International Business Environment essay
Present paper describes the international business environment and in particular the criteria by which international businesses judge whether a country is stable or not to locate foreign operations. I will discuss the importance of the political risk analysis, the ways in which foreign environments influence international businesses, possible political risks in international trade and the ways of managing these political risks.
Political stability used to be an important issue to many countries in the world. On the other side the business organizations are developing quickly all over the world. If the companies are running on nice work, they are attempting to set up as many new branches as possible. This fact is obvious from the past scenarios where a firm placed in one country has spread its wings all over the globe. There might be a lot of grounds to employ these practices that will be discussed later in the present paper. The key factors about which the companies are seriously concerned about beginning a new international business depends are discussed in present work.
The role of politics in international business has long been implicitly recognized, but it is only in the recent years that academic interest has concentrated on this interaction. Events like the war between Iran and Iraq, the Russian invasion of Afghanistan, the crisis between Argentina and Britain over the Falkland Islands have drawn the attention to the influence of non-business factors on the international business. They have stimulated the evolution of a managerial function involved with the assessment and the evaluation of the non-business environment that possesses current significance (Fitzpatrick, 1983).
Political Risk Analysis
Handling political risk requires planning and caution. First, the company should have an understanding of the domestic affairs of the country. Usual questions may include: Is the country politically stable? Is the region subject to religious or ethnic conflict? Will democracy triumph? How are minority groups treated? What is the economic situation in the country?
The organization should also realize regional politics. Is the whole region stable? Are neighboring nations hostile? Are border conflicts likely to happen? These considerations are especially important in the Middle East. Lastly, the international affairs should be considered. Is the nation abiding by international human rights standards? Is it a member of any global organization? (Rugman, Collinson, 2008)
It is hard to disagree, that access to the latest data is critical. The company may get assessments of the political environment in the foreign country with the help of political risk analysis. The Economist’s Country Briefings are a nice place to begin. These reports possess a wealth of background information a country’s economy and politics. Some issues to remember: Are there any urgent elections taking place soon? If yes, who are these candidates and what are their economic policies? Other sources comprise political risk consulting companies, insurance industry reports and even informal discussions with international bankers and shipping company representatives. A company engaged in strategic corporate planning should consider this data when creating its international business strategy and transacting business (Schaffer, Agusti, Earle, 2004).
Today we all realize that business becomes more challenging. It requires more efforts to flourish. Manufacturers may create too much goods and so domestic markets become oversaturated. And organizations have to seek for some additional markets. So, companies become international. In order to be successful it is vital to provide marketing research to recognize the finest opportunities from the available ones. In order to provide a comparative analysis there was created a list of criteria to utilize while making the analysis in accordance to which the most attractive markets will be seen. So here it is: general information, taxation, legislation, corruption, competition, entering barriers and other disadvantages (Poelzl).
Prior to expanding business overseas there should be provided a methodical marketing research of all available markets. It should comprise of several stages each of which has own methods, aims and results. This research is mainly targeted on a gathering of the secondary information about the potential international markets before gathering primary information in order to avoid huge expenses.
Foreign Environments Influencing International Business
Businesses in common experience have issues that influence their capability to run business and remain flourishing. This is even more so in the case with intercontinental business. Forces external to the organization can make a decision whether a business is flourishing or not and especially, financial and political powers have some of the maximum influences on modern companies. Traditionally it is like a rollercoaster for businesses to run industry internationally. Currency has become one of the largest financial difficulties to cope with when operating in a foreign country. While this sort of outside force is considered out of control, there are methods that businesses may lessen negative financial situation (Feinberg).
Changing currency values may have a positive and negative impact on firms and it is vital that financial executives plan for both. Making currency contracts with different banks may assist in defending a corporation when one currency’s value drops considerably and the whole business could be influenced. I am certain that it is vital for the companies to be all the time aware of exchange rates and have the capability to put into practice financial safety vehicles should a trouble come into sight. While some risks are involved in fluctuating exchange rates, nations of the regions in which a firm may work have the opportunity to put into practice currency exchange controls that may have an equally overwhelming result. By prohibiting the usage of a certain currency for intercontinental transactions, nations ultimately value too highly that currency compared to the open market, making it extremely hard to transact business cost-effectively.
