International

Business: Economic Environment Facing Business

Importance of economic analysis
Different countries have diverse business environments which are dynamically
influenced by economic and political factors. Changes in one country may produce
changes and consequences in another. This underscores the fact that all nations are
somehow interdependent. It is vital, yet difficult, to have a universal economic
analysis owing to the complexities of the system, the market dynamism (rise of
emerging economies and globalization), and market interdependence. The data
overload can be overwhelming for a simple analysis of a countrys development,
performance and potential. Hereby, managers must make intelligent decisions as to
what countries to avoid, and which have great potential.
Economic Freedom
Economic freedom holds that one has the right to work, produce, consume, save,
and invest in the way that one prefers.1 Nevertheless, it is still regulated by the state
to protect property, liberty and public safety. The economic freedom index
measures the extent of government control. History of the world markets indicate
that economically free countries have higher standards of living, stability and
economic prosperity. The recent global financial crisis has questioned the
acceptability of the free market and led to a rebirth of government control.
Managers should analyze the implications of the interaction between state control
and economic freedom.

Economic Systems

An economic system organizes the production, distribution, and consumption of

goods and services.1 There are three main types of economic systems: Market,
Command and Mixed. A market economy is based on the doctrine of capitalism,
thereby maximizing economic freedom. There is private ownership of resources.
Profits are considered rewards for entrepreneurial innovation and the associated
risks and investment involved. The command economy is hinged on the philosophy
of communism. The government owns and control resources and has the authority
to decide on market issues. A mixed economy is anchored on the philosophy of
socialism. While ownership is largely private and economic decisions are principally
market driven, the government may intervene for social equality ad fair distribution
of wealth.
State Capitalism
State capitalism is a system whereby the government manipulates market outcomes
for political purposes, realizing that politics has a tremendous impact on the
performance of markets. The government decide how assets are valued and when
and where they are used. The government uses markets to promote economic
growth and stability, thereby generating wealth that maximizes state supremacy
and ongoing rule. Today, state-capitalist countries like China have shown
tremendous growth. Other nations may find this attractive and will further
encourage democracys retreat.

Leading Indicators of Economic Development, Performance, and Potential

Today, countries are broadly classified according to its level of economic
development, performance and potential: 1. Developing (low per capita income), 2.
Emerging (fast growing and relatively prosperous like the BRICs Brazil, Russia,
India, and China), and 3. Developed (high per-capita income and standard of living
like the US and Japan.
Managers assess markets in terms of size (GNI, GNP, or GDP), income (GNI, GNP, or
GDP per capita), stability (HDI, HPI), and sustainability (NNP, GPI, YBLI). Emerging
markets are expected to flourish remarkably the next years. Hence, for a better
economic analysis, the GNI (Gross National Income) should be adjusted according to
the growth rate of the country, the local population, and the standard of living.
China, for example, may have the 2nd largest GNI, but adjusting for its huge
population puts it to the lower-middle income tier. Current concerns are:
1. Expand the concept of prosperity to include aspects of happiness. This is
spurred by the observation that people in rich countries are not necessarily
happier than people in poor countries.
2. Green measures of economic performance. Proponents of sustainable
development encourage promotion of an enabling environment to meet the needs
of future generations.
Managers also evaluate other important indicators: Inflation, Unemployment,
Debt, Income distribution, Poverty, and Balance of payments. These help them
develop a general profile of the world markets.

International Business: Globalization and Society

Broad Foundation of Ethical Behavior
Companies must behave in an ethical manner, based on a code of conduct of right
and wrong. Ethical behavior from different countries differ. Multinational
companies must be aware of these differences to gain competitive advantage and to
avoid public perception of being irresponsible. This is highlighted today due to
organizations who monitor and publicize corporate practices.
Three levels of moral development are recognized:1. Pre-conventional. Children
learn what is right or wrong, 2. Conventional. We conform to a set of behavior from
our peers, and from social laws like a code of conduct, and 3. Post-conventional,
Autonomous, or Principled where a moral behavior is adhered to because the
individual believes it the right thing to do.
Our moral reasoning is based on three approaches. The teleological approach is
when decisions are made based on the consequences of the action, while the
utilitarianism approach judges an action as right when it produces the greatest
amount of good. Moral reasoning and judgment occurs independent of
consequences in the deontological approach which deems that actions are right or
wrong as such.
Cultural and Legal Foundations of Ethical Behavior
Managers exercise human judgment which may be subjective, taking into account
that values differ across countries, companies and its people. This is underscored by

cultural relativism which recognizes these differences. Cultural normativism

upholds universal standards of behavior. Decision as to what ethical principles to
apply is undeniably challenging.
Realizing the inadequacy of the law to define ethical behavior, experts consider
adherence to law as sorely inadequate. Nevertheless, our actions are bound to the
law of the country we deal with. Furthermore, the law embodies many of a countrys
principles and should therefore serve as an appropriate guide for proper conduct.
Legal justification for ethical behavior is therefore an important standard. Since the
laws differ across nations, one runs into problems of extraterritoriality which
remains debatable and variable in this global world.

Ethics and Corporate Bribery
Corruption and Bribery greatly impacts on the well-being of the people, the
performance of business, and over-all economic development. Countries with high
bribery suffers from lower national growth rates and per capita income. Bribery
erodes government authority, damages reputations when disclosed, and increases
cost of doing business. This makes it a very challenging issue. There are efforts on
the international, regional and industry level to curb corruption.

Ethics and the Environment
Social responsibility, especially in the area of sustainability, is a foremost concern.
Our environment may be compromised by the companies manufacturing processes

and by their final products. Policies for responsible behavior toward the earth
should be in place.
A good business practice is to merge profitability with environmental responsibility
to maintain sustainability. While we meet present-day needs, we should not
compromise the ability of future generations to meet their own needs.

Consequences of Other Business Practices
It is not uncommon for pharmaceutical industries to practice tiered-pricing where
goods are sold at a higher price in developed countries while prices for developing
countries are subsidized. With the advent of generic drugs worldwide and its
remarkable affordability, there is also a shift in the professional practice to
prescribe generics. Generics manufacturers should comply with the WTO agreement
on Trade-related aspects of intellectual property rights.
Numerous labor issues affect labor conditions, namely, wages, child labor, working
conditions, working hours, and freedom of association. There are several sources of
worker-related pressures in the global supply chain like the government, the NGOs,
trade unions, media, and the consumers.

Corporate Response to Globalization
The United Nations Global Compact establishes guidelines for appropriate behavior
which encompasses human rights, labor, environment and anti-corruption.
Companies should have a code of conduct that should be communicated to their
employees, suppliers and subcontractors and must assure compliance. Unethical

behavior will have legal sanctions and economic costs due to bad publicity and low
employee morale. With the globalization we experience today, there will be a trend
towards greater convergence of ethical conduct and development of skills to
address ethical issues. The government, the business leaders, and social media will
greatly influence corporate ethics.


Reference:
1 Daniels JD et al. International Business: Environments and Operations 15th edition.

Pearson Education Limited 2015