Download MBA-Marketing (Master of Business Administration) 4th Semester Global Marketing Notes
UNIT 01
GLOBAL MARKETING
LESSON NO. 1:
GLOBAL MARKETING: INTRODUCTION,
SCOPE, BENEFITS, OBSTACLES AND PROTECTIONISM
STRUCTURE
1.1
From international marketing to global marketing
1.2
Definitions of international and global marketing management
1.3
Management orientation
1.4
Benefits of international marketing
1.5
Scope of global marketing
1.6
Obstacles to Internationalization
1.7
Protectionism
1.8
Arguments for Protectionism
1.9
Tools of government protectionism
1.10 Self-assessment questions
1.1
FROM INTERNATIONAL MARKETING TO GLOBAL
MARKETING
The term global marketing has only been used for some tem years and
began to assume widespread use in 1983 with the seminal article by Ted
Levitt. Prior to that, international marketing or multinational marketing
was the term used most often to describe international marketing
activities. However, global marketing is not just a new term for an old
phenomenon; there are real differences between international marketing
and global marketing. In many ways global marketing is a subcategory
of international marketing with special importance in our present world.
It has captured the attention of marketing academics and business
practitioners alike and, as indicated by the title of our book, we attach
considerable importance to this new type of international marketing.
However, before we explain global marketing in greater detail, let us
first look at the historical development of international marketing as a
field and gain a better understanding of the phases through which it has
passed.
1.1.1 Domestic marketing
Marketing that is aimed at a single market, the firm`s domestic market, is
referred to as domestic marketing. In domestic marketing, the firm faces
only one set of competitive, economic, and market issues and,
essentially, must deal with only one set of customers, although the
company may serve several segments in this one market. The marketing
concepts that apply to domestic or single-country marketing are those we
expect our readers are well versed in and will not be covered further in
this book.
1.1.2 Export marketing
The field of export marketing covers all those marketing activities
involved when a firm markets its products outside its main (domestic)
base of operation and when products are physically shipped from one
market or country to another. Although the domestic marketing operation
remains of primary importance, the major challenges of export marketing
are the selection of appropriate markets or countries through marketing
research, the determination of appropriate product modifications to meet
the demand requirements of export markets, and the development of
export channels through which the company can market its products
abroad. In this phase, the firm may concentrate mostly on the product
modifications and run the export operations as a welcome and profitable
by-product of its domestic strategy. Because the movement of goods
across national borders is a major part of an exporting strategy, the
required kills include knowledge of shipping and export documentation.
Although export marketing probably represents the most traditional and
least involved form of international marketing, it remains an important
aspect for many firms. As a result, we have devoted chapter 18
exclusively to this topic.
1.1.3 International marketing
When practicising international marketing, a company goes beyond
exporting and becomes much more directly involved in the local
marketing environment within a given country or market. The
international marketer is likely to have its own sales subsidiaries and will
participate in and develop entire marketing strategies for foreign
markets. At this point, the necessary adaptation to the firm`s domestic
marketing strategies becomes a main concern. Companies going
international now will have to find out how they must adjust an entire
marketing strategy, including how they sell, advertise, and distribute, in
order to fit new market demands.
An important challenge for the international marketing phase of a firm
becomes the need to understand the different environme4nts the
company needs to operate in. understanding different cultural, economic,
and political environments becomes necessary for success. This is
generally described as part of a company`s internationalization process,
whereby a firm becomes more experienced to operate in various foreign
markets. It is typical to find a considerable emphasis on the
environmental component at this stage. Typically, much of the field of
international marketing has been devoted to making the environment
understandable and to assist managers in navigating through the
differences. The development of the cultural/environmental approach to
international marketing is an expression of this particular phase.
1.1.4 Multinational marketing
The focus on multinational marketing came as a result of the
development of the multinational corporation. These companies are
characterized by extensive development of assets abroad and operate in a
number of foreign countries or markets as if they were local companies.
Such development led to the creation of many domestic strategies, thus
the name multidomestic strategy whereby a multinational firm competes
with many strategies, each one tailored to a particular local market. The
major challenge of the multinational marketer is to find the best possible
adaptation of a complete marketing strategy to an individual country.
This approach to international marketing leads to a maximum amount of
localization and to a large variety of marketing strategies. The attempt of
multinational corporations to appear local` wherever they compete,
often results in the duplication of some key resources. The major benefits
are the ability to completely tailor a marketing strategy to the local
requirements.
1.1.5 Multiregional marketing
Given the diseconomies of scale of individualized marketing strategies,
each tailored to a specific local environment, companies have begun to
emphasize strategies for larger regions. These regional strategies
encompass a number of markets, such as Euro-strategies for Western
Europe, and have come about as a result of regional economic and
political integration. Such integration is apparent in North America,
where the United States and Canada have signed a far-reaching trade
pact and the inclusion of Mexico is discussed, or in the Pacific Rim,
where a number of countries have made great progress in their economic
development. Nowhere has the development been faster than in Europe
through the impetus of Europe 1992, a series of political and economic
measures aimed at total integration of the European Community.
Companies considering regional strategies look to tie together operations
in one region, rather than around the globe, the aim being increased
efficiency. Many firms are presently working on such solutions, moving
from many multidomestic strategies in Europe toward Pan-European
strategies.
1.1.6 Global Marketing
Over the years, academics and international companies alike have
become aware that opportunities for economies of scale and enhanced
competitiveness are greater if they can manage to integrate and create
marketing strategies on a global scale. A global marketing strategy
involves the creation of a single strategy for a product, service, or
company, for the entire global market, that encompasses many markets
or countries simultaneously and is aimed at leveraging the commonalties
across many markets. Rather than tailor a strategy perfectly to any
individual market, the company aims at settling on one general strategy
that will guide itself through the world market. The management
challenge is to design marketing strategies that work well across many
markets. It is driven not only by the fact that markets appear increasingly
similar in environmental and customer requirements, but, even more so,
by the fact that large investments in technology, logistics, or other key
functions force the companies to expand their market coverage.
Thus global marketing is the last stage in the development of the field of
international marketing. While global marketers face their own unique
challenges that stem from finding marketing strategies that fit many
countries, the skills and concepts of the earlier stages are very important
and continue to be needed. In fact, companies that take a global
marketing approach will be good exporters because they will include
some exporting in their strategies. Such firms will also have to be good
at international marketing because designing one global strategy requires
a sound understanding of the cultural, economic, and political
environment of many countries. Furthermore, few global marketing
strategies can exist without some local tailoring, which the hallmark of
multinational is marketing. As a result, global marketing is but the last of
a series of skills, all included under the broad concept of international
marketing.
1.2
DEFINITIONS OF INTERNATIONAL AND GLOBAL
MARKETING MANAGEMENT
Although much conceptual work has been accomplished in global
marketing, the use of the word global remained unclear among many
marketing academics and executives. For many, global is just a new term
or replacement term for international. Since, it does mean something new
and different to us, we plan to make use of the term in a judicious way.
For us, global marketing is a subset, albeit different and distinct, of
international marketing. In general, we still use the term international
more often to describe factors that relate to the entire field and to use
global mainly when it refers to the specific new phenomena in
international marketing. The term global was selected because it
indicates clearly that a significant portion of this text will deal
specifically with new concepts and strategies without neglecting the
standard concepts dealing with export, international, or multinational
marketing.
Having examined the scope of international and global marketing, we are
now able to define it more accurately. Any definition has to be built,
however, on basic definitions of marketing and marketing management,
with an added explanation of the international dimension. We understand
marketing as the performance of business activities directing the flow of
products and services from producer to consumer. A successful
performance of the marketing function by a firm is contingent upon the
adoption of the marketing concept, consisting of (a) a market focus, (b) a
customer orientation, (c) an integrated marketing organization, and (d)
customer satisfaction. Marketing management is the execution of a
company`s marketing operation. Management responsibilities consist of
planning, organizing, and controlling the marketing program of the firm.
To accomplish this job, marketing management is assigned decision-
making authority over product strategy, communication strategy,
distribution strategy, and pricing strategy. The combination of these four
aspects of marketing is referred to as the marketing mix.
For international and global marketing management, the basic goals of
marketing and the responsibilities described above remain unchanged.
What is different is the execution of these activities in more than one
country. Consequently, we define international marketing management
as the performance of marketing activities across two or more countries.
1.3
MANAGEMENT ORIENTATION
The form and substance of a company` response to global market
opportunities depend greatly on management`s assumptions or beliefs--
both conscious and unconscious-- about the nature of the world. The
worldview of a company`s personnel can be described as ethnocentric,
polycentric, regiocentric, and geocentric. Management at a company
with a prevailing ethnocentric orientation may consciously make a
decision to move in the direction of geocentricism. The orientations is
collectively known as the EPRG framework.
1.3.1 Ethnocentric
A person who assumes his or her home country is superior compared to
the rest of the world is said to have an ethnocentric orientation. The
ethnocentric orientation means company personnel see only similarities
in markets and assume the products and practices that succeed in the
home country will, due to their demonstrated superiority, be successful
anywhere. At some companies, the ethnocentric orientation means that
opportunities outside the home country are ignored. Such companies
sometimes called domestic companies. Ethnocentric companies that do
conduct business outside the home country can be described as
international companies; they adhere to the notion that the products that
succeed in the home country are superior and, there-fore, can be sold
everywhere without adaptation.
In the ethnocentric, international company, foreign operations are viewed
as being secondary or subordinate to domestic ones. An ethnocentric
company operates under the assumption that tried and true
headquarters knowledge and organizational capabilities can be applied in
other parts of the world. Although this can some-times work to a
company`s advantage, valuable managerial knowledge and experience in
local markets may go unnoticed. For a manufacturing firm,
ethnocentrism means foreign markets are viewed as a means of disposing
of surplus domestic production. Plans for overseas markets are
developed, utilizing policies and procedures identical to those employed
at home. No systematic marketing research is conducted outside the
home country, and no major modifications are made to products. Even if
consumer needs or wants in international markets differ from those in the
home country, those differences are ignored at headquarters.
