International Business Environment

CONCEPT AND RELEVANCE OF INTERNATIONAL BUSINESS ENVIRONMENT

I simply speaking, environment refers to one's milieu or surrounding.  In the context of a business firm, environment can be defined as various extremely actors and forces that surround the firm and influence its decisions and operations.  The two major characteristics of the environment as pointed out by this definition are: one these actors and forces are external to the firm, and secondly these are essentially uncontrollable.  The firm can do little to change them.  It has to rather learn to live with them.

Micro and Macro Environments

In order to gain a better understanding, let us have a look at two important classifications of environment; one classification is the micro and macro environments. Micro environment can be defined as the actors in the firm’s immediate environment which directly influence the firm’s decisions and operations.  These include: suppliers: various market intermediaries and service organizations such  as middlemen, transporters, warehouses, advertising and  marketing research  agencies, business consulting firms and financial institutions; competitors, customers and general public.  While the customers constitute firm's market, suppliers and market intermediaries help providing the firm with inputs and assist in production and marketing processes.  Competitors and general public, also influence the way a firm conducts its business.  Macro environment, on the other hand, consists of broader forces which affect the firm as well as other actors in the firm’s micro environment.  These include factors such as geographic, economic, financial, socio-cultural, political, legal, technological and ecological forces.  Firms need to continuously monitor changes in these environmental forces and devise strategies to cope with them.

Domestic, Foreign and Global Environment

Another way of understanding various factors constituting international business environment is to divide the various factors into three broad groups: domestic, foreign and global environments. This classification is based on the location at which environmental actors and forces exist and operate. 

The innermost circle of business environment represents firm's business strategy and decisions with regard to production, finance, marketing, human resources and research activities.  Since these strategies and decisions are made by the firm, they are called controllable.  Firm can change them but within the constraints of various environmental factors.

The next circle represents domestic environment and it consists of factors such as competitive structure, economic climate, and political and legal forces which are essentially uncontrollable by a firm.  Besides profound effect on the firm's domestic business, these factors exert influence on the firm’s foreign market operations.  Lack of domestic demand or intense competition in the domestic market, for instance, have prompted many Indian firms to plunge into international business.  Export promotion measures and incentives in country have been other motivating factors for the firms to internationalize their business operations.  Since these factors operate at the national level, firms are generally familiar with them and are able to readily react to them.

The third circle represents foreign environment consisting of factors like geographic and economic conditions, socio-cultural traits, political and legal forces, and technological and ecological facets prevalent in a foreign country.  Because of being operative in foreign market, firms are generally not cognizant of these factors and their influence on business activities.  The firm can neglect them only at the cost of losing business in the foreign markets.  The problem gets more complicated with increase in number of foreign market in which a firm operates.  Differences exist not only between domestic and foreign environments. But also among the environments prevailing in different foreign markets.  Because of environmental differences, business strategies that are successful in one nation might fail miserably in other countries.  Foreign market operations, therefore, require an increased sensitivity to the environmental differences and adaptation of business strategies to suit the differing market situations.

The upper most circles, viz., circle four, represents the global environment.  Global environment transcends national boundaries and is not confined in its impact to just one country.  Global environment exerts influence over domestic as well as foreign countries and comprises of forces like world economic conditions, international financial system, international agreements and treaties, and regional economic groupings.  World-wide economic recession;  international financial liquidity  or stability; working of the international organizations such  as World Trade Organization (WTO), International Monetary Fund  (IMF),  World  Bank and the United Nations  Conference on Trade and Development (UNCTAD); Agreement  on Textiles and Clothing (ATC); Generalized System of Preferences (GSP);  International  Commodity  Agreements; and initiatives taken  at regional  levels such as European  Union  (EU),  North  American Free Trade Association (NAFTA)  and Association of South  East Asian Nations (ASEAN) are some of the examples of global environmental forces having world-wide  or regional  influences on business operations.