One more financial force influencing companies is a country’s balance of payments. Should the organization’s balance of payments fall into the deficit, this could be a significant result of price increases, causing the government to take action in different ways to defeat balance of payments deficit. To support deflation, the administration can put into practice currency devaluation practices or some monetary policies to control the balance of payments. To contradict this practice, a company may think about seeking export incentives to provide assistance.
Another area of amazing financial significance is taxation. When deciding where to practice business overseas, taxes may be very cost unaffordable, even when other financial, political and social powers are to the advantage. Competently discussing a lower tax burden may be the dissimilarity in having the capability to suggest a lower prices on goods than ones competitor or not and should consequently be considered.
The political powers influencing global businesses are always present and come in various forms. Ideological forces like communism, capitalism and socialism play substantial roles in how well a firm works and must be discussed when starting international trade. Ideals (communism and socialism) evolve hard situations when pursuing free trade making growing businesses chances in the region feature a hard job. While the foundation of capitalism is free project, it should not be interpreted as harmonious environment to work. Government maintains some spheres where it can control business with the help of taxes, working conditions, safety, pollution and other spheres. Usually, it is clear that socialist and communist nations are the only countries where the government owns businesses. The practice of nationalization of business may be to engage firms which provide essential but not cost-effective products and services for the country, but also utilize the business to obtain additional funds. From a positive point of view, defense of company by government, for instance, in the spheres of farming may positively influence business in general. The farming business may see financial troubles but it may be vital for the administration to provide assistance for the good of the country.
From a political point of view, terrorism is the main concern of many managers. Businesses working overseas are particularly vulnerable to terrorist threats and must include some protective measures into every day business plans. Firms may be subject to acts like kidnapping of executives for payment or the bombing of buildings. It is imperative for businesses to not only be aware but be ready with countermeasures to prevent the attempts of felons as well as a means of assisting the form in recovering from violence.
All people realize that violent conflicts (internal or external) are always harmful to trade, and unluckily the globe is full of them. Internal conflicts may occur as civil wars like wars in Sudan, Nepal or Sri Lanka. Nevertheless, most of conflicts exist today in the type of terrorist activities that are very hard to plan for in advance. Unexpected blasts may spoil goods, create a law and order trouble following by damage or loss of goods or make their transit not possible. So, it will ultimately lead to the end of the trade. Goods may be insured, but insurance may not cover all the possible situations. Luckily, real wars are today few and occasional, and relatively simpler to foresee. Yet these wars, when they do take place, may have wide consequences on the supply lines across the world, and thus may influence intercontinental trade taking place away from the place of conflict through economic, financial or other effects. In all types of conflicts there is constantly a huge risk to the property and human beings. It’s a type of risk that businesses have to plan beforehand whenever these risks are considered significant.
Other political forces influencing international businesses are the governments themselves and their ability to preserve a stable climate (Wagner, 2000). When the political climate of a state is unstable, this may crash the businesses. Should that nation be in the midst of aggressive actions toward other countries, companies can surely suffer.
One more political risk to intercontinental trade is the form of conflicts without hostility. Sanctions are the key form of these conflicts that may be hurried by an action of the country, like the nuclear testing of North Korea or unexpected Buddhist protests in Myanmar. International sanctions can simply forbid trade, and therefore these possibilities need to be discussed while dealing with states with likelihood of sanctions.
A peculiar form of political risks is alterations in trading model imposed by politics. An example is an unanticipated prevention of imports or exports of particular goods, due to the rapid popular mood against trades. In case of imports, prohibition may be inflicted from the popular conflict against its adverse influence on the country’s industry. In case of exports, prohibition could arise from the price rise of those products in the country’s market. Sometimes abrupt political opportunism may lead to nationalization of business companies, or placing global trade in a particular product under strict government control.
