Unit 2
Business environment
Concept and Importance of business environment
Business environment refers to the environment within which a business organisation operates. The business environment composed of internal environment and external environment. The internal factors are plans and policies, employees, value system, physical resources, corporate culture, organisational structure etc. which can be controlled by the organisation by adopting appropriate measures. The external factors are economic, social, political, legal, demographic etc. which cannot be controllable by the organisation. All these internal and external factors influence the working of the organisation. Any change in the business environment also leads to changes in plans, policies and working mechanism of business organisations. For example, introduction of GST requires the business houses to register under GST Act to get the benefit of input tax credit. The business environment is highlighted in figure 1
Figure 1: Business Environment
Some of the important characteristics of business environment are-
1) It is the composition of internal and external environment. Internal environment are controllable and external environment are not controllable by the organisation.
2) It is dynamic in nature and keeps on changing.
3) It is unpredictable because the changes occur in the environment due to happening of natural events and also man-made events.
4) It varies from place to place depending on its location, culture, society, demography, political stability, governance etc.
5) It influence on organisational plans and policy, objectives, working mechanism etc.
Some of the significances of business environment are discussed below-
1. Business opportunities
The business environment is full of opportunities. The business organisations need to carefully scan the business environment and its recent changes to capture the opportunities for business. The advancement of information technology creates opportunities for online banking, e-learning apps, online shopping sites etc.
2. Helps to utilize useful resources
Careful scanning of your business environment can help you leverage the useful resources for business needs. This helps businesses track these resources and convert them into goods and services.
3. Dealing with change
Businesses needs to be aware of the on-going changes in their business environment, including changing customer requirements, new trends, new government policies, and technological changes. If the business is aware of these regular changes, they can provide a response to address those changes.
4. Planning support
It provides adequate information to the existing business houses for further planning for changes in the organisation to cope up with the changes in the business environment.
5. Helps to improve performance
Companies that scan the environment thoroughly not only address the changes presented, but also thrive with them. Adapting to external forces helps businesses improve performance and survive in the market.
6. Image Building
Environmental understanding helps the business organisations in improving their image by showing their sensitivity to the environment within which they are working. For example, in view of the shortage of power, many companies have set up Captive Power Plants (CPP) in their factories to meet their own requirement of power.
7. Meeting Competition
It helps the firms to analyse the competitors’ strategies and formulate their own strategies accordingly.
8. Identifying Firm’s Strength and Weakness
Business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.
Inter- relationship between Business and Environment
Business and environment is interrelated because any change taken place in environment, it will influences on the business. The business organisation changes its strategy, policy, rules and regulations etc. depending the changing scenario of business environment. The inter-relationships between business and environment is highlighted in the following points-
- Relationship with economic condition: The economy is dynamic in nature. It passes through different phases like recession, recovery, prosperity, boom and depression over a period of time. A business organisation need to changes its operation procedure, policy, rules etc. depending on the situation of the economy. During recession and depression the company will follow downsizing of labour force due to shut down of production. On the other hand, the firm will increase its labour force to support the increase production. For example, due to Covid 19 pandemic, a large number of workers are losing their jobs due to shut down of production units.
2. Relationship with micro environment: The micro environmental factors like shareholders, suppliers, employees, creditors etc. also influences on the plans and policies, decision making etc. The business formulates their plans and policies after considering the demand and expectations of shareholders, suppliers, employees, creditors etc. For example, if the labour union demand for hike in wage than the management will take decision for change in wage rate.
3. Consumer taste and preferences: The changes in consumer taste and preferences influences on the business. They need to develop, add product line, develop promotional strategy for their products/services to meet the changing consumer taste and preferences. For example, due to busy schedule of people, they prefer for online banking rather than physical visit to bank for the services. To meet the demand for online banking the banking system develops net banking, IMPS, RTGS, NEFT, payment banks etc. for the convenience of customers.
4. Changes in technology: The continuous development of technology influences the business organisations to adopt the changes for their survival in the market. The technological changes makes possible for home delivery, online shopping websites, online ticket booking for bus, railways, airways, e-learning etc. for example, Zomato, red bus.com, BHIM, Gpay, Flipkart etc.
