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    CHAPTER 3

    Key Factors Influencing International Business

    Learning value:

    This chapter highlights the major factors influencing the direction of

    international business, namely:

    1. Importance of environmental factors2. Economic environment3. Social environment4. Political environment5. Cultural environment6. Technological environment7. Legal environment8. Competitive environment

    A pilot has to check the atmosphere prior to taking off and landing his

    aircraft. A sailor has to understand the depth of the waters before sailing

    peacefully. A farmer has to plant seeds depending on the nature of the soil

    and the monsoons.

    On the same line, an international business entry or operation depends on

    multiple environmental factors. They may change the direction, strategy, and

    every moment of the international business operations.

    Prior to delving into the topic, we can ask ourselves a few questions andseek answers.

    Analyzing similarities and dissimilarities prevalent in different

    countries gives wisdom. Selecting a right country for business

    enkindles the spirit and minimizing risks assures success.

    Comment [r1]: I dont understand the entire

    introduction above

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    a.Why was ENRON unable to succeed in India and in thewhole world?

    b.What is the major hindrance in the success of Kelloggs inIndia?

    c.Why has KFC not made any breakthroughs in India, as itdid in other countries?

    d.What made Whirlpool and Caterpillar stop doing businessin India?

    An international marketer is required to understand, evaluate, and work outvarious parameters before venturing into any country. These parameters arecalled environmental factors and they determine the direction and purpose of

    the international business operation. Many decisions depend on

    environmental factors including the selection of the country, the location ofthe plant, liaisons with the government, the entry of investment from local

    bodies, product launches, channel management, and the promotion and

    opening of outlets. The first challenge for an organization is to navigate from

    its home country to the host country. Thereafter, it has to develop a propersystem so that the venture is successful in the host country, learn all about

    the regulatory bodies both in the host country and home country, understand

    the customers changing tastes and attitudes towards foreign goods, obtain

    revenues, and make the business deals effective with the right people.

    A majority of multinational corporations and large business houses appoint ateam of experts who are specialists in economies, political science,

    sociology, industrial psychology, and policy matters to advise management

    on its strategic decisions. These experts are called risk analysts. Prior toentry or investments of millions of dollars, the experts gather all relevant

    information about the country and interpret those facts to facilitate the

    companys entry. With risk analyses such as these, companies can safeguardthemselves from future dangers. The major risks are:

    1. Political

    2. Economic3. Exchange Control

    4. Socio-cultural5. Financial

    Comment [r2]: What does this mean?

    Comment [r3]: What do you mean e xchang

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    6. Legal7. Technological

    8. Competitive

    9. Infrastructural10. Labour-related

    An organization can overcome the effects of all of the above risks by taking

    into account the different environmental factors.

    Since the home environment is known, one can understand and overcome

    the pitfalls if any action goes wrong. The international business-relatedenvironments vary between continents, countries, and even regions. A

    detailed and comprehensive analysis of such a fast-changing environment is

    essential in formulating business strategies. Even well-known companieswith financial power, advanced technologies, and an efficient managementteam have failed to establish themselves successfully in other countries.

    Some examples of this are the Enron project, which did not take off in India;

    an American style of managing a sales force, which never worked forProcter and Gamble in Japan; the multilayer marketing technique of Amway,

    which did not work in South Korea; and Kentucky Fried Chicken (KFC) and

    McDonalds hamburgers, which failed in Brazil and Tashkent respectively.

    Thus, it is important for a company to have an international team dedicated

    to designing strategies that suit the varying environments of different

    countries.

    In this chapter, we discuss the environmental factors relevant to international

    business. The economic, political, cultural, technological, legal, andcompetitive environments play a vital role in determining an internationalbusiness operation. Certain environments are quite conducive to a company

    at the time of entry, but may pose major challenges later on. Argentina

    attracted huge investments before 2000, but after 2002, the country became

    detrimental to innumerable organizations. Hence, environmental factors

    could be stimulating or detrimental. If they are stimulants, the business will

    flourish, however if they are detrimental, the company has to be cautious.

    ECONOMIC ENVIRONMENT:

    The economic environment can be classified into three categories:

    a) Home-country economy

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    b) Host-country economyc) Global-level economy

    a) Home-country EconomySince 1940, hundreds of MNCs from the U.S.A. have ventured abroad with

    the support of their home country. After 1990, many Indian companies

    started venturing into sub-Saharan Africa, Southeast Asia, and Latin

    America due to the liberal policies adopted in India.