Nissan`s ethnocentric orientation was quite apparent during its first few
years of exporting cars and trucks to the United States. Designed for
mild Japanese winters, the vehicles were difficult to start in many parts
of the United States during the cold winter months. In northern Japan,
many car owners would put blankets over the hoods of their cars.
Tokyo`s assumption was that Americans would do the same thing. Until
the 1980s, Eli Lilly and Company operated as an ethnocentric company
in which activity outside the United States was tightly controlled by
headquarters and focused on selling products originally developed for
the U.S. market.
Fifty years ago, most business enterprises and especially those located in
a large country like the United States could operate quite successfully
with an ethnocentric orientation. Today, however, ethnocentrism is one
of the biggest internal threats a company faces.
1.3.2 Polycentric
The polycentric orientation is the opposite of ethnocentrism. The term
polycentric describes management`s often unconscious belief or
assumption that each country in which a company does business is
unique. This assumption lays the groundwork for each subsidiary to
develop its own unique business and marketing strategies in order to
succeed; the term multinational company is often used to describe such a
structure. Until recently, Citicorp`s financial services around the world
operated on a polycentric basis. James Bailey, a Citicorp executive,
offered this description of the company: We were like a medieval state.
There was the king and his court and they were in charge, right? No. It
was the land barons who were in charge. The king and his court might
declare this or that, but the land barons went and did their thing.
Realizing that the financial services industry is globalizing, CEO John
Reed is attempting to achieve a higher degree of integration between
Citicorp`s operating units. Like Jack Welch at GE, Reed is moving to
instill a geocentric orientation throughout his company.
1.3.3 Regiocentric and Geocentric orientations
In a company with a regiocentric orientation, management views regions
as unique and seeks to develop an integrated regional strategy. For
example, a U.S. company that focuses on the countries included in the
North American Free Trade Agreement (NAFTA) the United States,
Canada, and Mexico-has a regiocentric orientation. Similarly, a
European company that focuses its attention on Europe is regiocentric. A
company with a geocentric orientation views the entire world as a
potential market and strives to develop integrated world market
strategies. A company whose management has a regiocentric or
geocentric orientation is sometimes known as a global or transnational
company.
The geocentric orientation represents a synthesis of ethnocentrism and
polycentrism; it is a worldview that sees similarities and differences in
markets and countries, and seeks to create a global strategy that is fully
responsive to local needs and wants. A regiocentric manager might be
said to have a worldview on a regional scale; the world outside the
region of interest will be viewed with an ethnocentric or a polycentric
orientation, or a combination of the two. Jack Welch`s quote at the
beginning of this chapter that globalization must be taken for granted
implies that at least some company managers must have a geocentric
orientation. However, recent re-search suggests that many companies are
seeking to strengthen their regional competitiveness rather than moving
directly to develop global responses to changes in the competitive
environment.
The ethnocentric company is centralized in its marketing management,
the polycentric company is decentralized, and the regiocentric and
geocentric companies are integrated on a regional and global scale,
respectively. A crucial difference between the orientations is the
underlying assumption for each. The ethnocentric orientation is based on
a belief in home country superiority. The underlying assumption of the
polycentric approach is that there are so many differences in cultural,
economic, and mar-keting conditions in the world that it is impossible
and futile to attempt to transfer experience across national boundaries.
1.4
BENEFITS OF INTERNATIONAL MARKETING
The importance of international marketing is neither understood nor
appreciated by consumers though they are carrying out international
marketing daily. Government officials, especially bureaucrats, seem to
always point a negative aspect of international business. Many of their
charges on international marketing are imaginary than real. Hence, it is
essential that the benefits of international marketing be explicitly
discussed. These benefits are
(i)
Endurance
(ii)
Progress of overseas markets
(iii)
Sales promotion
(iv)
Diversification
(v)
Inflation and wholesale price index
(vi)
Employment and placement VB.
(vii) Standard of living style
(viii) Understanding marketing process.
(i)
Endurance
Every country is not as fortunate as America in terms of infrastructure,
size, resources and opportunities. Hence, they must trade with other
countries to survive. Similarly, every country is not as fortunate as India,
which has abundant natural resources and a treasure of bio-diversity that
it can survive within its resources even if there is a resource crunch.
Even then it has to carry out trading with other countries to get oil and
armaments for its own survival. Hong Kong cannot survive without food
and water from China. The countries of Europe have had similar
experience since most European nations are relatively small in size.
Without a foreign market, European firms would not have sufficient
economies of scale to allow them to be competitive with US firms.
Switzerland lacks natural resources, forcing it to depend on trade and
adopt the geocentric perspective. Similarly, Japanese firms are dependent
on raw material from other countries but they have better technical
know-how as a result of which they are the world leaders in electronics
and software industry.
(ii)
Progress of overseas markets
Developing countries, in spite of a poor economy with serious marketing
problems, are excellent markets. The US has found that India is the
biggest market in the world for consumer and engineering products.
According to a report prepared by the US Trade Representative US
Congress, Latin America and Asia are experiencing the worst economic
recession though they have potential in the world market.
The Conference Board`s study of some 1500 companies found that US
manufacturers, with factories or sales subsidiaries overseas,
outperformed their counterparts during 1980s in terms of growth in 19
out of 20 major industrial groups and higher earnings in 17 out of 20
groups. American market cannot ignore the vast potential of the
international market. The world market is four times larger than US
market. In the case of Amway Corporation, a privately held US
manufacturer of cosmetics, soaps, and vitamins, Japan represents a larger
market than the US.
(iii)
Sales promotion
Foreign markets constitute a large share of total business of many firms
that have cultivated markets abroad. Many large US companies have
done very well because of their overseas customers. IBM and Compaq
sell more computers abroad than at home. The case of Coca-Cola clearly
emphasises the importance of overseas markets. Coca Cola is coming up
with milk-based products as majority of Indians and Asians do not relish
the taste of aerated drinks which are supposed to have caffeine which is
addictive.
(iv)
Diversification
In the international market, cyclical factors such as recession and
seasonal factors such as climate affect the demand for most products.
Due to these variables, there are sales fluctuations, which frequently be
substantial enough to cause lay off of personnel. One way of diversifying
a company`s risk is to consider foreign markets as a solution for variable
demands. For example, cold weather may depress demand for cold drink
consumption. All countries do not enter the winter season at the same
time and some of the countries are warm round the year.
(v)
Inflation and wholesale price index
The best way to control inflation is to earn foreign exchange through
exports. Imports can also be highly beneficial to a country because they
constitute reserve capacity of the local economy. Without imports, there
is no incentive for domestic firms to moderate their prices. The lack of
imported product alternatives forces consumers to pay more, resulting in
inflation and excessive profits for local firms. This development usually
acts as a prelude to workers to demand higher wages, further
exacerbating the problem of inflation. Import quotas imposed on
Japanese automobiles in 1980s saved 46,200 US production jobs but at a
cost of $ 160 thousand per job per year. This huge cost was a result of
the addition of $ 400 to the prices of US cars and $1000 to the prices of
Japanese imports. This windfall for Detroit resulted in record high profits
for US automobiles.
(vi)
Employment and placements
Tariff barriers and trade restrictions in certain countries had contributed
significantly to the great depression of 1930 and have the potential to
cause widespread unemployment again. Unrestricted trade, on the other
hand, improves the world`s GNP and enhances employment generally
for all nations. With the liberalisation of economic policy, 1991, India
has gained tremendously with the inflow of foreign direct investment as
a result of which employment in the country has tremendously improved.
(vii) Standard of living/style
Trade affords countries and their citizen`s a higher standard of living
than is otherwise possible. Without trade, product shortages force people
to pay more for less. Products taken for granted such as coffee and
bananas may become unavailable overnight. Life in most of the countries
will be more difficult were it not for the many strategic metals that must
be imported. Trade also makes it easier for industries to specialise and
gain access to raw materials, while at the same time fostering
competition and efficiency.
(viii) Marketing process
International marketing should be considered a special case of domestic
marketing. It has earlier been explained that there is very little difference
between domestic and international marketing. Only thing is that the
word multinational has been added in the international marketing
process. Otherwise, the marketing mix is the same for both. With
improvements in information technology, the international markets have
become easily accessible and the whole world has become a small global
villay.
1.5
SCOPE OF GLOBAL MARKETING
The foundation for a successful international marketing programme is a
sound understanding of the marketing discipline. Marketing is the
process of focusing the resources and objectives of an organisation on
environmental needs and opportunities. The first and the most
fundamental fact about marketing is that it is a universal discipline. The
marketing discipline is equally applicable from China to India, United
States to Japan and Australia to Zanzibar. Marketing is a set of concepts,
tools, theories, practices and procedures and experience.
Although the marketing discipline is universal markets and customers
are quite differentiate. This means that marketing practices must vary
from country to country. Each person is unique and each country is
unique. This reality of differences means that we cannot always directly
apply experience from one country to another. If the customers,
competitors, channels of distribution and available media are different, it
may be necessary to change our marketing plan.
The scope of international marketing is to have a borderless world like
the multinational companies- Coca Cola, Pepsi, McDonald, Gillette and
so on. Their products and body marketing mix elements are both
international and local in nature. A central issue in international
marketing is how to tailor the international marketing concept to fit a
particular product or business
1.6
OBSTACLES TO INTERNATIONALIZATION
Companies attempting to establish and maintain an international
presence are likely to encounter obstacles to internationalization both
from within the company and from outside. Such obstacles can be
financial in nature: The Company might not have the finances to expand
beyond national frontiers. Others are psychological: Fear of an unknown
international environment or of local business practices may keep the
company from international engagement. These two types of barriers,
however, could equally affect the company`s local expansion efforts:
Companies may not have the finances to expand beyond a small regional
market, or they fear going into new markets where consumers may not
be familiar with their products and hence may not respond to their
marketing strategy.
