CHAPTER 10: the International Business Environment

Chapter14: The Global Business Environment

Key Review Points

The trend towards a global business environment

Entering overseas markets can be extremely risky, as evidenced by examples of recent failures where companies failed to foresee all of the problems involved. Nevertheless, a company which has successfully developed its business strategy should be well placed to extend this development into overseas markets.

Many of the fundamental principles of environmental analysis which have been applied to a firm's domestic market will be of relevance in an international setting.

International trade is becoming increasingly important, representing not only opportunities for domestic producers to earn revenue from overseas but also threats to domestic producers from overseas competition.

Firms' reasons for entering international trade

For an individual company, exporting to overseas markets can be attractive for a number of reasons.

Overseas markets represent new market segments.
Saturation of its domestic market can force an organisation to seek overseas markets.
As part of its portfolio management, an organisation may wish to reduce its dependence upon one geographical market.
The nature of a firm's product may require an organisation to become active in an overseas market.
Commercial buyers of products operating in a number of overseas countries may require their suppliers to be able to cater for their needs across national boundaries.
Some goods and services are highly specialised and the domestic market is too small to allow economies of scale to be exploited.

Economies of scale also result from extending the use of brands in overseas markets.

Macroenvironmental reasons for international trade

From the perspective of national economies, a number of reasons can be identified for the increasing importance of international trade:

Goods and services are traded to exploit the concept of comparative cost advantage.
The removal of many restrictions on international trade.
Increasing household disposable incomes results in greater consumption of many categories of luxuries, such as overseas travel, which can only be provided by overseas suppliers.
Cultural convergence which has resulted from improved communications.

Theory of international trade

Most industrialised countries are dependent on international trade to maintain their standard of living. Some products that buyers have become accustomed to, such as tropical fruits and gold, would be almost impossible to produce at home.

Rather than producers in the United Kingdom growing bananas at great expense for domestic consumption, while a producer in a tropical country attempted to grow temperate fruits, both could benefit by specialising in what they are good at and exchanging their output. This is the basis for the theory of comparative cost advantage.

Comparative cost advantage

The theory of comparative cost advantage states that the world economy will benefit if all countries:

Concentrate on producing what they are good at and export the surplus
Import from other countries those goods that other countries are better able to produce than themselves.

Limitations to the principle of comparative cost advantage

Unfortunately, the principles of comparative cost advantage may sound fine in theory, but it can be difficult to achieve the benefits in practice. In reality, the global ideals described above can become obscured by narrower national interests.

Despite a plethora of international agreements to facilitate trade between nations, minor, and sometimes major, trade disputes occur between nations.

The extreme form of import control is for a country to ban imports of a product or class of products from one or more countries.

Exchange rates

Currencies are just like any other commodity that is traded in a market. If the demand for a currency is great relative to its supply, then its "price" (or exchange rate) will rise. The opposite will happen if there is excess supply of that currency.

Changes in the supply of, or demand for, a currency can come about for a number of reasons:

Changes in demand for a nation's currency can result from a significant change in exports from that country.
An increase in imports by UK firms from Japan would have an opposite effect.
Demand for foreign currencies can arise from transactions involving the purchase of assets overseas.
Demand for a currency at any given time is influenced by individuals’ confidence about future price levels for a currency.

Fluctuations in exchange rates can cause considerable uncertainty.

Fixed exchange rates

An alternative to market-based fluctuating exchange rates is a fixed exchange rate system. Here, countries agree to maintain the value of each other's currency, or at least to keep fluctuations within a very narrow range. Where necessary, governments take action to maintain the agreed rates of exchange.

European Monetary Union

The launch of the Euro in 1999 as a common currency for EU member sates overcomes problems of fluctuating exchange rates between traders in countries that have adopted the Euro.

Opinion has been divided about the effects of the Euro on UK business organisations. Advocates of the Euro point to the greatly reduced transaction costs involved in trading with other EU countries and the greatly reduced risk of adverse currency movements.

Overseas trade patterns

Trade patterns throughout the world change in response to changes in the economic, political, technological and social environments.

Although it is common to talk about a country's overall balance of payments being in surplus or deficit, they must technically be balanced.

The current account is generally further divided into two components: a visible trade balance and an invisible trade balance.
The capital account records outward and inward flows of capital for investment purposes.

Trends in UK overseas trade

The overseas trade balance of a nation is very much influenced by the structure of its domestic economy. For the UK economy, the deterioration of the visible balance is symptomatic of the declining competitiveness of its manufacturing industries.

An indication of the changing relative competitiveness of UK business sectors can be found by examining ratios of:

Imports as a proportion of home demand and
Exports as a proportion of manufacturers' sales

Trade patterns can also be analysed in terms of the origin and destination of a country's transactions.

