Understanding the Business Environment of Various Countries - Essay Example

International Business Order No.217796 April 2008 International Business International business refers to business activities that straddle two or more countries. Businesses are increasingly looking beyond the bounds of their home country for new opportunities. (J. Morrison, 2006). The economic, political, and socio cultural changes that have taken place in the last decade have considerably altered the scenario of international business. This means that companies to remain competitive will have to continuously examine the way they do business in countries other than their own and must be prepared to react swiftly to changing global trends. Understanding business environment of various countries is becoming increasingly important with globalisation. As organisations begin to operate in foreign markets structural and environmental complexity and uncertainty increases. "If the domestic environment can be labelled uncertain, the international business environment is doubly so." (Mascarenhas 1982) International managers must know that international business environment is multidimensional that includes cultural differences, political risks, exchange risks, legal and taxation regulations. According to Mascarenhas the multiple factors a multinational faces due to environmental uncertainty are foreign exchange uncertainty, political uncertainty, and employment problems. However most experts of international business environment believe that it can be classified into four categories: administrative, engineering, entrepreneurial, and regulatory. More recently, Guisinger (2001) has put forward some of the main features of international business environment. They are: culture, legal system, political risk, income profile, tax regimes, exchange rate, and restrictions. Culture may be described as the values, beliefs and attitudes of a country. These tell apart one country from another. International managers need to be aware of this while they travel, communicate or negotiates with people of other countries. Cultural differences are extremely important. An organization must give top priority to learning the foreign countrys proper cultural practices as well as cultural taboos .If it fails to do this there may be a complete lack of trust. According to J.Morrison, 2006) understanding the other partner’s culture leads to smoother working relationships. Political risks sometimes arise when there is a change of government, bureaucratic interventions, civil revolution or foreign invasion. The political environment of a place is forever changing. This changing environment can either help or even may hinder investments. A leader may change overnight. Or some citizen groups of that country with vested interests can hinder investment operations and opportunities. Some local governments may look at foreign firms with suspicion. These changes or political considerations often take place all of a sudden without a hint or a warning. Businesses also need to consider the relative instability of countries such as Iraq, South Africa, and Honduras. Political unrest in countries may create hostile environments for foreign businesses. In Russia, sixteen foreign businesspeople were murdered there in 1993. Civil wars like the ones in Bosnia and Chechnya can disrupt business operations and may also place lives in danger. A sudden change in power may mean a government that is hostile to foreign investment. It is possible that some businesses may be asked to leave the country. Multinationals also face a variety of taxes that may differ significantly from those of their home country. There may be differences in income profiles of countries. An organisation doing business in a foreign country may have to adopt the labour skills, compensation policies and pricing strategies of the host country, In addition they may be compelled to adopt policies that will reduce exchange rate risks, and face restrictions like tariff barriers that local governments may impose on their products and services, or on the organizations, when they enter the host economy. Governments suddenly may suddenly impose tariffs, quotas and embargoes and other types of restriction in while reacting to political events. An organisation has to evaluate the economic environment of the foreign country in which it is going to operate Managers must monitor the interest rates, currency, inflation, infrastructure, interest rates, taxation and wages. It must first evaluate the average income levels of the population. In a country where the average income is very low there is no market for a product or service even if the people desperately need it. Next comes the tax structure of the host country. Foreign firms may have to pay much higher tax rates than the domestic competitors. This may be in the form of registration fees. An organisation has to deal with interest rates and exchange rates, which may fluctuate from time to time. In the U.S. inflation rates have been relatively stable and quite low for some years. However, it is not so in some countries. High inflation rates are quite common. Inflation causes a rise in prices, which in turn affects business. The exchange rate is determined primarily by supply and demand for a countrys goods and services. The government of a country can cause this exchange rate to change drastically by causing high inflation, which is done by printing extra currency or by devaluation of the currency. When the exchange rate drops. A foreign investor may incur heavy losses. Multinationals have to know and adjust to the legal practices and policies of the country where they are going to operate. A country may have a number of laws that regulate the activities of its firms engaged in international business. However, once outside the country the laws of that country may be different. Many legal rights that one takes for granted in ones country do not exist in other countries. A firm must know and obey the laws of the host country. For instance the acceptance of bribes or payoffs is considered illegal in the United States. In other countries, it may not be illegal. Rather it may be a common business practice. In some countries the copyright and patent laws are less strict than those in the U.S. some countries may even fail to comply with these laws. For instance China was recently threatened with severe trade sanctions for allowing American products to be counterfeited. Hence businesses doing international business have to take extra measures to protect their products, as the local laws may not be sufficient to protect them. An organisation doing business abroad has also to take into consideration the infrastructure such as highways, railroads, ports, power plants, hospitals, schools, communication facilities and the commercial distribution systems of that country. Management styles vary from country to country. China places more importance on a harmonious environment than on day-to-day productivity. In Morocco, even though there are women leaders, they tend to be more self-conscious than the American women. In Pakistan there are no women in management positions even if they are to be found in the workplace. The importance of work in an employees life differs from