UNDERSTANDING THE

INTERNATIONAL BUSINESS
ENVIRONMENT
OBJECTIVES OF THE MODULE - 2 IS TO STUDY;
1. The meaning of international business
environment
2. Reasons for global expansion of international
business
3. External factors impacting expansion of
international business
4. Global strategy
5. International trade barriers
WHAT INTERNATIONAL BUSINESS
ENVIRONMENT?
This refers to multidimensional including
the political risks, cultural differences,
exchange risks, legal & taxation issues.
Therefore International Business
Environment comprises the political,
economic, regulatory, tax, social &
cultural, legal, & technological
environments.
 INTERNATIONAL BUSINESS ENVIRONMENT
International business is an immensely significant
aspect of the modern economy, and will only
become more integrated into core business strategy
as technology improves. It is an aggregation of all
commercial transactions that take place between
various countries crossing political boundaries. It is
not exclusively limited to the field of business,
because, governments, NGOs, and coops also work
across country borders with a variety of objectives.
Nonetheless, in business perspective, the primary
incumbent in an international business environment
is the multinational enterprises that pursue strategic
success in global production and sales.
REASONS FOR GLOBAL EXPANSION
OF INTERNATIONAL BUSINESS
Global expansion is costly and
complex. To offset these costs and
risks, organizations must have
strong reasons for developing a
global strategy. These reasons
generally fit one (or more) of the
following three strategic areas:
 1. GLOBAL CONCENTRATION
Depending upon the
competitive concentration of a
given industry in a given region,
it may make sense to enter a
market where competition is
relatively scarce (and demand is
high).
2. GLOBAL SYNERGIES
Some organizations have
highly developed
competencies that are easily
scaled. In these situations,
global expansion means
natural synergy.
 3. GLOBAL STRATEGIC MOTIVATIONS

Other reasons for expansion to

a given country may exist
strategically, such as developing
new sourcing sites for
production or acquiring
strategic assets in a given region
EXTERNAL FACTORS IMPACTING EXPANSION
OF INTERNATIONAL BUSINESS

The external factors that

will impact success of
International business
expansion include:
See next slides
 1. SOCIO-CULTURAL FACTORS
The social environment of a given
region can have a significant impact
on success. Food companies are
highly impacted by this – certain
cultures prefer certain types of
foods. There certain animals that are
a taboo if consumed by certain
people.
 GEOGRAPHIC
Some sporting activities are
applicable in selected geographical
areas & not others!! For example,
skiing equipment may not do so well
in regions without snow. Oil
companies can only source oil from
resource-rich regions.
 LEGAL FACTORS
Some countries have
high barriers to entry,
complex tax rates,
and/or unclear legislative
practices.
ECONOMIC FACTORS
The standard of living is
different from region to region,
and recognizing the value of a
given market in terms of
spending power, currency, and
market size is a precursor to
deciding upon expansion.
 TECHNOLOGY
Access to internet, electricity,
clean water and a variety of other
technological dependencies must
be considered prior to entry if the
organizational operations depend
on easy access.
 POLITICAL ENVIRONMENT:

The political environment is the

government, the government
relationship with a business, & the
political risk in the country. Doing
business internationally, therefore,
implies dealing with a different type
of government, relationships, &
levels of risk.
 Global strategy

Global strategy is the ability of an organization

to apply a replicable and systematic
methodology to the unique challenges that are
faced by the organization. A sound global
strategy addresses questions such as, how to
build necessary global presence and what
should be the optimal locations for various
value chain activities. Any company which
implements the global strategy will have the
following aspects as its features: next slides;
i. Product is the same in all countries.
ii. Centralized control - little
decision-making authority on the
local level
iii.Effective when differences between
countries are small
iv.Advantages: cost, coordinated
activities, faster product
development
 INTERNATIONAL TRADE BARRIERS

Trade barriers may be;

