Briefly explain the political and economic environment of International Business.
Political Environment in International Business
The political environment means the political risk, the government’s relationship with a business, and the type of government in the country. Conducting business internationally implies dealing with different kinds of governments, levels of risk and relationships.
There are different types of political systems, such as one-party states, multi-party democracies, dictatorships (military and non-military) and constitutional monarchies. Thus, an organisation needs to take into account the following aspects while planning a business plan for the overseas location:
- Political system of the business
- Approach of the government towards business, i.e. facilitating or restrictive
- Incentives and facilities offered by the government
- Legal restrictions for licensing requirements and reservations to a specific sector like the private, public or small-scale sector
- Restrictions on importing capital goods, technical know-how and raw materials
- Restrictions on exporting services and products
- Restrictions on distribution and pricing of goods
- Required procedural formalities in setting the business
Economic Environment in International Business
The economic environment refers to the factors contributing to the country’s attractiveness to foreign businesses. It can differ from one nation to another. Better infrastructure, education, healthcare, technology, etc., are also often associated with high levels of economic development. The levels of economic activities combined with infrastructure, education, and the degree of government control affect the facets of doing a business.
Usually, countries are divided into three main economic categories, i.e. more industrialised or developed, less developed or third world, and the newly emerging or industrialising economies. There are significant variations within each economic category. Overall, the more developed countries are rich, the less developed are poor, and the newly industrialising are those moving from poor to rich. These distinctions are made based on the Gross Domestic Product per capita (GDP/capita).
A business needs to recognise the economic environment to operate in international markets successfully. While analysing the economic environment, an organisation intending to work in a particular business sector should consider the following aspects:
- Economic system to enter the business sector
- Stage and pace of economic growth
- Level of national GDP and per capita income
- Incidents of taxes, direct and indirect tax
- Available infrastructure facilities and the difficulties
- Availability of components, raw materials and their cost
- Sources of financial resources and their costs
- Availability of workforce, managerial and technical workers, their salary and wage structures