Economic Environment

• The economic environment refers to all the economic

factors that affect commercial and consumer behavior.

• The economic environment consists of all the external

factors in the immediate marketplace and the broader
economy. These factors can influence a business, i.e., how it
operates and how successful it might become.

• The economic environment consists of different things for

different people. For example, for a farmer, the weather and
price of fertilizers are important factors.
 Economic environment – factors
The economic environment consists of microeconomic and
macroeconomic factors.

•Microeconomic factors
The microeconomic environment refers to things that happen
at the individual company or consumer level.

Microeconomic factors do not affect the whole economy.

Below are some microeconomic factors that may influence a
business:
Competitors.
Demand.
Market size.
Suppliers.
Supply.
•Macroeconomic factors
The macroeconomic environment, on the other hand, refers
to things that affect the entire economy. Macroeconomics
is concerned with general or large-scale economic factors,
such as:
Unemployment
Inflation.
Interest rates.
GDP growth. 
Taxes.
Exchange rates
Levels of consumer confidence.
Savings rates.
 Economic System
• An economic system is an organized way in which a country
allocates resources and distributes goods and services
across the whole nation or a given geographic area.

• It is includes the combination of several institutions,

entities, agencies, decision-making processes and patterns
of consumption that make up the economic structure of a
specific community.

• Hence it is a type of social system. An economic system

defines how all the entities in an economy interact. 
 Types Of Economic System
• In this world there are three main types of
economic systems.

• Governments and their leaders claim to have

their own peculiar systems, but they are all
basically mixed economies. Economic systems
can be basically classed into three categories.
•Market economy:
Here prices are determined by levels of supply and demand,
instead of central and or local government.

Market forces determine what is produced, how much is

produced, how it is distributed, plus the prices of goods and
services.

All decisions regarding investment and salaries are also driven

by market forces in a market economy.

In a market economy, the government plays a minor role and

only lays down the rules so that businesses can thrive.

 An outdated word for this type of economy is Capitalism.

•Planned economy
  All
decisions regarding production, distribution, salaries,
investment and prices are made by a central authority – usually
the government.

The closest examples to this type of economy today are North

Korea and Cuba (to a lesser extent).

In a planned economy, also known as a centralized economy,

controlled economy or command economy, central
government has planners who make all the decisions.

According to economists, the most fundamental difference

between a market and planned economy is the existence of
private property, i.e. it exists in the free market and does not in
the command economy.
•Mixed Economy
Market economies sometimes get into trouble, at which point
the government feels compelled to intervene.

Sometimes, when lawmakers believe some players are being

exploited unfairly, or the level playing field for business is
under threat, the government may become involved.

Similarly, the leaders of a command economy may decide

that more investment is required, and the only way to
accomplish this is by allowing more freedom.

The moment the government of a command economy

loosens its grip, or that of a market economy begins to
intervene, they integrate some aspects of the other.
When this occurs, the result is a kind of hybrid system – a
mixed economy.

With the exception of North Korea, every country in the world

has a mixed economy. Even Cuba has elements of a mixed
economy – it has a huge black market which the government
semi tolerates.

Small, ancient societies that depended on hunting and

subsistence farming had Traditional Economies.

Some small societies today still have this type of economy,

such as a traditional Inuit village in North America or a tribe in
the Amazon rainforest.
 Socio - Cultural Environment
• The social environment, social context, sociocultural context or milieu refers
to the immediate physical and social setting in which people live or in which
something happens or develops.

• It includes the culture that the individual was educated or lives in, and the
people and institutions with whom they interact.

•  The interaction may be in person or through communication media, even

anonymous or one-way, and may not imply equality of social status.

• The social environment is a broader concept than that of social class or social

circle.

• The physical and social environment is a determining factor in active

and healthy aging in place, being a central factor in the study of
environmental gerontology.
•Social factors include:
 Population size and rate of growth
 Age distribution
 Wealth and income disparities
 Social mobility
 Job market mobility and attitude to work
 Health and education levels
 Language
 Religion
 Values and attitudes
 Lifestyles
 Buying habits
 Education level
 Emphasis on safety
 Health consciousness
 Sex distribution
 Average disposable income level
 Social classes
 Family size and structure
 Minorities
 Attitudes toward saving and investing
•A business should make efforts to track social changes and align
their products and services with customers’ changing
preferences.

• Not responding to social changes in the society can be fatal.

• The failure of Blackberry illustrates this point. Led by Apple and

Android devices, smartphone users became more and more
comfortable with touchscreen devices.

•BlackBerry failed to adapt to these changes and stuck with the

idea of a physical keyboard on their devices.
 Competitive Environment
• A competitive environment is the dynamic external
system in which a business competes and functions.
The more sellers of a similar product or service, the
more competitive the environment in which you
compete.

