Global Business Environment Impacting the International Business

Term Paper

Submitted by:
Bidhya Rimal
MBA 4th trimester

Submitted to:
Rahish Lal Shrestha
Lecturer
Ace Institute of Management

Kathmandu, Nepal
February 11, 2024
Introduction
The business environment encompasses a multitude of internal and external factors that
collectively influence the operations and performance of a company. Internally, the workforce
and management practices are pivotal, as the skills and motivation of employees directly impact
productivity, while effective leadership shapes strategic decisions. Externally, understanding and
meeting customer needs, responding to supply and demand fluctuations, and fostering strong
relationships with clients and suppliers are imperative for success. Owners' vision and
government activities, including regulations and policies, play a crucial role in shaping the
business landscape. Embracing technological innovations and staying attuned to social and
market trends are essential for adaptability. Economic changes further contribute to the dynamic
nature of the business environment. The difficult relationship of these factors necessitates a
proactive approach, with businesses regularly assessing and responding to these elements
through strategic planning and environmental scanning to navigate the complexities and thrive in
an ever-evolving landscape. This paper tries to identify and analyse different environmental
factors and their impact on the business.

Understanding the external business environment is of supreme importance for companies, as it

directly influences their ability to adapt, compete, and thrive in the marketplace. Knowledge of
the external environment allows businesses to make informed strategic decisions. By anticipating
and responding to market trends, economic changes, and emerging technologies, companies can
position themselves advantageously and make choices that align with long-term goals.
Awareness of external factors helps in identifying potential risks and uncertainties. Whether it's
changes in government policies, shifts in consumer preferences, or economic fluctuations,
understanding these risks allows businesses to develop proactive risk management strategies,
minimizing the impact of unforeseen events. The external environment is a source of
opportunities for growth and innovation. By staying attuned to market trends, technological
advancements, and social changes, businesses can identify new avenues for expansion, product
development, and market penetration, fostering sustainable growth.

Globalization
Yilmaz and Ozekan (2022) in a research discuss the evolving nature of state boundaries, noting

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that they have become more permeable over time. The paper highlights how the circulation of
human resources, capital, and production tools has become more achievable, facilitated by the
cheapening and diversification of communication. This has brought states and businesses closer
together economically. The disappearance of primitive frontiers in this context has shifted the
impact of political ties to the international arena. This suggests that managers now need to
consider a broader set of parameters when analyzing political conditions and be prepared to
review plans and strategies accordingly (Dima et.al 2023).

In an article Nebozhenko et al. (2023) explores the impact of globalization on a country's

development, covering economic, social, political, and technological aspects. The research,
spanning 2000 to 2022, uses statistical analysis on GDP, trade indicators, and the KOFGI
Globalization Index, focusing on trade and financial dimensions. The study findings emphasize
the complex connections among globalization, economic growth, and international business.
These connections result from the exchange of technologies, knowledge, investments, and
advancements in information and communication technologies (ICT). The intricate factors
influence the pace of economic growth and shape nations' policies to enhance cooperation and
form new partnerships. Between 2000 and 2015, there was integration, while 2016 to 2020
experienced de-globalization due to a decline in industrial production and trade conflicts, notably
between the United States and China. However, in 2021 and 2022, there was dynamic growth in
the share of exports and imports. Despite pandemic challenges, all regions saw an upturn in the
trade-to-GDP ratio, and the Globalization Index increased from 2000 to 2020. The slowdown in
globalization coincided with a significant economic growth deceleration from 2016 to 2020. The
study emphasizes the role of technology in globalization, international business, and economic
development. Over the past decade (2011-2021), there was substantial acceleration in
Information and Communication Technologies (ICT) development globally, facilitating the rapid
dissemination of information, knowledge, and technology.

