INTERNATIONAL BUSINESS DYNAMICS
MODULE 1: INTRODUCTION
The basic principles of business concerning tasks, functions, and processes that apply to international business are the same as that of domestic business. However, the environment in which domestic and international firms operate varies considerably and therefore requires an international firm to modify and adapt its business practices country by country. Unlike a domestic business manager, an international manager faces greater difficulties, greater uncertainties, and more importantly, much greater risks. The tasks of an international business executive are clearly much more challenging.
These difficulties, uncertainties, and risks originate from differences in the political, economic, legal and cultural environment, and from differences in foreign exchange markets and exchange rate systems. In most cases, these problems manifest themselves as constraints which render the process of decision-making and its implementation in international business more difficult (and in some cases, more hazardous) than in domestic business. More importantly, culturally insensitive decisions often result in conflicts which are more difficult (and costly) to resolve without seriously affecting the performance of the firm, its future operations, and the effectiveness of its management. The dynamic nature of constant changes in business, economic, political, and legal environments in the host country adds still more difficulties with which the international business executive must deal on an almost daily basis.
The differentiation between domestic and international business can broadly be done on the following parameters:
Culture
Each country in which the firm operates is culturally different. To be successful, the firm must operate in a culturally sensitive manner and within the constraints of the culturally determined manners, customs, values, and norms of the host country. An international business manager must respect and empathize with cultural differences in all aspects of business and social life, seek to conform and cooperate
rather than confront or behave as if operating in his/her own culture. Nike, the global sports shoe manufacturer, realized this fact in a hard way when it produced and marketed Nike Air brand of shoes for the first time. It wrote “Air” in cursive fonts and in an artistic way but it created a great problem in Saudi Arabia because it looked like the word ‘Allah’ in Persian. Similarly, marketing campaigns, especially the advertising may have to be adapted according to the local culture. Many years ago, campaign for ‘Tuff’ shoes which had shown male and female models wearing only shoes and no clothes had come under scanner. It was considered as obscene and was subsequently
banned in India. However a similar campaign in some other country like France may not have evoked public outcry and might have been considered normal like any other campaign.
Fiscal and Government Policies
Conducting business across national borders involves the use of different currencies and observing different government rules and regulations limiting the firm’s freedom of action; for example, restrictions on the amount of profit to be transferred. Different governments practice different exchange rate policies and systems, ranging from daily decrees about the value of the local currency in terms of the world’s major currencies to fixed and floating exchange rate systems. These practices add greater risk and uncertainty to the already highly risky and uncertain nature of international financial transactions. To be successful, the firm must develop an appropriate strategy to deal with these differences and the associated problems.
Legal Environment
The legal environment differs from country to country, requiring firms to show particular sensitivity to laws, rules, and regulations which may affect operations and performance. Disregarding or disobeying the laws of the host country can be very damaging to the finances and the image of the firm. Laws pertaining to joint ownership of assets, for example, are often very complicated, bureaucratic, frustrating,
and time-consuming. Legal difficulties are often the source of serious disputes between the host government and the firm, requiring protracted negotiations which may end in failure to invest or to continue the existing business.
Consumer Tastes and Preferences
Differences in consumer tastes and preferences and demand patterns arising from cultural differences require the firm to adopt appropriate production, procurement, and marketing strategies to minimize costs and maintain the firm’s value. McDonald’s for example, does not offer beef and pork items in India and sells only vegetarian food dishes in predominantly vegetarian state of Gujarat. Even in the case of standard global products, certain modifications may be necessary to render the product more acceptable o the consumer in the host culture. For example, the name of the product in the host country’s language may be offensive or the packaging may be inappropriate.
Availability of Factors of Production
Different countries possess different factor endowments with different qualities, requiring the firm to formulate and implement suitable product development and logistics strategies consistent with the availability and quality of resources in the host country. Certain skills or supplies may be either unavailable or available in limited quantities and qualities. If unavailable, the firm must either import them
or develop local sources of supply. Following its entry into the Soviet market in 1990, McDonald’s, one of the first Western fast food firms, experienced serious difficulties in obtaining high-quality local food supplies consistent with its food technology. To meet its high standards in quality, delivery, and production methods, McDonald’s had to transfer agricultural technology, equipment, and consultants
from other countries with superior technology to work with Soviet farmers. One astonishing outcome was an increase of 100 per cent in potato output alone. It even set up its own dairy farms, cattle farms, food-processing plants, and distribution system. Thus, international business should not be seen just as an extension of domestic business. It is quite different from the domestic business.
International Business Dynamics – Introduction & Evolution
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