• Look at fast food restaurants - there are so many to

choose from; the competition is high. However, if
you look at airlines servicing Hawaii, very few
actually fly to the islands.
•Direct competitors are businesses that are selling the same type
of product or service as you. For example, McDonalds is a direct
competitor with Burger King.

• Indirect competitors are businesses that still compete even

though they sell a different service or product. The products or
services offered by indirect competitors tend to be those that
can be substituted for one another. Again, considering travel, you
have the option to travel by plane, train, or car. Therefore,
airlines are also competing with train lines and buses (assuming
the travel does not go overseas).
 Types of competition
• Monopolistic Competition
 In monopolistic competition, we still have many sellers (as we had
under perfect competition). Now, however, they don’t sell identical
products.

 Instead, they sell differentiated products—products that differ

somewhat, or are perceived to differ, even though they serve a similar
purpose.

 Products can be differentiated in a number of ways, including quality,

style, convenience, location, and brand name.

 Some people prefer Coke over Pepsi, even though the two products
are quite similar. But what if there was a substantial price difference
between the two? In that case, buyers could be persuaded to switch
from one to the other. Thus, if Coke has a big promotional sale at a
•Oligopoly
Oligopoly means few sellers. In an oligopolistic market, each seller
supplies a large portion of all the products sold in the marketplace.

 In addition, because the cost of starting a business in an

oligopolistic industry is usually high, the number of firms entering it
is low.

Companies in oligopolistic industries include such large-scale

enterprises as automobile companies and airlines. As large firms
supplying a sizable portion of a market, these companies have
some control over the prices they charge.

But there’s a catch: because products are fairly similar, when one
company lowers prices, others are often forced to follow suit to
remain competitive. You see this practice all the time in the airline
industry
•Monopoly
In terms of the number of sellers and degree of competition,
monopolies lie at the opposite end of the spectrum from
perfect competition.

In perfect competition, there are many small companies, none

of which can control prices; they simply accept the market
price determined by supply and demand.

 In a monopoly, however, there’s only one seller in the market.

The market could be a geographical area, such as a city or a
regional area, and doesn’t necessarily have to be an entire
country.
Competitive Environment Analysis
• SWOT Analysis. You can assess the external and internal factors that
influence your company. This framework helps you identify
competitive advantages and compare your competitors' strong and
weak sides on different marketing channels and define your further
marketing steps.

• Strategic Group Analysis. It allows you to identify the positions of

your competitors in the competitive environment and factors that
bring your business a profit. This framework characterizes the
strategies of all strong competitors in various strategic dimensions. It
enables you to identify the key factors of success and assess your
position among competitors.

• Porter’s Five Forces. This framework explores the competitive market

forces in the industry and helps define the industry’s strengths and
•Growth Share Matrix. By using this framework, you can decide
which products to invest in according to their competitiveness and
attractiveness within the market. It’s particularly useful for large
companies since it helps them define their product portfolios and
which products are worth continuing to invest in and which are no
longer worth it.

•Perceptual Mapping. This framework allows you to see the

position of your product against the alternatives of your
competitors. It enables you to understand how your customers
perceive your product in comparison to competitors’ and whether
your positioning strategy matches your target audience. It can
also help you find the gaps you need to resolve.
 Business Environment with reference to
Global Integration
• The business environment in India has undergone
a tremendous change in the last few years.

• Although there are several factors responsible for

this, global integration is one of the most
important ones. 

• Liberalization, privatization, and globalization (LPG)
are three crucial components of this factor.
 Background of Global Integration
• The economy of India has developed drastically since
independence from the British rule.

• The government’s priorities immediately after 1947 were to focus

on social upliftment of people and eradicating poverty. The
economy them was largely agrarian and industries were scarce.

• Gradually, the government started establishing its own industries.

There were several public sector corporations operating in many
industries.

• The government ensured that they flourished by creating

monopolistic markets. Hence, private companies were heavily
regulated and controlled.
•This approach did not last very long because the government
ended up with a balance of payment crisis in 1991.

• When India approached international institutions like the World

Bank for help, they asked the government to open up its
economy.

•As a result, India adopted radical measures to integrate its

economy with that of other nations.

• These measures, thus, are broadly termed as global

integration of the Indian business environment.
 Elements of Global Integration
• Global integration means the process with which the local
Indian market opens up to the global economy.
Consequently, it amounts to letting foreign factors
influence India’s local business environment.

• The process of global integration of India’s business

environment began in 1991. The following elements were
largely responsible for this:
Liberalization
Privatization
Globalization
•Liberalization
Every government imposes restrictions on the way its citizens conduct
business activities.

