What are the approaches international managers seek to understand when instituting change in the international arena?
Working in a new environment, let alone the environment of an entirely different state than the one, which a company was created in, requires a profound understanding of the rules and regulations that the specified state environment works according to. In order to eliminate the possible preconceptions about the target environment, as well as avoid any possible misunderstandings, which may trigger further legal repercussions, a company must analyze the political situation within the target country.
The significance of launching an inquiry concerning the local political system and the possible restrictions that it puts on the trading process might not seem obvious at first. However, after a closer look at the subject matter will show that the location of the key political imbalances within a state is essential in defining the further approach for expanding in the target market and attracting the local customers (Daniels, Radebaugh, & Sullivan, 2011).
Therefore, managing political risks, which are determined by the current political situation within the target country, is the key approach that an international manager must seek in order to identify the methods of instituting a change in the area in question — the process of political risk management. However, apart from the above-mentioned approach, there are other routes that an international manager may take with scanning the designated area.
A thorough analysis of the state legal system is another step towards understanding the institutional change in shifting from home to the international market. What may be seen as a comparatively harmless action in the home market of a certain company may be interpreted as a major offense in another state; in order to avoid the possible legal concerns, an international company manager is to provide a detailed analysis of the legal system. Otherwise, major legal ramifications may follow the further actions of a company.
For example, the transition to the 21st-century global economy was marked by the diminishing role of the rich economies, whereas the emerging markets owned an impressive 6.4% of the market (Daniels et al., 2011).
However, the integration in China will reveal that the local economy is still far too flawed to be considered the environment that a company may evolve in; for instance, the enhanced bureaucracy rates affect the economy drastically, slackening the progress of private entrepreneurship and posing an almost insuperable obstacle to the organizations that attempt at expanding in China.
Even though private entrepreneurship is considered one of the backbones for the state economy to remain at a bearable level, even local companies receive little to no encouragement from the state, which means that foreign organizations will be practically unable to progress in the specified environment: “the bureaucracy involved in starting a new business has also fallen in recent years, meaning businesses waste less time on non-productive activities” (The power of three, 2013).
Consequently, without a proper understanding of the Chinese economy and detailed scanning of the local economic environment, one is most likely to fail in expanding into a foreign market.
At this point, one must mention that a variety of political risks may be caused by the company’s unwillingness to learn about the political situation that affects the trading processes of another country. It should be born in mind that the analysis of a local political situation is crucial because a company may face a threat of being unable to handle the instability caused by the political specifics thereof (Daniels et al., 2011).
In addition, it is essential for a company to undertake a rather circumspect approach towards expanding into the market belonging to a different state, as the laws and regulations in the latter may conflict with the company’s idea of trade. Specifically, the difference between the philosophies of trade for the democratic and the totalitarian regimes deserve to be mentioned. Without a proper analysis of the political situation, which the entrance to the new market requires, the operating position of the firm may deteriorate (Daniels et al., 2011).
An international manager entering a new market located in another state also needs to scan the new environment on both micro and macro levels so that the organization could evade a range of political risks. Herein the need to adopt the strategies, which will align with the state’s approach towards market regulation, emerges.
Thus, identifying the key issues within the state, as well as locating the governmental policies regarding the issues in question and creating the strategy that will not be in conflict with the governmental methods of intervention can be considered the key approach towards instituting change in the environment of a foreign country for international managers (Proctor, 2014).
What are the differences between common law, civil law, customary law, and theocratic law?
In order to adjust to the specifics of the legal environment within a specific country, be it a state with a democratic or a totalitarian regime, a company must study the laws of the state in question carefully. Traditionally, several types of law are distinguished within a state; these include the civil law, the common law, the customary law, and the theocratic law. According to Daniels et al. (2011), there is a basic difference between the four, which concerns the field of their application.