In the USA and European counties, labor unions are a political power which may have amazing influence on businesses. American unions have powerful political ties and are extremely active in the political sphere. Their impact may affect different sorts of legislative decisions that will finally affect a company’s capability to run business. Badly negotiated agreements may let the union to force businesses into decisions that may in the end lead to their termination.
Political Risks in International Trade
When, for example, an organization, like Nike, makes a decision to become a global entity, it will always experience a boost in profitability. Unluckily, the recent examples prove that organizations like Nike have to defeat hard obstacles before creating a successful business in a foreign state. Some of the worries are child labor laws, outsourcing’s effect on sales, wages. Because of this, the majority of widely known firms have presented a variety of cases to protect their positions on having business overseas. One such case is a Nike sweatshop labor case that evolved a lot of debates over business practices. Even though Nike has tried to recover from the bad articles in the papers, it still fights to overcome the negative thoughts from people across the USA.
International investing may become an influential way to enhance the work of company’s portfolio. However, investing in foreign markets also presupposes risks that may sometimes be far greater, or at least more complex, than the risks that investors usually face when investing in their countries. Political risk is the key example. For investors, risk may be described as the risk of losing money due to alterations that occur in a state’s government. War and terrorism are all severe examples of political risk. Expropriation of the goods by the government may have an overwhelming impact on share prices as well. In early 2007, the President of Venezuela Hugo Chavez suddenly declared plans to nationalize CANTV, the phone firm. This company shares plunged almost fifty percent before the details of president’s plans came out. Investors sold everything first and asked all their questions later (Christy).
But political risks appear in various forms. Some cases comprise: a new president or a prime minister of the county, a new ruling party, or noteworthy piece of new legislation. All of these alterations may have a huge impact on a nation’s economic environment and investor insights about nations’ prospects. Unlike financial and economic variables, political risk is more difficult to calculate. Whilst it is likely to calculate political risk “scores” or other associated benchmarks, it’s significant to remember that they are in the end based on qualitative judgments. There is no replacement for doing own research and making own conclusions.
Political risks are not accepted frivolously in intercontinental trade. Investors cautiously learn potential intercontinental partners, and the political environment under which they work. Political stability is not as usual in all regions of the globe. For instance, some worldwide trade companies have chosen to partner with plants in India instead of China for this ground. Nissan (Japan) and Renault (France) are now partners of Tata Motors (India) that have introduced a car that retails for $2,500 in India. The political climate is likely to be more stable in India than in China, for example.
Aside from the risk factor of having business with firms in countries of dissimilar philosophical opinions, a lot of eastern nations have amazing potential for troubles with extremist religious factions. Many intercontinental traders can’t risk the investments in states without political stability to defend their money. Even nations like Mexico have certain risks that are concentrated on the nationalistic trends. When the call is sounded for Latin American agreement against the capitalist aggressors that many western nations are considered to be, even the country Mexico may be complex to work with. Yes, we all can not forget when they nationalized the oil business years ago.
There is even a possible risk for American firms that outsource services, and move growth onto foreign soil. This risk is the reaction of negative response by American citizens. The rising worldwide economy is becoming a political football within the USA as population realizes that their nice jobs are being exported in exchange for inexpensive labor.
Intercontinental trade is really a risky business, in particular when it includes nations outside Europe and North America. In the middle of many risks involved in it, the political risks are the most tricky to estimate, while having the chance of greatest damage as well. These risks may be described and classified according to the different origins and etiologies. The risks which may tackle an intercontinental trader can arise in different ways. The most usual of these is the “change of government”. In a democratic country it is an election of another party to power. These cases, being quite traditional in established democracies, may often be predicted to certain levels, and therefore it is one of those risks that is relatively simpler to plan for.
