Lecture 6 - International Environment | Business Environment - Business Basics PDF Download

 Page 1


 
Institute of Lifelong Learning, University of Delhi                               1 
 
 
 
 
 
 
 
 
 
 
NME 
Business Environment 
Lesson: International Environment 
Lesson Developer: Ms.Reena Talwar, 
College/Dept: Assistant Professor in Commerce, Bharati 
College 
Lesson Reviewer: Prof. K.M.Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Page 2


 
Institute of Lifelong Learning, University of Delhi                               1 
 
 
 
 
 
 
 
 
 
 
NME 
Business Environment 
Lesson: International Environment 
Lesson Developer: Ms.Reena Talwar, 
College/Dept: Assistant Professor in Commerce, Bharati 
College 
Lesson Reviewer: Prof. K.M.Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong Learning, University of Delhi                               2 
 
Lesson: International Environment: Redefinition of Trade 
and Regional Associations  
Table of Contents: 
 
1: Learning Outcomes 
2: Introduction 
3: Concept of International Business Environment  
 3.1: Significance of International Business Environment 
4: Analyzing various components of International Environment 
5: Redefinition of Trade from GATT to WTO 
6. Regional Associations in International Environment 
Summary  
 Exercises 
 Glossary 
 References 
 
 
1. Learning Outcomes: 
 
After reading this lesson, you should be able to: 
 
? understand the concept of International Business Environment; 
? learn about nature and characteristics of International Environment; 
? appreciate the significance and relevance of the study of International Environment; 
? identify various components of analyzing International Environment; 
? gain insights on definition of trade from GATT to WTO; 
? appreciate the significance of Regional Associations. 
 
 
2. Introduction: 
 
International Business Environment is the study of business and environmental factors 
across international borders. In today?s world, economic boundaries have disappeared and 
businesses operate not only in their domestic economy but are also operating in different 
countries to meet the needs of customers around the world. 
 
Globalization has enabled the business firms to conduct cross border transactions of goods 
and services between two or more countries and when business activities are performed in 
more than one country, it is termed as international business. 
Page 3


 
Institute of Lifelong Learning, University of Delhi                               1 
 
 
 
 
 
 
 
 
 
 
NME 
Business Environment 
Lesson: International Environment 
Lesson Developer: Ms.Reena Talwar, 
College/Dept: Assistant Professor in Commerce, Bharati 
College 
Lesson Reviewer: Prof. K.M.Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong Learning, University of Delhi                               2 
 
Lesson: International Environment: Redefinition of Trade 
and Regional Associations  
Table of Contents: 
 
1: Learning Outcomes 
2: Introduction 
3: Concept of International Business Environment  
 3.1: Significance of International Business Environment 
4: Analyzing various components of International Environment 
5: Redefinition of Trade from GATT to WTO 
6. Regional Associations in International Environment 
Summary  
 Exercises 
 Glossary 
 References 
 
 
1. Learning Outcomes: 
 
After reading this lesson, you should be able to: 
 
? understand the concept of International Business Environment; 
? learn about nature and characteristics of International Environment; 
? appreciate the significance and relevance of the study of International Environment; 
? identify various components of analyzing International Environment; 
? gain insights on definition of trade from GATT to WTO; 
? appreciate the significance of Regional Associations. 
 
 
2. Introduction: 
 
International Business Environment is the study of business and environmental factors 
across international borders. In today?s world, economic boundaries have disappeared and 
businesses operate not only in their domestic economy but are also operating in different 
countries to meet the needs of customers around the world. 
 
Globalization has enabled the business firms to conduct cross border transactions of goods 
and services between two or more countries and when business activities are performed in 
more than one country, it is termed as international business. 
 
Institute of Lifelong Learning, University of Delhi                               3 
 
The functions, techniques and processes involved in international business are similar to 
what a business firm does in the domestic business. However, the difference lies in the 
environment within which these activities are performed and carried out. A business firm 
can easily scan domestic environmental factors which have an influence on its functioning. 
However, it is challenging for a business firm to monitor international environment which is 
quite different from the domestic environment. Therefore, to be successful internationally, it 
is important that global business firms understands the significance and various elements of 
international environment and change their strategies according to the changes in 
environmental factors present in different countries where the firms are operating. Long-
term survival of international business firms would largely depend upon how well these 
environmental factors are understood and used to their advantage.  
  
