41985016 Environmental Factors of International Business

7/25/2019 41985016 Environmental Factors of International Business

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Country Risk Analysis : Environmental Factors

of Business


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Economic Environment

Economic System (CentrallyPlanned, Capitalist & Mixed

Economy) Per Capita Income (Purchasing

Power Capacity) Market Sie (!arge Population &

"ge #actor) In#lation (Cost o# Production is

high, consumers$ income isreduced)


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Economic Environment in India

Indian Companies are embracing new

opportunities and challenges. Because:

%echnology has improed dramatically:

Some of the most advanced technologies and

skills in the world are available in the country

at a fraction of the cost of advanced nations.


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Consumer Demands is booming

Increasing Purchasing power, as Goldman Sachs

estimated per Capita Income of about $ 9000 per

annum.

India is giant consumer maret comprising !00million urban based middle"class consumer and

another #00 million consumers eist in rural

India.

In urban areas, the middle"class culture is

firml% established the ! &s of &'((S, &)*I+S

and &)*I(S to rule this class.


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Untapped rural market with millionaires is

captured by Companies like, ero onda,

!aruti Su"uki, #kai $%, &roctor ' (amble

and some banks like ICICI Bank, State Bank

of India.

'orldwide and loal *pportunities#or India+ *utsourcing *pportunity+

I$ services are not only outsourced in

India even innovation and manufacturing

work is also outsourced.


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Some of the fortune )** companies, like+elphi, +ell, lli -illy, (eneral lectric,

ewlett &ackard and +aimler Chryslerhave put up ' + facilities in India.

E$s %echnology Centre in angalore isthe company$s largest such #acilityoutside the -S with an inestment o#

-S . /0 million1

%he 2aimler Chrysler 3esearch Centre

in angalore is inoled in appliedresearch1


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%rans#orming and 3einesting "ctiity+

/ifteen yearsago eliance company was intosynthetic fibres which accounted for 0*percent of the group1s turnover. Currently,

company1s area of operations are:

*il gas exploration, energy, in#or4

mation & communication &technology, li#e Sciences researchand retail1


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I$C is e2ample of transformation by moving awayfrom the commodities cluster into:

5otels, high 6uality paper, packaging and

printing, li#estyle retailing, in#ormation

technology1

$ata group of company has transformed andencompasses more than 3* companies in diverse

sectors like4

"utomotie engineering products, metals,energy, chemicals, hotels, property deelo4pment, #inancial serices, and in#ormationtechnology1


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"c6uisition o# 7oreign Companies

Indian companies are now startedac6uisition o# companies to gain latesttechnology and cost & 6uality competit4

ieness1 Ma8or "c6uisitions are+

Top 10 deals itself account for nearly US $ 21,500

million since 2000.

This is more than double the amount involved in US

companies acuisition of !ndian counterparts.


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Top ! ac"uisitions made by Indian

companies #orld#ide

Acquirer Target CompanyCountry

targetedDeal value ($

ml) Industry

Tata Steel "orus #roup U 12,000 Steel

Hindalco %ovelis "anada 5,&'2 Steel

Videocon(ae)oo *lectronics

"orp. orea +2& *lectronics

Dr. eddy!s"a#s etapharm #ermany 5&+ -harmaceutical

Sulon %nergy ansen #roup el/ium 55 *ner/y

H&C"enya -etroleum

efinery td. enya 500 3il and #as

an#a'y "a#s Terapia S4 omania 26 -harmaceutical

Tata Steel %atsteel Sin/apore 2& Steel

Videocon Thomson S4 7rance 2&0 *lectronics

VS" Tele/lobe "anada 2& Telecom


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3elocation o# Plants

Seeral 7irms hae ought those plantsin deeloped countries now hae eenclosed ecause o# high cost1 %heseCompanies like+

ssar &ower relocated 5,6** !7 power &lant fromScotland to %adinar in (u8arat at a cost of about US9 50.; million.

