MGT387

TOPIC 1 – ASSESSING THE

ENVIRONMENT – POLITICAL,
ECONOMIC, LEGAL AND
TECHNOLOGICAL
Learning Objectives

1. Understand the global business environment and

how it affects the strategic and operational decisions
which managers must make
2. To develop an appreciation for the ways in which
political and economic factors and changes influence
the opportunities that companies face
3. To develop an appreciation of the legal environment
for international business
4. To review the technological environment around the
world and how it affects the international manager’s
decisions and operations
Dynamic environment
Managers are being challenged to operate in an increasingly
complex, interdependent, networked, and changing global
environment.

Those involved in international and global business need to

adjust their strategies and management styles to the many
developments taking place around the world, as well as to
the styles used in the regions of the world in which they
want to operate.
Typical challenges faced by managers involve:
• Politics
• Cultural differences
• Global competition
• Terrorism
• Technology

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What is International Management?

International management is ‘the process of

developing strategies, designing and operating
systems, and working with people around the
world to ensure sustained competitive advantage’
(Deresky, 2014, p. 4).

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The Global Business Environment

The current situation in global business characterised by:

• Energy, urgency and opportunity
• developing global leaders,
• building strategic alliances,
• launching global product platforms,
• leveraging technological breakthroughs,
• sustainable supply chains

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Globalization

Globalization is ‘global competition characterized by

networks of international linkages that bind countries,
institutions, and people in an interdependent global
economy’ (Deresky, 2014, p. 4).

• Economic integration results from the lowering of trade

barriers and the increased flow of goods and services,
capital, labor, and technology around the world.
• Emerging economies now produce as much trade,
capital, and knowledge flow as developed countries.

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Globalization

The rapid development of globalization is caused by many

factors, including:
• Use of technology and its uses in international
business
• Political developments that enable cross-border trade
agreements
• Global competition, global markets and global
production

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Global Trends

Five key global trends which provide both challenges and

opportunities for companies:
• Changing balance of growth towards emerging markets
• Need for increased productivity and consumption in
developed countries in order to stimulate their
economies
• Increasing global interconnectivity
• Increasing gap between supply and demand of natural
resources
• Challenge for governments to develop policies for
economic growth and financial stability

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Globality and Emerging Markets
Globalization has led to the narrowing of differences in
regional output growth rates.

As emerging markets continue to grow their countries’

economies, they will provide growth markets for the
products and services of developed economies.

There is evidence of the growing number of companies

from emerging markers, which can be seen in the Fortune
500 rankings of the world’s biggest firsms.
The Global 500 is increasingly global.
As of August 2020, China has taken the lead with 124
companies, US has 121, Japan has 53, France 31,
Germany 27.
(Source: https://fortune.com/global500/)
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Challenges to Globalisation
While many argue that the shift towards a more integrated
and interdependent global economy is a good thing,
others are critical of the impacts of globalization.
• Arguments against globalization include:
- Globalization has detrimental effects on living
standards and the environment.
- Globalization causes job losses, job insecurity, lower
wages and growing income inequality
- Shift of economic power from national governments to
supranational organisations such as WTO, EU, UN.

• Backlash against capitalism and rekindling of

nationalism
• Increased protectionism of high-demand resources
• Increasing pressure and publicity for companies to
consider the social responsibility of their actions
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Effects of Institutions on Global Trade
• Two major groups of institutions (supranational and
national) play a differing role in globalization.
• Supranational institutions:
→ World Trade Organisation (WTO)
– The WTO provides a forum for negotiating agreements
aimed at reducing obstacles to international trade and
ensuring a level playing field for all, thus contributing to
economic growth and development. The WTO also
provides a legal and institutional framework for the
implementation and monitoring of these agreements, as
well as for settling disputes arising from their interpretation
and application.
– 164 members representing over 96% of global trade and
global GDP.

https://www.wto.org

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Effects of Institutions on Global Trade

Supranational institutions (continued):

→ International Monetary Fund (IMF)

- The IMF was established to maintain order in the
international monetary system.
- 190 members
- IMF has three main roles:
- Surveillance
- Financial assistance
- Capacity development

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Effects of Globalization on Corporations

Global companies are becoming less tied to specific

locations. Greater international investment by global
companies means greater transfer of financial,
technological, and managerial resources around the
world
Companies that desire to remain competitive will have
to develop a cadre of experienced international
managers
Small companies are also affected by and in turn
affect globalism SMEs (which are companies with
fewer than 500 employees) also benefit. In particular,
technological developments (e.g., the Internet) make
international trade and activities easier for smaller
companies.

