Managing in a Global Environment

Chapter 4
 Importance of International Business

If you are not thinking

international,

you are not thinking

business management

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 Global Environment and
International Managers

 Difficulties Operating in Borderless World

 Challenges:
– Economic
– Legal-political
– Socio-cultural

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 A Borderless World

 Business is becoming a unified, global field

 Companies that think globally have a
competitive edge
 Domestic markets are saturated for many
companies
 Consumers can no longer tell from which
country they are buying
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 Global (stateless) Corporations

 Number is increasing
 Awareness of national borders decreasing
 Rising managers expected to know a 2nd or 3rd
language
 Corporate Example – Nestle (Swiss)
– CEO Peter Brabeck–Letmathe (Austrian)
– Half of general managers (non-Swiss)
– Strong faith in regional managers who are native to the
region

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 The International
Business Environment

 International management is management of

business operations conducted in more than one
country
 Fundamental tasks do not change
 Basic management functions
– are the same - domestic or international
– Greater difficulties and risks when performing on an
international scale

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 International Environment Factors

Economic Legal-Political
•Economic
•Political risk
development
•Infrastructure •Government
•Resource and takeovers
product markets •Tariffs, quotas, taxes
•Per capita
Organization
•Terrorism, political
Income
instability
•Exchange rates
•Economic •Laws, regulations
conditions Sociocultural
•Socio values, beliefs
•Language
•Religion (objects, taboos, holidays)
•Kinship patterns
•Formal education, literary
•Time orientation

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 How important is the study of economic
environment and what are to be studied?

 It is perhaps the most important among the environmental

factors to be studied before deciding on whether to do business
with a country or not – because the purchasing power of the
consumers of the target (or host) country is the foremost
requisite of profitable business.

– For marketing the products in a host country, the demand

conditions ( quantity and quality ) in the country with respect
to the products and related industry, need to be studied.

– For production of goods in a foreign country, its factor

conditions (such availability of raw material, human capital/
knowledge, land, infrastructure etc,) need to be studied.

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 – Other major economic aspects that need examination are:

 Economic size and economic data of the country

 Economic system prevailing in the country.

 Key macroeconomic indicators such as GNP, growth

rate, inflation, surpluses/ deficits etc of the target
country.

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 Economic Environment Factors

 Economic development
 Infrastructure
 Resource and product markets
 Exchange rates
 Inflation

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 Economic Development

● Countries categorized as “developing” or “developed”

● Criterion used to classify is per capita income
● Developing countries have low per capita incomes
● LDCs located in Asia, Africa, and South America
● Developed are North America, Europe, & Japan
● Driving global growth in Asia, Eastern Europe, & Latin
America

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  In addition to the level of economic
development ,countries can be classified as:
 Free-Market Economies (Govt. intervention is
minimum)
 Centrally planned Economies(Govt determines the
production & prices based on forecast of demand
and desired level of supply.)
 Mixed Economies(in it some activities are left to the
market forces and some are controlled by govt.

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 Infrastructure

A country’s physical facilities that support

economic activities

 Airports, highways, and railroads

 Energy-producing facilities
 Communication facilities

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 Resource and Product Markets

When operating in another country...

– Managers must evaluate market demand
– To develop plants, resource markets must be
available – raw materials and labor

Corporate Example – McDonald

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 Exchange Rates

 Rate at which one country’s

currency is exchanged for
another country’s
 Has become a major concern for
companies doing business
internationally
 Changes in the exchange rate
can have major implications for
profitability of international
operations

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 Inflation

 It is a condition where prices of the product

increases.
 The higher the level of inflation the lower is
the real income and (ability to purchase) i.e.
purchasing power of consumers.
 Thus control over inflation is required, low
inflation attracts investors and also maintains
the demand in the market.
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Political Environment
 What are the two political systems that lie on the two
extremes of the political spectrum?
 1. Democratic system 2. Totalitarian system

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 The Legal-Political Environment

 Political Risk– due to events or actions by host

governments
● Loss of assets
● Loss of earning power
● Loss of managerial control
● Government takeovers
● Acts of violence

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 Political Instability

 Events such as riots, revolutions, or

government upheavals that affect the
operations of an international company

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Legal Environment
What are the different types of existing legal systems?

 Basically there are three types of laws:

 Common laws : these are based on culture of the
nation, precedents, traditions etc.
 Civil laws : These are typically codified legal
system. They tend to be precise unlike the
common laws which are more open to
interpretations.
 Theocratic (or religious) laws : These are
religious laws . Eg:- Islamic laws.
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 Laws and Regulations

 Government laws and regulations differ from

country to country
 Make doing business a true challenge for
international firms
 Internet has increased impact of foreign laws
on U.S. companies – expands potential for
doing business on global basis

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 Sociocultural Environment

 Culture – shared knowledge, beliefs, values,

common modes of behavior, and ways of thinking
among members of a society
– Intangible
– Pervasive
– Difficult for outsider to learn

 Managers need to understand difference in social

values to comprehend local cultures and deal with
them effectively

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 Managing in a Global Environment

Managers must be sensitive to cultural subtleties

 Personal challenges – culture shock
 Managing Cross-culturally
– Leading
– Decision making
– Motivating
– Controlling
Managers must be culturally flexible and easily
adapt to new situations
Experiential Exercise: Rate your Global
Management Potential
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