Some obstacles are encountered only by firms in their process of
internation-alization-obstacles that they are unlikely to encounter in other
expansion efforts. They are the self-reference criterion, government
barriers, and international competition.
1.6.1 Self-Reference Criterion
Of crucial importance to international operations is the ability of the
firm, and especially of its marketing program, to adapt to the local
business environment in order to serve the needs of local consumers and
to address the requirements of local government, industry, and channels
of distribution. An impediment to adaptation is the self-reference
criterion, defined as individuals` conscious and unconscious reference to
their own national culture, to home-country norms, values, as well as to
their knowledge and experience, in the process of making decisions in
the host country.
Cultural Influences on International Marketing` illustrates a number of
situations in which self reference can lead to a breakdown in
communication between parties from different cultures. For example, an
employee of a large multinational company from the United States
conducting business in Japan who has been trained by career counsellors
in the U.S. that looking one`s counterpart in the eyes conveys directness
and honesty is likely to be perceived as abrasive and challenging.
Similarly, if the same employee proceeds directly to transacting the
business deal in Latin America or Southern Europe (instead of first
interacting in a social setting in order to establish rapport), he/she would
be perceived as arrogant, interested only in the bottom line, rather than in
a long-term working relationship.
A first step to minimizing the impact of the self-reference criterion is
selecting appropriate personnel for international assignments. Such
employees are sen-sitive to others and have experience working in
different environments. Second, it would be important to train
expatriates to focus on and be sensitive to the local culture, rather than
limit their personal interactions to own country nationals or to expatriates
from countries with cultures that are similar to one`s own. In fact, an
organization-level general orientation that instils and demonstrates
sensitivity to international environments and openly spurns value
judgments and national stereotyping should be instilled at the firm level.
1.6.2 Government Barriers
Local governments, especially governments in developing countries,
keep a tight control over international market entrants, permitting or denying
access to international firms based on criteria that are deemed important for
national industry and/or security considerations at a particular point in time.
Among formal methods used by national governments to restrict or impede
entrance of international firms in the local market are tariffs and barriers such as
import quotas, or policies of restricting import license awards, foreign exchange
restrictions, and local con-tent requirements, among others. Member countries of
the World Trade Organization, signatories of the General Agreement on Tariffs
and Trade, or members of regional economic integration agreements such as
NAFTA and the European Union find it very difficult to use tariffs as a means
of restricting international expansion of companies in the countries` territories.
Increasingly, they are using non-tariff barriers, such as cumbersome procedures
for import paperwork processing, delays in granting licenses, or preference
given to local service providers and product manufacturing for all contracting
work.
1.6.3 International Competition
Although competition can be a driver of internationalization, competitors
can also erect barriers to new entrants in a market. They often do so by
employing strategies such as blocking channels of distribution, binding retailers
into exclusive agreements, slashing prices temporarily to prevent product
adoption, or engaging in an advertising blitz that could hurt a company`s initial
sales in a market and cause it to retrench. With heavy competition from new and
lesser, brands in Asia, Central and Eastern Europe, and North Africa and the
Middle East, Marlboro has created a strong defensive strategy for its cigarettes:
It slashed prices by as much as a third, and advertised heavily anywhere it was
legal, especially on billboards in the centre of different capital cities and towns
in the provinces.
As an example, sales of Marlboro in South-Eastern Europe were hurt by
vari-ous local competitors and, in particular, by a successful international brand,
Assos from Greece. Assos was rapidly gaining a leading position in a number of
markets in the region when Marlboro went on the offensive, limiting Assos`s
market share to a point where the company was forced to abandon many of its
markets. Marlboro effectively put in question the international expansion of
many new European and Asian brands, as well as new brands from the United
States (it decimated, for instance, sales of new brands of American cigarettes
created specifically for the Russian market).
1.7
PROTECTIONISM
Protection of local markets from foreign companies constitutes an
important mandate for national and local governments alike. Many political
careers have been built and defended on market protection rhetoric. "We will not
sell our country" has been a slogan of countries resisting foreign economic and
political dominance in the past. Today, it is a slogan used against multinationals
that are rapidly expanding, taking over emerging markets, and bringing with
them a consumption culture perceived to go against local culture and traditions.
These multinationals also are seen as eliminating small local producers and
service providers, bankrupting formerly productive factories, and replacing
abundant local labour with more efficient advanced technology, increasing local
unemployment and disrupting political stability.
All actions by national and local governments aimed at protecting local
markets from foreign competitor.
Some of the arguments for protectionism are indeed valid. The infant
industry argument is aimed at protecting an emerging national industry from
powerful international competitors, which could easily squeeze out a newcomer
to the business merely with its brand name resonance and with pricing strategies
that a new industry could not possibly sustain in the long term. The argument
stressing the industrialization of developing countries also is valid for similar
reasons. The national defence argument is regarded as justified in international
trade forums and is widely accepted as a reasonable argument for protectionism.
There is also the argument for environmental protection and/or
protection of natural resources and the need for maintaining standards to the
benefit of all humankind; this line of arguments is also soundly reasoned. The
problem with this defence of protectionism arises when the standards imposed
are, in fact, simple protectionist arms that require foreign competition to go
through excessive and unwarranted bureaucratic exercise, or when these
requirements are imposed on international firms but not on local firms-or not to
the same degree.
In general, it is believed that consumers pay the final price for the cost of
strategies of protectionism. Arguments for protectionism ignore the economic
advantages of free trade and the importance of adopting open market
mechanisms for optimal long-term market performance. In fact, history has
amply demonstrated that a government's right and authority to pick and choose
winners among industries and firms could be corrupted and distorted by local
influential firms, power-seeking politicians, and favour-seeking lobby groups.
Politicians, particularly in the United States, favour trade barriers and vote for
imposing them because such strategies appeal directly to the concerns of their
constituencies regarding the possibility of losing their jobs. What these
politicians do not consider is the subsequent retaliatory action of other
governments which will negatively affect the domestic economy, the higher
consumer prices attributed to the tax imposed to subsidize the domestic industry,
and higher prices attributed to the reduction in competition in the local market.
1.8
ARGUMENTS FOR PROTECTIONISM
The following arguments most often advanced to justify the imposition
of tariff and nontariff trade barriers or protectionism.
1.8.1 Protection of Markets with Excess Productive Capacity
Markets that have excess productive capacity have committed significant
resources to the production facilities. In the case of Central and Eastern Europe,
for example, the standard for production during the central planning years under
communism was represented by mammoth factories employing hundreds of
thousands of workers, each charged with minuscule repetitive tasks under an
elaborate division-of-labour program. The goal of such programs was both to
ensure productivity and to assure a place of work to every individual, qualified-
or not. Such factories had, in addition to the workers, structures with directors
and Para directors, all served by several secretaries whose specializations varied
from typing to answering telephones, to making coffee, to taking care of the
director's family's personal shopping.
After the fall of communism, the new factory owners (often foreign)
quickly realized that they needed only a fraction of the workers for optimal
production and proceeded to fire the rest, leading to regional unrest. Currently,
remaining factories are protected from foreign buyouts and are managed locally.
Often they are state-owned enterprises. National governments protect them from
foreign investors. They also protect these enterprises by limiting the entrance of
competing products, such as superior steel and higher-performance tractors, by
arguing that such restrictions are instituted to protect a market with excess
productive capacity.
1.8.2 Employment Protection and Protection of Markets with Excess
Labour
Under the scenario presented in section (a) the markets of Central and
Eastern Europe-especially those in the countries of the Former Soviet Union are
now experiencing high levels of excess labour and underemployment, all of
which lead to flares of social unrest. As a result, local politicians actively lobby
against granting import licenses for products competing with locally produced
goods that are established in the market. Arguments invoking employment
protection are used to ensure that competing multinationals do not import
products manufactured elsewhere that might drive local manufacturers out of
business and create local unemployment. The argument also is used against
multinationals that might purchase local plants and fire most of the redundant
workers to create acceptable levels of profitability. A related argument, invoking
the protection of markets with excess labour, is also used to prevent more
efficient multinationals from taking over local businesses and streamlining local
operations.
1.8.3 Infant Industry Arguments and Arguments Related to the
Industrialization of Developing Countries
The infant industry arguments and arguments related to the
industrialization of developing countries are considered valid: Developing
countries need to protect their markets from competitors from countries with an
established industrial base. Foreign competitors would be able to offer higher
quality products at lower costs and would undoubtedly undercut local
manufacturers attempting to break into the market. Foreign competition would
present the greatest challenge to local industries in their infancy.
1.8.4 Natural Resources Conservation and Protection of the Environment
The resource conservation argument is considered to be valid in
international trade organization forums, especially in light of worldwide
shortages of raw materials. Similarly, a balance sometimes has to be struck
between free trade and legitimate arguments such as those entering on
environmental protection, but governments still need to find a way of agreeing
when curbs on trade can be an acceptable way to pursue a greater good.
The problem with these two arguments arises when they are used
arbitrarily, with a clear bias against international firms, either imposing the
standards only on foreign firms or requiring them to meet higher standards than
local firms.
