There are forces of three kinds of environments which International business must deal with in order to survive and these make it differs from domestic business. These environments are domestic, foreign and international.
While firm whose business activities are carried out within the borders of one country needs to be concerned essentially with only the domestic environment. Although domestic firm will not be totally free from foreign or international environmental forces because the possibility of having to face competition from foreign imports or from foreign competitors that set up operations in its own market is always present.
These environments forces do influence the life and development of the firm and they are classified into two groups i.e. internal and external forces. The internal forces are made up of factors of production such as capital, raw materials and labour and the activities of the organisation such as personnel finance, production and marketing which management has direct control over.
These are control-label environmental forces that management must administer in order to adapt to changes in the uncontrollable environmental forces that management must administer in order to adapt to changes in the uncontrollable variables.
For example, if the government promulgated a law that corn flour could no longer be used for baking of bread (uncontrollable variable) bakeries can respond by using wheat flour and adjusting costs of other ingredients in order to be in line with cost of production controllable variable)
Good managers don’t have to wait for changes to occur before a reacting. Successful managers are those who have the good knowledge edge about the environmental forces that they are not only prepared and waiting but may even contribute to these changes. These environments may be discussed briefly:
The Domestic Environment
The domestic environment is made up of controllable and uncontrollable forces which emanated from the home country. Even though the managers are familiar with them but they do affect foreign operations. For instance in Nigeria we are having acute supply of foreign currency, if the government now place embargo on overseas investment to reduce outflow of foreign currency. This will affect the activities of management of multinationals in especially in the area of expanding overseas facilities as they would like to do.
Foreign Environments
The forces in foreign environments only occur in foreign nations but they are the same as those in the domestic home environment except they operate differently.
The forces in the two environments are identical but their values often differ widely and at times are completely opposed to each other e.g. diametrically opposed political force values and the bewilderment they may create for multinational managers. For instance, let us use the case of Nigeria and Cameroun during the Bakassi tussle.
If Nigerian government placed embargo against shipment of goods to Cameroun and thus include foreign companies manufacturing under Nigerian license. At the same time, the Cameroun government instructed the subsidiary of Cameroun company in Ghana to stop the shipment of certain goods to Nigeria as retaliation.
But Ghanaian government ordered this subsiary to defy the embargo and continue the deliveries of such goods. The Cameroun subsidiary would be facing the opposed political force i.e. from its own domestic environment and foreign environment even coupled with international environment, i.e., Nigeria.
International Environment
The international environment occurs where the forces of both the domestic and foreign environments meet and result to conflicts like the example above. The going up by many nations. It would be of importance, if uncontrollable forces are’ briefly discussed due to their influence on management at multinational enterprises. These forces originate outside the business enterprise. They consist of the following.
Financial Forces
The financial forces include foreign currency exchange risks, national balances of payment, taxation, tariffs, national monetary and fiscal policies, inflation and national business accounting rules. The fact that those forces emanated from outside does not mean that the financial management of companies is helpless to minimise their disadvantages, those disadvantages may even be turned to the company’s advantage.
Foreign exchange rate is the price of one currency expressed in terms of another. Foreign exchange rate fluctuates from time to time in the foreign exchange market and because of this, government sometimes intervene in foreign exchange markets. The company financial manager must understand how to protect against losses or optimise gains from such fluctuations.
Another level of currency exchange risk is encountered when a nation suspends or limits convertibility of its currency, and the manager must try to foresee and minis or avoid losses resulting from large holdings of inconvertible and otherwise limited useful currency
Currency exchange controls limit or prohibit the legal use of a currency in international transactions and this also affect the activities of multinationals. Management should be alert for either currency devaluation or restrictive monetary or fiscal policies to induce deflation
when the Balance of payment is shipping into deficit. The government may probably consider one or more market or non market measures to correct or suppress that deficit. The state of a nation’s BOP will tell observant management much value.
Another possibility is that currency or trade controls may be among. With foresight, the MNE management can adjust to or at least soften their impact. While on the export side the MNE may start shopping for export incentives e.g. government incentives to make its export easier or more profitable.
Inflation is of concern to management. The management will be faced with the question, should it raise capital at all, and if so, should this be done through equity or debt? High inflation rates bring high interest rates and it may discourage borrowing. This creates more complex problem for international business with the complication that inflation rates are different in different countries.
In this regard, management of a multinational must try to forecast the rates for each of the countries in which the MNE is active. The comparative inflation rates will affect the comparative currency values as the currencies of high-inflation countries weaken vis-a-vis the currencies of the countries whose inflation rates are lower. Management will try to minimise holdings of the weaker currencies.
High inflation rates cause the price of the goods and services produced or offered by a country to rise, and thus the goods and services become less competitive. The company’s affiliate in that country finds it more difficult to sell its products in export, as do all other producers there.
Relative inflation rates affect where the multinational raises and invests capital, high inflation discourages new investment. The international debt crises have added new financial forces with which managers must cope. Many debtor countries must struggle to nay debts and have less money to pay for import of goods or services.
Physical Forces
Those who are concerned, with overseas marketing must, as a basis, know their export geography.
Business people should be familiar with the locations of countries, their significant land forms, and their climates. These elements of the physical forces exert a powerful influence on the cultural and political forces. Mountain ranges, deserts, and tropical forests act as barriers to the movement of people, goods and ideas, whereas bodies of water facilitate such movements.