Political factors
Government regulations and policies can have a significant impact on business operations.
Understanding and complying with these regulations are essential to avoid legal issues, financial
penalties, and disruptions to business activities. Change in one factor of global environment can

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bring ripple effect in other various world activities. Let’s take the example of the Russia-Ukraine
war which has significant implications on the global economy, affecting various sectors and
creating uncertainties in financial markets. Russia is a major exporter of natural gas and oil. The
conflict has led to concerns about disruptions in the supply chain, causing volatility in energy
markets. Increased geopolitical tensions have led to higher oil prices, impacting countries
dependent on energy imports and contributing to inflationary pressures. The conflict has
disrupted agricultural supply chains, leading to concerns about the availability and cost of
commodities such as wheat and metals. Countries heavily reliant on Ukrainian and Russian
exports may experience disruptions in their commodity markets. Geopolitical uncertainties often
lead to increased market volatility. Investors may seek safer assets, impacting stock markets and
currency exchange rates. The conflict can affect investor confidence, leading to capital outflows
from affected regions. Sanctions imposed on Russia and potential counter-sanctions have
disrupted global trade flows. Countries with close economic ties to Ukraine or Russia have faced
challenges in their export and import activities. The conflict has disrupted supply chains,
affecting industries reliant on components or raw materials from the region. Companies faced
challenges in production and delivery, impacting their overall business operations. Emerging
markets may face increased economic challenges due to their vulnerability to external shocks
and dependence on global trade. The conflict has impacted currency values, with affected
countries experiencing depreciation or appreciation based on economic and geopolitical
developments. Geopolitical risks associated with the conflict have lead to changes in investment
strategies, impacting global capital flows. In summary, the Russia-Ukraine war has far-reaching
consequences for the global economy, affecting energy prices, financial markets, trade, and
supply chains. The situation is dynamic, and the extent of the impact will depend on the duration
and severity of the conflict, as well as the international response (Russo & Figueira, 2023).

In a research paper written by Dima et.al (2023), they emphasize that political factors, both
global and sector-specific, can have direct and indirect impacts on businesses. This research
work underlines the importance of political stability, government policies, and various regulatory
aspects such as tax laws, competition laws, and environmental protection legislation. The
persistence of politicians, industry-oriented policies, exchange rates, and interest rates are all
cited as significant influencers on international companies and consumers. Overall, the political

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factors play a crucial role in shaping the business environment, and government officials and
entrepreneurs should consider them for positive impacts on business, advocating for law
amendments and strategic changes when necessary. Political instability discourages online sales.
Higher taxes affect the amount of online sales, as businesses need to figure out how much tax
they have to pay and adjust their strategies.

Regional Integrations
Regional integration plays a pivotal role in fostering economic cooperation among neighbouring
countries, providing numerous benefits for businesses operating within integrated regions. One
prominent example is the European Union (EU), where the removals of trade barriers,
harmonization of regulations, and the establishment of a common market have significantly
facilitated business activities. Companies within the EU can operate seamlessly across borders,
benefit from a larger consumer base, and enjoy reduced transaction costs due to standardized
regulations. Another illustration is the Association of Southeast Asian Nations (ASEAN), which
promotes economic integration among its member states. The elimination of tariffs and the
establishment of the ASEAN Free Trade Area (AFTA) have stimulated intra-regional trade and
investment. Businesses in ASEAN nations gain access to a broader market and find it easier to
navigate common regulatory frameworks. Regional integration enhances the overall
competitiveness of businesses by creating economies of scale, fostering innovation, and
encouraging specialization. Furthermore, it helps businesses mitigate geopolitical risks and
enhances their resilience by diversifying markets. In essence, regional integration exemplified by
entities like the EU and ASEAN provides a conducive environment for businesses to thrive,
promoting economic growth and stability within integrated regions.

Environmental factors
Sajid (2021) published an article regarding the impact of Covid-19 on the global economy where
he had found profound effects of Covid-19 on the global business environment as reshaping
industries and forcing organizations to adapt rapidly to unprecedented challenges. As global
supply chains faced disruptions due to lockdowns, travel restrictions, and labor shortages. This
affected the production and delivery of goods, leading to delays and shortages in various
industries. Lockdowns and social distancing measures prompted a widespread shift to remote

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work. Companies had to quickly adopt digital tools and technologies to facilitate remote
collaboration and maintain business operations. The pandemic triggered a global economic
recession as businesses faced closures, reduced consumer spending, and disruptions in
international trade. Many industries, such as travel, hospitality, and entertainment, were severely
impacted. Consumer behaviour underwent significant changes, with a shift towards online
shopping, increased focus on health and wellness products, and reduced spending on non-
essential goods and services. The travel and tourism industry was one of the hardest-hit sectors,
with restrictions on international travel and a decline in business and leisure travel. Airlines,
hotels, and related businesses faced substantial financial losses. Companies revaluated their
supply chain strategies, focusing on resilience and diversification. Some businesses considered
localization of production to reduce dependence on a single region. Governments worldwide
implemented various stimulus packages and financial interventions to support businesses and
mitigate economic impacts. These measures included grants, loans, and tax relief.

