40 Recent trends in Global Business Environment

Manjit Singh

1.   Learning Outcome:

 

After reading this lesson, you should be able:

 

To understand various factors affecting global business environment. To comprehend the recent trends in global business environment. To understand various driving forces.

 

2.   Introduction

 

In the year 1991, the Indian economy witnessed mammoth economic reforms. The Indian economy was running in deep crisis at that time witnessing twin deficits and depleting foreign exchange reserves. To wriggle out of the said crisis, the incumbent government undertook several major structural reforms in the name of Liberalization, Globalization and Privatization (LPG) policies. There is no single definition of the term ‘Globalization’. But in broader sense, it comprises, opening up of economic sectors, mobility of labor, financial flows (both portfolio as well as capital), exchange of technology, international trade relations, etc. Owing to these economic and political reforms, domestic business environment has changed substantially as a response to international events. The term ‘business environment’ generally relates to different factors having an impact on the conduct of businesses. These factors can further be categorized into internal and  external considering the international exposures of the same. Out of all the economic reforms, globalization is one of such economic reforms that have changed the attitude of worldwide economies toward India. Now, these events are not only for the Indian economy, other international economies are also witnessing increasing trade as well as financial linkages with each other. Notwithstanding, diverse countries are bestowed upon with different variety of resources, yet they have to depend on each other for optimum utilization and satisfaction of their particular needs. In simple terms, all the worldwide economies are coming up as a single large market platform, whereby the business houses are attempting to analyze not only their respective domestic economic events but the global factors as well.

 

“The term ‘environment’ refers to the surroundings or conditions in which a person, animal, or plant lives or operates: survival in an often hostile environment” (Oxford dictionary)

 

The same can also be said about a business environment. Internal factors are the elements panning within the organization, like employees, culture, management, supply chain, etc, whereas on the other hand, external factors embody different political, economic, social factors, etc., that channelize the overall way of doing businesses. So, global business environment comprise different global political, social, economical, cultural and financial factors that are exogenous to an organization but impacting domestic business environment. For instance, under the flagship endeavors of World bank and International Monetary Fund (IMF), different bilateral and multilateral agreements are entered between the countries. These agreements directly have an impact on the way of doing business with other connected international economies. On a similar note, the global financial crisis that got triggered in the US financial system had an impact on other international economies as well. The impact was not limited to financial system only, yet overall trade relations were hampered. So, an understanding of overall global business environment is utmost essential these days. Moreover, changing international market structures and integrations are adding up to the global business environment understanding.

 

3.  Factors affecting global business environment

 

1. Social factors: These factors include behavior, tastes, socio-cultural and lifestyles patterns of a population. Demographics play an important role in determining buying patterns of population. Age, gender, profession, composition, etc, have an impact on overall buying behavior of population and understanding of such changes is critical for developing corporate strategies. In a globalized environment, the social factors vary from one country to another. For instance, global chain of Quick Service Restaurants (QSR) McDonalds introduce products considering not only the taste and preferences of its domestic consumers, but religion sentiments are also considered at the time of designing menu strategies.

 

2. Legal factors: These factors involve changes in government laws and regulations. An understanding of these legal regulations is utmost essential owing to increasing trade as well as financial linkages among the international economies. Laws and concerning rules and regulations are changing over a period of time. To quote, laws relating to consumer health and consumerism are particularly different across nations. So, for successful functioning of business houses, international trade laws and regulations play a pivotal role.

 

3.   Political factors: This refers to political ideologies comprising changes in government policies. These factors have an impact on overall operations of the business. For example, rules relating to foreign direct investments (FDI) and foreign financial flows are changing over the years. These changing patterns are particularly relevant for the emerging markets, like India. On a similar note, fiscal policy initiatives undertaken in the emerging economies are particularly increasing competing elements among the said markets. The international business houses are required to comprehend these political ideologies time and again.

 

4.    Economic factors: These factors involve changes in overall economic structures. Inflationary pressures are the core economic factors driving international business strategies. Increasing living standards imply increasing inflationary pressures due to increase in demand for products. Consequently, increase in demand for the products causes business houses to witness profits. So, an understanding of overall economic conditions is essential for successful operations of business. Other economic factors that affect business include changes in real interest rate, wage rates, unemployment levels, consumer confidence levels, production levels, etc. Increasing consumer confidence also channelize business strategies across the nations.

