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Forces in the Environment

TheEnvironmentOf Environment
The sum of all forces surrounding and
InternationalBusiness influencing the life and development of the
firm.
Forces can be classified as

External forces
by Management can exert influence but

Anoop Kumar Gupta cannot control

Internal forces

MAIT Management must administer and

adapt
1

International Business Model

Figure 1.2 here

International business
transactions take place
across national borders and
may involve three
environments.

Domestic
Foreign
International
Global Business
Environment
Framework (as
per Wild) Chapter 1-4
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External Environmental Forces Internal Environmental Forces

Competitive Legal Factors of production
Kind, number, location Laws governing

Distributive business Capital, raw material, and people

For goods and Physical
services Topography, climate
Activities of the organization
Economic Political Personnel, finance, production, and
GNP, labor cost Form of government marketing
Socioeconomic Sociocultural
Characteristics of Attitudes, beliefs
population Labor
Financial Skills, attitudes
Interest rates, Technological
inflation, taxes Equipment, skills

Domestic Environment Foreign Environment

Composed of all the uncontrollable forces Operates differently than the domestic
originating in the home country that environment for the following reasons
surrounds and influences the life and Different force values

development of the firm Changes difficult to assess

Particularly political and legal forces
Managers most familiar

Forces interrelated
May affect foreign operations
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International Environment International Environment

The International Environment is
the interaction between the domestic Legal
environmental forces and the foreign Technological
environmental forces.
Accounting
the interaction between the foreign
environmental forces of two countries when an Political Environments
affiliate in one country does business with
customers in another.
Decision making is more complex

The Legal Environment Differences in Legal Systems

While domestic firms must follow laws and

customs of the home country, international
businesses must obey laws of the home Common Law Civil Law
country and all host countries.

Religious Law Bureaucratic Law

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Common Law Countries Using Common Law

Based on wisdom of judges decisions on
individual cases through history United States Barbados
Cases create legal precedents Canada Saint Kitts
Australia Nevis
India Malaysia
New Zealand

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Civil Law Religious Law

Based on codification of what is and is not
permissible
Originated in biblical times with the Romans
Reinforced by French Napoleonic code
Judge determines scope of evidence collected
and presented
Based on the officially established rules
governing faith and practice of a particular
religion
A country that applies religious law to civil and
criminal conduct is called a theocracy

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The Legal Environment:

Bureaucratic Law Domestically Oriented Laws

Bureaucratic

Impact
law is the legal Firms domestic operations

system in
communist International competitiveness of
countries and domestic firms

in dictatorships.
Business practices of foreign firms
operating outside the countrys
borders

3-17 COPYRIGHT 2015 PEARSON EDUCATION, INC. Chapter 3-18

Laws Affecting
International Business Transactions Laws Directed Against Foreign Firms

Sanction
Nationalization Expropriation

Embargo
Confiscation Privatization
Extraterritoriality

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Economic and Political Impacts of MNCs Cultural Impacts of MNCs on

on Host Countries Host Countries

Advantages Disadvantages Advantages Disadvantages

Greater selection Competition Improved standard Abuse of less
of living developed policies
Higher standards Job loss in the areas of
Introduction of new
Job creation Dependency on products safety and
Tax benefits economic health of Better health care environmental
MNC concerns
Technology More sanitary food
Political power products Negligent product
transfers
offerings

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The Legal Environment:

Dispute Resolution in International
Business Principle of Comity
4 Questions

Which countrys law applies? A country will honor and enforce within its
own territory the judgments of foreign
courts
In which country should the issue be
resolved? Conditions of the principle:
Reciprocity is extended
Which technique should be used to resolve
the conflict: litigation, arbitration, Defendant is given proper notice
mediation, or negotiation? Judgment does not violate domestic statutes
or treaty obligations
How will the settlement be enforced?

COPYRIGHT 2015 PEARSON EDUCATION, INC. Chapter 3-23 3-24

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Arbitration The Technological Environment

Arbitration is the process by which both

parties to a conflict agree to submit their Agricultural
Infrastructure
cases to a private individual or body land
whose decision they will honor.
Resources Rich
Low-cost
natural
labor
resources

Skilled
labor

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International Treaties Protecting

Intellectual Property Intellectual Property Rights

Patents International Convention for the Protection of

Copyrights Industrial Property Rights (i.e., the Paris
Intellectual property Convention)
Trademarks often forms the basis of Berne Convention for the Protection of Literary
Brand names a firms competitive and Artistic Works
advantage! Universal Copyright Convention
Trade-Related Intellectual Property Rights
Agreement

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Influences on a Country's Accounting

The Accounting Environment System

The Roots of National Differences

GAAP - Generally Accepted Accounting
Principles

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The Accounting Environment The Accounting Environment (continued)

Differences in Accounting Practices Other Differences

Valuation and Revaluation of Assets Capitalization of Financial Leases

Preparation of Consolidated Financial

Valuation of Inventories
Statements
Dealing with Tax Authorities
Capitalization of Research and Development
Use of Accounting Reserves expenses
Treatment of Goodwill

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The Accounting Environment (concluded) The Political Environment

Impact of Capital Markets Political Risk
International Financial Reporting Standards
Ownership
risk

Operating Transfer
risk risk

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Examples of The Political Environment:

Political Risks Political Risk

Expropriation Inflation Ownership

Confiscation Kidnappings, Risk
Campaigns terrorist threats
against foreign Repatriation
goods

Currency
Political Operating
Risks Risk

Mandatory labor devaluations
benefits legislation Increased taxation
Civil wars

Transfer
Risk
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Levels of Political Risk Political Risk Assessment

Is the country a democracy or dictatorship?

Does the country rely on free market or
Macropolitical government controls?
Does the government view foreign firms as a
Political positive influence?
risks Are the firms customers private or public?
Does the government act arbitrarily?
Micropolitical Is the existing government stable?

COPYRIGHT 2015 PEARSON EDUCATION, INC. Chapter 3-37 3-38

Countries Relative to Political Riskiness,

2008
Insurance Against Political Risks
Overseas Private Investment Corporation
(OPIC)
Multilateral Investment Guarantee Agency
(MIGA)

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