THE INTERNATIONAL BUSINESS ENVIRONMENT

Environment means the surrounding. International business environment means the factors/activities that
surround/encircle the international business. In other words, business environment means the factors that
affect or influence the MNCs and transactional companies. Factors that affect International Business include
Social and Cultural factors (S), Technological factors (T), Economic factors (E), Political/Governmental
factors (P),. International factors (I) and Natural factors (N). They are known as the STEPIN factors. The term
environmental analysis is, “the process by which strategists monitor the economic, governmental/legal,
market/competitive, supplier / technological, geographic and social settings to determine opportunities and
threats to their firms.” Environmental diagnosis consists of managerial decisions made by analysing the
significance of data (opportunities and threats) of the environmental analysis.
Concepts and Relevance of International Business Environment
In order to gain a better understanding, let us have a look at two important classifications of environment.
1. Micro and Macro Environments
Micro environment can be defined as the actors in the firm’s immediate environment, which directly
influence the firm’s decisions and operations. These include: suppliers: various market intermediaries and
service organisations such as middlemen, transporters, warehouses, advertising and marketing research
agencies, business consulting firms and financial institutions; competitors, customers and general public.
While the customers constitute firm’s market, suppliers and market intermediaries help providing the firm
with inputs and assist in production and marketing processes. Competitors and general public also influence
the way a firm conducts its business.
Macro environment, on the other hand, consists of broader forces which affect the firm as well as other
actors in the firm’s micro environment. These include factors such as geographic, economic, financial, socio-
cultural, political, legal, technological and ecological forces. Firms need to continuously monitor changes in
these environmental forces and devise strategies to cope with them.
2. Domestic, Foreign and Global Environment
Another way of understanding various factors constituting international business environment is to
divide the various factors into three broad groups: domestic, foreign and global environments. This
classification is based on the location at which environmental actors and forces exist and operate. Look at the
following figure where a schematic presentation of these three levels of environment along with their
components has been shown.

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Figure: Domestic, foreign and global environment
In the figure, the innermost circle represents the firm’s business strategy and decisions with regard to
production, finance, marketing, human resources and research activities. Since these strategies and decisions
are made by the firm, they are called controllables. The firm can change them but within the constraints of
various environmental factors.
The next circle represents the domestic environment and it consists of factors such as competitive
structure, economic climate, and political and legal forces, which are essentially uncontrollable by a firm.
Besides their profound effect on the firm’s domestic business, these factors exert influence on the firm’s
foreign market operations. Export promotion measures and incentives in countries have been other motivating
factors for the firms to internationalise their business operations. Since these factors operate at the national
level, firms are generally familiar with them and are able to readily react to them.
The third circle represents foreign environment consisting of factors like geographic and economic
conditions, socio-cultural traits, political and legal forces, and technological and ecological facets prevalent
in a foreign country. Because of being operative in foreign markets, firms are generally not cognisant of these
factors and their influence on business activities. The firm can neglect them only at the cost of losing business
in the foreign markets.
The upper most circle which is circle four represents the global environment. The global environment
transcends national boundaries and is not confined in its impact to just one country. Global environment exerts
influence over domestic as well as foreign countries and comprises of forces like world economic conditions,