3. Concept of International Business Environment: 
We need to first understand the meaning of “international business” and “environment”. 
When business operations are carried out in more than one country apart from the home 
nation, then it is termed as international business. A business firm is known as a 
multinational enterprise (MNE) when it carries out its production or operations in more than 
one country. An MNE is also referred as a multinational corporation (MNC) or transnational 
corporation (TNC). 
Environment refers to sum total of what is around someone which includes living things and 
natural forces. It is also referred as “the conditions that affect the behavior and 
development of a business enterprise.” When we combine these two words International 
Business and Environment, it refers to conditions or surroundings prevalent in foreign 
countries that affect the functioning of a business firm and its activities. 
Environmental factors are mostly external to a firm and are largely uncontrollable. The 
business environment of a firm comprises of Micro and Macro environment. Micro 
environment or task environment or operating environment consists of those individuals or 
groups which are very close to business and with which the organizations comes into 
frequent and direct contact in its business activities. It primarily consists of customers, 
suppliers, marketing intermediaries, competitors, and public. Macro Environment or remote 
environment refers to factors which are external to a business enterprise and are less 
controllable as compared to factors under micro environment. These include political, legal, 
social, cultural, technological and international environment 
The environment of each country varies from the other and if a business firm has to operate 
in more than one country, then it should have a thorough understanding of differences in 
environmental factors amongst nations. The strategies that work well in one country might 
not work in the other country due to differences in cultural, political, legal and economic 
factors. 
 
 
Page 4


 
Institute of Lifelong Learning, University of Delhi                               1 
 
 
 
 
 
 
 
 
 
 
NME 
Business Environment 
Lesson: International Environment 
Lesson Developer: Ms.Reena Talwar, 
College/Dept: Assistant Professor in Commerce, Bharati 
College 
Lesson Reviewer: Prof. K.M.Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong Learning, University of Delhi                               2 
 
Lesson: International Environment: Redefinition of Trade 
and Regional Associations  
Table of Contents: 
 
1: Learning Outcomes 
2: Introduction 
3: Concept of International Business Environment  
 3.1: Significance of International Business Environment 
4: Analyzing various components of International Environment 
5: Redefinition of Trade from GATT to WTO 
6. Regional Associations in International Environment 
Summary  
 Exercises 
 Glossary 
 References 
 
 
1. Learning Outcomes: 
 
After reading this lesson, you should be able to: 
 
? understand the concept of International Business Environment; 
? learn about nature and characteristics of International Environment; 
? appreciate the significance and relevance of the study of International Environment; 
? identify various components of analyzing International Environment; 
? gain insights on definition of trade from GATT to WTO; 
? appreciate the significance of Regional Associations. 
 
 
2. Introduction: 
 
International Business Environment is the study of business and environmental factors 
across international borders. In today?s world, economic boundaries have disappeared and 
businesses operate not only in their domestic economy but are also operating in different 
countries to meet the needs of customers around the world. 
 
Globalization has enabled the business firms to conduct cross border transactions of goods 
and services between two or more countries and when business activities are performed in 
more than one country, it is termed as international business. 
 
Institute of Lifelong Learning, University of Delhi                               3 
 
The functions, techniques and processes involved in international business are similar to 
what a business firm does in the domestic business. However, the difference lies in the 
environment within which these activities are performed and carried out. A business firm 
can easily scan domestic environmental factors which have an influence on its functioning. 
However, it is challenging for a business firm to monitor international environment which is 
quite different from the domestic environment. Therefore, to be successful internationally, it 
is important that global business firms understands the significance and various elements of 
international environment and change their strategies according to the changes in 
environmental factors present in different countries where the firms are operating. Long-
term survival of international business firms would largely depend upon how well these 
environmental factors are understood and used to their advantage.  
  