The common law is traditionally defined as the set of rules and regulations, which have been created after judgments are passed by courts on specific cases. Therefore, the common law stands in sharp contrast to statutory laws, which are adopted y the corresponding authorities on behalf of the executive branch and, therefore, require that the corresponding legislative processes should be carried out prior to the adoption of the law.
Daniels et al. (2011) determine the common law as the set of rules and regulations that “translates the country’s constitution into an open and just legal system” (Daniels et al., 2011, p. 155).
Therefore, it can be considered that the common law serves as the basis for the country’s legal system. The fact that the precedents, which the common law is founded on, determine the future decisions of the court, however, can be viewed as the distinctive feature of common law, as both civil law and customary law work according to the already existing postulates.
As far as the civil law is concerned, the specified set of regulations is traditionally referred to as the legal system that “ensures fairness and efficiency in business transactions” (Daniels et al., 2011, p. 155). To be more specific, the civil law of the state is the basis for carrying out the activities related to trade and trading business.
Since there may be certain discrepancies between the premises for the civil law regulations in various states, the trading process may become quite complicated for the organizations, which are unaware of the civil law of the foreign partners.
The key difference between the civil law and the common law, thus, concerns the domain in which the rules and regulations are applied. While in the common law, a variety of issues are addressed, the civil law tackles the trade issues for the most part. Moreover, according to Daniels et al. (2011), civil law does not rely on tradition, in contrast to the common law.
The customary law, in its turn, can be defined as the set of legal rules and regulations that reflect “the wisdom of daily experience or philosophical traditions” (Daniels et al., 2011, p. 156). Instead of focusing on the crimes against the state or the society of the above-mentioned sate, the customary law is supposed to take care of the “private wrongs or injuries” (Daniels et al., 2011, p. 156) that specific organizations or people have suffered.
The fact that the customary law is grounded deeply in the customs and traditions of a specific state is, therefore, the characteristic that sets it apart from the laws described above. On a more general level, the customs law can be viewed as the expectations set for the members of the society to comply with a specific pattern or patterns of the socially acceptable behavior (Daniels et al., 2011).
In a certain way, customary law resembles theocratic law, as it defines not only the restrictions that are imposed on people in terms of committing certain actions but also the accepted and expected behavioral patterns. Consequently, customary law is based on morals and traditions of the society, much like theocratic law; these are only the origins of these traditions that may differ. For instance, customary law in a Muslim country is based on the key tenets of the Muslim religion and, therefore, rubs elbows with the theocratic law.
Another set of rules and regulations that an international company must take into account when entering the market of a specific state, the theocratic law must be mentioned. Theocratic law is the system of principles that “relies on religious and spiritual principles to define the legal environment” (Daniels et al., 2011, p. 156). The fact that the theocratic law is based on religious concepts and not on the political ones is what makes it so different from the rest of the laws.
Basically, there is very little in common between the theocratic law and the rest of the laws, starting from the reasons for the laws to be established down to the punishment that the person breaking the law is supposed to suffer. As opposed to the customary law, the common law and the civil law, the theocratic law is based on the ideas of morality described in religious teachings.
Consequently, theocratic law needs a consistent update so that the principles created centuries ago, when the society worked according to different principles, could be applicable within the present-day settings. The fact that the theocratic law cannot possibly include the list of regulations and recommendations concerning every scenario imaginable and, therefore, needs to operate on a case-by-case basis, makes it rather similar to the common law.
However, in terms of the nature of the behavioral standards, theocratic law stands out of the rest of the laws, as it is grounded deeply in the religious beliefs and, therefore, may fail to tie in with the current concepts of justice and legal standards. Herein the key difference between the theocratic law and the remaining three types of laws lies.
What is the political risk, and how does it affect international business?
As it has been stressed, political risks faced by an international organization in various countries due to the difference between the policies accepted in the state that the company originates from and the ones that are followed in the country that the company attempts at expanding into.