1.8.5 Protection of Consumers
Protection of consumers is an often-echoed argument that ultimately
favors local, over international, business. Standards that are rigidly applied
against foreign businesses, quality controls that necessitate layers of costly
bureaucracy, and arbitrary product origin requirements, among others, are
invoked as a basis for this argument. Politicians in the European Union have
argued that they were protecting consumers by imposing standards on imported
beef: Listening to the unified voices of their constituencies and attempting to
protect the local beef industry against the high-quality, cheap, corn-fed U.S.
beef, the European Union banned its import, invoking the use of growth
hormones in the United States. With cattle in many countries of the European
Union plagued by mad-cow and/or hoof-and mouth disease, the primary option
available to European consumers is expensive Argentine beef. This is an
unequivocal demonstration that consumer-protection gone-too-far is not
necessarily in the interest of the consumer.
1.8.6 National Defense Interests
The national defence argument is also perceived as valid, and it is often
invoked in international trade forums. Publications that attempt to destabilize the
government, armament, and other similar products are often under an import
ban. More recently, the national defence argument has been advocated by
developing countries and/or by countries that attempt to control and restrict
access of their population to Western influence. Such nations may perceive a
threat in the unrestricted imports of information-based services through
electronic channels; countries such as China, Singapore, and Saudi Arabia
impose restrictions on and even ban ownership of satellite dishes, whereas other
nations are attempting to control citizen access on the World Wide Web
(WWW).
1.9
TOOLS OF GOVERNMENT PROTECTIONISM
1.9.1 Tariff and non-tariff barriers
(a)
Tariffs
Tariffs are any type of tax imposed on goods entering a particular
country. Tariffs are imposed to
Discourage imports of particular goods, such as consumer goods,
which often are not considered essential in developing countries
Penalize countries that are not politically aligned with the
importing country, or countries that are imposing tariffs or non
tariff restrictions on goods from the importing country
Generate revenues for the importing country
In general, tariffs that are assessed by the United States are relatively
low, less than 10 percent. Some developing countries set tariffs higher than 100
percent for products that compete with an infant industry. For example,
countries attempting to develop their own automobile industry are likely to
impose very high tariffs to all automobiles imported into the country.
(b)
Nontariff Barriers
Nontariff barriers include all measures, other than traditional tariffs, that
are used to distort international trade flows; they raise prices of both imports and
import-competing goods and favor domestic over foreign supply sources by
causing importers to charge higher prices and to restrict import volumes.
In the past twenty years, in an attempt to keep markets closed without
going against the General Agreement on Tariffs and Trade (GATT) and the
World Trade Organization, governments have created new nontariff barriers,
such as orderly market arrangements, voluntary import expansion, and voluntary
export restraints, which limit market access for foreign businesses. Many
countries have erected these nontariff barriers, but most are imposed by the
United States, members of the European Union, and by other industrialized
countries on exporting countries such as Japan, South Korea, and developing
countries. Other, more traditional, nontariff barriers include quotas, currency
controls, and standards-such as environmental, quality, performance, and health
standards, which are expensive to provide and to evaluate. Boycotts, embargoes,
and sanctions are the most severe barriers to trade that are imposed usually to
punish a company or a national government.
Nontariff barriers are constantly evolving: They are in a continuous
process of refinement, aimed at avoiding scrutiny from the World Trade
Organization or other trade organizations. Although the most frequently
encountered nontariff barriers are described here, it is important to note that new
variants of the barriers described are continuously emerging in the global trade
arena.
1.9.2 Import Quotas and Orderly Market Arrangements
Import quotas specify a maximum quantity (unit limit) or a value
(usually specified in the national currency) of a product that may be imported
during a specified period. Quotas are administered either on a global first-come,
first-served basis or on a bilateral basis to restrict shipments from a specific
supply source such as the Multifiber Arrangement.
The Multifiber Arrangement was initiated as a temporary measure in
1974 (but lasted 21 years). Its articulated goals were to expand trade, to reduce
barriers to trade, and to initiate a progressive liberalization of world trade in
textile products, while ensuring the orderly and equitable development of this
trade and avoiding disruptive effects in individual markets and on individual
lines of production in both importing and exporting countries. In reality, this was
an orderly market arrangement, an intricate process of establishing quotas in the
textile and apparel industries, initiated by the United States and Europe, whose
textile operations were moving to Asia to take advantage of cheaper labor. The
Multifiber Arrangement was nullified under the Uruguay Round of the General
Agreement on Tariffs and Trade in 1995 but has since been replaced by very
similar nontariff barriers.
1.9.3 Nonautomatic Import Licenses
Nonautomatic import licenses are issued on a discretionary basis and are
used to restrict imports of a given product. Licensing requirements can restrict
the volume of imports, as do quotas, or they can be used to impose on the
exporter or importer specific conditions that will result in fewer imports. It
should be mentioned that the World Trade Organization presently requires
member countries to ensure transparency of the import-license granting process;
they are asked to do so by publicizing information concerning administration of
restrictions, by listing information regarding the licenses granted over the most
recent period, and, where practicable, by providing additional import statistics of
the products concerned.
1.9.4 Automatic Import Licenses
Automatic import licenses are granted freely to importing companies.
Automatic licenses are used by the importing country's government for the
purpose of import surveillance: The licenses have the potential to discourage
import surges, they place additional administrative and financial burdens on the
importer, and they may also raise costs by delaying product shipments.
1.9.5 Voluntary Import Expansion (VIE)
Under a voluntary import expansion (VIE), a country agrees to open its
markets to imports. Voluntary import expansions increase foreign access to a
domestic market,' while increasing competition and reducing prices. Voluntary
import expansions are not voluntary at all: A country agrees to import products
as a result of pressure from another country. An example of voluntary import
expansion is Japan's decision to avert U.S.-imposed trade sanctions by importing
U.S. semi-conductors.
1.9.6 Voluntary Export Restraints (VER)
Voluntary export restraints (VERs) are self-imposed quotas and
constitute a barrier to trade often used in the 1980s to protect local industries.
The United States, for example, used voluntary export restraints to protect local
steel and automobile industries. Voluntary export restraints are agreed upon by
the importing country and the exporting country. A country that is subject to
voluntary export restraints limits the quantity of products it exports to another,
primarily because it attempts, by doing so, to avoid more severe, future
mandatory import restrictions. Voluntary export quotas are still used today even
though they have been banned by the Uruguay Round of the General Agreement
on Tariffs and Trade (and now by the World Trade Organization) since 1999.
The United States is imposing them informally, for example, for Japanese steel
imports; this protection mechanism has been used since 1969 in the long history
of trade protection of the U.S. steel industry.
1.9.7 Price Controls: Increasing Prices of Imports
Price controls have a direct effect on a product mix aimed at a particular
market. Increasing the price of imports to match minimum prices of domestic
offerings is one such strategy that is frequently used for both products and for
retailers. For example, Japan uses such controls to ensure that locally produced
rice is not at a disadvantage relative to rice imports from the United States,
which are of equally high quality but are sold at much lower prices. In this
instance, the prices of imports are held artificially high so that local consumers
would not discriminate in favour of U.S. competitors. Similarly, Wal-Mart and
other discounters and category specialists in the European Union are constantly
scrutinized and often pressured by local authorities to raise prices; EU
governments charge that these international retailers price products below cost
to drive out smaller competitors.
Price Controls: Antidumping and Countervailing Duty Actions
Antidumping and countervailing duty actions were designed to counter unfair
competition, such as predatory pricing. Dumping refers to selling below fair
value to undermine competitors' charging the market price and/or to get rid of
excess inventory-with the same outcome, of undermining competition. When
used as price controls, antidumping measures involve initiating investigations to
deter~ mine whether imports are sold below fair value, imposing duties to offset
dumping, as well as adopting other measures to counter the effects of dumping.
Countervailing measures include investigations to determine whether imports
are? sold below fair prices as a result of foreign subsidies; such determination is
usually followed by duties that are imposed to offset this practice and measures
taken to offset effects of subsidies.
To the detriment of international trade, such measures have become
protectionist tools that are used to intimidate importers and restrict trade. The
European Union has been under scrutiny recently for excessive use of
antidumping investigations. Such investigations probing into antidumping
activity and countervailing duty investigations are focused on a specific product
from a particular supply source, and thus they are frequently referred to as
"made-to-measure" protectionist devices.
1.9.8 Price Controls: Paratariff Measures
Paratariff measures are charges that increase the costs of imports in a
manner similar to tariffs. Such measures include allowing an initial number of
product units to enter, the country duty-free and charging tariffs to subsequent
shipments in excess of this quota; they also include advance import deposits,
additional import charges, seasonal tariffs, and customs charges. The United
States uses many of these paratariff measures to discourage shipment of certain
agricultural products from developing countries.
1.9.9 Standards
Standards as barriers to trade are frequently used as barriers to imports,
primarily imposed by highly industrialized countries. Problematic are standards
that are especially strict, such as those imposed by the European Union against
hormone-fed U.S. beef and bio-engineered corn and soybeans on safety grounds.
Standards that discriminate against foreign firms in particular, or that simply
create more bureaucratic hurdles for importing firms, act as nontariff barriers to
trade.
On the positive side, excessive standards could and often do help local
and international industry alike, by deterring gray markets. For example, the
United States has very strict environmental and manufacturing standards for
automobiles. Importing an automobile that is not specifically designed according
to U.S. specifications is very costly: One has to use expensive automobile
conversion services and obtain the appropriate Department of Transportation
authorization to use the vehicle.
1.9.10 Local Content Requirements and Foreign Ownership: Percentage
Requirements
Governments of many emerging market economies mandate that a
certain percentage of the products imported are locally produced: They mandate
a local content requirement. Manipulating and/ or assembling the product on the
territory of the importing country-usually in a foreign trade zone can often meet
this requirement. China, for example, has always presented a challenge to
importing firms. Multinational firms often join with Chinese partners and agents
to either package or manufacture enough of the product to have it qualify based
on local content requirements; firms often do tricky calculations on local
services and part values to meet such local content edicts.