country to country. For instance the Japanese consider work as an important part of their lives and are able to put up with things that workers in other countries consider as intolerable. Likewise, culture may impact what employees find motivating. What constitutes motivation and how people respond to rewards and punishments also varies. Americans consider personal growth, performance based rewards as the most important motivators. In many Asian cultures, including China group solidarity and group needs are placed above rewards for individual performance. Languages are different and international managers must remember that exact translations of words are difficult. The language barrier can result in embarrassment or even complete failure. For example, advertising phrases when translated can have unintentional hidden meanings when translated into other languages. For instance Coca-Colas English advertisement “Coke adds life” theme when translated into Japanese read “Coke brings your ancestors back from the dead”! The Kentucky Fried Chicken slogan “finger-lickin good” in English read as “eat your fingers off” in Chinese. The technology of the two countries must be compatible before a company can sell its product in another country. To accelerate the pace of research and development and reduce the costs of utilising the latest technology companies have to join forces with the host country. Also they have to choose partners and locations that have a work force with the ability to deal with the relevant technology. It is for this reason that many companies have chosen Mexico because it has a capable work force. General Motors chose Arizpe, Mexico, for its plant because it is equal in quality to its North American counterpart. The United States lays great emphasis on research and development and invests a heavy amount on it. With products and technology become more complex there is greater need for the public n know which products are safe and which are not. In the United States, the Federal Food and Drug Administration has set up complex regulations for testing new drugs. The Consumer Product Safety Commission has set safety standards for consumer products and companies are penalised if they that fail comply with them. Hence organisations wanting to do business in the US must have knowledge of these regulations. In China what they call as Guanxi is very important for business. Guanxi means having personal connections, relationship between personal and social connections, and relationship between business and government. It is not surprising that in China, those who possess good Guanxi with governments will benefit. In China, appreciation of Guanxi is a key factor for international managers to do business. Those who have Guanxi will benefit from Government programmes. In short to enter an international market, a company must have knowledge of the new country’s people, its economy and its government regulations. Coca-Cola, KFC and McDonalds are good examples of companies that have succeeded in their international businesses. For instance there are more than 1,000 KFC restaurants and 600 McDonald restaurants in China. The total income from fast food restaurants in China is 180 billion yuan RMB, and eight percent of this is accounted by KFC and McDonalds. What is the reason for this success? It is excellent inter-cultural management. Fast food restaurants like KFC and McDonalds are entirely American brands. There is a huge difference in the economics, politics and ideology between the US and China. Culture plays a huge role especially in the restaurant field. So they decided to adapt. Fast food does not compare with the traditional Chinese culture of food that lays great emphasis on fragrance, colour and flavour. They found a way out by combining the two cultures. Fast food restaurants have been learning to absorb a few essentials of Chinese culture. KFC introduced many Chinese items in its menus, such as Mushroom rice, preserved Sichuan Pickle, tomato and egg soup, Shredded Pork Soup, Peking Chicken roll, etc. When the Chinese customers got to eat Chinese cuisine at a foreign fast food restaurant., they believed that their traditions were being respected. Similarly McDonalds introduced the Vegetable and Seafood Soup and Corn Soup. (China Today) KFC and McDonalds have incorporated the Chinese cultural essentials of respect, recognition and assimilation and understanding into their management styles. At the same time they have maintained the essence of Western culture that stands for freedom, democracy, equality, efficiency and humanity. This kind of inter-cultural management style that has the American business culture at the centre supplemented by the Chinese traditional culture has become a reference point for international business. Coca-Cola came to Russia in 1992, a year after the fall of the Soviet Union. Coke was successful as it was able to convince Russia that its entry would benefit the country and also benefit the Russian economy. (Campbell, Constance R) To begin with Coke hired only Russian citizens in its work force. This also increased the tax base, as all its employees would come under the Russian tax system. Having successfully entered Russia, it managed to remain competitive by following effective human resource management practices. Coca-Colas strategies throughout the world are to contribute to the development of the communities of the place where its facilities are located. For example, in St. Petersburg where its bottling plant is located Coke has supported the restoration of the museum, museums restoration efforts, as the Russian government is unable to fund the restoration. In conclusion it can be said, "the domestic business does not simply grow bigger, but international activities add a new dimension, which will be reflected in the organization of the company, and how it is run. " (Bartlett and Ghoshal, 1998). The main obstacles to successful international marketing are opposing views and misinterpretations that result from cultural differences. An organisation has to be aware of at least some of these issues and ready to make the necessary adjustments. Prahalad and Doz (1987) have rightly said, "With increasing globalisation of the competitive environment, the dual imperatives of global integration and local responsiveness are becoming more vital than ever before for organizational survival and growth." References 1. Bartlett, C. and Ghoshal, S. (2002) Managing across Borders: the Transnational Solution, 2nd edition (Boston: Harvard Business School Press). 2. Campbell, Constance R (2000) Business success in Russia: Coca-Cola Bottlers, St. Petersburg, Southern Business Review, Retrieved from http://findarticles.com/p/articles/mi_qa3972/is_200010/ai_n8912423 3. China Today, KFC and McDonalds бк a model of blended culture, Retrieved from http://www.chinadaily.com.cn/english/doc/2004-06/01/content_335488.htm 4. Mascarenhas, B. (1982) Coping with uncertainty in international business, Journal of International Business Studies, 13 5. Morrison, J. (2006) The International Business Environment (2nd ed.), Basingstoke: Palgrave Macmillan 6. Prahalad, C. K. & Y. Doz. (1987). The multinational mission: Balancing local demands and global vision. New York: The Free Press. Read More