    In order to encourage the business community to venture overseas, it is

    necessary for a country to have liberal economic and trade policies.

    1. Economic policiesThe countrys economic policies are formulated and the targets are fixed by

    looking at business opportunities in other countries. Investing or setting up

    units abroad is made simpler for businessmen.

    2. Trade and commercial policies:The trade policy is announced by the ministry of commerce and industry,

    and the target for rational foreign trade is fixed. All of the promotionalbodies are geared to achieve the target. Many incentives are held out tooverseas companies so that they set up operations in the home country

    through local partners. Indonesia, Thailand, and Brazil extend all facilities in

    their home country to promote their nationals.

    3. Promotional and regulatory measures:The home country should take the opportunity to do business abroad. It can

    do this by being proactive, encouraging individuals to take risks, and

    extending fiscal and promotional support. If restrictions are imposed and

    bureaucratic hurdles are encountered at all stages, the business community

    will not think of taking any risks. By removing exchange control restrictionsand draconian codes of business and providing an environment conducive to

    foreign trade. Today, small countries such as Malta, Cyprus, and Mauritiushave transformed themselves into foreign trade economies.

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    b)Host-Country Economy.When a firm from one country enters any other country, the following major

    criteria are taken into account:

    1. Size of the marketMany multinational firms are thinking of entering India, China, Braziland Indonesia because of their large potential markets. Coca Cola,

    Pepsi, Hewlett Packard, and Samsung are looking to India as a future

    destination keeping in mind the size of the population, whichrepresents the size of the market.

    2. Gross Domestic Product (GDP)GDP is an indicator of the health of the economy; it also determines

    per capita income. A country with a high GDP is an attractive

    destination for any international businessman. If a constant growth

    rate is maintained, such a country would always be a magnet for

    investors. Thailand, Malaysia, and Indonesia were attractive during

    the 1990s due to a very high GDP growth rate until the currency crisis

    affected their economies.

    3. IndustrializationMany firms in the developing world were interested in entering intoEurope or the U.S.A. The recent trend among companies in India is to

    expand in Latin America, more specifically in Brazil, Argentina, and

    Chile. This is due to the industrialization program taking place in

    these countries. It is obvious that industrialization brings about

    prosperity and affluence.

    4. BankingBanking is the only channel through which remittances take place,

    and is hence a major infrastructure for international business.

    European, American, and economies in the Far-East have highly

    effective banking systems. Sub-Saharan Africa and CommonwealthIndependent States (CIS) are unable to provide good banking services

    to the international business community. Thus, a firm that enters

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    Africa or the CIS countries has to depend on other countries forbanking services.

    5. Purchasing PowerAnother major determining factor for any international business unit

    is whether or not the peoples ability to afford a product is low. In

    other countries, such as Saudi Arabia, both the income and

    willingness to pay for products are high. In Scandinavian countries the

    per-capita income is very high and they are ready to pay a premium

    price for highly sophisticated items. However, the low population is alimiting factor.

    6. Foreign ExchangeAnother determining factor in international business is whetherforeign exchange facilities are available for transactions. Although

    more than 70% of the countries in the world do not have foreignexchange reserves, the majority of them are becoming liberal in

    transacting in foreign exchange as a long term strategy for their future

    economic development. Against this, some countries with surplus

    foreign exchange reserves do not permit the free movement of the

    currencies. Countries that have such restrictions in the repatriation of

    foreign exchange will not be attractive to international business firms.

    Therefore, countries with sufficient foreign exchange reserves, a

    liberal policy on repatriation, and that have a demand for the products

    and services are an ideal destination for any company to dointernational business.

    7. Income LevelsEconomies are classified into two categories: low income and high

    income. Industrialized nations are high-income economies and enjoy a

    high per-capita income. Companies manufacturing or marketing

    premium-quality or high-technology products have an easier time

    entering into advanced countries with the proper strategies.

    Developing countries, or low-income economies, are price-sensitive.

    Many of them are under pressure due to high population levels,

    unemployment, and a lack the vision to industrialize more quickly.

