Political Environment In International Business

Political environment, regulatory and legal systems is one of the essential aspects to consider with when a firm decided to enter an international market. Root (1994) said that the political environment of the target country is able to affect a marketer to make a decision on the entry mode, especially based on the government policies and regulations regarding to the international business. While Globerman and Shapiro (2003) stated that the legal system can play a vital role to encourage the marketer to expand their market into foreign countries. These two statements can prove that political environment and legal system are vital importance for international business. The political and legal system is varied from one country to another country.

Edward Burnett Tylor (1871), an English anthropologist, stated in the first paragraph of his Primitive Culture that "Culture . . . is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society." According to Hofstede (1984), a culture defined as “collective programming of the mind which distinguishes the members of one category of people from another." Based on the statements mentioned, we can determine that culture is the shared knowledge, language, customs, values, norms, attitude, belief and so on among a certain/ large group of people and this differentiates them from another. Therefore, marketers have to examine and understand the culture in target foreign markets in order to formulate an effective business marketing strategy and reduce the risk or loss of the company attributed by the cultural difference. The differences in culture have the major effect in influencing the type of entry mode chosen and also the business marketing

(Brouthers, 2002) Root (1987) defined that “foreign market entry mode is an institutional arrangement that makes possible the entry of a company 's product, technology, human skills, management or other resources into a foreign country.” Based on the statement of Albaum and Duerr (2008), we can know that different entry modes involved different level of control, commitment, risk and also involvement. There are 3 general categories of entry mode, which are export, contractual agreement, and foreign investment entry modes. (Root, 1987) Export is the entry mode, which enables the firms to enter the foreign markets directly or indirectly through an agent or distributor in the host country; contractual agreement refers to the entry mode, which including licensing or franchising; and foreign investment entry modes involve actual equity ownership through joint ventures (JV) or wholly owned subsidiary (WOS). Based on the hierarchical model of market entry modes which developed by Pan & Tse (2000), we can determine that there are two choices of entry modes, which are non-equity modes and equity modes. Non-equity modes (exports and contractual agreements) are the foreign market entry modes which do not involve the use of equity whereas equity modes including joint