#rvind !ills reshifted its manufacturing plant from!auritius to India at an estimated cost of US 9 6.0

Con#lict o# Interest4=7elfare of economy %s.ma2imi"ation of corporate wealth+ta2 revenue%s. transfer pricing and balance of paymentissues>


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Regulations and $overnment %olicy is

C&angingin India

Competition is being encouraged

eservations are being done away

Inspectors a8 are being removed


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'egal Environment%ase o * IDIA CHIA +SSIA ,A-I" +S

Doing ,usiness /0 12 03 // 2

Starting a ,usiness 24 40 // 5

Dealing 6it7 "icens

es

25 84 88 08 /5

%mploying 9or:ers 14 13 0 ;

egistering &roperty / /; 54 0 0


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Cultural Environment

!anguage -Come ali/e with Pepsi in GermanCome out of the gra/e, 'merican &otors&atador become iller in Spanish 1.

Cast and 3eligion -In Iran because ofPurdah s%stem singer machines sales eecuti/edo approach husbands not wi/es1.

Material Element4 It is related to conomic,financial and social infrastructure which isob2ected and en2o%ed b% people. -ample3German lie beer while 4rench lie wine.1


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Cultural Environment

International Business success is based on Cross?cultural literacy.

Cross Cultural literacy is based on :

91 Social Structure 3eligious and Ethical System

Islam & economic Implication + @oran supports earning of legitimate profit through

trade and commerce. $hose who hold property are assumed as trustee

rather than owner. $rustees are entitled to receive profits from

the property but should use it in a socially andprudent manner.


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)ne economic principle of Islam prohibits the pa%ment orreceipt of interest.

It is also becoming a matter of law. In 5996, Paistansfederal Shariat Court declared earning interest is illegal andgo/t. should amend financial rule accordingl%.

Con#ucianism and its Economic Implication + 7his was the ethical s%stem in China, it has weaened

since 5989 but still people follow this in China, +orea andapan.

7hree /alues are central to the Confucian s%stem of ethics3 'oyalty1 Reciprocal -bligation and &onesty


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6. (anguage

Competitiveness of any country for entry of !ACbased on -anguage, if it has one spoken language,nglish, it is more competitive.

Competitiveness of !AC is based on !ulti language.

some times blunder can be committed if locallanguage is not known by marketing department.2ample :(eneral !otor was troubled when they have

launched their Car?

with the name of Chevrolet Aova. Aovameans S$# but in Spanish AD %# means

It does not go resultantly (! changed thename of the car as Caribe.


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!. ducation

4ormal ducation is the medium through which indi/idual learnman% of the language as well cultural norms which are taughtin school.

ducation is /er% important determinant of national compe"titi/e ad/antage as well guiding the location choices ofinternational business. *ecause &:C gi/e importance to thelocation which has a pool of silled and educated humanresources as well educated customers.

E2ample :'fter second world war, apan had almost nothing ecept for a

pool of silled and educated human resources. Postwareconomic success of apan based on education s%stem.


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Culture and )orkplace

;or Place culture is also determined b% the culturewhich affects operations of &:Cs in different countries.

Greet

Indiidualism :s Collectiism= less ties betweenindividual %s. high ties between individual >

-ncertainty aoidance = readiness to take risk anduncertainty>

Masculinity :s1 7emininity =large %s. little genderdifferentiation in the work>.


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4anagerial Implications

If culture varies because of differences in socialstructure, language, education and economicphilosophy, three important implications forInternational business are:

Cross Culture !iteracy+ $he biggest dangers confronting a company that goes

abroad for the first time of being ill?informed.

$o avoid mentioned problem international business shouldconsider employing local citi"ens to help in Buusiness andshould move from ethnocentric approach .


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Culture and Competiti/e 'd/antage

In International business there is important connectionbetween culture and competitive advantage while makingchoice of location for production facilities.

2ample :

# and B two locations are given. Both are characteri"ed bylow labour costs, same population si"e and at similar stage ofeconomic development.

In country # the education system is under?developed, thereare si2 ma8or linguistic groups.

In country B, education system is well developed, there isonly one linguistic group.

'hich country is est inestment site ;


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Culture and *usiness thics (enerally ethical principles are universal but some are

culturally bound. If this is the case, International businessmay be confronted with difficult ethical dilemmas.