    Still, they produced only primary goods and are rated one amongstLess Developed Countries(LDCs). Differences in income levels may

    limit involvement and investments. Sometimes, in a densely populatedcountry, a small percentage of the population can afford to buy

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    premium products. Since this does not represent the purchasing powerof the whole country, revenues would be minimal.

    8. Economic diversityIn the same country, a few urban centres may offer outstanding

    business opportunities while in other areas, there may be no demand

    at all. Nairobi in Kenya, Lusaka in Zambia, Johannesburg in South

    Africa, Sao Paulo in Brazil, and Casablanca in Morocco are cities

    with the highest purchasing power and demand for refrigerators, air

    conditioners, TV sets, and other such commodities. However, in otherparts of those countries, there is hardly any opportunity to do

    business. Despite the fact that Madagascar is a highly resourceful

    country, one cannot even get the basic items for survival, except intwo cities: Tamatave and Antamarino.

    c) Global-level economyBesides the home country and the host country, there are certain other

    factors that can influence the pattern of international business.

    Organizations such as the World Trade Organization, World Bank,

    International Monetary Fund, Asian Development Bank, and the

    Organization of Petroleum Exporting Countries (OPEC) can affect

    international business. The preferential treatment given to the membersof NAFTA, ASEAN, the European Union, and COMESA can have anegative impact on the trade between outside cartels and non-members.

    When shipments move from one destination to another, there are transit

    ports that charge huge amounts in surcharge or transit charges.

    SOCIAL ENVIRONMENT

    The social environment encompassing religion, language, customs,traditions, and beliefs influences buying consumption habits. Many

    companies face failure in foreign countries due to their inability tounderstand the socio-cultural environment of those countries. For

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    example, whenever any company establishes business in an Africancountry, the local population expects many jobs to open up for them.

    Very few countries perceive that they may be exploited.

    Due to the entry of foreign firms, the economic, and hence social,environment of an area can completely change. One example of this is

    southern China, which has completely shifted to become an affluent

    society due to the fact that almost 2000 companies get their products

    manufactured in coastal south China.

    1. National TasteIn Thailand, people prefer black shampoo; Nestle brews

    different varieties of instant coffee because people in different

    countries have varying tastes that may be uncommon in othercountries. Green is the favourite colour of all the Arabcountries, and red is still widely used in Russia, in banners,

    posters, and hoardings even though communism is in no wayprevalent in modern Russia.

    2. LanguageCross-culture and cross-border operations call for necessary

    language skills; for example, South Koreans have learnedIndian languages to be able to operate in India. This can be seen

    in the Hyundai or LG factories in India.

    Companies must also sometimes change their brand names andslogans in different countries. In Japan, General Motors sloganbody by fisher means corpse by fisher, and Pepsi Colas

    slogan come alive means come out of the grave. Prior to

    promoting the brand, one has to take into account the socio-

    cultural background of a specific nation and the different

    interpretations of a name in their local language.

    3. Values and beliefsIt is also important for companies to understand the significance

    of different designs and colours in different countries. For

    example, blue is perceived as feminine in Holland and

    masculine in another country. Green is a favourite color in theMuslim world, but is associated with illness in Malaysia, even

    though it is a Muslim country. White indicates death in Chinaand Korea, but is the colour of bridal dresses in Europe. Red is

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    associated with danger in many countries, but is a favourite inRussia.

    Another example is the swastika, which is considered sacred

    in India, but has completely different connotations in the west.

    4. DemographyA number of demographic factors, such as age, sex ratio, family

    size, and occupation influence the business of many companies.

    Different companies concentrate on different segments. For

    example, Barbie generates huge revenues through the childrenssegment of affluent countries.

    5. Literacy rateCountries with a high literacy rate experience a better standardof living. Here, the need is for standardized goods supported by

    technical services. For a country with an educated population,the amount of training required for the staff will be far less than

    in countries with a low literacy rate. This is an important factor

    as it influences incurred costs. An argument holds in the case of

    educating the consumer about the products manufactured and

    bought for use depending upon on the educational level. For

    example palmtop or multimedia kits could be sold to customer

    with technical skills to handle. In the same way medical

    equipment could be sold to the technician knowing operation

    mechanism.