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Regional Trading Blocs

Much of today’s world trade is grouped around

three dominant currencies:
• Euro, yen, and the dollar
These trade blocs are continually expanding their
borders to include neighboring countries

Much of today’s world trade takes place within

these three regional free-trade blocs:
• Western Europe, Asia, and the Americas

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The European Union (EU)

• The European Union is a unique economic and

political union between 27 EU countries that together
cover much of the continent of Europe.
• The European Economic Community (EEC) was
created in 1958 to increase economic cooperation
between six countries: Belgium, Germany, France,
Italy, Luxembourg and the Netherlands. Since then, 22
other members joined, and it became known as the
European Union (EU) from 1993, with 28 members.

• On 31st January 2020 the United Kingdom left the

European Union.    

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EU and China Trade

• The European Union and China are two of the biggest

traders in the world.
• China is now the EU’s biggest trading partner, overtaking
the USA in 2020.
• Trade between China and the EU was worth $709bn
(€586bn) in 2020.
• "In the year 2020, China was the main partner for the
EU. This result was due to an increase of imports
(+5.6%) and exports (+2.2%)," according to Eurostat, the
EU's statistical office.

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Asia-Pacific Economic Cooperation
(APEC)
• The Asia-Pacific Economic Cooperation (APEC) was
established in 1989 to leverage the growing
interdependence of the Asia-Pacific.
• APEC currently has 21 member states, including
Australia, China, United States, Russia, Japan and
Malaysia.
• APEC aims to 'create greater prosperity for the people
in the region by promoting balance, inclusive,
sustainable, innovative and secure growth and by
accelerating regional economic integration' (APEC,
2021). 

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Association of Southeast Asian Nations
(ASEAN)
• ASEAN was formed in 1967 and member countries
now consists of Indonesia, Malaysia, the Philippines,
Singapore, Thailand, Brunei, Cambodia, Laos,
Vietnam, and Myanmar. 
• The purpose of ASEAN is to 'accelerate the economic
growth, social progress and cultural development in
the region through joint endevours in the spirit of
equality and partnership in order to strengthen the
foundation for a propsperous and peaceful community
of South East Asian Nations' (ASEAN, 2021). 
• Further information on ASEAN can be found on the
website at https://asean.org/

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ASEAN and China Trade
• ASEAN countries have jumped to be the number one
trading bloc with China in 2020, with the trade volumes
hitting 4.74 trillion yuan ($731.9 billion), a 7 percent
growth year-on-year.
→ This made ASEAN China's largest trading partner for
the first time and making China ASEAN's largest
trading partner for 12 years in a row.
→ In the first half of this year, bilateral trade between
China and ASEAN continued robust expansion,
registering a 38.2 percent year-on-year growth
→ On the investment front, ASEAN has become one of
China's major outbound investment destinations and
sources of foreign direct investment, with cooperation
booming in sectors such as manufacturing, agriculture,
infrastructure, high-tech, the digital economy, and the
green economy (Source: http://www.xinhuanet.com/english/2021-
07/30/c_1310095612.htm)

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North American Free Trade Agreement
(NAFTA)
• North American Free Trade Agreement (NAFTA)
established a free-trade zone in North America; it was
signed in 1992 by Canada, Mexico, and the United
States and took effect on Jan. 1, 1994. NAFTA
immediately lifted tariffs on the majority of goods
produced by the signatory nations. 
• Under the leadership of President Trump, the United
States renegotiated the North American Free Trade
Agreement, replacing it with an updated and
rebalanced agreement, the United States-Mexico-
Canada Agreement (USMCA), which entered into
force on July 1, 2020. 

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China

• As of 2020, China's top five trading partners were

ASEAN, the EU, the US, Japan and South Korea.
• In addition, China's import and export to countries
along the Belt and Road reached 9.37 trillion yuan, up
1%.

Question:
Research the current data relating to China’s international
trade.
Has international trade been impacted by Covid-19?

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India

• India is the world's largest democracy, and one of the

fastest growing major economies. With a population of
1.36 billion (2019) there is great potential for growth.
• India is known as the world’s services supplier,
providing highly skilled and educated workers to
foreign companies.
India is the world’s leader for outsourced back-office
services, and increasingly for high-tech services.
• Main challenges to growth in India is poor
infrastructure – ie electricity issues, poor roads,
significant traffic etc.
• Growing middle class is fuelling growth. However, high
levels of poverty still exist.