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international financial system, international agreements and treaties, regional economic groupings.
Relevance to International Business Environment
As stated earlier, the environment plays a vital role in the conduct of business operations. Especially in
the context of international business, the environment assumes critical importance as no two countries have
similar environments and demand different business strategies to cope with differing business conditions. As
the environment affects firms’ strategic as well as tactical decisions, it becomes imperative for the firm to
have in-depth knowledge of the domestic, foreign and global environments.
 When a firm decides to enter into international business, it faces two major decision problems: one, in
which market(s) to select, and second how to enter into those markets. Both these decisions are strategic
in nature and are greatly influenced by the environmental forces.
 Firms select those countries as their target markets which have sufficient market potential. Market
potential, in turn, depends upon geographic, economic and cultural environments prevailing in the foreign
countries.
 Once the firm identifies countries with market potentials, it needs to decide as to what mode it should use
for entering into those markets. A wide range of options such as exporting, licensing franchising, joint
ventures or setting up wholly owned subsidiaries abroad are available to firms.
 Firm’s actual choice of market entry mode is influenced by a variety of environmental factors. Exporting
is desirable when it is economical to produce in the home country and there are no legal restrictions on
import of given products in the foreign markets. In the case of import bans or excessive costs of
transportation, a firm may choose to set up its manufacturing and marketing subsidiaries abroad. But this
is feasible only when foreign governments are not averse to foreign direct investment, and necessary raw
materials and labour are available locally at competitive prices in the foreign countries.
 In countries where the first condition is not fulfilled, the firm can go in for either licensing or joint venture
as these entry modes are politically less objectionable.
 Environmental forces play an equally important role in shaping a firm’s functional and tactical decisions.
What should be the scale of production? Should the firm employ labour or capital intensive techniques?
How to finance a firm’s foreign operations? How much to repatriate? What marketing mix should the
firm use? Should it hire local persons or employ foreign nationals? What should be their compensation
package? Answers to these and other questions require in-depth analysis of the prevailing environments
in foreign countries. Since the environments differ, firms cannot be much successful by falling back upon
its domestic decisions and practices.
 The firm needs to screen the foreign country environments and accordingly decide about the best course
of action in each country.
 It may be pointed out here that environmental analysis is important not only for the firms entering into

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 the foreign markets for the first time, but it is also important for the firms already in international business.
Since environmental conditions change over time, firms need to continuously monitor changes in the
environment and make suitable changes in their decisions.
Geographic Environment
Geography is an important component of the foreign environment and refers to a country’s climate,
topography, natural resources and people. Everyone engaged in international business must have some
knowledge of the geographic features of the foreign country as these influence the nature and characteristics
of a society. It also affects the demand pattern of the people living in the country. Geography is a major
contributory factor to the development of business systems, trade centres and routes.
Different climatic conditions (rain, snowfall, wind, temperature, humidity etc.,) give rise to demand for
different types of products. It is largely due to climatic differences that people differ in their housing, clothes,
food, medical and recreational needs. Many a time needs are same, and the same products are demanded. But
because of the climate and the topographic differences, products need adaptation or modifications to suit local
conditions.
Geographic conditions also affect a firm’s plant location decision. A firm prefers to set up its
manufacturing plant in a country which has favourable climatic conditions, possesses suitable topography
(i.e., surface features such as hills, plains, river and sea) and where raw materials, energy and labour are
cheaply and abundantly available. Foreign country’s nearness to other markets and its strategic location on
major trade routes are other equally important considerations.
Firms’ distribution and logistics strategies are directly influenced by geographic conditions in the foreign
markets, re-order points and safely level stocks are kept generally higher for those countries or places which
are not easily accessible and can be cut off suddenly and heavily due to bad weather.
Location of a country on the world map is an equally important consideration. It affects its trade prospects
with other countries. Landlocked countries such as Bolivia, Zambia and Zimbabwe are not only costly to
reach but are also difficult to penetrate as trading with these countries depend upon their relations with
neighbouring countries through which goods have to cross.
To arrive at a correct estimate of the market size, however, one needs to take into account these factors
also such as population growth, population density and population distribution by age, income, location and
occupation, take together, these variables provide better estimates of the present and future market potentials
and also help in providing information relevant for communication, distribution, product quality and pricing
decisions.
Economic Environment
Among the entire uncontrollables, the economic environment is perhaps the most important factor.
Economic Development: Economic development is directly related to the development of marketing in a