3. Concept of International Business Environment: 
We need to first understand the meaning of “international business” and “environment”. 
When business operations are carried out in more than one country apart from the home 
nation, then it is termed as international business. A business firm is known as a 
multinational enterprise (MNE) when it carries out its production or operations in more than 
one country. An MNE is also referred as a multinational corporation (MNC) or transnational 
corporation (TNC). 
Environment refers to sum total of what is around someone which includes living things and 
natural forces. It is also referred as “the conditions that affect the behavior and 
development of a business enterprise.” When we combine these two words International 
Business and Environment, it refers to conditions or surroundings prevalent in foreign 
countries that affect the functioning of a business firm and its activities. 
Environmental factors are mostly external to a firm and are largely uncontrollable. The 
business environment of a firm comprises of Micro and Macro environment. Micro 
environment or task environment or operating environment consists of those individuals or 
groups which are very close to business and with which the organizations comes into 
frequent and direct contact in its business activities. It primarily consists of customers, 
suppliers, marketing intermediaries, competitors, and public. Macro Environment or remote 
environment refers to factors which are external to a business enterprise and are less 
controllable as compared to factors under micro environment. These include political, legal, 
social, cultural, technological and international environment 
The environment of each country varies from the other and if a business firm has to operate 
in more than one country, then it should have a thorough understanding of differences in 
environmental factors amongst nations. The strategies that work well in one country might 
not work in the other country due to differences in cultural, political, legal and economic 
factors. 
 
 
 
Institute of Lifelong Learning, University of Delhi                               4 
 
3.1. Significance of International Business Environment: 
 
Whenever a business firm decides to conduct its operations internationally, it has to take 
two major decisions: 
 1. The countries or markets suitable to enter and 
 2. The mode of entry for entering into these markets. 
 
Both these are strategic and important decisions for a firm and require in depth analysis of 
environmental conditions and situations of these markets. A firm would enter into those 
countries or markets where there is enough market potential and scope of growth and 
expansion. Market potential, however, depends upon the economic and political factors 
prevailing in those countries. Demand for air conditioners, for example, would be higher in 
those countries which are situated near hot zones and where the purchasing ability of 
people is high. 
Once the firm has identified countries with market potential, it has to decide the mode of 
entry.  There are various modes of entry such as exporting, franchising, licensing, joint 
venture or setting up wholly owned subsidiaries. A business firm makes this important 
decision only after analyzing the various environmental factors. For example, a firm chooses 
exporting as the mode of entry when the product can be produced at a lower cost in the 
home country as compared to the foreign country and there are not much legal restrictions 
on the import of the product. However, if the product involves import bans or high 
transportation costs, then it might choose to set up a wholly owned subsidiary abroad 
provided the same is acceptable to foreign governments.  
Since the environmental factors differ from nation to nation, a business firm cannot be 
successful by replicating the domestic decisions and practices in other nations of the world. 
A multinational firm needs to continuously monitor the changes in political, legal, cultural, 
social and economic environment of foreign countries and accordingly make strategic 
decisions in each country. 
A business firm cannot be successful by replicating the domestic decisions and practices in 
other nations of the world. State true or false. 
Answer:  True 
Page 5


 
Institute of Lifelong Learning, University of Delhi                               1 
 
 
 
 
 
 
 
 
 
 
NME 
Business Environment 
Lesson: International Environment 
Lesson Developer: Ms.Reena Talwar, 
College/Dept: Assistant Professor in Commerce, Bharati 
College 
Lesson Reviewer: Prof. K.M.Upadhyay 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Institute of Lifelong Learning, University of Delhi                               2 
 
Lesson: International Environment: Redefinition of Trade 
and Regional Associations  
Table of Contents: 
 
1: Learning Outcomes 
2: Introduction 
3: Concept of International Business Environment  
 3.1: Significance of International Business Environment 
4: Analyzing various components of International Environment 
5: Redefinition of Trade from GATT to WTO 
6. Regional Associations in International Environment 
Summary  
 Exercises 
 Glossary 
 References 
 
 
1. Learning Outcomes: 
 
After reading this lesson, you should be able to: 
 
? understand the concept of International Business Environment; 
? learn about nature and characteristics of International Environment; 
? appreciate the significance and relevance of the study of International Environment; 
? identify various components of analyzing International Environment; 
? gain insights on definition of trade from GATT to WTO; 
? appreciate the significance of Regional Associations. 
 
 
2. Introduction: 
 
International Business Environment is the study of business and environmental factors 
across international borders. In today?s world, economic boundaries have disappeared and 
businesses operate not only in their domestic economy but are also operating in different 
countries to meet the needs of customers around the world. 
 
Globalization has enabled the business firms to conduct cross border transactions of goods 
and services between two or more countries and when business activities are performed in 
more than one country, it is termed as international business. 
 
