4.6: The Global Business Environment

The Economic Environment

Economic development refers to the process through which a region, country, or community improves the well-being of its citizens by increasing income, reducing poverty, creating jobs, and expanding access to healthcare and education. If you plan to do business in a foreign country, you need to know its level of economic development. You also should be aware of factors influencing the value of its currency and the impact that changes in that value will have on your profits.

Economic Development

If you don’t understand a nation’s level of economic development, you’ll have trouble answering some basic questions, such as: Will consumers in this country be able to afford the product I want to sell? Will it be possible to make a reasonable profit? A country’s level of economic development can be evaluated by estimating the annual income earned per citizen. The World Bank, which lends money for improvements in underdeveloped nations, divides countries into four income categories.

World Bank Group Income Categories as of July 1, 2024:^[1]

• High income— $14,005 or higher (United States, Germany, Japan, Canada)
• Upper-middle income—$4,516 to $14,005 (China, South Africa, Mexico)
• Lower-middle income—$1,146 to $4,515 (Kenya, Philippines, India)
• Low income—$1,145 or less (Afghanistan, South Sudan, Uganda)

Note that even though a country has a low annual income per citizen, it can still be an attractive place for doing business. India, for example, is a lower-middle-income country, yet it has a population of a billion, and a segment of that population is well educated—an appealing feature for many business initiatives.

The classification of countries into income categories has evolved significantly over the period since the late 1980s. In 1987, 30% of reporting countries were classified as low-income and 25% as high-income countries. Jumping to 2023, these overall ratios have shifted down to 12% in the low-income category and up to 40% in the high-income category.

The scale and direction of these shifts, however, vary a great deal between world regions. Here are some regional highlights:^[2]

• 100% of South Asian countries were classified as low-income countries in 1987, whereas this share has fallen to just 13% in 2023.
• In the Middle East and North Africa, there is a higher share of low-income countries in 2023 (10%) than in 1987, when no countries were classified in this category.
• In Latin America and the Caribbean, the share of high-income countries has climbed from 9% in 1987 to 44% in 2023.
• Europe and Central Asia have a slightly lower share of high-income countries in 2023 (69%) than they did in 1987 (71%).

The long-term goal of many countries is to move up the economic development ladder. Some factors conducive to economic growth include a reliable banking system, a strong stock market, and government policies to encourage investment and competition while discouraging corruption. It’s also important that a country have a strong infrastructure—its systems of communications (telephone, Internet, television, newspapers), transportation (roads, railways, airports), energy (gas and electricity, power plants), and social facilities (schools, hospitals). These basic systems will help countries attract foreign investors, which can be crucial to economic development.

Currency Valuations and Exchange Rates

If every nation used the same currency, international trade and travel would be a lot easier. Of course, this is not the case. The United Nations currently recognizes 180 currencies that are used in 195 countries across the world.^[3] Some currencies you’ve heard of, such as the British pound; others are likely unknown to you, such as the manat, the official currency of Azerbaijan. If you were in Azerbaijan, you would exchange your Canadian dollars for Azerbaijan manats. The day’s foreign exchange rate will tell you how much one currency is worth relative to another currency and so determine how many manats you will receive. If you have travelled abroad, you already have personal experience with the impact of exchange rate movements.

The Legal and Regulatory Environment

One of the more difficult aspects of doing business globally is dealing with vast differences in legal and regulatory environments. Canada, for example, has an established set of laws and regulations that provide direction to businesses operating within its borders. But because there is no global legal system, key areas of business law—for example, contract provisions and copyright protection—can be treated in different ways in different countries. Companies doing international business often face many inconsistent laws and regulations. To navigate this sea of confusion, Canadian business people must know and follow both Canadian laws and regulations and those of the nations in which they operate.

Business history is filled with stories about North American companies that have stumbled in trying to comply with foreign laws and regulations. Laws change over time. For example, the government in the Netherlands made working from home a legal right. This means companies can expect requests from employees to work remotely. Therefore, companies should develop a work-from-home policy outlining the factors they will consider when an employee makes a request.^[4]

One approach to dealing with local laws and regulations is to hire lawyers from the host country who can provide advice on legal issues. Another is working with local business people who have experience in complying with regulations and overcoming bureaucratic obstacles.