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 country. Countries characterised by high levels of economic development not only have high demand for
a variety of products, but also have better infrastructure and more developed marketing systems.
Competition is also high in these countries. In the less developed countries, on the other hand, not only
demand is low, but infrastructure is also poor. It, therefore, becomes quite difficult and more expensive to
do business in such nations.
Income: Income is an important indicator of the country’s level of development and also its market size. The
Gross national product (GNP) and per capita income are among the major measures of income.
Expenditure Pattern: Data on expenditure patterns are useful in judging as to how the money is spent on
different items and which products receive more weight-age.
Infrastructure: Infrastructure is another vital dimension of the country’s economic environment and is directly
related to the country’s economic development. Infrastructure refers to various social overheads such as
transportation, telecommunications, commercial and financial services like advertising, marketing
research, various media, warehousing, insurance, distribution, credit and banking facilities. Absence of
adequate infrastructure not only hinders the country’s development but also affects firms’ costs and
capacity to reach various market segments. Companies find it difficult to co-ordinate and control their
business in countries with poor communication systems.
Financial Environment
Sound financial position of the country coupled by the favourable investment policies reflect strong
demand potential.
Monetary and fiscal policies: Inflation, interest rate, various kinds of duties and exchange rates are the
variables related to the country’s monetary and fiscal policies and have a substantial impact on the costs
and profitability of business operations. These variables also influence a firm’s decision to move funds
from one nation to another.
Commercial and foreign investment policies: Each country has its own commercial and foreign investment
policies which must be studied in detail to ascertain the country’s openness to trade and investment with
other countries. A proper understanding of these policies can be quite helpful in ascertaining what tariff
and non-tariff barriers the particular country uses to protect its domestic industry from foreign
competition.
Balance of payments account: A country’s balance of payments account is another major source of
information about the country’s foreign trade and foreign currency reserves. The current account throws
light on the country’s exports and imports as well as its major sources of imports and destinations of
exports. Capital account reveals stocks of foreign investments, borrowings, lending and foreign exchange
reserves. An international firm must be duly aware of exchange controls prevalent in the foreign countries.

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Cultural environment
Culture can be defined as a “sum total of man’s knowledge, beliefs, art, morals, laws, customs and any
other capabilities and habits acquired by man as a member of society.” It is a distinctive way of life of a group
of people, their complete design of living. Culture thus refers to a man’s entire social heritage - a distinctive
life style of a society and its total value system which is intricately related to the consumption pattern of the
people and management philosophies and practices.
Some of the important elements to understand a country’s culture are: language, aesthetics, education,
religions and superstitions, attitudes and values, material culture, social groups and organisations, and
business customs and practices.
Language: Language is an important element of culture and it is through language that most of the
communication takes place. An international marketer should have a thorough understanding of the language
of the market - particularly the semantic differentials and idiomatic nuances which are essential characteristics
of all languages of the world.
Aesthetics: Aesthetics pertain to a culture’s sense of beauty and good taste, and is expressed in arts, drama,
music, folklore, dance et. Aesthetics are of special interest to the international business executives for these
govern the norms of beauty in a society and are helpful in correctly interpreting meanings of various methods
of artistic expressions, colours, shapes, forms and symbols in a particular culture. Colours, for instance, mean
different things to different people.
Education: Education is generally understood as formal schooling. But it is better to adopt a broader
perspective and define education as any process, formal or informal, through which one learns skills, ideas
and attitudes. Education is important as it affects not only the education levels but also the development of
mental faculties and various skills, In general, educated people have been found to be more sophisticated,
discriminating and receptive to new products and ideas.
Religions and superstitions: Religions are a major determinant of moral and ethical values and influences
people’s attitudes, habits and outlook on life which are reflected in their work habits and consumption patterns.
There are numerous religions and faiths in the world and each one has its own morals and codes of conduct.
A working knowledge of the religions prevalent in the target markets helps in understanding people’s work
habits, underlying motivations and consumption behaviours. Equally important are the superstitions of the
people in a society. People’s beliefs in astrology, hand reading, ghosts, lucky days and places are integral part
of certain cultures.
Social Environment
Social environment consists of religious aspects, language, customs, traditions, beliefs, tastes and
preferences, social institutes, living habits, eating habits, dressing habits etc. Social environment influences
the level of consumption.