In addition to the traditional local content requirements, there are other
forms of favouring local contribution and labour. For example, governments
often impose regulations to protect local carriers for passenger and freight
transportation. An example would be restricting foreign airlines landing rights or
ability to pick up passengers at an intermediate stop ("third freedom" rights);
this requirement favours national airlines operating on international routes.
Foreign ownership restrictions also are widely used. Some ownership
restrictions refer to the percentage ownership in a business-for example,
requiring 51 percent or more of a joint venture to be owned by a national firm.
Other restrictions are even more stringent and discriminatory in favour of
nationals. The history of Indo1) esia`s automobile industry is a case in point.
Initially, the industry was in the hands of Indonesians from the military ranks or
senior officials; as the "New Order" was instituted, the industry went into the
hands of the ruling Suharto family and of the large Chinese conglomerates,
creating a powerful lobbyist that was able to ban imports of motor vehicles until
1993, when the ban was replaced by tariffs in the range of 175 to 275 percent.20
It should be mentioned that service industries in particular are subjected
to regulations that invoke foreign ownership restrictions. Creative strategies that
employ an ambiguous legal environment are used to block entry of international
service providers or to place them at a disadvantage relative to local
competitors.
1.9.11 Boycott
A boycott is usually initiated as the result of an action group calling for a
ban on consumption of all goods associated with a particular company and/or
country. Often, boycotts target a company that is representative, or even
synonymous, with its country of origin. For example, when the uprising in the
West Bank and Gaza erupted, Coke sales in neighbouring Egypt and Jordan
were hit by local boycott calls. McDonald's restaurants were the target of French
protesters, who were against tariffs imposed by the United States on European
Union countries. Exxon-owned Esso has been the target of a high-profile
boycott campaign by groups angered at its support of the U.S. government's
rejection of the Kyoto climate change pact.
1.9.12 Embargoes and Sanctions
Embargoes and sanctions are imposed by a country (or a number of
countries) against another country. An embargo prohibits all business deals with
the country that is the target of the embargo, often affecting businesses from
third countries that do business with both the country (or countries) imposing the
embargo and the country under embargo. The embargo could be limited to a
particular product and/or to particular circumstances. For example, "smart
sanctions" have been imposed by the United States and the United Kingdom on
Iraq's oil exports, modifying the oil embargo against Iraq to allow for use of oil
revenues aimed at humanitarian purposes. Liberia is presently experiencing an
arms embargo imposed by the United Nations Security Council as a punishment
for its support of Sierra Leone's Revolutionary United Front.
The United States has imposed, for decades, a full embargo against
Cuba. The embargo covers any commercial and non-commercial relationship
with Cuba, and it even prohibits visits to the country by U.S. citizens, with some
exceptions. Furthermore, multinational companies from other countries doing
business in the United States are prohibited, under the embargo, from engaging
in any business deals with Cuba. Unfortunately for the United States, this
strategy does not appear to reach its goal-punishing Fidel Castro, Cuba's
president since the onset of the embargo, and his communist regime, by
derailing its economy. On the contrary, Cuba is reaching out to the world by
transforming itself into a hub for information technology, one where U.S.
companies may be at a disadvantage relative to competition in the future.
Finally, a form of no retaliatory embargo exists: It is imposed when
imports into a country that has established quotas for a particular product exceed
those quotas.
1.9.13 Currency and Capital Flow Controls
Strategies involving currency and capital flow controls are used in
economies that are under tight government control and/or that are experiencing
hard-currency shortages. In the case of capital flow, countries use arguments of
self-determination to ensure that regions in the country are uniformly developed
or that there would not be a capital flight from the country. Such strategies affect
international businesses in that they restrict market -dictated activity in the name
of protectionism.
Governments use currency flow restrictions primarily to influence the
stability of the national currency. Such restrictions, however, directly affect the
flow of imports into the country, by giving priority to desirable goods and
restricting the import of less desirable goods and services. Among the currency
controls used by governments are the following:
Blocked currency
Differential exchange rates
Foreign exchange permits
1.9.14 Blocked Currency
A country using a blocked currency strategy does not allow importers to
exchange local currency for the seller's currency. This strategy can be used as a
political weapon, to create obstacles for international business attempting to
enter the country. More often, however, the strategy is used because the country
is experiencing acute balance-of-payments difficulties. Firms fortunately have at
their disposal counter trade strategies to address this type of barrier. Under a
typical scenario, the exporter sells goods in exchange for local currency and uses
the proceeds to purchase local goods for sale abroad; U.S. companies in the past
often-bought goods from Mexico and from Eastern Europe with local currency
to address this barrier.
Another method that firms can use to bypass blocked exchange rates
entails using unofficial (and, from the perspective of the importing country,
illegal) exchange offices. Such offices exist both abroad and in the importing
country; however, they offer unfavourable exchange rates and expose the
company to the risk of government action against it.
1.9.15 Differential Exchange Rates
Two types of differential exchange rates can be used. The first, which is
government imposed, refers to a strategy the government uses to promote
imports of desirable and necessary goods, such as armament and petrol, and to
discourage imports of less desirable and necessary goods, such as consumer
goods and services, entertainment, and the like. Offering a less favourable
exchange rate for international products and services reflects a government
strategy that ultimately increases the cost of this second category of products to
the final consumer and discourages its purchase.
A second type of differential exchange rate is favourable to the
international firm importing products into this market. In this situation, a
difference exists between the black market exchange rate and the official
government exchange rate, with the black market rate being higher than the
government rate. The rate difference is a reflection of economic distortion: A
high black market exchange rate can signal a likely depreciation of the local
currency, or foreign exchange rationing by the government, or both. A large
difference between the government and the free exchange rate can also be
interpreted as a tax on exports and a subsidy on imports, stimulating the
diversion of resources from the official to the black market sector.
1.9.16 Foreign Exchange Permits
Countries attempting to control foreign exchange often require the use of
foreign exchange permits. Such permits are typically provided by the Central
Bank. They also give priority to imports of goods that are in the national interest
and delay access to foreign exchange for products that are not deemed essential.
An exchange permit can also stipulate differential exchange rates. Most
countries that experience a shortage of hard currency require foreign exchange
permits. China and countries in Sub-Saharan Africa currently require such
permits. In the past, Latin American and Eastern European countries relied
heavily on the use of foreign exchange permits for imports.
1.10 SELF-ASSESSMENT QUESTIONS
1.
How and why does global marketing differ from domestic
marketing?
2.
Explain the scope of global marketing.
3.
Why is the task of the global marketer more complex and
difficult than that of the domestic marketer?
4.
Distinguish
among
ethnocentricity,
polycentricity
and
egocentricity.
5.
Distinguish among domestic marketing, foreign marketing,
international marketing, multinational marketing and global
marketing.
LESSON NO. 2:
INTERNATIONAL MONETARY FUND
(IMF) AND WORLD TRADE ORGANISATION (WTO)
STRUCTURE
2.1
International Monetary Fund (IMF)
2.1.1 Origin of International Monetary Fund (IMF)
2.1.2 Functions of IMF
2.1.3 Main features of the international monetary system as it
existed upto 1973
2.1.4 Changes made after 1973
2.1.5 Assistance provided by the fund
2.1.6 Special drawing rights (SDRs)
2.2
World Trade Organisation (WTO)
2.2.1 Trade without discrimination
2.2.2 Objectives of WTO
2.2.3 Functions of WTO
2.2.4 Most Favoured Nations status
2.2.5 The WTO structure
2.2.6 The WTO secretariat and budget
2.2.7 Norms for joining WTO
2.2.8 Agreements of the WTO
2.3
Self-assessment questions
2.1
INTERNATIONAL MONETARY FUND (IMF)
2.1.1 Origin of International Monetary Fund (IMF)
Even before the Second World War ended, monetary experts in the
U.S.A. and the U.K. began planning to solve the monetary problems
likely to be faced after the war. Known after their authors as the Keynes
Plan and the White Plan, both sets of proposals were subjected to
intensive discussion and furnished the basis for the Bretton Woods
Conference, which decided to set up the two organizations, the IMF and
the IBRD. The creation of the Fund represents a major effort at
international monetary co-operation. Its main objectives are:
1.
To promote exchange stability and orderly exchange
arrangements and to avoid competitive devaluation.
2.
To help re-establish multilateral system of trade and payments
and to eliminate foreign exchange restrictions.
3.
To provide for international adjustment, superior to deflation, by
making available increased international reserves.
4.
To facilitate the expansion and balanced growth of international
trade.
2.1.2 Functions of IMF
The basic functions of IMF are:
1.
To lay down ground rules for the conduct of international
finance.
2.
To provide short and medium-term assistance for overcoming
short-term balance of payments deficits.
3.
Creation and distribution of reserves in the form of SDRs.
The fund has 182 member-countries, accounting for about 80 per cent of
the total world production and 90 per cent of the world trade. Members`
quotas in the Fund amount to approximately SDR 212 billion (April,
1999). Quotas are used to determine (i) the voting power of members,
(ii) their contribution to the Fund`s resources, (iii) their access to these
resources, and (iv) their share in the allocation of SDRs. India`s quota in
the Fund is SDR 4,158.2 million.
2.1.3 Main features of the international monetary system as it existed upto
1973
1.
Par value system: The exchange value of a member`s currency
was fixed in terms of gold. Since the price of gold was officially
fixed at U.S. $ 35 per ounce, it also meant that par values were
fixed in terms of dollar. Dollar was used as the intervention
currency as at that time dollar was as good as gold. In fact,
members preferred to keep dollars in reserve, in as much as
dollars earned interest while gold reserves did not.
2.
Change in par value: In order to achieve short-term balance of
payments equilibrium, members could borrow funds from the
international Monetary Fund. If the IMF help did not serve the
purpose, the IMF was required. If the proposed change was
greater than 10 per cent, it could be allowed provided (i) there
was a fundamental disequilibrium, and (ii) devaluation would be
the right remedy for solving the fundamental disequilibrium.