In contrast, E-commerce experienced a significant surge as consumers turned to online platforms

for their shopping needs. This acceleration prompted businesses to enhance their online presence
and digital capabilities. The pandemic prompted increased investment and innovation in the
healthcare and biotech sectors. There was a heightened focus on vaccine development,
pharmaceuticals, and healthcare infrastructure. The prolonged uncertainty caused by the
pandemic highlighted the importance of robust risk management strategies. Businesses had to
adapt to rapidly changing conditions and plan for potential future disruptions. Small and local
businesses faced particular challenges, with many struggling to survive amid lockdowns and
reduced consumer foot traffic. Some adapted by embracing digital solutions or pivoting their
business models. To summarize the COVID-19 pandemic has had a multifaceted impact on the
global business environment, influencing supply chains, accelerating digital transformations,
reshaping consumer behaviour, and prompting strategic shifts in various industries. The ability
of businesses to adapt to these changes has become crucial for resilience and future success.

Economic Factors
The level of inflation is important to monitor because price increases for products/services effect
a reduction in demand due to reluctance to spend. Consequently, purchasing power is decreasing,

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transport, logistics and storage costs are increasing, and a complete restructuring of marketing
strategies is taking place. Increased monthly consumer spending has a significant impact on sales
as purchasing power decreases, consumer preferences change substantially, and companies are
forced to streamline their marketing strategies in order to attract new customers or increase sales
volume. The economic downturn has impact in terms of massive income reductions, investment
restrictions, and digital decline. Inflation impacts on e-commerce by increasing the cost of
services and goods traded. Together with these increases, inflation can also translate into a
decrease in consumer purchasing power, with a negative effect on the volume of online sales and
the profits of the selling companies.

The "Doing Business" index, formerly published by the World Bank, measured the ease of doing
business in various countries based on indicators such as starting a business, dealing with
construction permits, getting electricity, registering property, getting credit, protecting minority
investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.
Higher the index safer will be the country to invest on and start business. The Nepalese
government has undertaken various initiatives to attract foreign investors and promote economic
growth. Several sectors, including hydropower, tourism, agriculture, and manufacturing, have
been identified as priority areas for foreign investment. Nepal has implemented policy reforms to
simplify procedures, reduce bureaucratic hurdles, and create a more favorable environment for
FDI. The 'One Window Policy' introduced by the government aims to streamline the process for
obtaining permits and approvals, making it more convenient for foreign investors. However,
challenges persist, including political instability, regulatory complexities, and infrastructure
deficiencies. Investors often seek greater clarity and stability in policies to ensure long-term
commitments. The COVID-19 pandemic also introduced uncertainties, impacting global
investment flows. Economic conditions and government policies can evolve, influencing the
attractiveness of Nepal as a destination for foreign investment.

The monetary policy of Nepal Rastra Bank (NRB) significantly influences the business
environment in Nepal. NRB, as the central bank, employs various tools to regulate the money
supply and interest rates with the overarching goal of achieving macroeconomic stability.
Adjustments in policy rates, such as the repo rate, have a direct impact on borrowing costs for
businesses. Lower interest rates can stimulate investment and economic activity by encouraging

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businesses to borrow for expansion and working capital. Moreover, NRB's commitment to
inflation targeting aims to maintain price stability, providing businesses with a predictable
inflation environment for effective planning. The central bank's interventions in the foreign
exchange market to stabilize the currency also play a crucial role for businesses engaged in
international trade. However, the implementation of monetary policy comes with challenges, and
finding the right balance is essential to avoid risks such as asset bubbles or overly restrictive
conditions that may hinder economic growth. Businesses in Nepal closely monitor NRB's
monetary policy decisions as they have a direct bearing on credit availability, overall economic
stability, and the conducive atmosphere for sustained business growth. For the most current and
specific insights into NRB's monetary policy and its impact on businesses, it is advisable to refer
to the latest publications and reports released by the central bank.

