There are different types of business environments – import & export, Joint venture, FDI (Foreign Direct Investment), licensing, and Franchising. An International Business Environment is made up of almost everything that a business needs to operate.
Components of International Business Environment
Let’s take a look at the components that comprise the international business environment:
It encompasses the approach, attitude, and actions of the government of the country toward the foreign companies and the respective country. What kind of government a country has, how are its relations with business, and the political risks in a country, are very crucial for the success of a company. There are different political systems that a country can have. These are democracy, dictatorship, monarchy, and more.
Therefore, a company must analyze the political environment in the country it wants to enter. It must study how business-friendly a government is and what facilities it offers companies to set up and do business in that country and examine the legal constraints imposed by the government. The legal restrictions could be on licensing and import and export of products (capital goods).
A government could also set restrictions on pricing and distribution and take into account the restrictions on setting up a business. Overall, companies must take into account the following political factors:
- The government’s view and approach to the economy – liberal and encouraging, restrictive or discouraging.
- The incentives that the government provides.
- Restrictions, if any, by the government.
- Restrictions on imports of technology and capital goods.
- Government export and import policy.
- Government support in setting up a business.
It encompasses all the factors that make a country attractive to foreign companies. Like the political environment, different countries can have different economic environments. We can classify countries as developed, developing, or less developed countries in terms of economic growth.
Normally, an advanced country has better education, infrastructure, and technology, but the growth potential is more likely to be in a developing country, owing to rising demand.
A company must consider the following economic factors to decide its strategies: what stage of economic growth a country is at; GDP and per capita income; infrastructure level; tax structure; cost and availability of financial resources; and cost and availability of raw materials.
This includes the availability of machinery and raw materials for production in a country. In addition, the level and acceptance of technology in a country also play a crucial role in deciding on a company’s performance. Since a company has no control over the external environment, it is important that it adapts to the technological environment of a country.
A company that is able to capitalize quickly on new technologies, therefore, has a better chance of gaining a competitive advantage. Such companies are more likely to earn a higher ROI, both on the national and international markets.
Overall, we can say that a company must assess the following points in terms of the technological environment. It must take into account the status of technological development in the nation and in the specific industry it operates. A company must also consider the pace of technological change in a country and the sources of technology. Additionally, a firm also needs to consider any limitations on the technology transfer.
Adapting to the culture of a foreign country is a great challenge for a company. A firm can meet this challenge by analyzing the cultural environment of a foreign country. A cultural environment basically encompasses the general beliefs and values of the people in a country. These values and beliefs, in turn, depend on the history, language, and religion of the country.
Cultural factors play a major role in deciding what type of product a company should offer. A company must consider and work on the following cultural factors to increase its chances of success:
- How does society view a company?
- What influence does culture have on the acceptance of a product
- How supportive society is to the change.
- How does society perceive a particular product?
- The lifestyle and consumption behavior of potential buyers.
- What is the demand for a product at certain events such as festivals?
A competitive environment also differs from country to country. The level of competition in a country depends on several factors, including the economic, political, and cultural environment. In addition, competition could come from a public or private sector or from foreign or domestic companies.
Benefits of International Business Environment
A company faces several challenges in internationalizing its business. Nevertheless, an international company offers several advantages to business and society. The first advantage is that it contributes to bringing the world together or helping to develop a global village. This also facilitates the transfer of capital, human capital, ideas, and information across borders.
Moreover, a favorable business environment also leads to effective use of resources and more employment opportunities on the world stage.
Another great advantage of international business is that it helps stabilize the prices of goods and services. This is because of the easier availability of goods and services. A favorable IBE is also good for technological developments. Companies, too, usually account for a large or significant part of their turnover in their international division.
Overall, we can say that a positive IBE helps not only businesses but also society and the country. Therefore, a company must strive to adapt to the environment in which it operates. In addition, the government must ensure that it works to provide companies with a conducive environment that helps them maximize their potential.
Read about International Business in detail.