Sorry, external drive cannot be use as internal. U can't install os on it.
If somewhat u able to install os on it by means of cracking or something.
You windows will take time to boot. Because usb 2.0 are very slow, have average transfer rate of only 30 MB/s.
But Microsoft have given a function in windows 8 to use in on a pen drive or in a external hard drive. Known as "Windows To Go"
http://en.wikipedia.org/wiki/Windows_To_Go