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Other Regions of the World

Middle East
The African Union—AU
South Africa
Less developed countries—LDCs
– Low Gross National Product (GNP)
– Low Gross Domestic Product (GDP)
– Large, relatively unskilled workforce
– High international debt

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The Globalization of Information Technology

• The speed and accuracy of information transmission

are changing the nature of international manager’s jobs
• Cultural barriers are being lowered gradually
• Technology gets dispersed around the world by MNEs
• Explosive growth of information technology is both a
cause and effect of globalism

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The Globalization of Human Capital
• Outsourcing – the process of contracting with an external
firm to provide products or services that would otherwise
be completed internally. This may be done in the home
country or off-shore

• Off-shoring – involves the relocation of one or more

aspects of the firm’s business processes to a location in
another country (for the initial purpose of lowering costs),
with the function now performed by an entity owned by
the firm but staffed with foreign personnel in an off-shore
location.

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The Globalization of Human Capital
 Firms around the world have been offshoring
manufacturing jobs to low-cost countries for many
years. However, in the past few years, we have seen
some firms ‘reshoring’ jobs (bringing them back to the
home country) to lower shipping costs
 Firms are outsourcing white-collar jobs to India,
China, Mexico and the Philippines – customer
support, medical analysis, technical work, computer
programming, claims processing etc.

 For global firms, winning the war for talent is a

pressing issue

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The Global Manager’s Role

• Whatever the level of

involvement, it is important to
understand the global
business environment and it’s
influence on the manager’s
role.
• This complex role requires a
contingency approach to
dynamic environments, each
having their own unique
requirements.
• The smart manager will
analyze the new environment,
anticipate how it might affect
the future of the company,
and then develop appropriate
strategies and operating
styles.

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 The Political and Economic Environment
Globally orientated firms maintain an up-to-date profile of the
political and economic environment of the countries they
operate in.
• Sustainability—economic, political, social, and
environmental—has become a significant worldwide issue.
Investing in sustainability projects to benefit environment
and profitability.
• Ethnicity—a driving force behind political instability around
the world, often religious based conflicts
• Religion—religious disputes lie at the heart of regional
instabilities, for example, former Yugoslavia, Northern
Island, the Middle East…
Managers must understand the ethnic and religious
compositions of the host country to anticipate potential
problems, and aspects that might impact on the workforce,
production and access to raw materials.
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Political Risk

Managers of a global firm need to investigate the political

risks to which they expose their company in certain
countries, and the implications of those risks for the
economic success of the firm.

Political risks are any governmental action or politically

motivated event that could adversely affect the long-run
profitability or value of a firm.

Major political changes can affect the business

environment and risk level almost overnight – little
warning. Surveys have found that levels of political risk
are rising, not declining

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Political Risk
Seven typical political risk events (see page 21):

Expropriation

Nationalization

Discriminatory treatment

Barriers to repatriation of funds

Loss of technology or other intellectual property

Interference in Managerial decision making

Dishonesty by government officials

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Political Risk

Political risk can be characterised as:

• Macropolitical risk – an event that effects all foreign
firms doing business in a country or region.
For example: terrorism, kidnapping, random violence.

• Micropolitical risk – an event that affects one industry

or company or only a few companies.

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Political Risk Assessment

International companies must conduct some form of

political risk assessment to manage their exposure to risk
and to minimize financial losses.

Risk assessment usually takes 2 forms:

- Use experts or consultants
- Development of internal staff and in-house capabilities
– increasingly common

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Managing Political Risk
After assessing the potential political risk in a country,
managers need to make a decision on hot to manage that
risk.
Options:
• Suspend operations or withdraw from the country
• Start/continue operations but accommodate that risk
through adaptation to the political regulatory
environment:
• Equity sharing through joint ventures
• Participative management, involving nationals in the
management of the subsidiary
• Localization of the operation – change the subsidiary
name, management style etc to local style
• Provide development assistance through infrastructure
development
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Managing Political Risk

In addition to avoidance and adaptation, two other means

of risk reduction are:
• Dependency – keeping both the subsidiary and the
host nation dependent on the parent operation. May
include maintaining control over key inputs or
technology, control over distribution, expatriate control
in key positions.
• Hedging – minimising loss - political risk insurance and
debt financing

Strategic choice can also be used to manage political risk,

such as diversifying operations in many countries and
operating through joint ventures or local licensees, and
involving host country people and agencies.

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Managing Terrorism Risk

The risk of terrorism is now evident in many countries

around the world, even those that were previously
considered ‘safe’. Many companies have identified the
need to manage the risk of terrorism. Some approaches
include:
• Develop a benevolent image (IBM and Exxon)
• Maintain a low profile and minimize publicity
• Using teams to monitor terrorist activities
• Hiring counterterrorism consultants
• Training employees to cope with threat of terrorism

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Economic Risk

A country’s level of economic development generally

determines its economic stability and therefore its relative
risk to a foreign firm.
Economic risk is determined by a country’s ability or
intention to meet its financial obligations
• Economic risk is closely related to political risk
• Historically, most industrialized nations have posed
little risk of economic instability

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Economic Risk
The economic risk incurred by a foreign corporation
usually falls into one of two main categories. Its subsidiary
(or other investment) in a specific country may become
unprofitable if:
1. The government abruptly changes it domestic
monetary or fiscal policies
2. The government decides to modify its foreign-
investment policies.