Daniels et al. (2011) define political risks as the alterations in the political environment caused by the shift to a different market, and the degradation of the operating positions, which the above-mentioned change leads to (Daniels et al., 2011, p. 150).To be more exact, Daniels warns about the threats of underrating the significance of a political change and the effects that it may have on an organization operating in the environment of a foreign country.
According to Daniels et al. (2011), the presence of a political risk hinges on the philosophy that the country in question has adopted as its current political regime. Specifically, Daniels et al. (2011) blame totalitarian regimes for the lack of flexibility and, therefore, the failure to provide a decent environment for the development of international companies.
Apart from the specified problem, the change of the political leadership opinion in general, as well as the alterations in the external relations or any kind of political disorder, is qualified as a political risk (Daniels et al., 2011).
As a rule, several types of political risks are identified; the effects that they have on international business are quite different from each other. For instance, the catastrophic political risk, clearly falling under the category of the worst-case scenarios, presupposes that an international company will possibly find itself under the pressure of deleterious circumstances, which will affect its further operations and may even trigger its untimely demise (Daniels et al., 2011).
The aforementioned type of risks can be observed in cases when a company engages in the practices that are banned in the state that it operates in. To be more specific, the actions carried out by the company may be interpreted by the state government as a violation of the country’s laws. As a result, the company may be liable for breaking the state laws and face the court, with rather deplorable consequences, i.e., the loss of money and the prohibition from providing its services in the designated area.
The alterations in the public policy, which occur once a company switches from operating in their home environment to integrating into a different market, however, are classified as the systemic political risk by Daniels et al. (2011). Resulting in the necessity to change the company’s approach towards a more flexible one and, therefore, adapting towards the new political environment.
On the one hand, some of the effects of the given change can be viewed as rather positive, as developing flexibility is an essential skill that the leader of entrepreneurship must possess. On the other hand, the need to adapt to the economic environment of a specific country may require spending a very large amount of the company’s resources.
Herein the threat for a company to fail to replenish its resources lies; apart from missing its financial goals, the firm in question may have to resort to the services of another partner and, thus, reduce its quality standards. Disappointed in the quality of the final product and the speed of its delivery, customers may refuse to buy anything from the company, which will ultimately lead to bankruptcy. Hence, the issue of facing political risks bravely is a double-sided sword for numerous international companies.
Moreover, the necessity to adapt to an entirely new political regime when transferring the company into the environment of another country is an admittedly rare occurrence. Instead, organizations often have to deal with specific elements of the political system within a certain state, bureaucracy being one of the key impediments to the company’s successful performance.
At this point, the phenomenon of procedural political risk factors in. Determined by Daniels et al. (2011) as the risk of the company’s key transactions being slackened down by bureaucracy and the related political risks, the phenomenon can be avoided once a detailed analysis of the political situation within the target country is conducted.
Last, definitely not least, the risk that comes from the restriction or downright elimination of the local property rights by the state authorities (Daniels et al., 2011, p. 152) must be mentioned. The specified type of risk also minimizes the company’s chances for succeeding in the target area, as it poses a major obstacle to companies establishing their offices in the corresponding state (Njanike, 2013, p. 24).
Therefore, political risks impede the development of international business. They hamper the process of accommodation, which is crucial to the further successful evolution of the company. Detecting the existing and the emerging political risks, as well as defining the means of avoiding them, is the key priority of an international manager.
What is the effect of inflation on the international business?
There is no need to stress the deplorable effects of inflation on the economy of the state that it occurs in. According to Daniels et al. (2011), inflation is the “sustained rise in prices measured against a standard level of purchasing power” (p. 207). Whereas the idea of increasingly high prices being the key factor shaping the company’s strategy in the market might seem profitable in terms of the streak of revenue, the actual implications of inflation, especially the long-term ones, are beyond deplorable.
Resulting in a rapid rise in the number of buyers and the inescapable drop in the buying power of the dollar (Daniels et al., 2011), inflation affects both interest rates of an organization and its chances to succeed in the environment in question.