5. Changes in governance: Any changes in governance policy also influences in business. The business formulates their objectives, policies, rules etc. depending on the prevailing laws, acts and legislations. For example, the LPG policy has opened the path for private organisations, foreign investment, expansion of foreign trade etc. Implementation of GST act, demonetisation etc. affects the company to the change their tax filing, payment system etc. The Environmental Act makes essential for companies to take measures for prevention of environmental pollution from wastage of their company.
6. Relationship with societal changes: The changes in societal factors like lifestyle, composition of sex, literacy rate, income level etc. influences on objectives, plans and policies of business organisation. For example, due to luxurious lifestyle, consumption of junk food, job stress, competition etc. different health problems like diabetes, heart problem etc. increases day by day. Such health issues demand for health insurance policies, medical treatment etc. Increase in income demand for more luxurious items like personal car, appartments, AC, leisure tourism etc.
7. Relationship with political stability: The values, beliefs and attitudes of political party also influences on sustainability and growth of business. If the political party favours privatisation, MNCs, foreign investment than they will formulate policies for the same. On the hand, if the political party favours local and indigenous industries, MSME etc. then they will formulate policies for the growth of this sector. The present BJP Government of India implemented policies like MUDRA, skill India, Atmanirbhar Bharat etc. to support the MSME, indigenous industry of India.
Key takeaways-
- Business environment refers to the environment within which a business organisation operates. The business environment composed of internal environment and external environment.
The business environment composed of internal environment/micro environment and external environment/macro environment. These environmental factors are discussed under the two broad heads-
a) Internal/micro environment:
The internal environmental factors are controllable by changing their policy, plans, objectives and also adopting different measures. The factors of internal environment are-
Figure 2: Internal environment
- Plans and policies:
The plans and policies, objectives, rules and regulations are important for uninterrupted running of the organisation. It helps the employees of the organisation to know their responsibility, role, authority, payment structure, targets etc.
2. Human resources:
The human resources are crucial asset of the organisation. The human resource department recruit and appoint human resources according to the desire and need of the vacant posts in the organisation. The management undertakes financial and non-financial incentives for effective management of the resources.
3. Physical resources:
The physical resources are raw materials, equipments, land and building, office, warehouses, manufacturing plants etc. The management take decisions about investment in such resources, suppliers, sources of supply, location of storage of materials etc. for uninterrupted production/delivery of services
4. Corporate culture:
The corporate culture is about values, beliefs, ethics of the organisation. The corporate culture helps to maintain good relationship between management and employees, shareholders, public, consumers, suppliers etc. For example, annual award for best employee, pay out of profit, collective decision on important matters, decentralisation of activities etc.
5. Organisational structure
The organisational structure may be line, simple, matrix, star etc. A simple organisational structure allows free and fast flow of information, messages, ideas, complaints etc. Thus it helps in fast decision making, transmission of messages, resolution of disputes etc. On the other hand, a complex organisational structure create obstacles for free flow of information, messages, complaints etc. and thus disturbs in fast decision making and resolution of disputes.
b) External Environment
The components of external/macro environment are depicted in figure 3-
Figure 3: Components of business environment
- Economic environment
The economic environment of business refers to economic system of a country as well as the world. It consist of the following elements-
a) Economic Conditions: It includes gross domestic product, per capita income, markets for goods and services, availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help in improving the pace of economic growth.
(b) Economic Policies: It includes-
(i) Industrial policy,
(ii) Fiscal policy,
(iii) Monetary policy,
(iv) Foreign investment policy,
(v) Export –Import policy (Exim policy).
(c) Economic System: There are three types of economic systems, viz., (i) Capitalist economy; (ii) Socialist economy; and (iii) Mixed economy.
2. Sociocultural environment
It refers to the environment that includes social factors like customs, traditions, values, beliefs, poverty, literacy, life expectancy rate etc. The social structure and the values that a society cherishes have a considerable influence on the functioning of business firms. For example, during festive seasons there is an increase in the demand for new clothes, sweets, fruits, flower, etc. Due to increase in literacy rate the consumers are becoming more conscious of the quality of the products. Due to change in family composition, more nuclear families with single child concepts have come up. This increases the demand for the different types of household goods.
3. Political environment
This includes the political system, the government policies and their attitude towards the business and industrial sector. The political stability, their ideology, beliefs, values etc. influences the business organisation. The LPG policy, demonetisation, GST etc. are some of the examples of policy formulated by different government from time to time that influences the industrial sector of our country.