• Risk of exchange-rate volatility results in currency

translation exposure
Every MNC operating overseas exposes itself to some
level of economic risk, often affecting its everyday
operational profitability, managers must constantly
reassess the level of risk by tracking economic indicators

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The Legal Environment

• Consists of the local laws and legal systems of those

countries in which an international company operates,
and of international law, which governs relationships
between sovereign countries.
• A global manager should consult with legal services,
both in the host country and at the headquarters, to
ensure it complies with host-country regulations and
maintain cooperative long-term relationships.
• There are also certain legal issues covered by
international law.
• The manager of the foreign subsidiary will comply with
the host country’s legal system.

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Legal Systems

Common • Past court decisions act as the precedents to the

interpretation of law and to common custom.
Law • Eg. USA, Australia, UK, Canada

• based on a comprehensive set of laws organized

into a code. Interpretation of these laws is based
Civil Law on reference to codes and statutes.
• Eg. France, Germany, Japan

• Based on Islamic religious beliefs and dominates

Islamic Law all aspects of life.
• eg. Egypt, Libya, Saudi Arabia, Yemen

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Contract Law
A contract is an agreement by the parties concerned to
establish a set of rules to govern a business transaction.

• Contract law plays a major role in international business

transactions because of the complexities arising from
different legal systems and because the host government
in developing countries often is a third party in the
contract.
• Both common law and civil law enforce contracts, but
differ in resolving disputes.

Common Law Contracts Civil Law Contracts

• details must be written in • assumes promises will be
the contract to be enforced enforced without specifying
the details

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Other Regulatory issues

• Protectionist policies, such as tariffs or quotas and

other import and trade restrictions

• The attractiveness of the tax system

• The level of government involvement in the economic

and regulatory environment

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Technological Environment

Technology has had a significant impact both in our

private lives and in business.
Advances in information technology are bringing about
increased productivity for employees, for companies and
for countries.

The impact of technology on global trade and business

transactions are significant.
• Internet has led to growth in electronic commerce
around the world.

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Technological Environment
New technology specific to a firm’s products represents a
key competitive advantage to firms and challenges
international businesses to manage the transfer and
diffusion of proprietary technology.

Appropriability of technology – the ability of the

innovating firm to profit from it own technology by
protecting it from competitors.

In most countries, governments use their laws to some

extent to control the flow of technology.

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Technological Environment
The most common methods of protecting proprietary
technology are:
• Patents - a right that is granted for any device,
substance, method or process that is new, inventive
and useful.
• Trademarks
• Tradenames
• Copyrights
• Trade secrets

International Convention for the Protection of Industrial

Property (Paris Union) – protection of patents

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Technological Environment

• One risk to a firm’s intellectual property is the

inappropriate use of the technology by joint-venture
partners, franchisees, licensees and employees.

• Another major consideration is the appropriateness

of technology for the local environment – especially in
less-developed countries.
• Decision regarding level of technology transfer is
often dominated by the hose government’s
regulations or requirements.
– May require only modern machinery and methods
– May require labour-intensive processes to reduce
unemployment

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Global E-business

The internet has had significant impacts on how

companies buy and sell goods around the world.

• The integration of systems, processes, organizations,

E-Business value chains, and entire markets using Internet-based
and related technologies and concepts

E-Commerce • The marketing an sales process via the internet

B2B • Business-to-business transactions. Eg Alibaba

B2C • Business-to-consumer. Eg Amazon

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Global E-Business

The internet and e-business provide a number of uses

and advantages in global business, including:
• Convenience of conducting business worldwide
• An electronic meeting an trading place
• A corporate intranet service
• Power to consumers though access to options and
information
• A link and efficiency in distribution
There are a number of challenges and problems when
trying to implement a global internet strategy. Refer to
page 29 – list some of these problems and barriers.

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Conclusion

• Assessing the environment is crucial to developing a

strategic plan or considering an international
investment. The political, economic, legal and
technological environments will likely influence
strategic decisions.
• The assessment should not be a comparison of
countries, but a comparison of (1) relative risk, and (2)
the projected return on investments among those
countries for a particular investment.
• It is important that the assessment is ongoing, as
situations can change quickly.

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