Fundamental disequilibrium was nowhere defined, but
experience has shown that severe depression abroad with
prolonged unemployment at home and cases of structural
disequilibrium could be taken as cases of fundamental
disequilibrium.
3.
Exchange control was not permitted on current transactions
except (i) when a member`s currency was under massive attack,
and (ii) when the Fund declared some currency as scarce.
Members could use exchange control so far as the use of that
currency was concerned.
2.1.4 Changes made after 1973
1.
A member can peg its currency to (i) either a single major
currency, or (ii) a basket of currencies, or (iii) allow it to float
independently, or (iv) adjust it to a set of indicators. Thus, there
is a complete departure from the par value system. It is, however,
subject to surveillance by the fund.
2.
A reduction in the role of gold in the International Monetary
System. There is now no statutory price for gold. In fact, one-
third of the gold stock with the IMF was disposed of to create a
Trust Fund to be used to provide additional balance of payments
support on concessional terms to 59 eligible developing
members. S.D.R. is now the unit of account for Fund`s
transactions.
2.1.5 Assistance provided by the fund
Ordinarily, a fund member subscribes its quota in the Fund by paying 25
per cent in reserve assets and 75 per cent in its own currency. When a member
draws on the Fund`s resources, it purchases the currencies of other member-
countries or SDRs with its own currency, leading to a rise in Fund`s holdings of
the member`s currency. The borrowing member must buy back its own currency
within a specified period with SDRs or currencies specified by the fund. The
Fund`s financial resources are made available to its members through a variety
of policies, which differ mainly in the type of balance of payments need they
address and in the degree of conditionality attached to them. The rules
governing access to the use of the Fund`s general resources apply uniformly to
all members.
For any purchase, a member is required to represent to the fund that the
desired purchase is needed because of its balance of payments or reserve
position or developments in its reserves.
Access to Fund resources is determined in relation to a member`s quota.
The annual access limit is 100 per cent of quota and the cumulative access limit
is 300 per cent of quota.
(i)
Regular facilities
Reserve Tranche, A member has a reserve tranche position if the IMF`s
holdings of its currency in the General Resources Account, excluding those
holdings that reflect the member`s use of IMF resources, are less than its
quota`, that is, the amount a member pays to belong to the IMF, which is based
on a complex formula that generally reflects the size of the country`s economy
in the world economy. A member may draw up to the full amount of its reserve
tranche position at any time, subject only to the member`s representation of a
balance of payments need. A reserve tranche drawing does not constitute a use
of IMF credit and is not subject to charges or to an expectation or obligation to
repurchase.
Credit tranches: IMF credit is subject to different conditions and phasing,
depending on whether it is made available in the first credit tranche` (segment)
of 25 per cent of a member`s quota or in the upper credit tranches (any segment
above 25 per cent of quota). For drawings in the first credit tranche, members
must demonstrate reasonable efforts to overcome their balance of payments
difficulties.
Upper credit tranche drawings are made in installments, or phased, and
are released when performance targets are met. Such drawings are normally
associated with Stand- By or Extended Arrangements, which typically seek to
resolve balance of payments difficulties and to support structural policy reforms
where appropriate. Performance criteria and periodic reviews are used to assess
policy implementation.
Stand-By Arrangements: Stand-By Arrangements give members the
right to draw up to a specified amount of IMF resources during a prescribed
period. Drawings are normally phased on a quarterly basis, with their release
conditional upon meeting performance criteria and the completion of periodic
reviews. Performance criteria generally cover bank credit, government or public
sector borrowing, trade and payments restrictions, and international reserve
levels. These criteria allow both the member and the IMF to assess progress and
may signal the need for further corrective policies. Stand-By Arrangements
typically range from 12 to 18 months (although they can extend up to three
years). Repayments are made within 3 ? to 5 years of each drawing.
Extended fund facility (EFF): The EFF provides assistance for members`
adjustment programs over longer periods and with generally larger amounts of
financing than under Stand-By Arrangement. Extended Arrangements, which
normally run for three years (and can be extended for a fourth), are designed to
rectify balance of payments difficulties stemming largely from structural
problems that require a longer period of adjustment.
A member requesting an Extended Arrangement outlines its objectives
and policies for the period of the arrangement and presents a detailed statement
each year of the policies and measures to be pursued over the next 12 months.
The phasing and performance criteria are comparable to those under Stand-By
Arrangements; although phasing on a semiannual basis is possible Repayments
are made within 4 ? to 10 years of each drawing.
(ii)
Concessional facility
Enhanced structural adjustment facility (ESAF): This facility, established
by the Executive Board in 1987 and extended and enlarged in February 1994, is
the principal means by which the IMF provides financial support, in the form of
highly concessional loans, to low-income member countries facing protracted
balance of payments problems.
At the same time the ESAF was extended and enlarged, no new
resources were made available for its precursor-- the Structural Adjustment
Facility (SAF), which had been established in 1986. The end of 1995 disbursed
all remaining SAF resources. The objectives and primary features of the SAF
were similar to those of the current ESAF, but programs supported under ESAF
Arrangements are more ambitious with regard to macroeconomic policy and
structural reform measures.
ESAF resources are intended to support strong medium-term structural
adjustment programs. Eligible members seeking ESAF resources must develop,
with the assistance of the staffs of the IMF and the World Bank, a policy
framework paper (PEP) for a three-year adjustment program. The PEP, which is
updated annually, describes the authorities` economic objectives,
macroeconomic and structural policies during the three-year period, and
associated external financing needs and major sources of financing. The PEP,
which is a document of the national authorities, is intended to ensure a
consistent framework for economic policies and to attract financial and technical
assistance in support of the adjustment program.
Adjustment measures under ESAF-supported programs are expected to
strengthen substantially a country`s balance of payments position and foster
growth during the three-year period. Monitoring under ESAF Arrangements is
conducted through quarterly financial and structural benchmarks. In addition,
semiannual performance criteria are set for key quantitative and structural
targets. ESAF loans are disbursed semiannually, initially upon approval of an
annual arrangement and subsequently based on the observance of performance
criteria and after completion of a midterm review. ESAF loans are repaid in 10
equal semiannual installments, beginning 5 ? years and ending 10 years after
the date of disbursement. The interest rate on ESAF loans is 0.5 per cent a year.
(iii)
Special facilities
Compensatory and contingency financing facility (CCFF): The
compensatory element of the CCFF provides timely financing to members
experiencing a temporary shortfall in export earnings or excess in cereal import
costs, attributable to factors largely beyond the member`s control. Particularly
commodity exporters have used this element of the facility. The contingency
element helps members with IMF arrangements keep their adjustment programs
on track when faced with unexpected, adverse external shocks. The affected
variables could include export earnings, import prices, and international interest
rates; workers` remittances and tourism receipts may also be covered if they are
a significant component of the member`s current account.
Buffer stock financing facility (BSFF): Under this facility, the IMF helps
finance a member`s contribution to approved international buffer stocks if the
member demonstrates a balance of payments need. No drawings have been
made under this facility since January 1984.
Supplemental reserve facility (SRF): The IMF established the
supplemental reserve facility in reaction to the unprecedented level of demand
for IMF resources during the recent Asian crisis. The facility provides financing
to members experiencing exceptional balance of payments difficulties owing to
a large short-term need resulting from a sudden and disruptive loss of market
confidence reflected in pressure on the capital account and the member`s
reserves. Its use requires a reasonable expectation that the implementation of
strong adjustment policies and adequate financing will result in an early
correction of such difficulties. Access under the SRF is not subject to the usual
access limits but is based on the financing needs of the member, its capacity of
repay, the strength of its program, and its record of past use of IMF resources
and cooperation with the IMF. Financing is committed for up to 1 year, and
repurchases are expected to be made within 1 to 1 ? years, and must be made
within 2 to 2 ? years, from the date of each purchase. For the first year, the rate
of charge on SRF financing is subject to a surcharge of 300 basis points above
the usual rate of charge on other IMF loans; the surcharge then increases by 50
basis points every six months until it reaches 500 basis points.
Contingent credit lines (CCL): In April 1999, the Board agreed to
provide Contingent Credit Lines for a two-year period. Like the Supplemental
Reserve Facility, the CCL is designed to provide short-term financing to help
members overcome expectational balance of payments problems arising from a
sudden and disruptive loss of market confidence. A key difference is that the
SRF is for use by members already in the midst of a crisis, whereas the CCL is a
preventive measure solely for members concerned with their potential
vulnerability to contagion but not facing a crisis at the time of the commitment.
In addition, the eligibility criteria confine potential candidates for a CCL to
those members implementing policies considered unlikely to give rise to a need
to use IMF resources; whose economic performance-- and progress in adhering
to relevant internationally accepted standards-- has been assessed positively by
the IMF in the latest Article IV consultation and thereafter; and who have
constructive relations with private sector creditors with a review to facilitating
appropriate private sector involvement. Resources committed under a CCL can
be activated only if the Board determined that the exceptional balance of
payments financing needs faced by a member have arisen owing to contagion--
that is, circumstances largely beyond the member`s control stemming primarily
from adverse developments in international capital markets consequent upon
developments in other countries.
The CCL is not subject to general IMF access limits, but commitments
under the CCL are expected to range from 300 per cent to 500 per cent of the
member`s quota. The maturity of and rate of charge on CCL resources are the
same as for SRF resources.
(iv)
Other forms of financial assistance
Support for currency stabilization funds: The IMF decided in 1995 to
provide financial support for the establishment of currency stabilization funds to
bolster confidence in countries` exchange-rate-based stabilization strategies--
preferably an exchange rate peg with relatively narrow margins or a
preannounce craw. The countries` economic policies would have to be
sufficiently tight that inflation would be compatible with the targeted exchange
rate anchor, so that little use of the currency stabilization fund for exchange
market intervention would be expected. So far, the IMF has not actually
provided this type of assistance.