4. Legal environment
This refers to set of laws, regulations, which influence the business organisations and their operations. Every business organisation has to obey, and work within the framework of the law. Some of the important legislations that concern the business enterprises include:
(i) Companies Act, 1956
(ii) Foreign Exchange Management Act, 1999
(iii) The Factories Act, 1948
(iv) Industrial Disputes Act, 1972
(v) Payment of Gratuity Act, 1972
(vi) Industries (Development and Regulation) Act, 1951
(vii) Prevention of Food Adulteration Act, 1954
(viii) Essential Commodities Act, 2002
(ix) The Standards of Weights and Measures Act, 1956
(x) Monopolies and Restrictive Trade Practices Act, 1969
(xi) Trade Marks Act, 1999
(xii) Bureau of Indian Standards Act, 1986
(xiii) Consumer Protection Act, 1986
(xiv) Environment Protection Act
(xv) Competition Act, 2002
Besides, the above legislations, the following are also form part of the legal environment of business.
5. Technological environment
Technological environment include the methods, techniques and approaches adopted for production of goods and services and its distribution. In the modern competitive age, the pace of technological changes is very fast. Hence, in order to survive and grow in the market, a business has to adopt the technological changes from time to time. For example, technology changes bring changes from traditional banking to online banking, traditional shopping to online shopping, offline education to online education etc.
6. Demographic environment
This refers to the size, density, distribution and growth rate of population. All these factors have a direct bearing on the demand for various goods and services. A company market their products depending on the target population. For example a country where population rate is high and children constitute a large section of population, then there is more demand for baby products. Again, The high rise of population indicates the easy availability of labour. These encourage the business enterprises to use labour intensive techniques of production.
Educational Environment and its impact
Environmental education is the academic surrounding that covers training and development schemes applied on human force for overall development. Education environment facilitates systematic knowledge about different disciplines. It also contributes to the business and industry by imparting knowledge and skills on business administration, marketing, accounting and finance, business law, taxation, entrepreneurial skill etc. It consists of educational institutions, learners, course curriculum, faculties etc. The role/impact of educational environment are highlighted in the following points-
- Entrepreneurial learning: The educational environment promotes entrepreneurship in the country by imparting knowledge and skills on entrepreneurship. The government established institutes and also implement schemes for entrepreneurship promotions by imparting them training on vocational subjects and upgrading their skills to establish their own ideas. Entrepreneurial learning impart knowledge about technical skill development, business set up process, fund management, marketing skills, product development etc.
- Knowledge on business administration: Different business schools and institutes set up to impart knowledge on business administration through MBA and BBA course curriculum. The graduates from B-schools able to perform administration and management function efficiently which is very necessary for smooth running of business.
- Knowledge on marketing: The educational environment imparts knowledge and skills on marketing of products/services. Marketing is essential for promotion and positioning of products in the market. They learn about different promotional strategies to be adopted to attract the target market.
- Knowledge on trade: It impart knowledge on trade, procedure involved, opportunities in trade, allied services of trade like logistic, insurances, packaging etc. It will help them to make planning and policies for trading.
- Knowledge on accounting and finance: The business must keep proper recording of business transactions and prepare financial statements to find out annual profit and loss and position of assets and liabilities at the end of the period. The graduates of commerce, chartered accountants, Company secretary, Cost and management accounting provides in-depth knowledge about the accounting techniques and methods, sources and application of finance, fund management etc.
- Knowledge about the business laws: Different business laws are formulated for regulating and controlling the conduct of business organisations, trade, financial market, banks etc. The business follows the laws, acts to operate in a fair manner in the market. The graduates of commerce, chartered accountants, Company secretary, Cost and management accounting provides in-depth knowledge and understanding about prevailing laws, acts, rules and regulations etc.
- Make aware about social responsibility: The learners of commerce education aware about the corporate social responsibility of business. They able to make the organisation a societal person by contributing a person of their profit for the growth of the organisation.
- Makes aware about sustainable business: The learners of commerce education become aware about sustainable business for maintaining ecological balance. The learners able to implement innovate ideas and take measures for conduct of sustainable business.
- Acquire knowledge and skills: The education environment provide skills and knowledge on all important aspects of business like business ethics, marketing, entrepreneurship, accounting, management, law etc. which is necessary for healthy growth of business.
- Encourage creativity and learning: The education environment encourage creativity and innovations among the business organisation by providing them skills and knowledge about all aspects of business, research and development etc.