Foreign Corrupt Practices Act

One Canadian law that creates unique challenges for Canadian firms operating overseas is the Corruption of Foreign Public Officials Act (CFPOA), which prohibits the distribution of bribes and other favours in the conduct of business. Despite the practice being illegal in Canada, such tactics as kickbacks and bribes are business-as-usual in many nations. According to some experts, Canadian business people are at a competitive disadvantage if they’re prohibited from giving bribes or undercover payments to foreign officials or business people who expect them. In theory, because the Corruption of Foreign Public Officials Act warns foreigners that Canadians can’t give bribes, they’ll eventually stop expecting them.

Where are business people most likely and least likely to encounter bribe requests and related forms of corruption? Transparency International reports on corruption and publishes an annual Corruption Perceptions Index that rates the world’s countries. Transparency International annually rates nations according to “perceived corruption” and defines corruption as “the abuse of entrusted power for private gain.” A score of 100 would be perfect (corruption-free), and anything below 30 establishes that corruption is rampant. In 2023, Canada scored 76/100 on the Corruption Perceptions Index, ranking 12/180 countries. Top-scoring countries also tend to have well-functioning justice systems, stronger rule of law and political stability.^[5]

Ranked as the least corrupt country was Denmark, ranking 1/180 and scoring 90/100, followed by Finland, New Zealand, Norway, Singapore, and Sweden. The most corrupt countries include Somalia, ranked 180/180, followed by Venezuela, Syria, South Sudan, Yemen, and North Korea.^[6]

Transparency International reports on corruption and publishes an annual Corruption Perceptions Index that rates the world’s countries. A score of 100 would be perfect (corruption-free), and anything below 30 establishes that corruption is rampant.

Trade Controls

The debate about the extent to which countries should control the flow of foreign goods and investments across their borders is as old as international trade itself. Trade controls are policies that restrict free trade, and governments continue to control trade. To better understand how and why, let’s examine a hypothetical case. Suppose you’re in charge of a small country in which people do two things—grow food and make clothes. Because the quality of both products is high and the prices are reasonable, your consumers are happy to buy locally made food and clothes. But one day, a farmer from a nearby country crosses your border with several wagonloads of wheat to sell. On the same day, a foreign clothes maker arrives with a large shipment of clothes. These two entrepreneurs want to sell food and clothes in your country at prices below those that local consumers now pay for domestically made food and clothes. At first, this seems like a good deal for your consumers: they won’t have to pay as much for food and clothes. But then you remember all the people in your country who grow food and make clothes. If no one buys their goods (because the imported goods are cheaper), what will happen to their livelihoods? And if many people become unemployed, what will happen to your national economy? That’s when you decide to protect your farmers and clothes makers by setting up trade rules. Maybe you’ll increase the prices of imported goods by adding a tax to them; you might even make the tax so high that they’re more expensive than your homemade goods. Or perhaps you’ll help your farmers grow food more cheaply by giving them financial help to defray their costs. The government payments that you give to the farmers to help offset some of their production costs are called subsidies. These subsidies will allow the farmers to lower the price of their goods to a point below that of imported competitors’ goods. What’s even better is that the lower costs will allow the farmers to export their own goods at attractive, competitive prices.

Canada has a long history of subsidizing farmers. Subsidy programs guarantee farmers (including large corporate farms) a certain price for their crops, regardless of the market price. This guarantee ensures stable income in the farming community, but it can have a negative impact on the world economy. How? Critics argue that in allowing Canadian farmers to export crops at artificially low prices, Canadian agricultural subsidies permit them to compete unfairly with farmers in developing countries. A reverse situation occurs in the steel industry, in which a number of countries—China, Japan, Russia, Germany, and Brazil—subsidize domestic producers. U.S. trade unions charge that trade subsidy practices give an unfair advantage to foreign producers and hurt American industries, which can’t compete on price with subsidized imports.

The top exports of Canada in 2022 were crude petroleum ($123B), cars ($29.4B), petroleum gas ($24.3B), refined petroleum ($17.2B), and gold ($14.7B), exporting mostly to the United States ($438B), China ($25.4B), Japan ($14.3B), United Kingdom ($12.9B), and Mexico ($7.39B). The top imports of Canada are cars ($31.9B), refined petroleum ($19.8B), motor vehicles; parts and accessories ($17.4B), delivery trucks ($17.3B), and crude petroleum ($16.8B), importing mostly from United States ($308B), China ($62.1B), Mexico ($22.2B), Germany ($14.1B), and Japan ($9.87B).^[7] So, if Canada imported $308B from the United States and exported $438B to the United States, Canada achieved a positive trade balance of $130B.

