Businesses in general experience a wealth of issues that impact their ability to conduct business and remain successful. This is even more so the case with international business. Forces external to the company can decide whether a business is successful or fails and in particular, financial and political forces have some of the greatest impacts on today’s organizations. The intent of this paper is to discuss these forces and show specific examples of what many industries can experience when operating on a global scale.
Typically businesses ride a financial rollercoaster when conducting business internationally. Currency has become one of the biggest financial hurdles to overcome when operating overseas. While this type of external force is considered uncontrollable, there are ways that businesses can mitigate negative financial hardship.
Fluctuating currency values can have both a positive and negative effect on organizations and it is crucial that financial managers plan for both. Establishing currency contracts with banks can help protect a corporation when the Yen value drops significantly and Asian business could be affected. It is important to be continually aware of exchange rates and have the ability to implement financial safety vehicles should a problem loom on the horizon.
While a certain amount of risk is involved with fluctuating exchange rates, governments of the regions in which a company may operate have the potential to implement currency exchange controls which can have an equally devastating result. By restricting the use of a particular currency for international transactions, governments ultimately overvalue that currency compared to the open market, making it extraordinarily difficult to transact business economically.
Another financial force affecting businesses is a country’s balance of payments (BOP). Should the country’s BOP slide into deficit, this could be a result of inflation, causing that country’s government to take action in several ways to overcome this BOP deficit. To encourage deflation, the administration may implement currency devaluation practices or other monetary policies intent on controlling the BOP. To counter this practice, an organization may consider seeking export incentives to provide relief.
Another area of great financial importance is taxation. When determining where to pursue business overseas, taxes can be very cost prohibitive, even when other financial, social and political forces are to their advantage. Skillfully negotiating a lower tax burden can be the difference in having the ability to offer a lower product price than ones competitor or not and should therefore be carefully considered.
The political forces affecting global businesses are ever-present and come in many forms. Ideological forces such as communism, socialism and capitalism play considerable roles in how well a business operates and must be considered when venturing into international commerce. Ideals such as communism and socialism make for difficult situations when pursuing free trade making expanding businesses opportunities in that region a difficult task.
While the basis of capitalism is free enterprise, it should not be construed as an perfectly harmonious environment in which to operate. Government maintains several areas in which it may control business through taxes, wages, employment conditions, safety, pollution, zoning and other areas.
Typically, it is assumed that socialist and communist countries are the only ones in which the government owns businesses but nationalization of business is farther reaching than where these systems exist. The practice of nationalization of business can be to support companies that provide necessary but not profitable goods and services for the country but also use the business to funnel more funds into government itself.
From a positive aspect, protection of business by government such as in the areas of farming and mining can positively affect business in general. The farming industry as a whole may experience financial difficulties but it may be necessary for the government to provide protection or assistance for the good of the nation.
Politically, terrorism remains in the forefront of the minds of many managers. Businesses operating internationally are particularly susceptible to terrorist threats and attacks and must incorporate their protective measures into their daily business plans. Companies can be subject to acts such as kidnapping of corporate executives for ransom or the bombing of contracted construction sites intended to cripple the government. It is imperative for businesses to not only be aware but be prepared with countermeasures intended to thwart the attempts of terrorists as well as a means of helping the company recover from an attack.
Other political forces affecting global businesses are the governments themselves and their ability to maintain a stable environment. Every country may deal with the unexpected happenings of fiscal or monetary changes, but governments that can maintain relatively stable during these changes are ideal. When the political environment of a country is in flux, this can also impact the businesses importing to, exporting from or operating in that country. Should that country be in the midst of hostile actions toward other nations, businesses can certainly suffer.
In the US and Europe, labor unions are a political force that can have great impact on operations. American labor unions have strong political ties and are quite active in the political arena. Their influence can affect many types of legislative decisions that will ultimately affect a company’s ability to conduct business. Strikes or poorly negotiated labor agreements can allow the union to force businesses into decisions that may ultimately lead to their own demise.
Here we’ve seen examples of financial and political forces affecting international business but have universality regardless of region. Financially, currency rates have an impact on business whether a company operates abroad or not. With businesses being interconnected the way they are, the yen rate and the euro rate will both influence how large and small business alike can function. Inflation and BOP play a very large part in how we do business overall regardless of where in the world we are located and it is a very important factor when making business decisions. Politically, governmental control, social ideals like communism and stability of the current regime can dictate whether Starbuck will open stores in Nepal or Nice, Frankfurt or France. The choices governments make to nationalize or privatize can even determine the fate of McDonalds. That being the case, every business operating at an international level must assess its risk in that country before making a commitment. Understanding the economic, social and political nature of a country will be key to that business’ future.
