Factors Affecting the International Business Environment

Mar 1, 2023

3,596

5 mins

The article below explores the factors affecting the modern-day international business environment. Read on to know more about the same.

With globalisation becoming the trend of the hour, companies that want to make it big also have an international business presence. Multinational companies benefit from having a global presence because it gives them access to new markets and opportunities for growth. When you’re established in one country, you may be limited by the borders to which you do not have access. With an international presence, however, you can explore new markets and develop relationships with potential customers who live outside your current borders. Because these companies have a global reach, they can sell products or services to people who live in other countries and make more money doing so. That said, you must explore several factors affecting the international business environment before considering establishing your company as an MNC.

The Benefits of an International Business

If you’re wondering why you should be planning to turn your company into an MNC, here are a couple of the benefits of international business environment:

• One major benefit of international business is that it brings countries together to form a cohesive business environment. The ideas and practices of one country can be shared with another country

• International trade also benefits consumers because they have more choices when shopping for goods. Consumers can choose between different brands and products from around the world

• International trade allows countries to share their resources and products, meaning each can specialise in what it does best

• Another benefit of international business is finding new growth and expansion opportunities. With more than 200 countries worldwide, there are plenty of opportunities for businesses willing to look outside their home markets.

The Classification of the International Business Environment

The international business environment is primarily categorised into the micro-environment and the macro-environment. The micro-environment is within a country or region, while the macro-environment encompasses all countries and regions.

• The Micro Environment

The micro-environment encompasses all the factors that impact how an organization operates, such as cultural variances, political and legal limitations, market intelligence, and technology. This environment is dynamic and subject to change over time, thus it is crucial to stay informed about any modifications and integrate them into your business model.

• The Macro Environment

The macro-environment includes economic factors such as national income levels, inflation rates, currency values, interest rates, etc., which impact an individual’s ability to do International Business envioronment.

The macro-environment reflects global trends such as the proliferation of information technology, increased consumerism and environmental concerns. The world has become more interconnected than ever before, making it difficult to disentangle the effects of one country’s actions from another’s.

• The Political Environment

When establishing a foothold in another country, companies must keep the country’s political environment in mind. Whether it’s a dictatorship, democracy, or constitutional monarchy, you have to consider their approach toward new business, the formalities of setting up a business, and other factors.

The type of government will affect how they want to run their country. For example, in a dictatorship like North Korea or Cuba, companies are not allowed to own property or even travel abroad. In these countries, the state owns all businesses and individuals are not allowed to own any assets.

In democracies like India, companies have more freedom to set up and operate their businesses but still have to follow some rules and regulations set by the government.

• The Economic Environment

The country’s economic environment also plays a large part in deciding how well your international expansion will go. You need to review the country’s annual growth rates, the level of per-capita income, the infrastructure available for setting up a company, and even look at the wage structure to see whether it fits your business model.

The economic environment can affect the success or failure of an international expansion plan in many ways.

For example, if your target country has high levels of unemployment and few job opportunities for ex-pats, it may be challenging to find suitable candidates to hire as employees. On the other hand, if there are many job openings but low wages, you may find that some candidates would instead work for themselves than join an expatriate company.

The last thing you want is to start an operation in a country without the demand for your product or service. If you open a factory in China and nobody buys from you? You’ll have wasted money and resources on something that won’t work out.

• The Technological Environment

While countries usually embrace technological advancements, poorer countries might not have access to the technology you need for your business.

Suppose you’re expanding to a new country. In that case, you have to review their technological environment by looking at the level of technological development as a whole, the sources of tech, and other such factors.

The availability of technology varies across countries. Sometimes, this is because of how much access people have to information or how much they can afford to pay for it. In other cases, it’s because they simply haven’t had enough exposure to technology or are not innovative enough to create something new.

You can explore the technological environment of a country by looking at:

• Where technology has advanced in the country

• The speed of further advancement in tech fields

• Restrictions against this advancement and facilities to ensure growth

• The Cultural Environment

The cultural environment is the most important thing to consider when expanding to a new country. The Hofstede mechanism is a great way to understand the challenges that come from a country’s cultural environment.

The Hofstede mechanism is based on research conducted by Dutch psychologist Geert Hofstede in the 1970s. He studied the culture of IBM employees worldwide and discovered that different cultures have different values. The model has five different dimensions: individualism vs collectivism, power distance, uncertainty avoidance, short-term orientation vs long-term orientation, and masculinity vs femininity. (Hofstede et al., 2010).

• Power Distance

Power distance refers to how hierarchical society is. A low power distance culture has flat structures where everyone is equal, and decisions are made by consensus; high power distance cultures have hierarchical structures where decisions are made at the top and workers follow orders from above without much question.

• Individualism vs Collectivism

Individualism refers to societies where people look out for themselves rather than their communities; collectivism refers to associations where individuals unite with others to form groups or teams with shared goals or interests.

• Uncertainty Avoidance

Uncertainty avoidance refers to how well individuals adapt to unfamiliar situations and new things; low uncertainty avoidance means that people are comfortable dealing with uncertainty and ambiguity, while high uncertainty avoidance means that people prefer known quantities over unknown ones.

• Masculinity vs Femininity

Masculinity vs femininity is a dimension of culture that concerns the distribution of values between masculine and feminine. Cultures in which masculinity and femininity are not valued equally are said to be biased against the feminine. Masculine cultures value traits such as assertiveness, courage, self-reliance, and competitiveness; on the other hand, feminine cultures value relationships, intimacy, and cooperation.

• Long-term vs Short Term Orientation

This dimension pertains to an individual’s focus on either the present or the future while disregarding the past or future. A long-term orientation emphasizes the need to guarantee a better future for the succeeding generations, whereas a short-term orientation prioritizes the maximization of profits in the present without giving much thought to the welfare of future generations, or even the immediate one.

Conclusion

However, it isn’t as simple as getting into your car and driving off to a new country. You need an expert who can help you with everything, so you don’t encounter any problems. That’s where Vakilsearch comes in.

Vakilsearch, which provides a wide range of services to the corporate sector, offers skilled and experienced corporate law professionals who are qualified in all business setups. It is here for you if you need assistance with foreign direct investment (FDI) or other commercial agreements. 

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