 

5.   Technological factors: New innovations and inventions always have an impact on overall business operations because the said factors reduce costs and develop new products. With the advent of modern information and communication technologies, relevant information can be transferred from one country to another in just few micro seconds. This further helps in gaining competitive advantage. For instance, international brokerage houses are heavily reliant on modern technologies, whereby buy and sell related strategies are provided with respect to worldwide markets across different nations.

 

4.  Recent trends

 

1.      Global banking structure: Domestic banking institutions are slowly increasing their exposure to international assets and liabilities. To quote, the US financial crisis had an impact on other international economies due to exposure of the latter economies in structurally created international mortgage assets. With the advent of modern technology, domestic banking institutions are converting into global banking institutions. These increasing international exposures are substantially driving global business strategies.

2.      Sustainable and clean energy: Climate change agreements are talk of the town these days. The emerged markets like, the US, UK, European Union (EU), Japan, etc, are entering into agreements in taking emerging markets to the path of sustainability and usage of clean energy. The countries are deriving ways in procuring clean energy from international shores. Consequently, these agreements are seriously impacting the way businesses are conducted in domestic a well as international markets.

 

3.      Increasing economic power of emerging markets: The contribution of the emerging markets in overall global factors is increasing over the years. The acronym ‘BRICS’ comprising Brazil, Russia, India, China and South Africa is gaining importance since the last decade. The said economies are expected to outperform other emerged markets in coming future owing to the existence of diverse opportunities in the wake of middle class strata of society, technological revolutions, infrastructure advancements, education levels, socio-cultural factors, etc. So, due to these opportunistic factors, emerging markets are considered to be an important import and export destinations for the international players thereby driving business strategies.

 

4.      Increasing Privatization: Slowly, the international economies are moving toward privatizing corporate affairs. Public-private partnerships and divestment programs are core parts of these strategies undertaken in worldwide markets. The role of government in channelizing funds is slowly reducing, i.e. capitalism is state of the art philosophy which international economies are following. Obviously, these changing patterns are having an impact on international business environment.

 

5.      Technological revolution: With the advent of information and communication technology, new business opportunities are emerging. Cloud computing is a new way of handling business operations worldwide. Mobile phones and broadband connections are changing the way of doing businesses by promoting virtual teams. Moreover, the role of government in enhancing the use of technology is quite commendable. For instance, the concept of ‘smart city’ under the flagship of present National Democratic Alliance (NDA) government clearly reflects the importance that is being placed on the technological revolutions that the government attempts to introduce. For this, the government is also considering international financial flows.

 

6.      Changing Demographic features: Owing to globalization, consumers’ tastes and preferences are changing over the years. More and more women candidates are getting employment in industrial and financial houses. Growing e-commerce platforms are helping consumers and prospective customers in buying and even selling through international platforms. The said platforms are creating new employment avenues for the people. For instance, Japanese economy is witnessing aging population, however, it is finding respite in selling its products to the worldwide consumers.

7.      International arbitration: These days international arbitrators are playing an important role in directing global business strategies. The disputes which are outside the purview of domestic rules and regulations are referred to international arbitrators. The existence of these agencies is not only resolving the said disputes but also promoting and enhancing confidence among the business fraternities for entering into international trade relationships.

 

8.      Competitive advantage: In today’s scenario, most of the emerged markets are witnessing slower growth rates, so, this situation is placing an important role that the emerging markets can play in driving international growth rates. Increasing trade relations with the emerging markets vividly highlight the growing importance and competitive advantage of the said economies.

 

9.      Regional and economic blocs: Lastly, these regional and economic blocs, like EU, ASEAN nations, etc., are slowly increasing cooperation among the international economies. The said economies are opening up their respective domestic economies for the international investors. Consequently, these regional and economic blocs are having an impact on the global business environment.

 

5.  Driving forces

 

1.      Integration of international economies: Globalization has led to integration of domestic economies with the international ones. The countries are undertaking several trade related measures and developmental policies so as to increase cross border trade relations. These increasing economic ties are adding to the global business environment.