- Growth of professionalism: The educational environment brings professionalism among the learners by educating them about ethics, morale, unfair trade practices, consumer protection, sustainability, environment safety etc. Professionalism helps to conduct business in fair manner and prevent to adopt unfair trade practices.
- Work culture: Positive work culture is necessary to motivate employees and maintain good relationship between management and workers. The work culture involves discipline, communication between employer and employees, motivation of employees, rules and regulations etc. The education environment impart knowledge about the organisational behaviour where the learners learn about management of work culture, employees behaviour etc.
- Enhance leadership: The education environment also enhances leadership qualities of leadership by educating them about the leadership theories, qualities of leadership, types of leadership etc. Leadership is essential for team work and proper management of workers.
- Technology friendly: The education environment makes people dynamic and they able adopt the changes in technology for positive growth of business.
International Environment – Current Trends in the World
International trade environment refers to the sum total of external forces where the international trading organisation operates. Such trading environment is influenced by both domestic environment of the country where the firm located and also by the global environment where it provides services/sell products. The figure 4 shows elements of international trading environment-
Figure 4: Elements of international trading environment
- Political-legal environment
Political environment refers to the existing political system, governance etc. that prevails in the world. Their stability, values, beliefs, support all these influence on the sustainability, growth and expansion of international trade in different parts of the world.
Legal environment refers to the set of rules, regulations, acts, legal system formulated to control and regulate the global trade. The stakeholders of international trade must follow such rules and regulation others penalty or other punishment will be imposed on international trading firms.
2. Economic Environment
It consist of different economic factors like economic conditions, economic policies, economic system, phases of trade cycle, international organisations, international agreements which issue different guidelines, rules and regulations for smooth conduct of international trade. WTO, IMF, World Bank, UNCTAD, etc. supervise the activities and trends of international trade.
3. Cultural environment
The cultural environment of international trade is highly volatile and influences their decision making, problem solving, exchanging information and ideas etc. The trading organisations should plan their promotion policies depending on the values, beliefs, social life style, food habits, preferences etc. of the global customers.
4. Technological environment
The technological environment helps to easily access the customers of every knock and corner of the globe, collect material information and deliver the service/ product without delay. Technological environment promotes e-commerce business, international banking and insurance services, telecommunication services, fast transport of cargo by airways etc. It helps the customers to consume imported goods with reasonable price.
Features of international trading environment
- It is very complex because of existence of different laws, different cultures, different political system etc.
- Common trading policies are followed by all stakeholders of international trade.
- There are different trade and non-trade barrier are present in the trading environment. Thus trade agreements are formed among the countries to negotiate such trade barriers.
- The trading environment is based on different trade theories provided by different scholars from time to time.
- The trading countries exchange their products or services with a common currency (dollar, euro, pound, yuan, yen etc.) other than home currency.
International Trading Environment – WTO and Trading Blocs and their impact on Indian Business.
WTO
The World Trade Organization (WTO) was established in 1995 by Uruguay Round negotiations of GATT as global international organization dealing with the rules of trade between nations. The head office of WTO is in Geneva, Switzerland and currently it has 164 members. The GATT mainly dealt with trade in goods, the WTO and its agreements also cover trade in services and intellectual property. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.
Source: www.wto.org
Map 1: WTO members and observers
The main activities WTO are:
- Negotiating the reduction or elimination of obstacles to trade (import tariffs, other barriers to trade) and agreeing on rules governing the conduct of international trade (e.g. Antidumping, subsidies, product standards, etc.)
- Administering and monitoring the application of the WTO's agreed rules for trade in goods, trade in services, and trade-related intellectual property rights.
- Monitoring and reviewing the trade policies of our members, as well as ensuring transparency of regional and bilateral trade agreements.
- Settling disputes among our members regarding the interpretation and application of the agreements.
- Building capacity of developing country government officials in international trade matters.
- Assisting the process of accession of some 30 countries who are not yet members of the organization.
- Conducting economic research and collecting and disseminating trade data in support of the WTO's other main activities.
- Explaining to and educating the public about the WTO, its mission and its activities.
The news-paper article provided below highlights activity of WTO
WTO stands for-
- Non-discrimination: A country should not discriminate between its trading partners and it should not discriminate between its own and foreign products, services or nationals.
- More open: Lowering trade barriers is one of the most obvious ways of encouraging trade; these barriers include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively.