    6. Female WorkforceThe most spectacular change that has taken place in the current

    era is the empowerment of women throughout the world. In

    China, Indonesia, Russia, and Thailand, women are major

    contributors to the GDP. With economic independency, women

    no longer have to depend on men to make decisions about what

    to buy; they can make their own decisions about whether to

    purchase any consumer product. Dulux, a well-known brand of

    paint in Europe, was promoted through campaigns directed at

    women because it was felt that women have an aesthetic taste

    for colours in the household paint segment. The performance ofApples iPod hit the roof in terms of revenue generation due to

    female customers. The female workforce is very strong invarious sectors in many countries. Some examples are Indian

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    women in IT-enabled services and handicrafts, Chinese womenin soft toys and ceramics, and Indonesian women in garments

    and paperwork, who have brought great success to their

    countries.

    7. Double-Income FamiliesAs the household income increases, the demand for the number

    of products increases proportionately. This is especially true for

    packaged food items, electronic gadgets, household appliances,health equipment, Japanese entertainment electronics. French

    perfumes dominate in Europe and North America, and fast-food

    chains such as Pizza Express, McDonalds, and Kentucky FriedChicken invariably rule the households of double-incomefamilies throughout the world.

    8. Impulse buyingBenefit-oriented buying is taking place everywhere. Pre-

    planned shopping and scheduled purchases are gradually

    disappearing. Throughout the world, people want items

    instantly. They see, ask, and buy. Providing benefits to lure

    impulse buying is a major challenge to international

    businessmen.

    POLITICAL ENVIRONMENT.

    The political environment in international business operates in

    different dimensions:

    1. The home country political environment2. The host country political environment3. The global political environment

    1. Home Country Political EnvironmentIn an ideal world, one would not normally expect domestic policies to

    affect a firms international activities. Some countries, such as theU.S.A., encourage their organizations to establish activities abroad,

    especially in their core-competency fields. Japan encouraged theirelectronics and auto companies to spread their activities outside Japan.

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    Domestic firms that continue to invest and manufacture abroad whileignoring their home country are often accused of creating domestic

    unemployment problems and may be subject to political pressures

    from the government. The Indian government encourages businesshouses to go abroad with their steel, healthcare, mining, textile, and

    automobile industries.

    2. Host Country Political EnvironmentIf the actual benefits of foreign firms are shared in terms of

    employment, taxes, and social security with the local population, thepolitical atmosphere tends to be hospitable. If it is felt that the foreign

    firms contribute nothing to the well-being of the nation, this may

    produce a hostile reaction from the business community and labourorganization, which in turn puts pressure on the government. Inextreme cases, this may lead to either political turmoil or the

    appropriation of the assets of the foreign firm.McDonalds had to face a change in the ruling party in Israel. When

    the National Religious Party (NRP) came into power, it demanded

    that McDonalds change its practices or be shut down.

    3. Global Political EnvironmentThis may be described as the combined politics of the home country,

    the host country, and the other countries in the world.

    Multilateral agreements between international organizations, such as

    GAAT, UNO and the Commonwealth, may constitute an impedimentto free trade as well as to the nature and scope of the operation ofinternational firms. Embargos, cartels, free-trade pacts, and customs

    unions allow a few nations to enjoy competitive advantages, while

    others lose their business prospects. However, there may also be

    advantages, for example, the Commonwealth Generalized Systems of

    Preferences (CWGSP) offers good opportunities to all commonwealth

    countries to supply and receive goods and services at concessional

    rates, which ultimately give them a competitive edge over non-

    commonwealth nations.

    Global politics can influence businesses in vastly varying ways. For

    example, the economic embargo on Iraq by the Security Council of

    the United Nations in 1991 meant that conducting trade with thatcountry was illegal for all international firms. Another example of this

    is when China ordered Microsoft to stop selling Windows 95 as itcontained politically offensive material, including phrases like

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    communist bandits. Microsoft agreed to change the material for re-entry.

    CULTURAL ENVIRONMENT

    The cultural environment for international business refers to the

    set of factors that shape the material and psychologicaldevelopment of a nation and represent the primary influence on

    individual lifestyle, attitude, predisposition, and behaviours of

    consumers in the market. The most important task ofinternational business is to identify relevant similarities anddifferences among countries and the means and methods to

    match the organizations culture with that of the country whereit will be operating. For example, when Toshiba gained 100

    percent ownership of Rank-Toshiba in the Plymouth, all of the

    managers in charge learned the British style of working.