Rapid depletion of known sources of natural resources have forced firms which depended on them for production to search for new supplies in previously unexplored regions. The importance of new discoveries is not far fetch because they frequently create new markets. If substitutes are found that will decrease the need for a natural resource, a number of currently strong markets may diminish in importance. Industrial accidents such as pollution of water in riverine areas in Nigeria have caused both the industrialized and the developing nations to be more concerned about the protection of national resources. Multinational firms are being questioned about their operating practices worldwide.
Socio-Cultural Forces
The management of multinational enterprise must have knowledge of culture in order to be successful in their relationships overseas. Culture comprises of beliefs, rules techniques, institutions and artifacts that characterise the human population, must be of interest to businessmen who carry on business in other countries because of its influence on all other functions of the firm.
They have to be culturally sensitive because the society is composed of people and their cultures. Attitudes and beliefs, especially those concerned with time, achievement, work, and change, can be radically different from those to which the businessperson is accustomed. Being aware of the differences can often decide the outcome of a business venture.
Material culture, especially technology, is of great importance to management contemplating overseas investments. Foreign governments are becoming increasingly involved in the sale and control of technical assistance. The educational level will not only determine the kinds of people available to staff foreign operations but will also exert an important influence on the affiliate’s marketing mix.
For a person to understand the culture of a people, the language which is the key to culture must be learnt. At the same time knowledge of how a society is organise is useful because it is the societal organization that defines and regulates the manner in which its members interface with one another
These cultural components discussed above are very useful for managers involved in international business who must make cultural assessments.
Political Forces
For a foreign company to operate perfectly in a country, such company must deal with nationalism. Nationalism is an emotional force with political effects. Some countries are unable to a greater or lesser degree, to protect business and its managers from terrorism or other forms of attack.
Even, evidence have shown that nations are training and financing terrorists and directing terrorist attacks in other countries. Evidence has implicated -Syria, the Soviet Union, Iran and Libya. In international law, such state activities are acts of war. Business always expected and cope with the gradual changes of government policies toward business.
However, sudden changes of such government policies or sudden changes of government are unsettling or alarming to business. When business confronts such changes, it tends to stay away or go away.
Traditional hostilities between world groups cause problems for business. A group may boycott a company if it deals with another. The influence of these groups; international orgnanisation, such as UN and EC is growing and they are becoming more politicized and are gaining more political powers.
Labour is a major political force, so MNE has political power. Some MNEs have more resources than the nations with which they deal. They can use technology, distribution, management, capital sources and other strengths in their negotiations with host countries.
How a day’s risk assessment is necessity for banks and businesses operating internationally because of the increasing world unrest.
Legal Forces
Taxes differ greatly from country to country. Most countries have some sort of income tax but many rely more on the value added tax (VAT). In United States tax laws is strictly enforced but relatively relax elsewhere.
The United States has the most comprehensive antitrust laws, and it tries to apply and enforce the extraterritorially. United States is doing this by bringing their citizens and companies under U.S. law for acts performed outside the United States.
Many nations are not happy about this because they see it as intrusion into their sovereignty. Some countries and the European community have these type of laws which are called restrictive trade practices laws but they are not as enforceable as the U.S. antitrust laws.
At times some nations put obstacles in form of tarrifs, quotas, packaging requirements, health requirements as means of protecting or favouring their ow business against imports. Some even seize foreign owned property or domesticate it by taking 51 percent ownership in order to control it.
In some countries, both the executives and their companies face litigation problems from their workers or the public if one of their products causes injury or death. This liability may be civil or criminal in nature.
Price and wage control laws even labour laws exist everywhere and they must be studied. These laws can be expanded as the inflation continues. Almost all LDCs and communist countries have currency control laws, and some of them enforce these laws very harshly.
Conflict of laws may, occur where parties involved in a contract are from different countries and with different laws and the contract was not performed satisfactorily by one of the parties. Solutions to this have been found in international trade by making reference to inter national chamber of commerce uniform rules for collection or uniform customs and practice for documentary letter of credit publications.
Industrial property such as patents is protected by a number of multinational conventions (treaties) and by bilateral treaties. There is growing complaint by American business that U.S. laws and their enforcement by the government is lessening the competitiveness of US. companies as compared to foreign companies. Cited are the antitrust and tax laws, the Foreign corrupt Practices Act, and the anti boycott law.
Labour Forces
A company before investing in a country, there is need to examine the availability and. potential employee pool, it: composition, skill and attitudes These are beyond the management control before and after making investment in overseas country.
The company workforce may consist local citizens or foreigners. These foreign-workers may be guest workers who are legally in the country to perform certain tasks which the natives do not want to do. They may also be refugees, legally or illegally in the host country who came primarily to escape something and not primarily to perform specific work.
At times foreign workers cause problems, because when the economic is depressed local citizens may prefer the jobs held by them. Even during prosperity, there are racial conflicts and hostility between foreign workers and the natives.
Productivity suffers more in a situation where unskilled workers dominated the work force. The amount of capital equipment also has influence on productivity and it is effected by research and development and savings rates both of which can be encouraged or discouraged by tax policies.
Management investing overseas should be prepared, to perform differently in a traditional society than in a more developed, industrialized country. They have to consider, as they affect employment policies, the local attitudes toward social status, sex, race, religion and minorities.
It is very important and necessary for company proposing investing abroad to examine laws and government intervention in employer employee relationships. The need to study labour unions and strike record is also important.
Labour unions have begun to be active internationally and to coordinate studies and labour action. Such coordination has been growing in Europe and it was in Europe, first in Germany that codetermination began. Some of work participation in management can now be found in several European countries, Japan, and the united States.