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Political Environment
It is rightly said that a foreign business firm operates only as a guest and at the convenience of the host
country government. The government reserves the right of allowing a foreign firm to operate in the country
as well as laying down the manner in which a foreign firm can conduct business. To gain an insight into a
foreign country’s political environment, one needs to analyse factors such as the current form of government
and political party system, role of government in the economy, political encouragement to foreign firms,
political stability, and political risks to business.
Technological Environment
The latest information technology has dissolved the national boundaries and the advancements of
transportation technology have reduced the distance among the world nations. Technology changes at a faster
rate. In fact, it brings change in the society, economy and politics. Technology affects all walks of life, all
countries and the entire globe. Technology flows from the advanced countries to the developing world through
the multinational corporations (MNCs), joint-ventures, technological alliances, licensing and franchising.
Technology influences the way we live, we cook (electric rice cooker), we drink even water (filtered and
mineral water), communicate (telephone, fax, e-mail, video conferencing, e-mail chatting etc.), preparing for
a class or a case or reading a newspaper through the internet, marriage alliances through the internet, computer
aided design, production, selling (e-commerce), satellite networks, electronic fund transfers, lasers, fibre
optics, unmanned factories, miracle drugs, new diagnostic methods. New studies in technology like eye
replaces the password and using the remote for car driving will take place.
The level of the technology is not the same in all the countries. Advanced countries enjoy the fruits of
the latest technology while the developing nations face the consequences of obsolete or outdated technology.
Therefore, the MNCs have to understand the technology, analyse it before entering the foreign markets. MNCs
have to procure the technological environmental information regarding: The level of technology of the
industry in the home country. If the technology is not compatible, then select the appropriate technology for
the host country, if possible. If not, select the host country’s technology that suits the home country’s
technology. Study the compatibility of the technology to the culture of the host country including the taste
and preferences of the host country’s customers. Study the transfer host country’s governmental policies
regarding technology Study the modes of technology transfer like joint ventures, technological alliances etc.
Study the impact of the technology on the environment of the home country including the laws pertaining to
environmental pollution.
Legal Environment
Every business firm operates within the jurisdiction of legal system. This is true of domestic as well as
international firms. But the problem for the international firms is that the laws that they face in their home
countries might be different from those encountered in the host countries. Advertising laws in a country, for

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instance, might be so strict that it is best advised for the international marketer to get himself a good legal
counsel before framing his advertising strategy. Different laws exist not only in the area of marketing mix
variables but also for other business decisions like the location of plants, level of production, employment of
people, raising money from the market, accounting and taxation, property rights including immovable,
property and patent and trade marks, cancellation of agreements.
Besides directly influencing firm’s business operations, laws affect the environment within which a firm
operates • in the foreign country, Thus while one country may promote competition within its markets through
its legal system, another country might try to protect its industry and thereby restrain competition.
A major problem with laws in different countries is that the legal systems of the world are not harmonised
and are in fact based on contradicting legal philosophies. The legal systems that exist in different countries of
the world are antecedents of one of the two legal philosophies which are the common law and code law.
Ecological Environment
Ecology refers to the pattern and balance of relationships between plants, animals, people and their
environment. Earlier there was hardly any concern for the depletion of resources and pollution of the
environment. Smoke stemming from the chimneys and the dust and grime associated with factories were
accepted as a necessary price to be paid for the development. But in recent years, the magnitude and nature
of the ‘pollution overload’ have assumed such alarming proportions that pressures have built up all over the
world to do something urgently lest the situation gets out of control. In almost all the countries, there exist
today legislations and codes of conduct to preserve the earth’s scarce resources and put a halt to any further
deterioration in the environment. Business considerations of the international firms are no exceptions and
have been brought under such regulations.
The concept of industrial progress and development has also undergone paradigm shifts. Corporations
today are judged in terms of not only financial returns, but also conservation of environmental resources and
reduction in pollution levels. Green technologies, green products and green companies are highly valued in
today’s global market place.