    Working in the operational environment of MNCs or dealing

    with customers abroad one can not overlook cultural elements.

    The performance of a company in the international arena

    depends partly on how well the strategic elements fit into the

    culture of the host country. Culture may be described as the

    totality of the complex and learned behaviours of members of agiven society. Elements of culture include beliefs, art, morale,code of conduct, and customs. Culture has the following three

    characteristics:

    - It is learned: acquired by people over time throughtheir membership in a group that transmits culture from

    generation to generation.

    - It is interrelated: i.e. one aspect of the culture isconnected with another part, for example, religion and

    marriage, or business and social status.

    - It is shared: i.e. tenets of a culture extend to othermembers of the group.

    Culture is perhaps one of the most important determinants ofhuman behaviour. Food habits, social class, the family system,

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    community units, and other cultural and sub-cultural elementsinfluence the process of decision making in day-to-day dealings

    and the buying habits of customers.

    Thus, there is a need for cross-cultural understanding becauseof the significant differences in attitudes, beliefs, motivations,

    perceptions, and lifestyles between nations. For example,

    branded products will move fast in Europe and America, but

    Africans perceive branded products as being very expensive.

    The Influence Of Culture On International Business

    1. The utility value of a product may differ considerably fromcountry to country because of differences in beliefs, values, andlifestyles. Fast foods, such as Kentucky Fried Chicken,McDonalds, hamburgers, and pizzas are more popular in

    modern societies than in traditional societies. Similarly,branding and packaging are very susceptible to cultural bias.

    2. Products are launched in markets on the basis of eitherperceived or real utility value. Products from certain parts of the

    world such as Western Europe, Japan, and the United States

    command premium prices in developing countries because it is

    felt that they are of better quality than locally manufactured

    products, and as such, they have a higher value.

    3. Culture is perhaps the most powerful influence in determiningthe acceptability of advertising copy, design, and other elementsin various countries. For example. advertisements released inFrance may not be acceptable in the United Kingdom, many

    advertisements acceptable in the other parts of the world would

    not be accepted in Saudi Arabia, and liquor advertisements are

    prohibited in many countries.

    4. Holidays in different countries vary due to different religiousbackgrounds. Friday is a holiday in the entire gulf region. In

    China, offices and factories are closed for a week for the New

    Year celebrations. For companies with firms in different

    countries, it is thus impossible to impose common business

    practices everywhere, as productivity would be very low during

    festive days. Any strict implementation of company policy willhave direct repercussions, which may even lead to the closure

    of the business in some countries.

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    5. Local norms and practices may affect certain distributionstrategies. Eating in public places during Ramadan is prohibited

    in Muslim countries. Therefore, eateries are not open during the

    day during this period. In Spain, mail-order shopping is verypopular, whereas in the U.S. and Europe, chain stores are

    preferred, and in many Scandinavian countries, door-to-door

    delivery is common. Shopping malls are coming up in urban

    India faster than in any other country in the world. Still, small,

    traditional shops near ones hometown are perceived as

    trustworthy suppliers when customers need groceries.

    TECHNOLOGICAL ENVIRONMENT

    Technology and its applications are key factors in determining the

    international competitiveness of a firm when conducting internationalbusiness. Multimedia using Pentium 4 chips is common in advanced

    countries, whereas it will take at least another five years to introduce such

    products in Africa. Leadership in technology is achieved and maintained

    through a consistent program of intensive research and development, which

    can be very expensive. Only those companies that are able to maintain their

    technological activities will remain competitive.

    A Company may invest millions of dollars in R&D, despite the fact that the

    projected revenue in the home country would be very low. However, other

    countries will generate huge revenues over a period of time. Hoffkins, BioRad, Genen Technology, and Pfizer are examples of institutions and firmsthat are investing huge sums of money in R&D because they are sure of their

    returns on their investments over a period of time. In the late 20th century,

    the Asian tigers, Japan, South Korea, Hong Kong, Singapore, and Taiwan

    achieved miraculous success due to their investment and implementation of

    technology policies in specific sectors.