 One way of doing this is by making it compulsory for people to obtain

several licenses and permissions for business. This process, for
example, was called ‘License Raj’.

Liberalization basically refers to the removal of these restrictions.

This happens when the government removes unnecessary license

requirements, allows more freedom in conducting business, dilutes
regulation and reduces taxes.

 Another way to do it is by making imports and exports easier.

Liberalization has been responsible for several large MNCs coming to

India. The government has been able to attract crores of Rupees as
foreign capital because of it.
•Privatization
Privatization simply means allowing private players and
companies to conduct business.

This did not happen commonly before 1991 because the

government controlled many industries. It also implies
withdrawal of the state’s interference in business.

The main objectives of privatization are to reduce the burden

on tax-payers, encourage private competition, facilitate capital
inflow, etc.

 Some common modes by which a government indulge in

privatization include disinvestment, franchising, public-private
partnerships and liquidation of public sector undertakings.
Due to privatization, there are very few government
companies remaining in India now.

The ones that remain do not even enjoy a monopoly.

Government companies like Air India, ONGC, LIC and HAL
have to compete with private companies and MNCs. As a
result, India’s economy has become more diverse and growth-
oriented.
•Globalization
The restricted nature of India’s economy before 1991 had
made it over-dependant on local companies.

Indian firms only competed amongst each other. Foreign

companies, thus, could not even think of working here. This
finally changed when India adopted globalization.

Globalization, in simple words, means growing inter-

dependence between countries with regards to business and
trade.

 Modern means of communication and transportation

technology have made this possible. Even international
organizations and treaties between countries have played a
big role in globalization.
There are several benefits of globalization. For example, many
new markets like insurance, transportation, and banking
services have grown due to it. Furthermore, people now have
access to more choices and international brands because of
free trade between countries.
 Comparative Analysis of Business
Environment: India and China
• Government and Legal Regulations
China and India both have ponderous bureaucracy
systems created by history and tradition. Since the
opening of China’s market to foreign investors in 1978
and India in 1991, they have been gradually moving
from centrally planned economic system towards
decentralization.
However, besides their continuous movements in order
to provide businesses a better environment, significant
problems still exist. In realizing that foreign investments
are the key source of the nation’s economic rise, the
Chinese government has given special preferences to
foreign investors .
This is mostly done through reduction of most favored nation
(MFN) tariff rate. In India, on the other hand, fair competition
exists between domestic and foreign investors.

Although the Indian government states that it aims to reduce its

MFN tariff rate, which currently doubles the rate in China, to
other ASEAN country levels, it is in reality a big challenge because a
large portion of the nation’s tax revenue comes from customs tariffs

Nevertheless, India overall has a better internal taxation system,

with lower tax rates and easier ways of payments, according to a
report by World Bank, IFC and PricewaterhouseCoopers.

China, after joining the World Trade Organization, is under the

progress of developing a more comprehensive and enforceable
judicial system to help ease business operations.
It is also creating institutions that aim at improving commercial
dispute settlement, patents and intellectual property rights
protection.

Indian institutions are not functioning efficiently because of poor

government regulation in design and quality of implementation. For
this reason, doing business in India is, in fact, more costly than in
China, especially for smaller firms

One issue that troubles businesses in both China and India at the
moment is the complexity in setting up and closing down
businesses.

Despite the fact that there is no specific statute regulating FDI in

India in contrast with China, it has much more excessive regulation of
entry and exit than China
•Economic Indicators
China and India are very much similar in terms of pure
economic conditions. Both countries have huge market potential.

China has a population of almost 1.3 billion and its real GDP
growth rate between 2014 and 2014 averaged at 10 percent.
India at the same time has an average real GDP growth rate of 8
percent, with a population of over 1 billion as well.

According to the World Bank, in 2014, China and India were

already respectively the second and fourth largest economies in
the world based on purchasing power parity.
Apart from being target sales markets, China and India are also
among the ideal locations for production.

Statistics show that the unit cost of labor is similarly low in both
countries, with China having a higher literacy rate of over 80
percent compared to 60 percent in India.

It is clear that while China currently has a great and still improving
economic environment, and leads the world in growth prospects,
India is not far from catching up.
• Socio-cultural Environment
Tradition plays a key role in the shaping of today’s Chinese and
Indian economies. Confucianism is the major guidance of social
norms in China, along with Buddhism and Taoism, each blended
with the other two ideologies.

Because of the absence of a legal-rational system, successful

businesses in China generally depend on developing and
maintaining strong social relationships and networks, which is
compatible with Confucius teachings. It is therefore essential for
foreigners to study Chinese customs before entering the market.

In the case of India, as a result of the traditional caste system,

Indians have a preference for hierarchical relationships. In rural
areas, many workers are still employed based on their caste
rather than skill.
This may be an obstacle for foreign companies investing in related
areas.