- Predictable and transparent: Foreign companies, investors and governments should be confident that trade barriers should not be raised arbitrarily. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition, choice and lower prices.
- More competitive: Discouraging ‘unfair’ practices, such as export subsidies and dumping products at below cost to gain market share; the issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade.
- More beneficial for less developed countries: Giving them more time to adjust, greater flexibility and special privileges; over three-quarters of WTO members are developing countries and countries in transition to market economies. The WTO agreements give them transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions.
- Protect the environment: The WTO’s agreements permit members to take measures to protect not only the environment but also public health, animal health and plant health. However, these measures must be applied in the same way to both national and foreign businesses. In other words, members must not use environmental protection measures as a means of disguising protectionist policies.
Trade blocks
Trade block/economic integration are agreement between/among the countries either to reduce or eliminate the trade barriers. It encourages trade among the countries leading to wide participation in international trading environment.
Trade blocks may be multilateral and bilateral-
a) Multilateral trade agreements/blocks:
Multilateral trade agreement involves agreement among three or more countries without discrimination among themselves regarding tariff and other trade barriers to promote trade and investment among the member countries. The member countries follow common tariff and non-tariff barriers of trade for non-member countries. There are large numbers of multilateral trade agreements are made by different countries of world. Some of them are highlighted in table 1-
Table 1: Examples of multilateral trade agreements
Sl no. | Name of agreement | Member countries |
1. | North American Free Trade Agreement (NAFTA) | United States, Canada, and Mexico |
2. | Central American-Dominican Republic Free Trade Agreement | Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador |
3. | Trans-Pacific Partnership | United States and 11 other countries bordering the Pacific Ocean. |
4. | General Agreement on Trade and Tariffs (GATT) | 125 member up to 1995 |
5. | World Trade Organization (WTO) | 195 countries of the world |
6. | European Union (EU) | Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia and Cuba |
7. | ASEAN Free Trade Area (AFTA) | Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Myanmar, Cambodia, Laos, Vietnam. |
8. | South Asian Free Trade Area (SAFTA) | Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan and Sri Lanka |
9. | Asia-Pacific Trade Agreement (APTA) | Bangladesh, China, India, Lao PDR, Mongolia, Republic of Korea, and Sri Lanka. |
10. | African Continental Free Trade Area (AfCFTA) | 36 members |
Some of the advantages of multilateral trade agreements are-
- It treats all member nations equally by following non-discriminatory trade policies for all member countries.
- It makes international trading easier for developing and underdeveloped countries as such counties able to make different trade treaties with developed countries.
- WTO provides common Trade regulations are the same for every member country irrespective of their size of economy, category of economy etc.
- It helps emerging markets to grow in the international market by entering into agreement with other countries for funding, technology and other resources, import and export etc.
- Multilateral trade agreements make it possible for multiple nations to solve their common issues or achieve their common objectives by entering into a common agreement.
Some of the disadvantages of multilateral trade agreements are-
- The negotiations made under multilateral trade agreements can be lengthy, risky and breaking down.
- Such agreements may be easily misunderstood by the public.
- Removal of trade barriers may affects businesses of small scale industries and ethnic manufacturers of member countries.
b) Bilateral trade agreement/blocks:
Bilateral trade agreement refers to agreements between two countries without discrimination between them regarding tariff and other trade barriers to promote trade and investment between the member countries. The member countries follow common tariff and non-tariff barriers of trade for non-member countries. Some examples of bilateral trade are-
- ASEAN–China Free Trade Area (ACFTA).
- ASEAN–Hong Kong, China Free Trade Agreement (AHKFTA).
- ASEAN–India Free Trade Area (AIFTA).
- ASEAN–Japan Comprehensive Economic Partnership (AJCEP).
- ASEAN–Korea Free Trade Area (AKFTA).
- ASEAN–Australia-New Zealand Free Trade Area (AANZFTA).
- EU – Japan Economic Partnership Agreement.
- US – EU United States (TTIP – Transatlantic Trade and Investment Partnership).
Some of the benefits of bilateral trade agreements are-
- It reduces tariff and non-tariff barrier between the member nations.
- It paves the path for liberalisation of trade and investment.
- It is the forum of discussion of multiple issues for member countries,
- It prefers for trade dispute settlement.
Some of the disadvantages of bilateral trade agreements are-
- In this type of agreement, the developed country dominates the developing /underdeveloped countries by formulating policies in favour of earlier one.
