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UNIT 14 ENVIRONMENTAL CHALLENGES OF INTERNATIONAL

1.0 INTRODUCTION

Let us at this point consider the environmental challenges that face the international business organizations. Three major environmental challenges need further discussion and these include the economic environment, the political/legal environment, and the cultural environment.

2.0 OBJECTIVE

After reading this unit, you should be able to explain . The international economic environment

. The international political/legal environment . The International cultural environment

3.1 The international economic environment

We can identify three aspects of the economic environment that are useful to managers operating internationally. These shall be discussed under the economic system, natural resources, and infrastructure.

3.1.1 Economic System

Let us first consider the economic system of a country. Most countries all over the world today are moving toward market economy, the key element here is freedom of choice. Consumers are free to decide on what products and services they prefer to purchase. Firms are also free to decide on what products or services to provide. It therefore follows that as long as both the consumers and the producers are free to decide on what products or services to buy or produce in the market, then supply and demand determine which firms and what products will be available.

Another fundamental characteristic of market economies which is also related to above factor is concerned with the nature of property ownership. There are two distinctive types, which are complete private ownership and complete public ownership. In private ownership, individuals and organizations own and operate companies that carry out business activities. Here government is less concerned with running businesses. However in systems with public ownership, the government directly owns the companies that manufacture and sell products. Few countries have pure systems of private ownership or pure

systems of public ownership. Most countries tend toward one extreme or the other, but usually a mix of public and private ownerships exists.

3.1.2 Natural Resources

Natural Resources is another aspect of the economic environment. A broad range of resources are available in different countries which help to promote economic activities. There some countries which have a lot of natural resources while others don’t. The United States has a lot of natural resource such as crude oil, natural gas, coal, iron ore, copper, uranium, and other metals and materials that are important to the economic development of a modern economy. Japan on the other hand very few resources on their own and have to depend on importation of most of the resources needed for industrial activities.

One of the vital natural resources in the modern global economy is crude oil.

Nigeria produces crude oil along with other nations like Saudi Arabia, Iraq, Iran, and Kuwait. Some of these countries have attracted many international businesses into their country because of this important natural resource.

3.1.3 Infrastructure

Infrastructure is also an important aspect of the economic environment that is of relevance to international business management. Infrastructure consists of physical things such as roads, railways, schools, hospitals, communication systems, electricity, air ports, and so on. While some countries have highly developed infrastructures, others lacked them. Countries like United States, Japan, Britain, Canada, France, Sweden, Denmark, and Germany to mention just a few have highly developed infrastructures that have affected the development of international businesses in these areas. Others like Nigeria, Sudan, Kenya, Peru, Chile, and Pakistan to mention just a few have poorly developed infrastructure that discouraged international business. The poor electricity supply in Nigeria discouraged many international organizations from investing in the country. In some cases interested companies may have to build their own infrastructure such as houses, schools, hospitals, and others in order to attract international workforce.

3.2 The Political/Legal Environment

A second environmental challenge facing the international manager is the

political/legal environment in which he or she will do business. Today’s

Management Issues describes how the political/legal environment affects

immigration policies. Four other especially important aspects of the

political/legal environment of international management are government

stability, incentives for multinational trade, controls on international trade, and the influence of economic communities on international trade.

3.2.1 Government Stability. Stability can be viewed in two ways ----as the ability to be given government to stay in power against other opposing factors in the country and as the permanence of government policies toward business. A country that is stable in both respects is preferable because managers have a higher probability of successfully predicting how government will affect their business. Civil war in countries such as Lebanon has made it virtually impossible for international managers to predict what the government policies are likely to be and whether the government will be able to guarantee the safety of international workers. Consequently, international firms have been very reluctant to invest in Lebanon.

In many countries—the United States, Great Britain, and Japan, for example—

changes in government occur with very little disruption. In other countries—

India, Argentina, and Greece, for example—changes are likely to be somewhat chaotic. Even if a country’s government remains stable, the risk remains that the policies that the policies adopted by that government might change. In some countries foreign businesses may be nationalized (taken over by the government) with little or no warning. The government of Peru once nationalized Perulac, a domestic milk producer owned by Nestle, because of a local milk shortage.

3.2.2 Incentives for International Trade – Another facet of the political environment is incentives to attract foreign business. For example, the state of Alabama offered Mercedes-Benz huge tax breaks and other incentives to entice the German firm to select a location in that state for a new factory. In like fashion, as noted earlier, the French government sold land to The Walt Disney Company far below its market value and agreed to build a connecting freeway in exchange for the company’s agreement to build its European theme outside Paris. Such incentives can take a variety of forms. Some of the most common include reduced interest rates on loans, construction subsidies, and tax incentives. Less developed countries tend to offer different packages of incentives. In addition to the raw materials and equipment, market protection through limitations on other importers, and the right to take profits out of country. They may also have to correct deficiencies in their infrastructures. As noted above, to satisfy the requirements of foreign firms.

3.2.3 Controls on International Trade a third element of the political

environment that managers need to consider is the extent to which there are

controls on international trade. In some instances, the government of a country may decide that foreign competition is hurting domestic trade. To protect domestic business, such governments may enact barriers to international trade.

These barriers include tariffs, quotas, export restraint agreement, and “buy

national” laws. Let us briefly consider the meaning of these terms