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How The Global Business Environment Affects Business: Explanation & Examples

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  • 0:03 Complexity of Global Business
  • 0:36 Different Political Systems
  • 3:13 Different Economic Systems
  • 3:56 Different Cultures
  • 4:25 Meeting the Challenge
  • 5:48 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
The world is becoming smaller. As globalization continues, businesses will be presented with opportunities and face challenges. In this lesson, you'll learn about some of these challenges and see how businesses can meet them.

Complexity of Global Business

Nancy owns a medium-sized toy manufacturing company. Her business has been very successful, but she believes she has tapped out of her domestic market. She wants to take her products to the global market. However, she knows that conducting business globally is complicated and requires careful planning.

Each foreign market that Nancy attempts to infiltrate will have different political systems, economic systems and cultures. Let's take a closer look.

Different Political Systems

Markets still operate within the confines of national territories. Therefore, Nancy must understand the political system of each country in which she wants to conduct business. Some political systems are safer places for business.

For example, democracies tend to follow the rule of law, which is a legal principle that states no one, including the government, is above the law. On the other hand, authoritarian regimes often do whatever they want. While Nancy may be able to do business in a country with an authoritarian regime in power, she will not necessarily have the protection of the rule of law.

Nancy may also be confronted by trade barriers set up by countries to protect their domestic businesses from competition. Nancy may have to contend with tariffs, which are taxes imposed on imports. For example, tariffs are designed to make domestically produced toys more competitive with the toys Nancy imports.

She may also face import quotas, which will restrict the number of imports that can enter the market during a specific time. Due to these quotas, Nancy may be limited to the number of toys she can sell in a foreign market.

Nancy may also be helped through different levels of economic integration between countries. For example, if her country and another have entered into a trade treaty, she may not be subject to tariffs or other trade barriers. In fact, if her country is a member of a free-trade area or economic union, there will be even fewer restrictions on trade with member countries. An example of a free trade area is NAFTA, and an example of an economic union is the European Union.

The world can be a dangerous place, and sometimes events have serious effects on business. Two of the most problematic are war and terrorism. Threats of terrorism can clog up distribution systems, such as airports and shipping ports.

It's even possible that businesses and their employees may become targets of terror. War may close off entire markets either because of hostilities or because of embargoes where a business' government prevents it from engaging in trade with a country. Company facilities and employees may become 'collateral' damage in war.

Different Economic Systems

Nancy will also face different economic systems when she starts selling her toys abroad. The best business environment for Nancy is a free market system where the government pretty much stays out of economic activities and doesn't regulate all that much. At the other extreme are command economies where most production and distribution of goods and services are done by the government. Nancy will probably stay away from command economies.

Most economies are mixed economies that have aspects of both free market and command economies. This type of economy is where Nancy will be importing most of her toys.

Different Cultures

One of the biggest hurdles that Nancy will face is trying to understand the cultures of her new markets. A culture is the sum total of a group's values, beliefs, customs and practices. From a business standpoint, consumers from different cultures often have different preferences for goods or services. Understanding these cultural preferences will increase the chances of Nancy's success in a new foreign market.

Meeting the Challenge

Nancy can take different approaches when entering the global market. Let's look at some of the options. Nancy can simply export her toys to new markets. Exporting is selling goods or services in an overseas market. Nancy can also license the design of her toys to a foreign company. A license gives a person the right to use intellectual property, such as the design of Nancy's toys.

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