Institute of Lifelong Learning, University of Delhi                               3 
 
The functions, techniques and processes involved in international business are similar to 
what a business firm does in the domestic business. However, the difference lies in the 
environment within which these activities are performed and carried out. A business firm 
can easily scan domestic environmental factors which have an influence on its functioning. 
However, it is challenging for a business firm to monitor international environment which is 
quite different from the domestic environment. Therefore, to be successful internationally, it 
is important that global business firms understands the significance and various elements of 
international environment and change their strategies according to the changes in 
environmental factors present in different countries where the firms are operating. Long-
term survival of international business firms would largely depend upon how well these 
environmental factors are understood and used to their advantage.  
  
3. Concept of International Business Environment: 
We need to first understand the meaning of “international business” and “environment”. 
When business operations are carried out in more than one country apart from the home 
nation, then it is termed as international business. A business firm is known as a 
multinational enterprise (MNE) when it carries out its production or operations in more than 
one country. An MNE is also referred as a multinational corporation (MNC) or transnational 
corporation (TNC). 
Environment refers to sum total of what is around someone which includes living things and 
natural forces. It is also referred as “the conditions that affect the behavior and 
development of a business enterprise.” When we combine these two words International 
Business and Environment, it refers to conditions or surroundings prevalent in foreign 
countries that affect the functioning of a business firm and its activities. 
Environmental factors are mostly external to a firm and are largely uncontrollable. The 
business environment of a firm comprises of Micro and Macro environment. Micro 
environment or task environment or operating environment consists of those individuals or 
groups which are very close to business and with which the organizations comes into 
frequent and direct contact in its business activities. It primarily consists of customers, 
suppliers, marketing intermediaries, competitors, and public. Macro Environment or remote 
environment refers to factors which are external to a business enterprise and are less 
controllable as compared to factors under micro environment. These include political, legal, 
social, cultural, technological and international environment 
The environment of each country varies from the other and if a business firm has to operate 
in more than one country, then it should have a thorough understanding of differences in 
environmental factors amongst nations. The strategies that work well in one country might 
not work in the other country due to differences in cultural, political, legal and economic 
factors. 
 
 
 
Institute of Lifelong Learning, University of Delhi                               4 
 
3.1. Significance of International Business Environment: 
 
Whenever a business firm decides to conduct its operations internationally, it has to take 
two major decisions: 
 1. The countries or markets suitable to enter and 
 2. The mode of entry for entering into these markets. 
 
Both these are strategic and important decisions for a firm and require in depth analysis of 
environmental conditions and situations of these markets. A firm would enter into those 
countries or markets where there is enough market potential and scope of growth and 
expansion. Market potential, however, depends upon the economic and political factors 
prevailing in those countries. Demand for air conditioners, for example, would be higher in 
those countries which are situated near hot zones and where the purchasing ability of 
people is high. 
Once the firm has identified countries with market potential, it has to decide the mode of 
entry.  There are various modes of entry such as exporting, franchising, licensing, joint 
venture or setting up wholly owned subsidiaries. A business firm makes this important 
decision only after analyzing the various environmental factors. For example, a firm chooses 
exporting as the mode of entry when the product can be produced at a lower cost in the 
home country as compared to the foreign country and there are not much legal restrictions 
on the import of the product. However, if the product involves import bans or high 
transportation costs, then it might choose to set up a wholly owned subsidiary abroad 
provided the same is acceptable to foreign governments.  
Since the environmental factors differ from nation to nation, a business firm cannot be 
successful by replicating the domestic decisions and practices in other nations of the world. 
A multinational firm needs to continuously monitor the changes in political, legal, cultural, 
social and economic environment of foreign countries and accordingly make strategic 
decisions in each country. 
A business firm cannot be successful by replicating the domestic decisions and practices in 
other nations of the world. State true or false. 
Answer:  True 
 
Institute of Lifelong Learning, University of Delhi                               5 
 
Justification: Since the environmental factors differ from nation to nation, a business firm 
has to make changes in its practices and policies depending upon the environmental factors 
of each country.  
 
4. Analyzing components of International Environment: 
 
International environment comprises of economic, socio-cultural, geographic, financial, 
political, legal and technological forces.  
 
 
 
 
 
 
Figure 1: Components of International Business Environment 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
It is not necessary that all the components of international environment are relevant for 
every business firm operating globally. It depends upon the nature of firm and its 
strategies. 
 
For example, a business firm interested in exporting its products to the other nations needs 
to know about the economic policies and regulations of the foreign nations. However, if a 
International 
 Business Environment 
Economic 
Political-Legal 
Socio-cultural Ecological 
Geographic