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. Look at Figure 1 .I where a schematic presentation of these three levels of environment along with their components has been shown. 

In the figure, innermost circle 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 internationalise 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 cognisant of these factors and their influence on business activities. The firm can neglect them only at the cost of losing business in the foreign h markets. The problem gets more complicated with increase in number of foreign markets 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 organisations such as World Trade Organisation (WTO), International Monetary Fund (IMF), World Bank and the United Nations Conference on Trade and Development (UNCTAD); Agreement on Textiles and Clothing (ATC); Generalised 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.