Democratic nations often provide stable business environment. There are many grounds for that. There is less risk of a military takeover as the government is chosen by population on a regular basis. Additionally, transparency, tax laws, ownership, profit repatriation, and all other democratic processes contribute to the environment that allows free competition. Although, there are several exceptions. Nondemocratic countries, such as Singapore, Taiwan have expressed impressive economic development, while economic nation, for instance, India has had a relatively slow economic development during the same period of time. A company should know all democratic processes and institutions. Totalitarian countries create risky environment for business. The major risk arises from the arbitrary nature of decisions made in these countries (Menipaz, Menipaz, 2011).
However, even in a democratic country, elected government may also be removed by political manipulations. This is a characteristic of parliamentary democracy. In presidential type of government, the unexpected alteration of rule can come by abrupt death, or murder of the president. From time to time, this change of government may happen in the local government, whose procedures may be more applicable for that trade.
Whenever there is an alteration of ruling administration, the maximum unfavorable influence on trade may develop in 2 ways. First, and a major risk, develops from unfulfilled assures of a government. Second risk develops from the option of a conscious alteration of policies by a new ruling party that can be destructive to business. This risk is simpler to cope with than the initial one, as a new political position, attempting to strengthen own position in the political sphere, hardly ever has time required to make instant alterations in policy, thus giving some rest to those likely to be unfavorably influenced by the actions.
Political Risks Management
To plan for managing a political risk, the initial step is to calculate the likelihood of its occurrence. Then, a significant decision needs to be taken. It is vital to calculate this risk in financial terms. If it is decided to carry on the business in spite of all risks, then required provisions have to be made for the losses likely to evolve from them. Political risks are different from economic and financial risks in that the unfavorable political developments usually take place suddenly, with few long term signs preceding the event. For this reason, the estimation of these risks is a very imprecise job, which makes political risks tricky to plan beforehand.
Organizations doing business globally are grappling with political issues that occasionally distress even the most experienced. New research by PwC and Eurasia Group demonstrates that in spite of recent efforts and, for instance, the success of the MO-SYS company (which is located in London and in politically stable India), a high amount of multinational organizations think they are not doing everything possible to cope with political risk effectively. PwC and Eurasia Group think that effective management of political risk may help organizations protect their money and take advantage of new opportunities, thus enhancing global business performance. Firms doing business globally are willing to take huge risks. And I believe that huge risk takers have to be informed risk takers – and political risk management is a vital part of risk-taking savvy.
Managing political risk helps in 2 basic ways. It defends new and existing international investments and operations by helping management forecast the risk propositions of political alteration. Prepared executives are more likely to be capable to exit markets that are in danger of becoming extremely unstable. Or management may put into practice risk lessening. Also, for an organization always on the lookout for new opportunities, controlling political risk inside objective countries may help executives hone in on political evolvements that predict commerce boom, beating revivals to the punch.
It is important not to avoid political risk totally. Even if a company keeps all of the investments in the USA, it is still exposed to choices in Washington DC. One of the keys to victory in intercontinental investing is realizing political risk so the firm may make better choices. As with all other risk, the only real way for mitigating political risk is diversification. A firm should spread intercontinental investments around in many states and regions so that it won’t get hurt badly even if the political risk estimations turn out to be off the mark.
Conclusion
So, these were the financial and political powers influencing international business. I have describes the international business environment and especially the criteria by which international businesses judge whether a country is stable or not to locate foreign operations. I have introduced the significance of the political risk analysis, the ways in which foreign environments influence international businesses, possible political risks in international trade and the ways of managing these political risks. From a political point of view, governmental power, social ideals and stability of the current regime can tell whether a firm will have new stores in Nepal, Stuttgart or France. The choices administrations make to nationalize or maybe privatize may also create the fate of McDonalds, Nike or MO-SYS. So, every company working at a worldwide level must review the risks in that state before any further actions. Understanding the economic, political and social nature of a nation will be a key to the future of the business.
