NBFCs (Non-Banking Financial Companies) are the type of companies which provide banking services like loans and advances, acquisition of stocks/bonds/shares/securities/debentures. They are incorporated as per Companies Act 2013 and regulated...
Perspectives on Globalization
Globalization has shrunk the boundaries of operating or doing businesses across the globe. With the rapid growth in business ventures, there is a significant enhancement in global trading in goods and services that have reached 25% of the entire GDP. International business in the manufacturing sector has also enhanced since 1995. Increasing globalization is imposing some major challenges on businesses willing to operate overseas.
However, International Business is not easy to undertake as it faces several uncertainties, and challenges such as different political environments, cultural diversity, taxation, and other legal barriers.
International Business Environment
International Business Environment means trading across the globe. In layman’s terms, it means selling and buying goods and services around the world. International business connects with transactions taking place across two or more borders while keeping the management located in a single country.
The scope of International Business is increasing as it focuses on the opportunities and challenges concerning the business environment that will operate on a global scale. The differentiating factor of international business from that of domestic business is that it operates in an entirely uncertain environment subjected to rapid changes with the probability of overall enhanced income and customer base.
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Types of International Business Environment
Following are the major types of environment affecting international business:
- Political Environment: This environment includes the type of government and its laws, policies, and regulations that prevail in an economy. While doing business in other countries, the business owners consider the relationship of government with businesses and the political risk that prevails in that country.
- Economic Environment: The economic environment includes all the factors that are considered while doing business in any country. Every nation can have different economic environments depending upon the category of the country, such as developed, under-developed, or countries with new and emerging markets and opportunities. The economic environment is the sum of the factors, such as National & per capita Income, Taxation aspects, Infrastructure facilities, availability of raw material & HR, etc.
- Technical Environment: This environment relates to technical upgradation and advancement in adopting new technology and methods for manufacture or production. The level of success of a business depends upon the level of acceptance and usage of technological innovation in different countries. Technical advancement helps the business to gain competitive advantages and firms these days, even transfer the technology globally to be competitive in global terms.
- Cultural Environment: Culture in any country refers to the beliefs and values followed in such a country. Factors such as language, history, origin, education level, the tendency of customers to save and spent, resistance to change, the lifestyle of people, etc. sum up to be the cultural environment.
Challenges in International Business
Businesses are expanding and diversifying overseas to reach new clients, enhance their customer base, and increase overall earnings. While global markets are becoming more accessible and are more interconnected, the following risk and challenges involved in doing international business shall be tackled throughout:
- Company’s Structure: A proper team should be in place if the company willing to be globally competitive for which it shall consider the structure of the organization and location from where the expertise team operates. The company shall decide its headquartered and its structure of working well before hands. For example, one can decide to have centralized headquarter with presidents or manager who manages the smaller or regional sub-division.
- Foreign Laws: After determining the proper structure, businesses going global shall have a comprehensive understanding of the local laws and rules that prevail in that country. From tax implications to trading norms, legal requirements are different for every country. Proper team with expert knowledge and experience on laws and regulation of countries where businesses are stepping into being globalized shall be in place to avoid any prosecution or penalties of that state. For Example, Airbnb, due to lack of knowledge on international laws, breaches the local tourism laws of Barcelona, facing the penalty of 30000 as a fine.
- Accounting: Accounting is very critical when it to multinational business liable to pay corporate tax in the countries they operate. Different tax implications, tax rates, and various compliance requirements make the accounting a challenge in an international operation.
- Tax Liabilities: Company is liable to pay tax on its income in the country of its operations and sometimes also its resident country. Paying multiple taxes can burden the company with double taxation reducing its overall revenue. However, Company can mitigate its risk of multiple layers of taxation by having good knowledge in tax concepts such as Tax Treaties between the Countries, Double Taxation Avoidance agreements, etc can lower the burden of business that needs not to pay double taxes.
- Pricing: Price quoted for products and services that are served abroad can be another significant challenge while doing business overseas. The company shall ensure to keep its cost-competitive along with ensuring its profits. For example, the business should take into account the following factors, such as production cost, shipping cost, labor, and marketing expenses, along with the margin of the company to remain viable. Pricing is a crucial factor in positioning its brand like higher prices reflect the luxurious position of the product, while low price helps to penetrate a new market.
- Payment Methods: Business working abroad shall determine the acceptable payment method along with its accuracy and security, which is a key challenging factor for any business as payment is the key-category of any running business. Payment methods that are acceptable in the home country are not necessarily acceptable abroad. However, the business can decide amongst the several methods of accepting the payment, such as wire transfers, Paypal, Bitcoin, WordPress, apple app store, Expedia, etc.
- Currency: Fluctuation in the currency rate is one of the challenges to be considered by the business operating abroad. Exchange Rates shall be monitored throughout as major fluctuations can affect the expense and profits. For instance, if the company makes the payment of expenses such as supplier cost, production cost in Kuwaiti Dinar while sale the product in a country with a relatively weaker currency, say Iranian Rial will end up in a very small margin or loss. Therefore companies to avoid such situations can make a sale and pay the cost in the same currencies to balance the rate of expenses and income.
- Cultural Differences: Communication skill is very efficient for business strategy, either operating in the home country or abroad. However, the difference in cultures and languages across the world is a major challenge faced. The company shall focus on developing core cultural and communication skills. Effective Communications with clients, customers, colleagues is essential for international success. Non-Verbal communications also play a crucial role in successful business operations. The company shall research and
know all the cultural values and norms such as greeting, body language, shaking hands, etc.
- Political risk: International business has to deal with political instability and uncertainties as a major challenge and threat. Business shall do the risk assessment of the economic and political environment before entering into any market. Business face issues such as corrupt practices, unstable policies, etc in emerging markets. Ever-changing business regulations and policies can negatively affect the working of the business.
- Terrorism: To trade globally is not easy due to terrorism being a global issue due to which international trading is economically riskier. Racism is also a challenge faced by a business that restricts international activities.