The World Bank supports businesses and economic development globally through various
initiatives. It provides financial support for projects, focusing on infrastructure development to
enhance transportation, energy, and communication networks. The International Finance
Corporation (IFC), a part of the World Bank Group, works to increase access to finance, offering
investment and advisory services to help businesses grow. The World Bank offers policy advice
to governments, recommending reforms to improve the business environment by streamlining
bureaucracy and enhancing legal frameworks. Through capacity-building initiatives, the World
Bank strengthens institutions and skills within countries, fostering an environment conducive to
business growth. Initiatives to facilitate international trade, such as reducing trade barriers and
improving customs procedures, are also part of the World Bank's efforts. The World Bank's
impact is measured through positive outcomes in economic development, poverty reduction, and
the overall improvement of the business environment in the countries it serves.

Exchange rate systems, such as fixed, floating, managed float, crawling peg, currency board, and
target zone, have distinct impacts on businesses engaged in international trade. In a fixed
exchange rate system, stability is provided but at the expense of flexibility, potentially leading to
trade imbalances. Floating exchange rates, determined by market forces, offer adaptability but
introduce uncertainty for businesses in predicting future rates. Managed or dirty float systems
combine elements of both, providing some stability through occasional central bank
interventions. Crawling peg systems allow periodic adjustments, offering a middle ground

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between fixed and floating rates. Currency board systems ensure stability but limit independent
monetary policy. Target zone systems provide a predetermined fluctuation range, balancing
stability and flexibility. The choice of exchange rate system directly influences the costs of
imported goods, pricing strategies, and competitiveness for businesses. Managing currency risk
becomes crucial, requiring businesses to employ hedging strategies and financial instruments to
navigate the complexities associated with different exchange rate systems. Additionally, the
economic stability and policy decisions influenced by the chosen system indirectly impact
businesses operating within a particular economy.

The International Monetary Fund (IMF) aids organizations globally through various means.
Firstly, it provides financial assistance to member countries facing economic crises, stabilizing
economies and supporting necessary reforms. Secondly, the IMF offers policy advice, covering
fiscal, monetary, and structural reforms, aiming for macroeconomic stability and sustainable
growth. Regular surveillance of global economies and tailored policy recommendations
constitute another crucial role. Additionally, the IMF assists in capacity development,
strengthening institutional capabilities in areas like public financial management. Managing
external debt and promoting debt sustainability are also areas of focus, ensuring responsible debt
practices. By contributing to global economic stability, crisis prevention, and resolution, the IMF
fosters an environment conducive to international trade and investment. Serving as a forum for
global collaboration, the IMF facilitates dialogue, policy coordination, and addresses challenges
that transcend national borders. Overall, the IMF's efforts aim to enhance global economic
resilience, reduce poverty, and promote sustainable development through tailored support to
member countries.

The World Trade Organization (WTO) also plays a crucial role in facilitating international trade
and supporting businesses globally. By providing a framework for negotiation and cooperation
among member countries, the WTO helps businesses access foreign markets through reduced
trade barriers and more predictable trading environments. The organization establishes rules for
fair competition, ensuring that businesses operate in an environment where trade practices are
transparent and disputes are resolved through a structured mechanism. The WTO's agreements
cover various sectors, including goods, services, and intellectual property, creating a level
playing field for businesses of all sizes. Additionally, the WTO serves as a platform for trade

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negotiations, allowing countries to address emerging trade issues and adapt to changing
economic landscapes. Through its commitment to non-discrimination and the reduction of trade
barriers, the WTO fosters a more open and interconnected global economy, providing businesses
with opportunities for growth, diversification, and increased market access.

Legal Factors
The impact of company acts and laws within a country on businesses is profound, as these legal
frameworks define the regulatory environment, governance structures, and compliance
requirements for enterprises. For instance, in India, the Companies Act of 2013 introduced
comprehensive changes affecting corporate governance, disclosure norms, and social
responsibility. This legislation emphasizes the role of independent directors, promotes
responsible business conduct, and mandates increased transparency in financial reporting. Indian
businesses have had to adapt their practices to align with these legal requirements. In general,
these laws impact businesses by establishing guidelines for their formation, operation, and
dissolution, influencing decision-making processes, financial reporting practices, and
accountability standards. Adherence to these legal frameworks ensures legal compliance, fosters
investor confidence, and contributes to a stable and transparent business environment. However,
businesses may also face challenges in adjusting their operations to comply with evolving legal
requirements, necessitating ongoing attention to regulatory updates and legal changes.