Prospects for UK international trade

League tables of international competitiveness have shown the United Kingdom slipping.

The top ten list of most competitive countries shows the recent supremacy of the USA and a gradual deterioration in the UK's position.

It must not be forgotten that market mechanisms in themselves have a tendency to correct trade imbalances.

International trade institutions and agreements

There have been many attempts to develop international agreements for the free movement of trade. At their simplest, international trade agreements comprise bilateral agreements between two countries to open up trade between the two. Sometimes, groups of countries join together to form trading blocs.

The Single European Market

A principal aim of the European Community has been the removal of barriers to trade between member states.

It has been estimated that the effects of the Single Market after five years of operation would have been to increase EU output as a whole by 7 per cent, for prices to fall by up to 6 per cent in real terms and for EU-wide employment to increase by 1.8 millions.

Despite the efforts of the Single European Market programme, a number of barriers to trade within the EU remain.

Other regional trading blocs

A number of other trading blocs exist in the world with aims which are similar to those of the EU. These include the North America Free Trade Area (NAFTA), the Gulf Co-operation Council (GCC) and the Association of South East Asian Nations (ASEAN).

Organisation for Economic Co-operation and Development (OECD)

The OECD works by trying to co-ordinate the economic policies of members, to co-ordinate programmes of economic aid and by providing specialised services, especially information.

The World Bank

The World Bank acts as an adviser to governments in the provision of international finance.

The International Monetary Fund (IMF)

The IMF is essentially a world forum for international negotiations on governments' fiscal policies.

The World Trade Organization (WTO)

WTO has proceeded to reduce tariffs and quotas through several negotiating "rounds". It has also tried to redress the distortion to world trade and the unfair competitive advantage given to subsidised exporters of agricultural products.

Other international agreements and institutions

A wide range of other agreements and institutions affect international trading companies. An example in this category is the agreement to set up a European Bank for Reconstruction and Development.

Evaluating overseas business opportunities

This section identifies some general questions which need to be asked in assessing the business environment of overseas countries and then considers specific aspects of researching such environments.

Macro-level analysis of a foreign business environment

Questions to be asked in analysing an overseas business environment are examined under the overlapping headings of the political, economic, social and technological environments.

Sources of information on Overseas Markets

The methods used to research a potential overseas market are in principle similar to those that would be used to research a domestic market.

Initial desk research at home will identify those markets that show greatest potential for development. An organisation will then often follow this up with further desk research of materials available locally within the short-listed markets, often carried out by appointing a local research agency.

Just as in home markets, secondary data have limitations in assessing market attractiveness.

Primary research is generally undertaken overseas when a company has become happy about the general potential of a market, but is unsure of a number of factors that would be critical for success.

Market Entry Strategies

A new foreign market represents both a potential opportunity and a risk to an organisation. A company's market entry strategy should aim to balance these two elements.

An assessment of risk is required in deciding whether an organisation should enter a foreign market on its own or in association with another organisation. The former maximises the strategic and operational control that the organisation has over its overseas operations, but it exposes it to the greatest risk where the overseas market is relatively poorly understood.

Exporting

It is often possible for a company to gain a feel for a foreign market by exporting to it from its home base.

Exporting is likely to be the less satisfactory option for manufacturers who produce high-volume, low-value products for which transport costs could put them at a competitive disadvantage in overseas markets.

The use of export/import agents may minimise risks for an exporter.

Direct investment in a foreign subsidiary

This option gives an organisation maximum control over its foreign operations, but can expose it to a high level of risk on account of the poor understanding that it may have of the overseas market.

Global e-commerce

The development of the Internet has offered new opportunities for organisations to enter foreign markets.

The service sector has been at the leading edge of developments in electronic commerce, helped by the absence of a tangible content which must be physically delivered.

Licensing/franchising

Rather than setting up its own operations in an overseas market, a company can license a local company to manufacture and sell a product in the local market.

Joint ventures

An international joint venture is a partnership between a domestic company and a foreign company or government. A joint venture can take a number of forms.

Strategic alliances are agreements between two or more organisations where each partner seeks to add to its competencies by combining its resources with those of a partner.

Management contracting

Rather than setting up its own operations overseas, a company with a proven track record in a product area may pursue the option of running other companies' businesses for them.

Adapting to Foreign Business Environments

Having analysed an overseas market and decided to enter it, an organisation must make decisions that will allow it to successfully enter and develop that market. Decisions focus on the extent to which the organisation should adapt its products to the needs of the local market, as opposed to the development of a uniform product that is globally applicable in all of its markets.