One huge social advantage India has over China though is its
English speaking background inherited from British colonization.

Although China has included English as a compulsory subject even

in primary schools, it is still hard for most Chinese to master this
language due to its considerable difference to Chinese
• Technological Environment
Conducting businesses overseas inevitably involves electronic
commerce (e-commerce).

 According to a study ,China is notably ahead of India in

infrastructure and internet penetration, among other factors that
form an e-commerce environment.

However, there is also the argument that India is actually better

prepared for e-commerce than is China because of its advantages
in “legal support for virtual transactions and digital signatures,
well-developed private sector and entrepreneurship, the
regulatory environment including taxation, and openness to
trade and investment.
Indeed, China is yet to catch up with India’s world famous immense
pool of skilled IT workers, which makes it the top outsourcing
destination for research and development (R&D).

Nevertheless, in 2014, China’s spending on R&D took second

place in the world. The government is looking to increase its R&D
spending from about 1.23 percent of GDP in 2014 to 2.5 percent in
2020.

One of the reasons that give China the confidence in improving its
R&D is the fact that 40% of undergraduates in China are
engineering majors.
•Export-import Opportunities
In 2014, the Chinese exports to India stood at US$ 5926.67
million. However, it industrialists in India were not in favor of
China being given free access to the domestic markets.

But bilateral trade relations between India and China have

increased over the years, reaching US$18.7 billion in 2013
from US$ 4.8 billion in 2002.

 However, the bilateral trade is to be increased further to US$

20 billion by 2014 and further to US$30 billion by 2010. Data on
agricultural trade between India and China is annexed. In the
year 2013-2014, India’s total export of agricultural
commodities to China was of the order of US $ 2803.2 million.
India’s principal agricultural exports during this period were
frozen fish including hilsa, mucilage and thickeners, castor oil
and cotton. During the same period, the agricultural import
from China was of the order of US $304.31 million.

Crude petroleum is India's biggest import with $155bn spent

on it in 2012. Imports of gold and silver amounted to $62bn
and electronic goods and pearls and precious stones are also
top import items for the country.
 Factors affecting international business
environment
• Political factors:
Various political factors affect the international factors.

Political factors such as changes in tax rates, policies and actions of

government, political stability of country, foreign trade regulations etc.
affects the working of an international business firm.

Lack of political stability in the country directly impacts the operations

of business firm.

 Also, various tax policies and government initiatives sometimes

hinders the expansion of business in other countries.

Thus, effective political environment of business influences the growth

•Economic factors
Economic factors relates to the economic system of the
country where the firm has its operations.

Various econocmi factors such as inflation rate, interest rate,

income distribution, employment level, allocation of
government budget, etc., directly impacts the operations of
business firm.

Various economic factors such as purchasing power of

customers also determines the demand of various products
and services.
•Legal factors
Legal factors relate to the legal environment of the country in
which firm operates.

Different laws prevail in different countries and international

business firms have to abide by the laws of each country.

Laws relating to age and disability discrimination, wage rates,

employment and environment laws affects the working of
business firms.

Along with this, various international lending agencies affects

the legal culture and working policies of business firm
•Social factors
Social factors such as education, awareness and trends and status
of people in the society affects the consumer behavior to purchase
various goods and services.

Also, Social environment and culture such as customs, lifestyles and

values differs from country to country which further directly
impacts the international business.

•Technical factors
Technological changes in the industry has both positive and
negative impacts on the working of business firms.

Technological changes and development of automated work

processes helps in increasing the efficiency of business processes.

 However, technological changes also threaten the demand of

various products and services in the industry.
•Environmental factors
Environment factors such as weather, climate change,
temperature etc. affects the business firm and the demand
pattern of various goods and services.

 Increasing environment awareness has made this external

environment factor a significant issue to be considered by
business firms.

 Move towards environment friendly products and services

also has affected the demand pattern of various goods and
services.
 Driving and Restraining forces of
International Business
• Driving factors
– The important forces driving globalisation are as follows:
1. Liberalisation
2. MNC’s
3. Technology
4. Transportation and Communication revolutions
5. Product development and efforts
6. Rising aspirations and wants
7. World economic trends
8. Regional Integration
9. Experience transfers
10. Resource Utilisation
•Restraining forces On Globalisation
There are also several factors which restrain Globalisation
trend.  They are
External Factors
Internal Factors

External Factors: These are government policies and controls

which prevents cross-border business.

Internal Factors: These are collection of factors that exists

within the organisation that prevents Globalisation.  One such
factor is called as management myopia or near sightedness.  The
company with an aim to make immediate profit engage itself in
short-term plan and target local markets for business.  This is
called as management myopia.  This acts against Globalisation of
business.