In order to gain a better understanding, let us have a look at two important classifications of environment.
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.
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.
Economic and Financial Environment
Among the entire uncontrollable, economic environment is perhaps the most important factor. An analysis of economic environment enables a firm to know how big is the market and what its nature is. Answers to these questions in turn determine whether a firm should enter a given foreign market, and if yes, what strategies it should use to successfully run its business operations, Closely related to the economic environment is the financial environment, which affects a firm’s capital structure, investment decisions and accounting practices.
Various dimensions one needs to consider, while attempting an economic and financial analysis include : foreign country’s level of economic development, income, expenditure pattern, infrastructure including financial institutions and system, inflation, foreign investment in the country, commercial policy, balance of payments account, accounting systems and practices, and integration of the foreign country’s foreign exchange, money and capital markets with the rest of the world.
Socio- Cultural Environment
Business is as much a socio-cultural phenomena as it is an economic activity. Per capita income in two countries may be the same, yet the consumption patterns in these countries may differ. Socio cultural forces have considerable impact on products people consume; designs, colour and symbols they like; dresses they wear and emphasis they place on religion, work, entertainment, family and other social relations. Socio-cultural environment influences all aspects of human behaviour and is pervasive in all facets of business operations.
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 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. These technological changes enabled international business to take the shape of transnational business through the concept of global business. International business, in fact, gained significance due to the amazing advancements in technology. Technological environment has significant and direct influence on business in general and international business in particular. Technology is the application of knowledge.
Technology advanced phenomenally during the past 50 years. 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.
As stated by Alvin Toffler, “Technology feeds on itself. Technology makes more technology possible.” Thus, technology is self-reinforcing. Technology brings the globe closer. Technology flows from the advanced countries to the developing world through the multinational corporations (MNCs), joint-ventures, technological alliances, licensing and franchising.
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 West Germany, for instance, are so strict that is best advised for the international marketer to get himself good legal counsel before framing his advertising strategy in West Germany. Similarly, there exist laws in European countries preventing promotion of products through price discounting. These laws are based on the premise that such practices differentiate buyers.
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. Recently, the United States government imposed a ban on exports of marine products from countries including India which did not have special devices fitted into fishing trawlers to free the tortoises trapped during fishing expeditions. Similarly, restrictions have been put on garment exports using cloth processed through the use of AZO dyes. Germany today is perhaps the country with most stringent environmental laws in the world.
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.
