Definition, Meaning & Components of International Business Environment

International Business Environment is limited to respective social and cultural factors that comprise several aspects such as technical, demographic, economic, natural, legal, political & socio-cultural environments. All these components play an important role in establishing a successful business.

So, let’s discuss what these factors are and how to analyze them for better business development.

Why is International Business Environment Important?

International Business is quite important for a country’s economy. As per the Operation for Economic Co-operation and Development (OECD), all of the world’s strongest economies like Germany, Switzerland, Japan, etc. are involved in international trade practices and have the highest standards of living. They have high volumes of imports and exports while nations like Greece, Spain, Italy, etc have lower ratios of international trade and are facing some serious economic challenges and problems.

Therefore, the International Business environment plays a crucial role in the development and growth of a nation.

International Business Environment and its Components

 IBE or the International Business Environment is a multidimensional system including various risks and issues like exchange risks, political risks, cultural differences, legal & taxation issues.

Hence, IBE comprises various components like economic, political, competitive, social and culture, social & cultural, legal, and technical environments.

The Economic Environment:

The economic environment varies from one nation to another and includes all the factors that relate to a country’s attractiveness for foreign trade and business activities. Countries are divided into three categories such as the developed or industrialized, less developed, and developing countries with new industrialization or emerging economies.

Each category has some major variations. The developed countries are rich whereas the less developed are the poor ones and the newly developing and industrializing are moving from poorer to richer class. These distinctions are based on the GDP/Capita Income. Apart from it, better infrastructure, education, technology, and healthcare, are also associated with the economic development of a country.

So, it’s clear that the level of economic activity along with better infrastructure, education, and so on, virtually affects all facets of doing business. A company needs to recognize the economic environment if it wants a successful international business relationship.

Important Aspects

The organization may analyze the economic environment based on the following aspects:

• The pace and stage of economic growth.
• Per capita income.
• The level of national trade
• The Incidents of both direct and indirect taxes
• Available Infrastructure facilities
• The difficulties to carry out business activities
• Easy availability of raw materials and components and their costing
• Financial resources & their costing.
• Easy availability of skilled and efficient manpower-managerial, their salaries, and wage structures.

The Political Environment:

The political environment has always been important to start a business in a new nation. It refers to political risks, type government, and their rules, their relationship with a business, in a country. International business requires maintaining the government’s relationships and estimating the levels of risks associated with it.

The political systems of countries are quite distinctive from each other. For instance, the multi-party democracies, constitutional monarchies, one-party states, dictatorship, etc. Therefore, analyzing the political-legal environment becomes very crucial for a company and it needs to consider all the below-given aspects carefully:

Importance Aspects

• Political system.
• The restrictive or facilitating approach of the government towards a business
• Rules on the pricing and distribution of goods.
• Facilities and incentives it provides to the business
• Formalities and procedures required to be followed.
• The restrictions imposed by the government on import and export of goods and services.
• Legal restrictions such as licensing requirement, reservation for different sectors like the public, private or small-scale sector;
• The Restrictions imposed by the government on imparting technical know-how, capital goods, and raw materials.

The Cultural Environment:

The cultural environment remains the most difficult and distinctive component in International Business Environment. The culture of a country is described as its beliefs and values that are shared by the citizens of the country. Beliefs and values are based on factors such as language, history, religion, education, etc of the country. So, to understand the cultural environment of a country, the firms have to analyze these factors first.

 Hofstede proposed a four-dimensional model to understand the cultural environment of a country. It included cultural values such as individualism, power distance, uncertainty avoidance, and masculinity. Created in 1980, it is the most extensively used model. Various managers and academics use it, as it provides data for a wide array of nations.

Important Aspects

To analyze the social & cultural environment, a firm may consider the below-given aspects carefully:

• Lifestyle and usage of the product by people.
• People’s level of acceptance and resistance to change.
• Influence of cultural, social, and religious factors on the acceptability of a product.
• Public demand and requirements
• Consumption of the product.
• Value adjoined with the product.

The Technological Environment:

The technological environment is no doubt one of the most important things to be considered while planning to start a business in a new country. It comprises the materials & machines used to manufacture goods & services in the country.

Advancement of technology has brought an ease of doing business for every type of company. Even the small scale companies can have a global presence due to high-speed internet services and can sell their products throughout the world. Following aspects can be considered while analyzing the technological environment:

• Level of development of technology and its usability by the citizens
• The speed at which technological changes are taking place.
• Facilities and restrictions imposed on technology transfer.
• Sources of technology.

The Competitive Environment:

The competitive environment varies from country to country. It is inter-related with other environments such as the economic, political, & cultural environments. These environmental factors can help a firm to determine the degree of competition existing in a respective country. Competition is distinctive and can come from various sources. For instance, it can be from a private or a public sector, or large or small organizations can be from domestic or global and so on.  

So, this was all about the International Business Environment (IBE) and its important components.