    Some countries, such as Japan for electronic equipment, Germany for

    medical equipment, and the U.S.A. for pharmaceuticals, have remained

    leaders in their fields for decades. Other countries have remained behind

    them. The time between the innovation and its adoption may vary from

    country to country. Countries that innovate are few and countries that follow

    are many. Technology leaders encash on price-skimming strategies in whichthe margins are huge. Eriksson, Nokia, Motorola, and LG have been

    successful since they began manufacturing cell phones. Currently, thebusiness opportunities for cell phones exist in every country of the world.

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    People around the world are adaptable to the technology as well. Whiletechnological innovation is adaptable to the masses, the companies involved

    in such businesses prosper. Today, Hewlett Packard, Fujitsu, Apple,

    Samsung, and Lenova compete against each other by educating the workerson the use of their laptops and as such, launch their new versions

    everywhere.

    LEGAL ENVIRONMENT:

    This relates to the laws and regulations governing the conduct of business

    activities in the country. Before entering any country, firms avail of the

    services of local legal firms to understand business interpretations pertainingto labour legislations, taxes, environment, pollution, investment,distribution, contracts, and logistics, among other factors. The international

    legal environment has three aspects:

    a) Home country lawsb) Host country lawsc) International laws

    a) Home Country LawsThese deal with two important issues:

    i) Conduct of the firm in the domestic territoryii) Trade with other countries

    For international operators, home country laws are not usually stringent.

    They are more facilitating or regulating in nature, but not controlling with

    regards to the normal practices of the business.

    b) Host country lawsThese include investment regulations, tariffs and duties, anti-dumping

    regulations, and the protection of local industries from unfair

    competition from industrialized countries. Tariffs and duties are used to

    discourage imports of non-essential products in order to conserve

    foreign exchange, maintain a favourable balance of trade, and generate

    revenue. Seven advanced countries impose laws against developingcountries. Super 301 against Indian nylon skirts imposed by the U.S.A.

    as an inflammable fabric and ban on Indian sea food by EuropeanCommunity are the examples. Comment [r8]: I do not understand this senten

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    c) International Laws

    These include treaties, conventions, and agreement between nations,

    and basically have the same standing as laws. They are particularlyprevalent in areas relating to patents, trademark protection, and privacy

    laws. One has to understand the broad provisions of UN resolutions and

    multilateral trade agreements such as the WTO. Disputes are solved by

    different means. Food and drug administration, health regulation, and

    registration formalities are judiciously implemented in international

    business operations. Investment restrictions in some sectors, promotionin others, and the role of regulatory authorities are part of the legal

    environment. For example, the Nigerian government nationalized the

    assets of British petroleum when it was revealed that the company wasselling Nigerian crude oil to South Africa, despite an embargo.

    COMPETITIVE ENVIRONMENT:

    Competition is a threat imposed by an environment that may affect,

    hamper, or challenge the operation of an international firm.

    Competition could either be from the firms home country, a host

    country, or a third country. Sometimes, product-related competition

    may crop up through substitutes, low-cost production processes,

    technology, or cost reduction through economies of scale. The current

    international business operation has to encounter competition at various

    stages, such as entry, operation, production, administration, humanresources, technical resources, financial resources, distribution, andlogistics.

    Motorola had to face competition from Nokia, soon Nokia concentrated

    in fast growing markets of India and China resulting the follower

    became leader in the world. Cuba-based white spirit company; Havana

    Club entered very late in the field and surpassed the erstwhile leaders

    like Smirnoff and Baccardi.

    Tusker and Phoenix, the major beer brands in COMESA (Common

    Market for East and South Africa) countries, have been overtaken by

    Kingfisher after the UB group took over National Breweries of South

    Africa.

    For international companies, competition is a way of life. According tothem, competition keeps their mind alert, as a quality war is inevitable.

    Beyond theoretical models, they believe in learning aboutcompetitiveness in the streets, countries, and production centres. They

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    consolidate competitive advantages and succeed. Hyundai Motors inIndia, Honda Motors in Europe, and Tata Motors in Africa withstood all

    the competitive forces and succeeded.

    FACTORS INFLUENCING INTERNATIONAL BUSINESS

    ENTITY ENVIRONMENT ACTIVITIES END

    RESULT

    INTERNATIONAL

    FIRM

    Economic

    Political

    Cultural

    Social

    Technological

    Legal

    Manufacturing

    Investment

    Trading

    MarketingCompetitive

    InternationalDestinations

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