Emergency financing mechanism (FEM): The EFM comprises a set of
procedures that allow for quick Board approval of IMF financial support while
ensuring sufficient conditionality. It is to be used in rare circumstances
representing or threatening a crisis in a member`s external accounts and
requiring an immediate IMF response. The EFM was established in September
1995 and was used in 1997 for the Philippines, Thailand, Indonesia, and Korea,
and in 1998 for Russia.
Emergency Assistance: The IMF also provides emergency financial
assistance to a member facing balance of payments difficulties caused by a
natural disaster. The assistance is available through outright purchases, usually
limited to 25 per cent of quota, provided that the member is cooperating with the
IMF to find a solution to its balance of payments problem. In most cases, this
assistance has been followed by an arrangement with the IMF under one of its
regular facilities.
In 1995, the policy on emergency assistance was expanded to cover
countries in post conflict situations. This assistance may be provided when the
member`s institutional or administrative capacity has been disrupted by conflict
but still has sufficient capacity for planning and policy implementation and a
demonstrated commitment on the part of the authorities; there is an urgent
balance of payments need; and IMF support could be catalytic and is part of a
concerted international effort. Conditions for emergency assistance include a
statement of economic policies, a quantified macroeconomic framework to the
extent possible, and a statement of the authorities` intention to move as soon as
possible to an upper credit tranche Stand-By or Extended Arrangement or to an
ESAF Arrangement. The conditionality is tailored to the individual country
situation and to rebuilding the country`s administrative and institutional
capacity.
To conclude, it may be said that the use of Fund`s resources enables
member-countries to get necessary foreign exchange resources in times of
difficulties and thus ensures better planning of import requirements both for
domestic use and export production. The limits regarding the use of the IMF
facilities may be exceeded in exceptional cases.
2.1.6 Special drawing rights (SDRs)
SDR is an international reserve asset created by the Fund as supplement
to the existing reserve assets. As any assets do not back SDRs, they are also
known as paper gold. They were first allocated to all member-countries of the
IMF in 1970-72 on the basis of the then existing quotas, total allocation being
SDR 9.3 billion. To strengthen the resources of the Fund, SDR allocations were
again made in 1979-81 to the extent of 12.12 billion. The total allocations now
amount to SDR 21.42 billion.
In 1970, the value of an SDR was equal to US $ 1, which was
maintained till July, 1974 when it was decided to value the SDR on the basis of
a basket of 16 currencies. From January 1, 1999, the amount of currency units in
the SDR valuation basket and the weight of each to be used to calculate the
amount of each of these currencies in the basket will be as follows:
US Dollar
0.5821
39 per cent
Euro (Germany)
0.2280
21 per cent
Japanese Yen
27.2000
18 per cent
Euro (France)
0.1239
11 per cent
pound
0.1050
11 per cent
The IMF calculates the value of SDR in US Dollar terms daily. On
February 15, 2000 one SDR was equal to US $ 1.35.
Due to the sharp depreciation in the value of the US dollar, SDR has now
emerged as a standard of value. It is the unit of account for Fund`s transactions.
It is also finding increasing acceptance as a unit of account for private contracts
and international treaties and for use by many international and regional
organizations.
Members designated by the Fund are obliged to accept SDRs upto the
point when their holdings of SDRs increase to 3 times their allocation. There is
an important reason why members are willing to accept SDRs-- they earn an
interest determined weekly on the excess of their holdings over the original
allocations. The Fund has prescribed 14 institutions as other holders of SDRs.
Other holders` can acquire and use SDRs in transactions and operations by
agreement with participants and other holders under the same terms ad
conditions as participants. They cannot, however, receive allocations of SDRs.
Countries having a deficit can utilise their SDRs upto 85 per cent of their
holdings for (i) obtaining foreign currency, (ii) to redeem balances of their own
currencies held by other member-countries, and (iii) to meet their obligations to
the Fund, viz., and repayment of interest charges. Countries having less SDRs
than allocated would have to pay interest (determined weekly by the Fund).
SDRs may now be freely transferred, by agreement between participants,
in transactions and operations that include purchases and sales of SDRs. SDR
have also been used as a currency peg.
The question of fresh allocation of SDRs is very often pressed by
developing countries on the following grounds: (i) international liquidity
constraints prevent a general expansion in world trade and production, (ii) a new
issue of SDRs will provide adequate resources to the countries in debt to
maintain imports and provide further impetus to the growth of world trade, and
(iii) developing countries are not in a position to borrow at commercial terms.
However, the degree of required support for a fresh SDR allocation is still
lacking.
2.2
WORLD TRADE ORGANISATION (WTO)
The World Trade Organization (WTO) was established on 1 January
1995. Governments had concluded the Uruguay Round negotiations on 15th
December 1993 and ministers had given their political backing to the results by
signing the Final Act at a meeting in Marrakech, Morocco, in April 1994. The
Marrakech Declaration` of 15th April 1994, affirmed that the results of the
Uruguay Round would strengthen the world economy and lead to more trade,
investment, employment and income growth throughout the world. The WTO is
the embodiment of the Uruguay Round results and the successor to the General
Agreement on Tariffs and Trade (GATT). The WTO has a larger membership
than GATT (145 by the end of March 2002). India is one of the founder
members of the WTO.
2.2.1 Trade without discrimination
The main principle that guided the erstwhile GATT and directs the
present incumbent, WTO, is to promote trade without discrimination. For almost
50 years, key provisions of GATT outlawed discrimination among members and
between imported and domestically produced merchandise. According to Article
I, the famous most favored nation (MFN) clause, members are bound to grant
to the products of other members treatment no less favorable than that accorded
to the products of any other country. A second form of non-discrimination
known as national treatment requires that once goods have entered a market,
they must be treated no less favorably than the equivalent domestically produced
goods. This is Article III of the GATT apart from the revised GATT (known as
GATT 1994), several other WTO agreements contain important provisions
relating to MFN and the national treatment. Intellectual property protection by
WTO members provides for MFN and national treatment. The General
Agreement Trade in Services (GATS) requires members to offer MFN treatment
to services and service suppliers of other members pre-shipment inspection;
trade related investment measures and the application of sanitary and
phytosanitary measures.
WTO, contrary to popular belief, is not a free trade institution. It
permits tariffs and other forms of protection but only in limited circumstances. It
is a system of rules dedicated to open, fair and undistorted competition.
2.2.2 Objectives of WTO
In its preamble, the agreement establishing the World Trade
Organization reiterates the objectives of GATT. These are: raising standards
of living and incomes, ensuring full employment, expanding production and
trade and optimal use of the world`s resources. The preamble extends these
objectives to services and makes them more precise.
It introduces the idea of sustainable development in relation to
the optimal use of the world`s resources, and the need to protect
and preserve the environment in a manner consistent with various
levels of national economic development.
It recognizes that there is a need for positive efforts to ensure that
developing countries, and especially the least developed among
them, secure a better share of the growth in international trade.
2.2.3 Functions of WTO
The agreement establishing WTO provides that it should perform the
following four functions:
First, it shall facilitate the implementation, administration and
operation of the Uruguay Round legal instruments and of any
new agreements that may be negotiated in the future.
Second, it shall provide a forum for further negotiations among
member countries on matters covered by the agreements as-well
as on new issues falling within its mandate.
Third, it shall be responsible for the settlement of differences and
disputes among its member countries.
Fourth, it shall be responsible for carrying out periodic reviews of
the trade policies of its member countries.
2.2.4 Most favoured nations status
According to WTO, all the signatory countries are given the most
favoured nations (MFN) status so that these countries have market access to
each others, trading areas. India has already given a most favoured nation status
to Pakistan; however, Pakistan has? not so far reciprocated. India, in any case, is
not going to suffer because of the acrimonious attitude of Pakistan.
2.2.5 The WTO structure
Its highest authority?the Ministerial Conference-- dominates the
structure of the WTO. This body is composed of representatives of all WTO
members. It meets at least every two years and is empowered to make decisions
on all matters under any of the multilateral trade agreements.
The day-to-day work of the WTO is entrusted to a number of subsidiary
bodies, principally, the General Council, also composed of all WTO members,
which is required to report to the Ministerial Conference. The General Council
also convenes in two particular forms- as the Dispute Settlement Body and the
Trade Policy Review Body. The former overseas the dispute settlement
procedure and the latter conduct regular reviews of trade policies of individual
WTO members.
The General Council delegates` responsibility to three other bodies,
namely the Councils for Trade in Goods; Trade in Services and Trade-Related
Aspects of Intellectual Property Rights (TRIPS). The Council of Goods overseas
the implementation and functioning of all the agreements covering trade in
goods, though many such agreements have their own specific overseeing bodies.
The latter two Councils have responsibility for their respective WTO agreements
and may establish their own subsidiary bodies as necessary.
The Ministerial Conference reports to the General Council which
delegates` responsibility to three other bodies as mentioned above. The
Committee on Trade and Development is concerned with issues relating to the
developing countries and especially to the least developed along them. The
Committee on Balance of Payments is responsible for consultations among
WTO members and countries, which resort to trade and restrictive measures in
order to cope with their balance of payments difficulties. Finally, a Committee
on Budget, Finance and Administration deals with issues relating to WTO`s
financing and budget. Each of the plurilateral agreements of the WTO- those on
civil aircraft, government procurement, dairy products and bovine meat-
establish their own management bodies, which are required to report to the
General Council.