A closer analysis of the effects that inflation has on international companies operating in the global environment will reveal that increasing inflation rates, in fact, “erode purchasing power that creates wage pressure that reduces profits that lowers savings and so on” (Daniels et al., 2011, p. 187). In other words, inflation drains international organizations both financially and economically without leaving these companies any chance of regaining their profits and the chances to remain competitive in the context of the global economy.
More importantly, inflation alters the principle of international companies’ operation, therefore, depriving them of the opportunity to adapt to the rapidly changing environment and maintain their performance potential as high as it used to be before the beginning of the changes in the state economy.
It would be wrong to claim that an organization has no chances of surviving in the realm of inflating economy; however, adjustment to the above-mentioned environment presupposes that every single resource that a company has should be used to the maximum and that every single element of the organization should work flawlessly; the slightest hiccup in the corporate mechanism, be it the production process, the communication issues, the marketing strategy, etc., may be destructive to the organization (Gray, 2013).
The international business, in general, also suffers greatly from the increasing inflation rates. Being one of the factors that restrict the opportunities for international organizations to evolve in a specific environment, inflation can be considered a major obstacle to the progress of international business in general.
Since “positive relationships exist between economic freedom, inflation, and employment” (Daniels et al., 2011, p. 190), changes in inflation obviously shape the environment in which international companies operate and, therefore, affect the latter on economic and financial levels. Hence, it is desirable that balance should be maintained between the above-mentioned elements for the sake of the sustainability of international businesses.
Inflation, therefore, affects international business on a very basic level by restricting the options that an organization has in terms of defining its financing strategy, its appeal to the target customers, etc. Inflation affects the cost of living greatly, therefore, shaping the buying power of the customers and dictating organizations, especially foreign ones, to either drop their prices to the threshold that will allow their target audience to buy their products, or to cease the company’s activities and go bankrupt.
The former option, as a matter of fact, does not guarantee that the organization in question will be capable of evading the threat of a crisis or, worse yet, its untimely demise. Quite on the contrary, a change in the pricing policy may trigger either major losses in terms of the company’s income, or a significant drop in the quality of the company’s services and products (Daniels et al., 2011).
Inflation, therefore, is an extremely tricky subject to tackle for foreign investors, which results in the latter refusing to have anything to do with the states that face an increase in inflation rates.
By definition, inflation causes the value of the national currency of the state that foreign investors operate in to fall (Cavusgil, Rammal, & Freeman, 2011, p. 312); as a result, the process of carrying out financial transactions becomes increasingly more complicated for foreign companies that operate in the specified area. As a result, companies investing in organizations located in states with major inflation rates suffer from taking huge costs.
Therefore, when boosted by unfavorable economic or political conditions, inflation rates put an international company in serious peril, as the organization must make no mistake in any domain; otherwise, the entire company may collapse under the pressure of the financial and economic threats.
Whereas low inflation rates are traditionally viewed as positive factors and the “telltale signs” (Daniels et al., 2011, p. 192) of the on-coming opportunities for enhanced trade, a sharp rise in inflation triggers an immediate strain in the realm of international business, leading to its inevitable collapse.
Why do countries with high GNI and GDP are attractive for foreign investment?
As a rule, foreign investors invest in the entrepreneurship located and expanding in the markets of the states that are defined by rather high GNI and GDP. The reasons for the countries with a relatively high GNI and GDP to look especially alluring for foreign investors are quite obvious since the aforementioned factors define the level of the market development and the financial opportunities, which an organization may enjoy in the country in question.
By definition, GDP is the indicator of the state’s economic potential, as it “strips out price effects in order to estimate the annual growth in the actual production of goods and services” (Daniels et al., 2011, p. 200) and, therefore, helps locate the current economic potential of the state. Logically, the higher the GDP rates are, the more chances a company may have once entered the market of the designated state.
