In today’s world, we all play a part in international business. Whether we are the buyer or seller, we are all integral. For instance, the iPhone is assembled in countries such as “Mongolia, China, Korea and Taiwan” (Kabin, 2018) before returning to the USA as the final product. It is then shipped to international Apple stores, to be purchased worldwide by consumers.
International business is the “exchange of goods and services among individuals and businesses in multiple countries.” (BusinessDictionary.com, 2018). For example, a trade between UK and India. Trading internationally consists of “PESTLE”, an acronym for Political, Economic, Social, Technological, Legal and Environment (Academy, 2018). This is significant when trading overseas as these factors will affect the business positively and negatively. In comparison with companies that strictly sell domestically, they are targeting a small percentage of their consumers. Therefore, by trading internationally, businesses will be able to “diversify their portfolios and insulate them against periods of slower growth in the domestic economy” (A. DiMatteo, 2016)
A social aspect to consider alongside international business is cross culture due to its significant influence on society. Businesses can implement cross culture to increase interaction with consumers of different backgrounds. Businesses have to alter their products to specifically target their audience depending on the country of origin, for instance, in the UK, it is acceptable to provide food containing pork, ham, alcohol etc. Whereas, in Muslim countries such as Dubai and Pakistan, they are prohibited due to religious and cultural reasons. Consequently, a business has to understand the culture and values held by society before immersing themselves into international business, altering their product to fit society’s needs and wants. Another cultural factor is language, as interaction has to take place for a sale to be made. “Joint ventures, mergers, licensing, distribution agreements and sales of products and services” (Yoko Brannen and Mughan, 2016) consist of face-to-face interactions, highlighting the importance of language as it makes international trade between countries smoother. For instance, having a multilingual instruction manual rather than just English will appeal to more customers. Furthermore, only through language will a multi-national company be able to cultivate effective strategies to dominate their international market, implemented through staff training and development (Von Glinow, 1988; Gibson and Hodgetts, 1991).
Technological factor is progressively essential to consider with international business. For instance, it is possible to contact someone on the other side of the world via email, phone etc. Additionally, through the use of technology, businesses can use machinery to cut labour costs, create less wastage and perform dangerous tasks. For example, in 2016 Amazon made its first air drone delivery, changing the shift between delivery drivers to self-automated drones.
Economic concerns with international business is inflation, as prices can rapidly increase or decrease at any time. “Influence on interest rates, exchange rates, cost of living, inflation affects general confidence in a country’s economy” (P. Neelankavil, 2015). Different countries have different levels of inflation, developed countries have lower inflation in comparison with lower economically developed countries who may experience hyperinflation. For example, “1993, Brazil inflation rate was over 1,000 percent” (P. Neelankavil, 2015). This is alarming for organizations who conduct business in Brazil as it destabilises their future due to factors such as expenses, inventory and cash-flow and hyperinflation.
Foreign direct investment “represents the capital investments made by companies in other countries… including the purchase of real estate, manufacturing plants, service and distribution centre’s or foreign businesses.” (A. DiMatteo, 2016). There are three areas where foreign direct investment has noticeably heightened over the past couple decades, Europe, East Asia and America. We can infer that these regions have strong political and economic power, driving international businesses to invest in these countries. In contrast with a nation dealing with political or economic unrest, a decline in foreign direct investment will follow, for example, “Russian Federation… saw FDI inflows drop by 50 percent in 2014 compared to the year before” (A. DiMatteo, 2016). This occurred because of the turmoil caused by Russia invading Crimea, which resulted in sanctions from the west causing a decline in Russia’s oil, which is what they are renowned for, as well as a downfall in currency. This shows the connection between international economies and how certain decisions may affect neighbouring countries likeliness to invest.
“A country’s political system influences the decisions made by an international firm” (P. Neelankavil, 2015). A secure and welcoming government would hope to see international businesses flourish in their country, in comparison with other governments who may be unreceptive due to clashes in political ideology e.g. Democracy vs communism. Additionally, “government introduces policies…through actions of wage, price controls, taxes, manipulation of money supply, decisions on government expenditures, production and the way businesses operate” (P. Neelankavil, 2015). For instance, these changes could insinuate an increase in minimum wage, which could be costly for the business, or if government modify existing policies such as restraining amount of international trade allowed in a country. Moreover, some government may require countries to pay additional charges for them to be allowed to trade legally. Governments use tariffs and quotas to shield domestic business and make them look more attractive in the eyes of the consumer as they would be cheaper. This is limiting for international businesses as their profits can be affected due to tax and a limit to the amount they can sell. However, if countries want to increase the amount of international business, they can use encouragements such as Free Trade Zones, allowing manufactures to conduct their business activities without interruptions from resident authorities. A majority of these zones exist in developing countries such as Pakistan and Sri Lanka as developing countries are more in need for foreign investment. A political decision that had a major effect is Brexit. Since Britain choose to leave the EU in 2016, it has since come with many negative implications such as devaluation of the pound by 15%, increasing gas and oil prices and a decline in the investment for real estate (J. J. Welfens, 2017).
Demographics is a factor to consider whilst conducting international business. The “study of human population in terms of size, density, location, age, gender, race, occupation and other statistics” (P. Neelankavil, 2015). As the world population is rapidly on an increase (6 billion people on earth) this will have an effect on international business because some areas are more congested. Depending on the size and population of the country will determine whether a business will want to invest into a foreign market as they will want to view how economically active the country is. For instance, “1 billion inhabitants in China to less than 1 million in Luxembourg” (P. Neelankavil, 2015). This indicates that there are more business opportunities available in China due to the fact that there is a wider target market and people are more economically active, implying more people are ready to work and spend their disposable income.
National laws affect how businesses carry out their day-to-day activities and this could have an effect on the organisations overall performance. Legal factors are vital for an organisation that wants to establish longevity, especially for countries that want to expand globally. Therefore, businesses have to consider legal acts such as health and safety, equal pay, child labour etc. The government can put in legislations in place, for instance to pay men and women the same amount per hour of work. Also, there are specific laws that cater to international businesses, for instance “investment of capital and repatriation of earning” (P. Neelankavil, 2015). Additionally, different countries have different forms of law, United Kingdom follows a common law, France follows civil law and theoretic law for countries that follow a religion such as Saudi Arabia. The importance of understanding the difference between country law is crucial for a business’s trying to expand internationally as they would have to abide by laws of the country they’re in. For instance, in Saudi Arabia, women have to keep their modesty in public and cover themselves head to toe, whereas in France, it is banned to wear a hijab in public.
A crucial aspect that countries must evaluate before doing business internationally is the condition of the market. Certain markets have no space for new businesses to co-exist as there are presently too occupied, therefore no opportunities for new businesses to flourish. Kokemuller, 2007 explains the limitations that may occur from entering a business that is too saturated. The issues are that it may restrict the profitability of the business, as there are too many businesses operating in the current market and therefore there may be a little customer left, which may construct the businesses aim of profitability. Additionally, another issue is the potential to grow within a market. If a market is already overly saturated, there will be no space for new business to flourish and grow.
To conclude, international businesses brings risks such as language barriers, exchange rates and legal requirements, however, it creates opportunities like integration of economies, increase profitability and brand notoriety.