 

2. Liberalization: For an effective implementation of globalized practices, freedom of trade, goods, services, technology, capital and labor across the international borders act as a precursor. Concerning this, several business entities are required to undertake business ventures considering the liberalized policies of the international economies.

 

3. Free Trade: Another important feature of globalization is free trade between the countries. The term ‘Free Trade’ does not means trade between the countries without paying any custom duty or other levies. It simply means reduction in governmental procedures and duties, so that the international trade conventions can be conducted without excessive procedures.

 

4.  Transfer of technology: On the whole, globalization leads to transfer of technology from developed nations to developing. The developed countries, like the US are more advanced and rich in technology which can further be transferred to the developing economies likeIndia in the wake of optimum exploitation and development of the latter economies. These technological revolutions are helping in driving global business environment.

  5.      International Financial Flows: Globalization involves movement of financial flows from one country to another. Increasing international financial flows and global banking transactions are promoting international cooperation between the domestic and global business strategies.

 

6.      Transnational Companies: Owing to globalization, a new concept of ‘transnational companies’ has come into existence, apart from multinational companies. The transnational companies treat entire world market as one single market promoting decentralized decision making systems across international boundaries. In other words, the transnational companies do not make changes in their respective products at the time of entering a foreign market, like Coca-Cola. The product is same across diverse boundaries.

 

 

 

6. Case study: Troubled Times for The Chinese Toy Industry

 

(Source:http://www.icmrindia.org/casestudies/catalogue/Business%20Environment/BENV013.ht m)

 

Introduction

 

On October 4, 2007, the Consumer Product Safety Commission (CPSC)5 in the US recalled more than half a million toys made in China as they contained dangerous levels of lead. The CPSC announced that the recalled toys included ‘Pirates of the Caribbean’, ‘Baby Einstein’ and ‘Totally Me! Funky Room Decor Set’ decorating kits, imported and sold by Toys “R”Us Inc.6c and a variety of wooden toys imported and sold by KB Toys Inc. A lot of what is being recalled is because it violates the law, not that there is an imminent health risk,” said CPSC spokeswoman Julie Vallese (Refer Exhibit I for more information on toy recalls in October 2007). The October 2007 recall was the latest in a series of Chinese toy recalls by toy companies and retailers in developed countries. Among the reasons given for the recalls were excessive levels of lead paint, loose magnets that could be swallowed by children, or other potentially serious problems.

 

Toys have had a prime place in Chinese society since ancient times. Folk toys made of wood, clay and paper have always been very popular with Chinese children. Masks and clay figurines in the shape of animals have been found in the ruins of ancient Chinese habitations. The history of modern Chinese toys, however, dates back to the early 1900s. Around 1910, the first factories that made toys from tin were set up. Toy making in China started gaining momentum after the May Fourth movement8 in 1919.

 

Growth

 

Chinese toy companies, like other companies in the manufacturing sector, benefited from the reforms initiated in China in 1979. With the opening up of the Chinese economy, toy makers from Hong Kong, which by then had become a major global center for good quality toys, started setting up production facilities in mainland China in order to take advantage of the lower operational costs. However, most of the value-added work such as product design, production planning, quality control, management and marketing continued to be done from Hong Kong.

 

Problems

 

Though the Chinese toy industry had several strengths, it was also up against several problems that had the potential to significantly impact future growth. To start with, Chinese toy companies were faced with the dual pressures of rising costs and declining prices. The recalls had a limited impact on toy sales in the US and the EU but they severely dented the Chinese toy industry’s image in international markets. The possible long-term impact on its reputation, however, was only one of the many issues confronting the toy industry in China. With costs of raw materials and labor increasing, the toy companies were seeing an erosion in margins. Also, the growing popularity of high-tech electronic toys was a challenge to Chinese toy companies as they were not very strong in this field. Furthermore, even in the traditional toy markets, Vietnam and Thailand were beginning to pose a threat.

 

Outlook

 

In an attempt to improve the quality of toys, the Chinese government sponsored a two-day training session on October 11 and 12, 2007, on quality control for more than 1,000 people from the Chinese toy industry. At these sessions, Chinese government officials and executives from multinational companies lectured on European and US quality and safety standards, China’s toy licensing system, toy certificate systems, export test regulations, etc. Participants were also taught how to deal with high lead levels or design flaws in their products.

