutions and the political norms and rules that governs their activities. Goal is to integrate the elements of the society.

The Political Environment

Relatively uncontrollable factors outside the firm that influence its decision-making

Legal and Political Environment

Technological Environment

Factors in government, the law and the regulatory system that affect the way an organisation operates

Environment Economic

Socio-Cultural Environment

Role of Govt. in the society (Individualism Vs. Collectivism) Individualism: Refers to the primacy of the rights and role of the individuals in the society.

 Political officials and agencies have limited role in an invidualistic society. Apply commercial regulations to correct market insufficiencies such as consumer knowledge or excessive producer power Example: U.S. Collectivism: Refers to the primacy of the rights and role of the community as a whole. Political officials and agencies have extensive role Political officials set up formal and informal relationships with the businesses and the goal is to develop successful companies that will then boost national prestige and power. Govt. takes aggressive and forceful actions to promote labor, social equality and workplace democracy. Example: China, Sweden

The Political Environment

SYSTEM STABILITY Legal and Political Environment

POLICIES

SYSTEM
Includes the structures, processes, and activities by which a nation governs itself.

Political System

Totalitarian state Democratic state

Totalitarianism single agent whether an individual, group, or party monopolizes political power. Enforce restrictions that subordinate the day-to-day life of people. Democratic system involves wide participation by citizens in the decision making process.

SYSTEM
Totalitarian state Imposed authority Lack of constitutional guarantees Restricted participation Companies might need to pay bribes to government The business law is vague Freedom Rights Democratic state

Stable business environment thanks to laws Freedom and no censorship Doing business in a democratic state seems to be safer than in a totalitarian state

Doing business seems to be a risky proposition

TYPES OF DEMOCRACY Parliamentary Democracy Ex: India Liberal Democracy - Ex: Japan Multiparty Democracy Ex: Canada Representative Democracy Ex: US Social Democracy Ex: Norway.

STABILITY
Political Stability : A subjective governance indicator aggregated from a variety of sources and measuring perceptions of the likelihood of destabilization.

Political Risk
The risk that political decisions or events in a country negatively affect the profitability or sustainability of an investment.

Political Risk (contd.)

TYPES OF POLITICAL RISKS

1. Systemic Political Risks

risks that impact all firms whose activities are affected by the political system.
2. Procedural Political Risks Its Political actions which create frictions that interfere with people, products or funds transactions between a company or a country.

Political Risk (contd.)

Distributive Political Risks When countries revise their distribution policies to capture greater benefits from foreign companies.

Catastrophic Political Risks

This is the Political developments that adversely affect the operations of all companies in a country.

MANAGEMENT OF POLITICAL RISK Management Prior to Investment Capital budgeting Reducing the investment flow Agreement with the host government Planned divestment Risk Insurance(MIGA- Multilateral Investment Guarantee Agency) Management during the lifetime of the project Joint Venture Political support Structured operating environment Anticipatory Planning TECHNOLOGICAL ENVIRONEMNT

 Technological Environment means the development in the field of technology which affects business by new inventions of productions and other improvements in techniques to perform the business work. Globalization has been fostered to a large extent by technological revolution. When different technologies are available, it needs to be ensured that the technology chosen is the most appropriate for the company/ country.

The Technological Environment

Infrastructure

Agricultural land
Resources Rich natural resources

Low-cost labor

Skilled labor

Intellectual Property
Patents Copyrights

Trademarks
Brand names

Intellectual property often forms the basis of a firms competitive advantage!

Intellectual Property rights are designed to give the registered owners of inventions, literary and artistic works, and symbols, names, images, or designs the right to determine the use of their property

Most countries have passed laws protecting intellectual property rights. Protection of such rights has also been promoted by numerous international treaties. Among these are the International Convention for the Protection of Industrial Property Rights (more commonly known as the Paris Convention), the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, and the Trade-Related Intellectual Property Rights agreement (part of the Uruguay Round). On paper these laws and treaties would appear to provide adequate protection to owners of intellectual property. However, not all countries have signed the treaties. Further, their enforcement by many signatories is lax. International Treaties Protecting Intellectual Property Rights International Convention for the Protection of Industrial Property Rights (i.e., the Paris Convention) Berne Convention for the Protection of Literary and Artistic Works

 Universal Copyright Convention Trade-Related Intellectual Property Rights Agreement

LEGAL ENVIRONMENT Influences business Imp for managers to know legal systems, nature of legal profession, both domestic and international, and legal relationship that exist among countries. Degree of independence of the judiciary from political process.

KINDS OF LEGAL SYSTEM 1) Common law: Based on tradition, precedent, custom and usage, and interpretation by the courts. Detailed contracts E.g., US, UK. 2) Civil Law: also called codified legal system, is based on detailed set of laws organized into legal courts, and how law is applied to facts. Shorter contracts E.g. Germany, France, Japan. 3) Theocratic Law: Based on religious precepts, such as Islamic Law. 25% of the world population is Islamic. Countries like Iran, Sudan, Pakistan have banned traditional commercial banking and adopted Islamic Banking Models. Islamic law has been frozen & cant change with changing times. Based on following sources: Koran, Sunnah (sayings of Pr. Mhd), consensus of Muslim countries legal communities.

DEMOGRAPHIC ENVIRONMENT
The demographic environment differs from country to country and from place to place within the same country or region. Further it may change significantly over time.

Peter Drucker, who emphasizes the tremendous economic and business implications of demographic changes, suggests that any strategy, that is any commitment of present resources to the future expectations, has to start out with demographics.
Population Size The size of the population is an important determinant of demand for many products. There are countries with less than a lakh of people on the one hand and those with thousands of millions on the other hand. Poor countries with small population are generally not attractive for business. However, even such countries may hold out opportunities for some companies. As these markets may not be of interest for large companies, small firms may find promising niches in these markets. Advanced countries, particularly with large population, are generally attractive markets. The major part of the international trade and foreign investments naturally take place between these nations. Because of the large potential of these markets, competition is generally strong in them. Falling Birth Rate and Changing Age Structure True, there has been an explosive growth of the global population, particularly in the developing countries. The universal trend now, however, is fall in birth rates, although the total population is still growing at over one per cent annually. Developing countries are also experiencing significant decline in the population growth rates. In developed countries the fall in the birth rate is so steep that the population size would shrink drastically. Because of the declining birth rate population is already peaking in a number of countries. The collapse of population size has serious implications for business.

he important demographic bases of market segmentation include the following: 1. 2. 3. 4. 5. Age structure Gender Income distribution Family size Family life cycle (e.g.young,single: young, married, no children; young married with children.......) Occupation Education

6. 7.

8. 9. 10. 11.

Social class Religion Race Nationality