2ample :

Chinese culture is based on guanxi


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$here is thin line between corruption and legitimate giftgiving to support business transaction.

$homas +onaldson has suggested three guiding principlesto deal with ethical dilemma in international business:

91 3espect #or human rights which determines theasolute moral threshold #or all usiness1

=1 3espect #or local tradition

>1 %he elie# that context matters when deciding what isright and what is wrong1

i#t giing does not iolate human rights and is

important in the context o# some cultures likeChina and ?apan1

Employing Child laour at less than minimumwages would e unethical1


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Cultural Implication:Failure of )al54art

$he company had toiled for G years strugglingto make its South@orean and erman storescompete against strong, established local

retailers.

In Huly 6**, 'al?Martannounced itswithdrawal of operations from (ermanybecause the firm was losing some 96)*million per year on sales of 96.) billion.


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'al?!arts G) big?bo2 stores were sold to(erman company !$D #(, a much bigger

player with ))* stores in (ermany. $he saleof 'al?!arts G) (erman stores resultedin a 95?billion loss,

!ain problem was competitie prices #romnational discountersas well as (ermanconsumer re8ection of #merican?style signa?

ture features such as stores outside o#town centers, employees re6uired tosmile and heartily greet customers1


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Dn !ay 66, 6**, the #merican retailerwithdrew from the South@orean market

when it agreed to sell all 5 of its 'al?Mart@oreastores to Shinsegae, South@oreastop discount chain.

$he deal was for 9GG6 million. 'al?Mart@oreahad lost 95* million on sales of some9G** million in 6**). 'al?!arts Jwarehouse?

styleJ environment proved unfriendly to theneeds of @orean shoppers. In particular,housewies were dissatis#ied with #oodand eerage o##erings1


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Cultural Implication : Islamic Banking

@oran clearly prohibits interest, whichis called riba.

$here are now 50* Islamic financialinstitutions world?wide managing over95)* billion in assets and making an

average return on capital of more than 5 percent.


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$wo of the largest banks are entering

into the market 4 Citigroup and SBC.

Islamic Banking is based on twodifferent methods :

Mudaraah + It is a pro#it sharingscheme.

7hen Islamic bank lends money to a

business, rather than charging interest onloan, it takes a share in the profits that arederived from that investment.


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Similarly, when a business =or individual>deposits money at an Islamic bank in asaving account, the deposit is treated as aneEuity investment in whatever activity the

bank uses the capital for.

$hus the depositors receives a share in theprofit from the bank1s investment.


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Second method is 4

MuraahaContract +

7hen a firm wishes to purcahse any eEuipm?

ent that costs 9 5,***, the firm tells the bankafter having negotiated the price with themanufacture.

Initially, bank buys the eEuipment for 95,***and later on borrowers buy back from bank in9 5,5**, it can be assumed as interest.


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Environment T&reat and -pportunity

%rofile *ET-%0 for a Bicycle Company

Enir1 Aature Impact o# each sector

Sect1 *# ImpactBBBBBBBBBBBBBBBBBBBB

conomic ising disposable income and

-iving Standard

!arket Drgani"ed sector a virtual oligo?poly,

buyers critical and better informed, overallindustry growth

not so encouraging, (rowth ratefor niche segment like sports, trekking and racing ishigh.


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Sect1 *# Impact

International India is second global e2po?rter after China, India1s share

is shrinking due to cheapChinese imports.

egulatory &arts and components rese?rved for small scale industry,regulatory restrictions heavy,

it is thrust area for e2ports.


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nvir. Aature Impact of each sector Sect. Df Impact

Social nvironment and health friendlytransportation. 7ide usage for

physical fitness eEuipment .

Supplier !ostly ancillaries and associatedcompanies in small scale sector

supply parts and components,

rising steel prices, increasing useof aluminum


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Sect1 *# Impact

$echnological $echnological upgradation

of industry in progress,import of machinery is

simple, product innovations

ongoing such as battery? operated and lightweight

foldable cycles.

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41985016 Environmental Factors of International Business