- The Policies are prepared without considering vulnerability of developing countries.
- It Impact on indigenous businesses due to competition from large scale and multinational companies because they find it hard to keep their business going as they will not be able to compete with more successful industries in another country.
- The elimination of trade taxes means companies lose their price advantage.
- A bilateral agreement can result in competing agreements between other countries.
Types of trade blocks
The different types of trade blocks are discussed below
- Preferential Trade Area:
Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.
2. Free Trade Area:
Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members. Example, NAFTA, SAARC
3. Customs Union:
A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO. For example, Eurasian economic union
4. Common market:
It refers to full economic integration and occurs when member countries trade freely in all economic resources. All barriers to trade in goods, services, capital and labour are removed. It formulates common agricultural policy, fisheries policy etc. For example, European Union.
5. Political union:
It refers to co-ordination/ integration of political system, policies etc. Here members of a trading block add a political dimension to their existing economic dimension. For example, Soveit Union, USA etc.
Figure 4: Trade blocks/economic integration
Impact of trade block on business
The impact of trade blocks are discussed below-
- Economic benefits: Competition and scale effects arise as separate national markets become more integrated in a single unified market. The larger market permits economies of scale to be achieved and brings producers in member countries into closer contact-and competition-with each other. Entrenched monopoly positions are eroded, promoting efficiency gains within firms. Suppliers from non-member countries will also experience the change in market size and competition, inducing changes in the pricing of their imports and in their attitude to foreign direct investment (FDI).
- Economies of Scale: the larger markets result in higher efficiency and productivity through larger factories and lower overhead. Such factors benefit large businesses that can scale up their production and save money. The operations of small businesses are not large enough to generate substantial savings in this way, and small companies may not even be able to finance such expansion. After the creation of regional trading blocs, small companies may find that they are dealing with more and larger competitors. To survive, they must maintain the strategy that allowed them to succeed against larger competition in the first place.
- Opportunities for work and Investment: Trade agreements create more opportunities for countries to trade with one another without any border barriers to commerce and investment. Reduction or removal of tariffs, results in lower consumer prices in the bloc countries. Many studies have concluded that regional economic integration contributes in an important way to the relatively high growth rates in the less-developed countries. Removing restrictions on labor movement, economic integration can help expand job opportunities. Free trade also promotes regional understanding and economic parity can also facilitate closer political cooperation.
- Inward Trade: A negative issue with a trade bloc might come from members trading almost exclusively with each other which might result in a less efficient or more expensive producer because it is in a member country. In this scenario less efficient companies can be protected within the bloc agreement acting as a trade barrier with countries outside of the trading bloc. In the labour market, sudden shifts in employment can tax the resources of member countries.
- Diminished Sovereignty: With each new round of discussions and agreements within a regional bloc, nations may find that they have to give up more of their political and economic rights. This issue prompted Brexit which is turning out to be a nightmare for the British Government with no one knowing how it will all end up.
- Trade creation: Tariff removal leads to trade creation as it lower prices for consumers and greater opportunity for exporters. Trade creation leads to wide participation countries in the international trade, investment etc.
- Increased competition: The removal of tariffs creates greater choice for consumers. Therefore domestic firms have a greater incentive to cut costs to remain competitive.
- Increased interdependence: It leads to increased interdependence of member nations in case of economic activities. Excessive interdependence may lead to deficit in BOP of economically weak countries
- Loss of sovereignty: The rich and powerful member country generally dominates the small and less powerful member country. All important decisions are made by the powerful country and the remaining members are bound to follow such decisions.
- Increased influence of multinationals: The economically poor country faces influence of multinationals as they interfere on economic policy, political decision making etc.
Key takeaways-
- The business environment composed of internal environment/micro environment and external environment/macro environment.
- The World Trade Organization (WTO) was established in 1995 by Uruguay Round negotiations of GATT as global international organization dealing with the rules of trade between nations.
- Trade block/economic integration are agreement between/among the countries either to reduce or eliminate the trade barriers.
References-
1. Jhingan, M. L. (2014). International Economics (6th edition). Vindra Publications P Ltd.
2. Varma, S. (2019). International Business (4th edition). Pearson Education.
3. Towards sustainable and lasting Growth. (2016-17). Ministry of Commerce & India, Dept. Of Commerce.
4. Www.rbi.org.in.
5. Www.wto.org.
