Trade and Trading Environments

The environment of International trade is regarded as the sum total of all the external forces working upon the firm as it goes about its affairs in foreign and domestic markets. The environment can be classified in terms of domestic, foreign and international spheres of impact. The domestic environment is familiar to managers and consists of those uncontrollable external forces that affect the firm in its home market. However, it may be underlined that some of these forces (e.g. the cost of capital and export restrictions) can also have significant effect on global operations of a firm. The foreign environment can be taken as those factors, which operate in
those other countries within which the MNC operates. Generally, the factors are the same, but they can have widely differing impacts from the home country situation.

The various Environmental Forces are as follows:
1. Political-Legal Environment
2. Economic
3. Cultural
4. Technological

1. Political-Legal Environment
Political environment refers to the influence of the system of government and judiciary in a nation on international business. The system of government in a nation wields considerable impact on its business. The type and structure of government prevailing in a country decides, promotes, fosters, encourages, shelters, directs and controls the business of that country. A political environment that is stable, honest, efficient and dynamic and which ensures political participation to the people, and assures personal security to the citizen, is primary factor for economic development. The developed economies of the today owe their success to a large
extent to the political system they richly enjoyed.

Legal Environment refers to the legal system obtaining in a country. The legal system then refers to the rules and laws that regulate behaviour of individuals and organizations. Failure to comply with the laws means that penalties will be inflicted by the courts depending on the seriousness of the offence. The legal system of a country is of immense importance to international trade. A
country‘s laws regulate business practice, define the manner in which business transactions are to be carried out and set down the rights and obligations of those involved in business deals.

2. Economic Environment
Economic Environment refers to those economic factors, which have impact on the international trade. It includes economic conditions, economic policies, economic system, phases of business cycle, foreign investment, international organizations (IMF, World Bank, WTO etc.), international trade agreements etc. There are various international organizations, which issue various guidelines, make different rules and regulations for regulating international trade. Among these important organizations are international Monetary Fund, World Bank, World Trade Organization etc.

3. Cultural Environment
In global business activities such as leading, motivating, decision-making, problem solving and exchanging information and ideas depend on the ability of managers and employees from one culture to communicate successfully with colleagues, clients and suppliers from other cultures. Mistakes in cross cultural communication often go unnoticed by the communicators, but these
mistakes have potential to cause damage to international relationships and negotiations.

4. Technological Environment
Technological Environment like its counterparts political and legal has a considerable influence on international business. Technology has facilitated international business in at least six ways:

  • E-Commerce
    The internet allows both small and big companies to expand their global presence at a lower cost than ever before. The internet makes it much easier for buyers and seller to find each other, wherever they may be located, and whatever their size.
  • Telecommunications
    Technology such as 3G, 4G, MMS etc. have fostered closely knit global business.
  • Transportation
    In addition to developments in computers and telecommunications, several major innovations in transportation. In economic terms, the most important are probably the development of commercial jet aircraft and super freighters and the introduction of containerization, which simplifies trans-shipment from one mode of transport to another.
  • Globalization of production of Production
    Technological breakthroughs have facilitated globalization of production. A worldwide communications network has become essential for any MNC. Factors influencing the location of
    manufacturing facilities vary from country to country. They may be more favourable in foreign
    countries rather than in home country.
  • Globalization of Markets
    Globalization of markets refers to the process of integrating and merging of the distinct world markets into a single market. This process involves the identification of some common norm, value, taste, preference and convenience and slowly enables the cultural shift towards the use of common product or service.
  • Technology Transfer
    Technology transfer and globalization are interconnected with each other. They are highly interdependent as well. The onset of globalization has brought up free passage of goods and services across the globe. The role of technology has also changed from time to time. It is currently considered as one of the important factors in the propagation of globalization. Technology transfer consists not only of various scientific researches and discoveries, but also the transformation of such researches and discoveries into practical and feasible applications or products. Technology transfer is one of the major aspects of globalization.
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