Whether they push up the price of imports or push down the price of local goods, such initiatives will help locally produced goods compete more favourably with foreign goods. Both strategies are forms of trade controls—policies that restrict free trade. Because they protect domestic industries by reducing foreign competition, the use of such controls is often called protectionism. Though there’s considerable debate over the pros and cons of this practice, all countries engage in it to some extent. Before debating the issue, however, let’s learn about the more common types of trade restrictions: tariffs, quotas, and embargos.

Tariffs

Tariffs are taxes on imports that increase the price of foreign-made goods, making them less competitive. They also serve as a source of revenue for governments. For instance, in March 2025, President Donald Trump announced that the U.S. would maintain a 25% tariff on imported steel products to bolster the American steel industry and protect U.S. steel manufacturers.

Quotas

A quota imposes limits on the quantity of a good that can be imported over a period of time. Quotas are used to protect specific industries, usually new industries or those facing strong competitive pressure from foreign firms. Canadian import quotas take two forms. An absolute quota fixes an upper limit on the amount of a good that can be imported during the given period. A tariff-rate quota permits the import of a specified quantity and then adds a high import tax once the limit is reached.

Sometimes quotas protect one group at the expense of another. For example, let us assume that a hypothetical country restricts the number of mangoes imported. Let us also assume that the demand for mangoes in the country is 27,000 pounds and the current international market price for one pound of mangoes is $1.35. Upon introducing an import quota, the country imposed restrictions and allowed the import of only 18,000 pounds of mangoes. When this happens, it hikes the domestic price to $1.89 per pound of mangoes. At this price, the domestic farmers of the country can afford to increase their production from 4,000 to 9,000 pounds. At the same time, at the price of $1.89 per pound, the country’s demand for mangoes declines to 25,000 pounds. In this example, the restriction helps domestic mango farmers increase production and decrease demand through price regulation.^[8]

Another example is the wheat export quota implemented by India, which has prompted Nepal’s flour industry to adapt and innovate. It was introduced in response to concerns about reduced wheat production due to heatwaves in India, but it has spurred resilience in Nepali flour mills. Nepal, which primarily sources wheat from India, initially received a partial quota allocation, leading to concerns about potential price increases. In response to this situation, calls have been made for the Nepali government to engage in constructive dialogue with India to secure 200,000 tonnes of wheat, which could help mitigate potential shortages. While the initial quota allocation did offer some relief by reducing flour prices, industry leaders are now advocating for a comprehensive, long-term solution, recognizing that domestic production alone may not suffice to meet the demand.^[9]

Embargos

An extreme form of quota is the embargo, which, for economic or political reasons, bans the import or export of certain goods to or from a specific country.

Dumping

A common political rationale for establishing tariffs and quotas is the need to combat dumping: the practice of selling exported goods below the price that producers would normally charge in their home markets (and often below the cost of producing the goods). Usually, nations resort to this practice to gain entry and market share in foreign markets, but it can also be used to sell off surplus or obsolete goods. Dumping creates unfair competition for domestic industries, and governments are justifiably concerned when they suspect foreign countries of dumping products on their markets. They often retaliate by imposing punitive tariffs that drive up the price of the imported goods.

The Pros and Cons of Trade Controls

Opinions vary on government involvement in international trade. Proponents of controls contend that there are a number of legitimate reasons why countries engage in protectionism. Sometimes they restrict trade to protect specific industries and their workers from foreign competition—agriculture, for example, or steel making. At other times, they restrict imports to give new or struggling industries a chance to get established. Finally, some countries use protectionism to shield industries that are vital to their national defence, such as shipbuilding and military hardware.

Despite valid arguments made by supporters of trade controls, most experts believe that such restrictions as tariffs and quotas, as well as practices that don’t promote level playing fields, such as subsidies and dumping, are detrimental to the world economy. Without impediments to trade, countries can compete freely. Each nation can focus on what it does best and bring its goods to a fair and open world market. When this happens, the world will prosper, or so the argument goes. International trade is certainly heading in the direction of unrestricted markets.

Media Attributions

“Container port, Port, Coast image” by cocoparisienne, used under the Pixabay license.