Management > International Business Management > Introduction to International Business > Factors Affecting International Business
The exchange rate, geographical position, level of development, national income, legal and political framework are some factors which influence the international business.
Influence of Politics and Protectionism:
A country’s government can have a major effect on its balance of trade due to its policies on subsidizing exporters, restrictions on imports, or lack of enforcement on piracy. The government may adopt a policy of protectionism and restrict trade through tariffs to safeguard the domestic economy. Different ways of protectionism are licensing, anti-dumping laws, quota restrictions, and tariffs for their business operations in a foreign country or region.
Legal and regulatory framework:
Companies involved in international business may have to comply with laws of more than one country. This certainly poses a challenge as each country has its own set of laws. These companies have to ascertain that their scope of business is within the regulatory framework set by the authorities of that country.
Lengthy Legal Procedures:
Import or export of goods involves a lengthy and complicated procedure. Prior permission of the government has to be obtained before exporting or importing goods or services. One has to fill many documents, get customs clearance, conversion of rupee into foreign currency, booking of the ship, etc. All of these are time-consuming activities.
Inflation:
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. Inflation affects imports and exports primarily through their influence on the exchange rate. Higher inflation typically leads to higher interest rates, and this leads to a weaker currency. A currency with a higher inflation rate will depreciate against a currency with lower inflation. A stronger domestic currency can have an adverse effect on exports and on the trade balance. Inflation leads to a reduction in exports due to which the goods and services become more costlier in the international market. Higher inflation increases the input costs of raw materials and labor. These higher costs can have a substantial impact on the competitiveness of exports in the international market. But imports become cheaper.
Balance of Payments Position:
If a country is facing balance of payment crisis, it has to adopt measures intended to restrict the import and increase On the other hand in case of balance of payment surplus imports are supported.
National Income:
National income means the value of goods and services produced by a country during a financial year. Thus, it is the net result of all economic activities of any country during a period of one year and is valued in terms of money. In an open economy consumers of a country also spend some income on imported goods. The imports of a country depending on their level of income. The higher the level of income, the prices of imported goods and tastes of consumers remaining the same, the greater will be its imports.
Exchange Rate:
The currency unit varies from nation to nation. This may sometimes cause problems of currency convertibility, besides the problems of exchange rate fluctuations. Each country’s currency is valued in terms of other currencies through the use of the exchange rate so that currencies can be exchanged to facilitate international transactions. The balance of trade impacts currency exchange rates as supply and demand can lead to an appreciation or depreciation of currencies. A country with a high demand for its goods tends to export more than it imports, increasing demand for its currency. The monetary system and regulations may also vary from country to country.
Market forces:
Demographics of each country have its own perceptions about different products and services. The availability and nature of the marketing facilities available in different countries may vary widely. The local, political, economic, and technological environments differ from country to country. Similarly, we have to consider several other factors. They may be in terms of customer preferences, product placement, pricing, advertising, distribution channels and so on. An international company has to face the challenges of multiple regional customers, each with unique requirements.
Geographical Position:
Common borders, ease of transportation, coastal areas, climate, etc. affect international trade. If the distance between the markets is large, the transport cost becomes high and the time required for affecting the delivery tends to become longer. Distance tends to increase certain other costs also. This factor impacts international trade greatly.
Level of Economic Development:
The developed countries have a large share of international business. They trade in finished and high quality good. The developing countries trade in raw materials and agricultural goods.
Culture:
The cultural differences are one of the most difficult problems in international marketing. In a domestic market, a business deals with a homogenous culture whereas in international business the company has to deal with heterogeneous cultures in multiple countries. The company’s management has to get accustomed to different languages, culture, sentiments, and traditions of the foreign country in order to conduct business effectively. Different languages are spoken and written in different countries. Traders must appoint someone who can read and understand the foreign language to read the price list, terms, and conditions of trade, etc.
Advancement in technology
The changes in technology bring about the change in the working conditions and the quality of the product. It also helps to produce the goods on a large scale at a lower cost. The company can have major advancements due to the latest technology and techniques. With the help of technology, there is an increase in the earnings of the company.
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