International Environmental Influences
The global business environment can be analyzed against number of factors, such as PEST (Political, Economic, socio/cultural and technological).
Political
Political factors are how and to what degree a government intervenes in the economy.
There are two types of risk in political factors:
· Political risk – a risk that a company incurs losses due to non-market factors, which are related to government policy (trade rules, investment incentives and tax regime). Currency controls also fall under this risk.
· Country risk – similar to political risk but in a specific country.
Corporate Political Activity (CPA) – refers to the involvement of companies in the political process with the aim of influencing policies towards their preferences.
Two types of CPA:
· Buffering – proactive actions like warning the government about the impact of legislation while it’s being considered, in an attempt to influence the content.
· Bridging – reactive actions that focus on ensuring the firm is aware of and meets required standards of behavior.
Rugman and Hodgetts summarized different aspects of political risk
Sources of Political Risk (Code: RUN CAL)
U – Social unrest and upheaval
N – Nationalism increased
C –Changing economic conditions
A – Alliances. New international alliances
L – Local business people vested interests
Groups that generate political risk (Code: GIFT PO)
I – International organizations like World Bank and United Nations
F – Foreign governments that have influence
T – Terrorist groups
P – Protesters like students
O – Opposition groups
Effect of political risk (Code: I’M TIRED)
M – Modification or cancellation of contracts
T – Taxes increased and other financial penalties
I – Indigenisation level – restriction on foreign ownership or favouring of local firms
R – Restrictions on ways of operating
E – Expropriation (seizing) of assets, with or without compensation
D – Disruption and/or damage from terrorist activity
Jennings and Wattam devised the model to weigh up political risk
Risk Management – involves reducing the probability of the risk occurring and minimizing the impact on the organization that it will cause
Minimising the Probability of RISK (Code: PDA)
P – Postponing or abandoning the project until the level of risk is reduced
D – Develop links with relevant government departments to help shape policy
A – Abandon the project
Minimising the Impack of RISK (Code: CCC)
C – Continually monitor the environment and be prepared to react quickly
C – Contingency plans
C – Country or political risk insurance should be taken out
Economy and economic development
Economic factors (Code: GERI)
E – Exchange rate stable?
R – Rate of inflation? Government policy?
I – Interest rate compare with other countries
Level of Economic Development
GDP – Value of goods and services produced by an economy in a given period. It refers to the market value of all final goods and services produced in a country in a given period.
Social/Cultural
A country’s culture consists of a number of factors such as beliefs, morals and how citizens behave.
National culture is important to businesses because it influences the perceptions and behavior of consumers as well as employees and managers.
Language is another important aspect of culture.
Technology
This is the key driver of global economic activity.
Impacts of Technology ( Code: PEACE)
E – Standard education and technical infrastructure is important for advanced technology
A - Advanced Technology
C – Communication is easy with overseas (i.e. email)
E – ‘e’ methods for marketing communications (i.e., music downloads, broadband internet, mobility)
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