DOMESTIC,FOREIGN AND GLOBAL ENVIRONMENT & INFLUENCE ON INTERNATIONAL BUSINESS

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MASTER OF COMMERCE – M.Com First Year (IBO) Solved Assignments for July 2019 and January 2020 Admission Cycles

IBO Tutor Marked Solved Assignment

Course Code : IBO – 01
Course Title : International Business Environment
Assignment Code : IBO-01/TMA/2019-20

Coverage : All Blocks

IBO – 01 International Business Environment Solved Assignment for 2019-20

Q1.) How do domestic, foreign and global environment influence international trade? Explain various economic and financial environment which influence international business with examples.

Ans: Another way of understanding various factors constituting international business environment is to divide the various factors into three broad groups: domestic, foreign and global environments. This classification is based on the location at which environmental actors and forces exist and operate. Look at Figure 1 .I where a schematic presentation of these three levels of environment along with their components has been shown. 

In the figure, innermost circle represents firm's business strategy and decisions with regard to production, finance, marketing, human resources and research activities. Since these strategies and decisions are made by the firm, they are called controllable. Firm can change them but ‘within the constraints of various environmental factors.

The next circle represents domestic environment and it consists of factors such as competitive structure, economic climate, and political and legal forces which are essentially uncontrollable by a firm. Besides profound effect on the firm's domestic business, these factors exert influence on the firm’s foreign market operations. Lack of domestic demand or intense competition in the domestic market, for instance, have prompted many Indian firms to plunge into international business. Export promotion measures and incentives in country have been other motivating factors for the firms to internationalize their business operations. Since these factors operate at the national level, firms are generally familiar with them and are able to readily react to them.

The third circle represents foreign environment consisting of factors like geographic and economic conditions, socio-cultural traits, political and legal forces, and technological and ecological facets prevalent in a foreign country. Because of being operative in foreign market, firms are generally not cognizant of these factors and their influence on business activities. The firm can neglect them only at the cost of losing business in the foreign h markets. The problem gets more complicated with increase in number of foreign markets in which a firm operates. Differences exist not only between domestic and foreign environments. But also among the environments prevailing in different foreign markets. Because of environmental differences, business strategies that are successful in one nation might fail miserably in other countries. Foreign market operations, therefore, require an increased sensitivity to the environmental differences and adaptation of business strategies to suit the differing market situations.

The upper most circles, viz., circle four, represents the global environment. Global environment transcends national boundaries and is not confined in its impact to just one country. Global environment exerts influence over domestic as well as foreign countries and comprises of forces like world economic conditions, international financial system, international agreements and treaties, and regional economic groupings. World-wide economic recession; international financial liquidity or stability; working of the international organisations such as World Trade Organisation (WTO), International Monetary Fund (IMF), World Bank and the United Nations Conference on Trade and Development (UNCTAD); Agreement on Textiles and Clothing (ATC); Generalized System of Preferences (GSP); International Commodity Agreements; and initiatives taken at regional levels such as European Union (EU), North American Free Trade Association (NAFTA) and Association of South East Asian Nations (ASEAN) are some of the examples of global environmental forces having world-wide or regional influences on business operations.

Financial Environment:

Sound financial position of the country coupled by the favorable investment policies
reflect strong demand potential. Let us briefly learn important financial indicators.

Monetary and Fiscal Policies: Inflation, interest rate, various kinds of duties and exchange
rates are the variables related to the country's monetary and fiscal policies and have a substantial impact on costs and profitability of business operations. These variables also influence a firm's decision to move funds from one nation to another.

Commercial and Foreign Investment Policies: Each country has its own commercial and foreign investment policies which must be studied in detail to ascertain country's openness to trade and investment with other countries. A proper understanding of these policies can be quite helpful in ascertaining what tariff and non-tariff barriers the particular country uses to protect its domestic industry from foreign competition. The country may plan to minimize the incidence of these trade measures.

Balance of Payments Account: A country's balance of payments account is another major source of information about the country's foreign trade and foreign currency reserves. The current account throws light on the country's exports and imports as well as its major source of imports and destinations of exports. Capital account reveals stocks of foreign investment, borrowings, lending and foreign exchange reserves. An international firm must be duly aware of exchange controls prevalent in the foreign countries. Countries running deficit in their balance of payment accounts generally impose controls on movement of foreign exchange into and out of their economies. These controls prompts the multinational corporations to resort to transfer pricing mechanism, i.e., over invoicing of imports and  under pricing of exports so as to move out more than permitted funds from such countries.


  ECONOMIC ENVIRONMENT: