Relevance of International Business Environment

As stated earlier, environment plays a vital role in the conduct of business operations. Especially in the context of international business, environment assumes critical importance as no two countries have similar environments and demand different business strategies to cope with differing business conditions.  As the environment affects firms’ strategic as well as tactical decisions, it becomes imperative for the firm to have in-depth knowledge of the domestic, foreign and global environments.

When a firm decides to enter into international business, it faces two major decision problems: one, in which market(s) to select, and second how to enter into those markets.  Both these decisions are strategic in nature and are greatly influenced by the environmental forces.  Firms select those countries as their target markets which have sufficient market potential.  Market potential in turn depends upon geographic, economic and cultural environments prevailing in the foreign countries.  Demand for fans, for instance, will be more in countries which are geographically located in hot zones and where per capita income is high enough for the people to afford purchase of fans. Besides climate and sufficient income, electricity should be available to make the fans workable.

Once the firm identifies countries with market potentials, it needs to decide as to what mode it should use for entering into those markets.  A wide range of options such as exporting, licensing, franchising, joint venture or setting up wholly owned subsidiaries abroad are available to firms.  Firm’s actual choice of market entry mode is influenced by a variety of environmental factors.  Exporting is desirable when it is economical to produce in the home country and there are no legal restrictions on import of given product in the foreign markets.  In the case of import bans or excessive costs of transportation, a firm may choose to set up its manufacturing and marketing subsidiaries abroad.  But this is feasible only when foreign governments are not averse to foreign direct investment, and necessary raw materials and labour are available locally at competitive prices in the foreign countries. In countries where first condition is not fulfilled, the firm can go in for either licensing or joint venture as these entry modes are politically less objectionable.

Environmental forces play an equally important role in shaping a firm’s functional and tactical decisions.  What should be the scale of production?  Should the firm employ labour or capital intensive techniques?  How to finance firm are foreign operations?  How much to repatriate?  What marketing mix should the firm use? Should it hire local persons or employ foreign nationals? What should be their compensation package?  Answers to these and other questions require in-depth analysis of the prevailing environments in foreign countries.  Since the environments differ, firm cannot be much successful by falling back upon its domestic decisions and practices. Firm needs to screen the foreign country environments and accordingly decide about the best course of action in each country.

It may be pointed out here that environmental analysis is important not only for the firms entering into the foreign markets for the first time, but it is also important for the firms already in international business.  Since environmental conditions change over time, firms need to continuously monitor changes in the environment and make suitable changes in their decisions.