International Business Environment

 Running head: INTERNATIONAL BUSINESS ENVIRONMENT 1
International Business Environment
(Name)
(Institutional Affiliation)
INTERNATIONAL BUSINESS ENVIRONMENT 2
International Business Environment
Finance runs the world in many ways both directly and indirectly. From giving all the
comforts to being the bone of contention, it has an effect on all aspects of people’s lives.
Finance or economics continues to play an important role in the lives of individuals or even
societies and also countries. Since its origination, humans have been active both mentally and
physically, which has transformed the world from a primitive to an advanced one. The activities
are normally carried out by humans, organising themselves into different countries or nations.
When one looks at the annals of history, it is clearly proven that for a nation to reach the top
echelons, mainly in the aspect of providing its people the needed comforts and also to gain
superiority over other nations, its economy has to be strong. However, if a country’s economy
fails and goes into recession due to certain factors, it will result in a lot of problems for its
citizens, which needs urgent attention.
Nowadays, in this globalised world, an economic problem in one country is not restricted
to that country alone but affects other countries as well. This is happening today, with the
economic recession that started in the United States of America having negative effects all over
the world. The economies of most countries are directly and indirectly dependent on the US’
economy, and with liberalisation happening everywhere, the negative effects in the USA will be
felt everywhere. This paper will discuss the financial and economic impacts of the recent credit
crisis on global business by focusing how its origin in the USA is having an effect all over the
world.
The US Economy and Recession
From the late 1800s until now, the US economy remains the largest and the most
influential economy in the world. Being a mixed economy, it is mainly run by the
INTERNATIONAL BUSINESS ENVIRONMENT 3
microeconomic decisions of the private parties under the regulation of the central government.
The US’ economy’s gross domestic product (GDP) was also on the higher side all these years,
but in recent times, the GDP has started to decline, showing all signs of the impending recession.
Yet, despite its status, the US economy is experiencing unprecedented problems, and the threat
of a recession is only one of many problems affecting the US economy (Pettinger, 2008). In the
economic parlance, the term ‘recession’ is normally used when there is a decline in a country's
GDP or negative economic growth consecutively for two or more quarters of a year. Based on
said definition, recession has not yet started in the US, but it is already showing all signs of
happening.
Origination and Its Impacts on the Global Business
The ‘seeding’ of the recession mainly happened in the housing sector due to the dubious
activities of the various banks and its officials when the people approached them to get loans for
house purchases. Fed Chief Bernanke also said that many of the troubles now facing the US
economy stemmed from the housing slide. That is, for the bank officials to get a hefty cut from
the loan deals, they granted loans to a high volume of people who wanted to buy houses.
Because of this questionable practice, people obtained loans more than their credit standing
could cover, so they bought more expensive houses with the money (Ray, 2008). This buying of
expensive houses by many people created a ‘housing boom’. However, some of the borrowers
struggled to pay back the high loans, especially when the interest rates were adjusted upwards
under variable interest rate mortgages. Because of this, “the banks and other financial
institutions now began to be saddled with bad loans” (Ray, 2008). With the housing boom
deflated, the loans given by the banks became unrecoverable even after the sale of the houses.
This is because the amount recovered from the house sale was below the amount of loans granted
INTERNATIONAL BUSINESS ENVIRONMENT 4
as the prices of houses fell below the threshold. This housing burst resulted in the financial
institutions incurring high losses, and this forced them to downsize the credit volume not only to
the housing sector but also to other sectors as well. This also made people poorer as the market
value of their wealth restricted their spending power.
The trouble that originated in the housing sector had and is still having an impact on the
other spheres of life leading to recession in the USA and all over the world. According to
Patterson and Thomasson, the crisis that began with bad home loans to sub-prime borrowers in
the US is threatening to push the global economy into a recession as consumers lose confidence
and banks cut back on lending (2008).
Fiscal Irresponsibility
The other reason why GDP was not able