Overview of the International Business Environment

The international business environment includes social, political, economic, regulatory, tax, cultural, legal, and technological aspects.
The international business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, that influences decision-making on resource use and capabilities. This includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments .

The political environment in a country influences the legislation and government rules and regulations under which a foreign firm operates. Every country in the world follows its own system of law and a foreign company operating within it has to abide by these laws for as long as it continues to operate there.

The technological environment comprises factors related to the materials and machines used in manufacturing goods and services. The organization's receptivity and willingness to adopt to new technology, as well as the willingness of its consumers to do likewize, influences decisions made in an organization.

As firms have no control over the external environment, their success depends upon how well they adapt to it. A firm's ability to design and adjust its internal variables to take advantage of opportunities offered by the external environment, and its ability to control threats posed by the same environment, determines its success.

Economic factors exert huge impacts on firms working in an international business environment. The economic environment relates to all the factors that contribute to a country's attractiveness for foreign businesses.

• Businesses rely on a predictable and stable mechanism. A monetary system that acknowledges countries' and economies' interdependence and that fosters growth, stability and fairness at a global level is important for prosperity, and the operation and growth of companies.
• Inflation, interest rates, and the borrowing costs of companies also contribute to a country's attractiveness. If a country has a high rate of inflation, its central banks will raise the interest rate, which increases the cost of borrowing for firms. High inflation also makes the value of the revenue in domestic currency fall, and this exposes firms to foreign exchange risks. It is even worse if firms produce in countries of high inflation and then sell products to countries of low inflation, since the input costs are on the rise while the revenue stays stable.
• Absolute purchasing power parity posits that the exchange rate between two countries will be identical to the ratio of the price levels for those two countries. This concept is derived from a basic idea known as the law of one price, which states that the real price of a good must be the same across all countries. As the currency of a country depreciates, its competitiveness is improved since its goods are cheaper than other countries', helping companies export more.
• Relative purchasing power parity (PPP) is an economic theory used to determine the relative value of currencies, estimating the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to (or on par with) each currency's purchasing power. It asks how much money would be needed to purchase the same goods and services in two countries, and uses that to calculate an implicit foreign exchange rate. PPP rates facilitate international comparisons of income, as market exchange rates are often volatile; affected by political and financial factors that do not lead to immediate changes in income, and that tend to systematically understate the standard of living in poor countries. Another interpretation is that the difference in the rate of change in prices at home and abroad—the difference in the inflation rates—is equal to the percentage depreciation or appreciation of the exchange rate so that the competitiveness of one country could be maintained.