Technological factors
Technological advancements have profoundly transformed the business landscape, influencing
operations, communication, and competitiveness. One notable impact is the increased efficiency
and automation of processes, leading to enhanced productivity. For example, the integration of
artificial intelligence (AI) in customer service allows businesses to provide personalized and
efficient interactions. Additionally, advancements in data analytics enable companies to make
informed decisions by extracting valuable insights from vast amounts of information. The
evolution of e-commerce platforms, exemplified by giants like Amazon, has reshaped retail,
offering convenient and personalized shopping experiences. Furthermore, cloud computing
technologies have revolutionized how businesses store and access data, promoting flexibility and
scalability. These technological shifts also facilitate global connectivity and collaboration,

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enabling businesses to operate seamlessly across borders. Despite these advantages, challenges
such as cyber security threats and the digital divide persist. As technology continues to advance,
businesses need to adapt, innovate, and strategically leverage these tools to remain competitive.

Socio-Cultural factors
External factors, such as social trends and customer preferences, directly influence what products
or services are in demand. Companies that understand and cater to these preferences are more
likely to satisfy customer needs, build brand loyalty, and maintain a positive reputation in the
market. Culture significantly shapes the operational landscape for businesses within a particular
environment. Communication styles, influenced by cultural nuances, can impact collaboration
and relationships both within the organization and with external stakeholders. Decision-making
processes are culture-dependent, with some cultures favouring hierarchical structures and others
emphasizing consensus. Work ethics and values, such as attitudes towards work-life balance,
play a crucial role in employee engagement. Relationship-building approaches, influenced by
cultural norms, vary from personal connections to transactional interactions. The perception of
authority and hierarchy, along with attitudes toward legal and regulatory compliance, varies
across cultures, affecting leadership and governance. Cultural influences extend to consumer
behaviour, influencing buying patterns and product perceptions. Additionally, cultures shape
attitudes toward innovation and risk-taking, impacting a company's ability to adapt and thrive. In
essence, recognizing and navigating these cultural dynamics is vital for businesses to succeed in
diverse cultural environments, fostering effective communication, decision-making, and overall
organizational effectiveness.

Globalization has resulted in high degree of work diversity. Having a diverse workforce is
beneficial for businesses in several ways. It can help save on labor costs and improve overall
performance and competitiveness. Many companies, especially in regions like Europe, the
United States, and Japan, have embraced diverse employment models for years to address
challenges such as industrial transformation and global competition. A diverse workforce not
only activates the labor market but also enhances labor efficiency, contributing to economic
development. Businesses with diverse teams often experience increased creativity and improved
problem-solving capabilities. However, managing a diverse team poses challenges like conflicts
and reduced team cohesion. To overcome these challenges, enterprises should establish

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management policies for workforce diversity, leveraging the differences among employees to
enhance organizational productivity. This approach fosters an inclusive, supportive, and
harmonious working atmosphere, contributing to overall success (Chu, 2023).

Critical Analysis
However, PESTEL factors might also impose hindrances to the businesses. Political factors
involve government policies and stability, affecting regulatory frameworks and potential risks.
Economic factors encompass aspects like inflation, exchange rates, and economic growth,
impacting business profitability and consumer purchasing power. Social factors examine cultural
trends, demographics, and societal attitudes, crucial for understanding consumer behaviour and
market preferences. Technological factors assess the influence of innovation and advancements
on business processes and competitiveness. As businesses increasingly rely on technology for
their operations, the challenges of data security and privacy have come to the forefront.
Safeguarding sensitive customer and company information is crucial to maintain trust and
comply with evolving regulations. Environmental factors involve considerations related to
sustainability, ecological impacts, and corporate responsibility. Legal factors encompass the legal
framework and regulatory environment, guiding business compliance and governance. A critical
analysis of PESTEL is essential as it allows businesses to anticipate and adapt to dynamic
external factors, enabling strategic planning and risk mitigation. This comprehensive analysis
empowers organizations to make informed decisions in a rapidly evolving business landscape,
enhancing their resilience and sustainability.

Conclusion
A thorough understanding of the external business environment also provides a competitive
edge. Businesses can differentiate themselves by adapting quicker to changes, offering products
and services aligned with customer preferences, and anticipating and meeting market demands
more effectively than competitors. The business environment is dynamic, and external forces
continually evolve. Companies that grasp the external landscape are better equipped to adapt and
adjust their strategies, structures, and operations to stay relevant and resilient in the face of
change.

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