 

The history of modern Chinese toy industry dates back to the early 1900s. By the early 1980s, the Chinese toy industry was developed enough to compete in the international market. By 2006, benefiting from economies of scale and cheap labor, the Chinese toy industry had come to dominate the global market for toys, accounting for around 75% of the world’s output. However, in 2006-07, the Chinese toy industry faced a series of product recalls, adversely affecting its global image. The case discusses the development of Chinese toy industry over the years. It discusses the problems facing the toy industry in China, with specific emphasis on the issue of recalls in 2007 and the reason behind the recalls. It examines some of the other challenges that the Chinese toy industry faces such as increasing labor costs, technological inferiority of Chinese toys and the growing demand for high tech toys and the Chinese toy manufacturers’ lack of brand power. The case ends with a discussion on the actions taken in response to the series of recalls and the possible impact of these recalls on the Chinese toy industry.

 

Issues

 

The case is structured to achieve the following teaching objectives:

 

Understand the reasons for the growth of the Chinese toy industry Analyze the problems facing the Chinese toy industry

Evaluate the impact of recalls on the fortunes of the Chinese toy industry Analyze the future of the toy industry in China

 

  1. Summary

 

The term ‘business environment’ generally relates to different factors having an impact on the conduct of businesses. These factors can further be categorized into internal and external considering the international exposures of the same. Out of all the economic reforms, globalization is one of such economic reforms that have changed the attitude of worldwide economies toward India. Now, these events are not only for the Indian economy, other international economies are also witnessing increasing trade as well as financial linkages with each other. All the worldwide economies are coming up as a single market platform, whereby the business houses are attempting to analyze not only their respective domestic economic events but the global factors as well. Internal factors are the elements panning within the organization, like employees, culture, management, supply chain, etc, whereas on the other hand, external factors embody different political, economical, social factors, etc., that channelize the overall way of doing businesses. So, global business environment comprise different global political, social, economical, cultural and financial factors that are exogenous to an organization but having an impact on domestic business environment. Global banking structure, sustainable and clean energy, increasing economic power of emerging markets, increasing privatization, technological revolution, changing demographic features, international arbitrations, competitive advantage and regional and economic blocs are some of the recent trends in global business environment.

 

Few important sources to learn more about the Economic Planning in India are:

 

  1. Shaikh Saleem (2009). Business Environment. New Delhi-110017: Pearson Education.
  2. Bagchi Amaresh (2011). Readings in Public Finance. New Delhi-110020. Oxford University Press.
  3. Datt & Sundharam (2011). Indian Economy. New Delhi-110055. S. Chand & Company Ltd.
  4. Paul Justin (2009). Business Environment-Text and Cases. New Delhi-110008. Tata McGraw Hill Education Private Limited.
  5. Agrawal Raj (2006). Business Environment. New Delhi-110028. Excel Books.
  6. http://yaleglobal.yale.edu/content/5-key-trends-globalization-are-changing-us-and-world
  7. https://books.google.co.in/books/about/Challenges_Of_Globalization.html?id=_Wd2HP83KgwC &hl=en

 

Points to Ponder

 

  • 1) The term ‘business environment’ generally relates to different factors having an impact on the conduct of businesses.
  • 2) These factors can further be categorized into internal and external considering the international exposures of the same. Out of all the economic reforms, globalization is one of such economic reforms that have changed the attitude of worldwide economies toward India.
  • 3) All the worldwide economies are coming up as a single market platform, whereby the business houses are attempting to analyze not only their respective domestic economic events but the global factors as well.
  • 4) Internal factors are the elements panning within the organization, like employees, culture, management, supply chain, etc, whereas on the other hand, external factors embody different political, economical, social factors, etc., that channelize the overall way of doing businesses. So, global business environment comprise different global political, social, economical, cultural and financial factors that are exogenous to an organization but having an impact on domestic business environment.
  • 5) Global banking structure, sustainable and clean energy, increasing economic power of emerging markets, increasing privatization, technological revolution, changing demographic features, international arbitrations, competitive advantage and regional and economic blocs are some of the recent trends in global business environment.