(i)Tariff Barriers and
(ii)Non Tariff Barriers or
protective barriers.
 TARIFF BARRIERS:
Tariffs are taxes on the imports. to restrict the
inward flow of goods from other countries to protect
the country's own industries by making the goods
expensive in that country, such that the products
becomes so steep that it is not worthwhile importing
it. The duty so imposed also provides a large source
of revenue to the importing country which can help
to balance its balance of trade. A nation may also use
this method to influence the political and economic
policies of other countries. It may impose tariffs on
certain imports from a particular country as a protest
against tariffs imposed by that country on its goods.
 SPECIFIC DUTIES,
It is imposed on the basis of per unit of any
identifiable characteristic of merchandise
such as per unit volume, weight, length, etc.
The duty schedules so specified must specify
the rate of duty as well as the determining
factor such as weight, number, etc. and basis
of arriving at the determining factor such as
gross weight, net weight or tare weight
(officially accepted weight of an empty car,
vehicle, or container).
 AD VALOREM
Tariffs are based on the value of imports and
are charged in the form of specified percentage
of the value of goods. Most of the countries
follow the practice of charging tariffs on the
basis of Cost, Insurance, and Freight (CIF)
cost or Free on Board (FOB) cost mentioned in
the invoice. As tariffs are based on the cost,
sometimes unethical practices of under
invoicing are adopted whereby Customs
revenue is affected.
NON - TARIFF MEASURES (BARRIERS)
To protect the domestic industries against unfair competition
& to give them a fair chance of survival various countries are
adopting non-tariff measures. Like:
Quantity Restrictions, Quotas & Licensing Procedures:-
Under quantity restriction, the maximum quantity of different
commodities which would be allowed to be imported over a
period of time from various countries is fixed in advance.
The quota fixed normally depends on the relations of the two
countries and the needs of the importing country. Here, the
Govt. is in a position to restrict the imports to a desired level.
Quotas are very often combined with licensing system to
regulate the flow of imports over the quota period as also to
allocate them between various importers and supplying
countries.
 Foreign Exchange Restrictions
Exchange control measures are used
by developing countries to regulate
imports. Under this system an
importer has to ensure that adequate
foreign exchange is available for
imports by getting a clearance from
the exchange control authorities of
the country.
 Technical Regulations
It is a measure to regulate the imports.
The imported commodity has to meet
some technical specifications.
Stringent technical regulations and
standards beyond international norms,
expensive testing and certification,
and complicated marking and
packaging requirements.
 Voluntary Export Restraint
The agreement on 'voluntary' export restraint is
imposed on the exporter under the threat of sanctions
to limit the export of certain goods in the importing
country. Similarly, establishment of minimum import
prices should be strictly observed by the exporting
firms in contracts with the importers of the country
that has set such prices. In case of reduction of export
prices below the minimum price level, the importing
country imposes anti-dumping duty which could lead
to withdrawal from the market. Voluntary export
restraints mostly affect trade in textiles, footwear, dairy
products, cars, machine tools, etc.
Local Content Requirement:-
A local content requirement is an agreement between the
exporting and the importing country that the exporting
country will use some amount or, content of resources of
the importing country in its process of production. If the
exporting country agrees to do that only then the importing
country will import their goods.
Embargo:- Embargo is a specific type of quota prohibiting
trade. Like quotas, embargoes may be imposed on imports,
or exports of particular goods, regardless of destinations, in
respect of certain goods supplied to specific countries, or in
respect of all goods shipped to certain countries. Although
the embargo is usually introduced for political purposes,
the consequences, in essence, could be economics
General Agreement on Tariffs and Trade (GATT)*
 Anti-Dumping Duty
An anti-dumping duty is a
protectionist tariff that a domestic
government imposes on foreign
imports that it believes are priced
below fair market value. Dumping is a
process where a company exports a
product at a price lower than the
price it normally charges in its own
home market.
 Trade Bloc

A trade bloc is a type of intergovernmental agreement,

often part of a regional intergovernmental
organization, where barriers to trade (tariffs and
others) are reduced or eliminated among the
participating states. Trade blocs can be stand-alone
agreements between several states (such as the North
American Free Trade Agreement) or part of a regional
organization (such as the European Union).
Depending on the level of economic integration, trade
blocs can be classified as preferential trading areas,
free-trade areas, customs unions, common markets, or
economic and monetary unions.
 Economic integration

Economic integration is the merger of economic policies

amongst different states, through the partial or full
eradication of tariff & non-tariff restrictions on trade. The
trade-stimulation effects intended by means of economic
integration are part of the modern economic Theory of the
Second Best: where, in theory, the best option is free trade,
with free competition and no trade barriers at all. Free trade
is treated as an idealistic option, and although realized
within certain developed states, economic integration has
been thought of as the "second best" option for global trade
where barriers to full free trade exist. Economic integration
will lower prices for traders & consumers with the objective
of increasing the level of welfare, while leading to an
increase of economic productivity of the states involved.
The degree of economic integration can be categorized into five stages:

1. Preferential trading area

2. Free trade area,
3. Customs union,
4. Common market
5. Economic union,
REGIONAL ECONOMIC INTEGRATION
 COURSE WORK 30 marks
You already have 10 marks in the previous assignment.
QUESTION:
1. What is meaning of international business environment? (4Marks)
2. Explain the reasons for global expansion of international business.
(10Marks)
3. List and describe external factors impacting expansion of
international business. (8Marks)
4. Explain International trade barriers. (8Marks)

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