According to Daniels et al. (2011), “world GNP and world GNI are equal” (p. 191); in other words, the specified indices grow proportionally. Therefore, it will be reasonable to suggest that the state, which has a low GNP, is most likely to have a low GNI, and vice versa.
As a result, it is essential for investors that the countries, which they choose for locating their entrepreneurship and promoting the economic growth of their organizations, should have both high GNI and GNP. As a result, the organizations that are placed in the specified environment will have enough chances for growing and expanding into the local and global markets, thus, working towards increasing their steak of revenues.
The same can be said about the consistent willingness of foreign investors to choose the states that have relatively high GNI rates as the potential targets in their further international operations. According to Daniels et al. (2011), GNI, or Gross National Income, can be defined as the measure of the state economy (Daniels et al., 2011, p. 200).
The broadness and vagueness of the definition provided above can be justified by the broadness of the concept; embracing every possible source of income within the state, GNI embraces the revenues obtained by the state SMEs and major corporations.
Seeing that the GNI index is in a direct proportion to the state’s wellbeing and economic prosperity, the desire of international investors to choose the specified states is rather understandable: “The growth rate of GNI indicates a country’s economic potential” (Daniels et al., 2011, p. 200). To be more exact, the GNI index rates must be higher than the ones of the population growth; as soon as the economic and financial stability of the state is jeopardized, the specified values turn out to be in an inverse proportion (Daniels et al., 2011, p. 192).
Apart from favorable economic conditions, increased GNI “indicates increased business opportunities” (Daniels et al., 2011, p. 192). On a more general level, a steep rise in GNI leads to the introduction of a better economic and financial environment, as well as the possibility of improving the existing communication processes. Consequently, the chances for arranging the organizational operations properly are increased greatly. With an increase in the state GNI, possibilities for updating the operations of local entrepreneurship will emerge.
More importantly, a rise in the state GI may trigger an enhanced development of technology, which, in turn, will provide both local companies and foreign investors with chances for progress in the area in question.
A closer look at the challenges, which most organizations working in the environment of foreign economy suffer, will reveal that the lack of the required data, as well as the inability to locate the existing information sources and transfer the data from one company department to another one, is what hampers foreign investors’ progress in most cases.
Therefore, with technological development boosted in the state under analysis, the promotion of modern tools for information processing, as well as information technology in general, will become a possibility. As a result, an organization will have more chances of surviving in a foreign economy once the premises for proper data transfer are provided. States with high GNI rates, in their turn, create the aforementioned premises for an organization to expand and evolve.
Therefore, both GNI and GDP rates define the attractiveness of the economic environment of a specific state to foreign investors. Introducing an entrepreneurship to a new climate requires a thorough scanning of the economic, financial and political environment; therefore, the location of the performance rates delivered by the state’s key organizations is essential to determining the chances for the company’s success: “GNI and its offshoots estimate an economy’s absolute performance” (Daniels et al., 2011, p 199).
Once the premises for expanding into a new state and developing new business relationships by attracting new customers and conquering the new market are created, a company may become successful in the new environment.
Reference List
Cavusgil, S. T., Rammal, H., & Freeman, S. (2011). International businesses: The new realities. Upper Saddle River, NJ: Pearson Education.
Daniels, J., Radebaugh, L., & Sullivan, D. (2011). The political and legal environments facing business. In International business (13th ed.) (pp. 133–179). Upper Saddle River, NJ: Prentice Hall.
Gray, J. (2013). The company states keep: International economic organizations and investor perceptions. New York, NY: Cambridge University Press.
Njanike, K. (2013). The investors’ guide: Secrets of investing in the developing world. Bloomington, IN: AuthorHouse.
Proctor, T. (2014). Creative problem solving for managers: Developing skills for decision making and innovation. New York, NY: Routledge.
The power of three. (2013). The EY G20 entrepreneurship barometer 2013. Web.