2.2.6 The WTO secretariat and budget
The WTO Secretariat is located in Geneva. It has 148 members and is
headed by its Director General, Supachai Panitchpakdi, and four deputy
directors. Its responsibilities include the servicing of WTO delegate bodies with
respect to negotiations and the implementation of agreements. It has a particular
responsibility to provide technical support to developing countries, and
especially the least developed countries. WTO economists and statisticians
provide trade performance and trade policy analyses while its legal staff assists
in the resolution of trade disputes involving the interpretation of WTO rules and
precedents. Other secretariat work is concerned with accession negotiations for
new members and providing advice to governments considering membership.
The WTO budget is around US $83 million (105 million Swiss Francs)
with individual contributions calculated based on shares in the total trade
conducted by WTO members. Part of the WTO budget also goes to the
International Trade Centre.
2.2.7 Norms for joining WTO
Most WTO members were previously GATT members who signed the
Final Act of the Uruguay Round and concluded their market access negotiations
on goods and services by the Marrakech meeting in 1994. A few countries,
which joined the GATT later, in 1994, signed the Final Act and concluded
negotiations on their goods and services schedules, and became WTO members.
Other countries that had participated in the Uruguay Round negotiations
concluded their domestic ratification procedures only during the course of 1995
and became members thereafter.
Aside from these arrangements, which relate to original WTO
membership, any other state or customs territory having full autonomy in the
conduct of its trade policies may accede to the WTO on terms agreed with WTO
members.
In the first stage of the accession procedures, the applicant government is
required to provide the WTO with a memorandum covering all aspects of its
trade and economic policies having a bearing on WTO agreements. This
memorandum becomes the basis for a detailed examination of the accession
request in a working party.
Alongside the working party`s efforts, the applicant government engages
in bilateral negotiations with interested members` governments to establish its
concessions and commitments on goods and its commitments on services. This
bilateral process, among other things, determines the specific benefits for WTO
members in permitting the applicant to accede. Once both, the examination of
the applicant`s trade regime and market access negotiations, are complete the
working party draws up basic terms of accession.
Finally, the results of the working party`s deliberations contained in its
report, a draft protocol of accession, and the agreed schedules resulting from the
bilateral negotiations are presented to the General Councilor the Ministerial
Conference for adoption. If a two-thirds majority of WTO members vote in
favour, the applicant is free to sign the protocol and to accede to the
Organization; when necessary, after ratification in its national parliament or
legislature.
The General Council convenes, as appropriate, to discharge the
responsibilities of the Dispute Settlement Understanding as well as of the Trade
Policy Review Body. These bodies may have their own chairman and establish
rules of procedure, as they feel necessary, for the fulfillment of these
responsibilities.
The bodies provided under the plurilateral trade agreements carry out the
functions assigned to them under those agreements and operate within the
institutional framework of the WTO. These bodies keep the General Council
informed of their activities on a regular basis.
2.2.8 Agreements of the WTO
There are 28 agreements that had been signed in the Uruguay Round of
the GATT, 1994. The details of these agreements are given below:
A.
Trade in Goods
General Agreement on Tariffs and Trade 1994 (GATT, 1994)
Associate Agreements
1) Agreement on Implementation of Article VII of GATT 1994
(Customs Valuation)
2)
Agreement on Pre-shipment Inspection (PSI)
3)
Agreement on Technical Barriers to Trade (TBT)
4)
Agreement on the Application of Sanitary and
Phytosanitary Measures (SPS)
5)
Agreement on Import Licensing Procedures
6)
Agreement on Safeguards
7)
Agreement on Subsidies and Countervailing Measures
(SCM)
8)
Agreement on Implementation of Article VI of GATT
1994 (Ami-dumping) (ADP)
9)
Agreement on Trade-Related Investment Measures
(TRIMS)
10)
Agreement on Textiles and Clothing (ATC)
11)
Agreement on Agriculture
12)
Agreement on Rules of Origin
Understanding and Decisions
1) Understanding on Balance of Payments Provisions of GATT
1994
2)
Decisions
Regarding
Cases
where
Customs
Administrations have Reasons to Doubt the Truth or
Accuracy of the Declared Value (Decision on Shifting the
Burden of Proof)
3)
Understanding on the Interpretation of Article XVII of
GATT 1994 (State trading enterprises)
4)
Understanding on Rules and Procedures Governing the
Settlement of Disputes
5)
Understanding on the Interpretation of Article II: l(b) of
GATT 1994 (Binding of Tariff Concessions)
6)
Decision on Trade and Environment
7)
Trade Policy Review Mechanism
B.
Trade in Services
General Agreement on Trade in Services (GATS)
C.
Intellectual Property Rights (IPRs)
Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS) Plurilateral Trade Agreements
Agreement on Trade in Civil Aircraft
Agreement on Government Procurement
International Dairy Agreement
International Bovine Meat Agreement
2.3
SELF ASSESSMENT QUESTIONS
1.
Describe the functions and main features of international
monetary fund.
2.
Write a detail note on Special Drawing Rights (SDR).
3.
Write detail note on Assistance provided by IMF.
4.
What are the main functions and objectives of WTO? Also right
short note on most favoured trade nations status.
5.
Write a detail note on agreements of WTO.
LESSON NO. 3:
LIBERALIZATION OF SERVICE
INDUSTRIES: GATS, TRIMS AND TRIPS
STRUCTURE
3.1
Introduction
3.2
The Background to The WTO Negotiations
3.3
Current Scenario of GATS
3.4
TRIMS
3.5
TRIPS
3.6
The Private Sector
3.7
Views of EU and US Governments
3.8
Developing Countries
3.9
The Regulators
3.10 Summary
3.11 Questions for Discussion
OBJECTIVES
The motive of the lesson is to know the background to the WTO
Negotiations, current scenario of GATS, TRIPS, TRIMS, the private
sector, views of EU and US Governments, developing countries and the
regulators towards the service industries.
3.1
INTRODUCTION
Negotiations under way at the World Trade Organisation in
Geneva will address, and perhaps to a significant extent reshape, the
regulatory framework for financial and other services around the world.
As they seek to reduce barriers to market access, those engaged in these
talks are inevitably drawing lines between acceptable and unacceptable
domestic regulation. Key constituencies are watching closely to see, and
influence, where the lines will fall. Among the eager onlookers are
private sector companies from, for instance, banking, insurance,
securities and asset management, as well as national regulators and
outside critics. Much of the debate in the WTO turns on the issue of
whether there are general principles of regulation to which all can sign
up. Here there are differences between developed and developing
countries, and, to a degree that is becoming increasingly obvious,
between the European Union and the United States. It is highly desirable
that private sector views should be made known to Governments and
regulators. To this end, there have been useful discussions between
private sector representatives on both sides of the Atlantic. This article
offers some analysis of the different positions taken both in the public
and private sectors, and puts forward some suggestions on how, in due
course, differences could be bridged.
3.2
THE BACKGROUND TO THE WTO NEGOTIATIONS
For most of the past fifty years international trade negotiations
focused on trade in goods. However, the complex set of negotiations -
the so-called Uruguay Round - which concluded in 1994 and created the
World Trade Organisation also, and for the first time, covered trade in
services. One of the agreements to emerge from the Uruguay Round, and
to be administered by the WTO, is the General Agreement on Trade in
Services, or GATS. The GATS Agreement was basically a framework
agreement establishing general principles for WTO negotiations on
services, itself a useful achievement. On financial services, as on most
other services, member Governments were in many cases willing to
undertake not to add to the restrictions faced by foreign suppliers. They
did not commit themselves to dismantle these restrictions to any
significant degree. The aim of the new negotiations is achieve significant
liberalisation. That is in the interests of the big financial service
exporters like the EU and US, whose markets are already largely open
and who would gain from improved overseas access. It is no less in the
interests of countries around the world whose markets are more protected
but whose economic future depends on access to high quality financial
and other services. The existing GATS provisions on domestic regulation
Among the important principles enshrined in the GATS
Agreement are those related to domestic regulation. Articles III and VI
of GATS effectively provide a blueprint for reconciling liberalisation
and regulation. Regulations affecting trade in services have to be
published. They must be administered in a reasonable, objective and
impartial manner. Applicants to provide services which Governments
have agreed to liberalise must be given an answer within a reasonable
period. Administrative decisions must be subject to review. These and
other provisions are designed to ensure that liberalisation is not frustrated
by regulatory failings.
At the same time the need for proper prudential regulation is
specifically acknowledged in the GATS annex on financial services. This
came to be known as the prudential carve-out, and was introduced to
meet the concerns of regulators. So the existing GATS Agreement
reflects a balance which many Governments can accept. On the one
hand, there are good economic arguments for promoting quality and
efficiency in financial services by opening up to foreign competition. On
the other, market imperfections, and particularly the disparity between
suppliers` and customers` knowledge of the financial soundness of
suppliers, requires proper prudential regulation going beyond normal
anti-trust restraints on market abuse.
3.3
CURRENT SCENARIO OF GATS
Why then has the domestic regulation of services become an
issue for debate, and sometimes controversial debate, at the WTO? This
is because GATS Article VI.4 calls on the WTO Council for Trade in
Services, with a view to ensuring that measures relating to qualification
requirements and procedures, technical standards and licensing
requirements do not constitute unnecessary barriers to trade in services,
to develop disciplines to ensure that such requirements are based on
objective and transparent criteria, and are not more burdensome than
necessary to ensure the quality of the service.
In terms of process, the task of debating and elaborating these
disciplines falls to the WTO Working Party on Domestic Regulation,
created in April 1999 for this purpose. It is due to complete its work by
the conclusion of the present Round of WTO negotiations, which has
been fixed for January 2005. So far the Working Party has made little
progress. It has tried to work out how broadly similar disciplines could
be applied to all services sectors. But the issues are not easy; and the
Working Party can hardly be expected to move swiftly when significant
differences persist among member Governments. It is therefore worth
looking at the attitudes of the different key players in the debate on
regulation which will be running over the coming months. This debate
involves Governments in developed and developing countries, the
private sector, regulators, and outside critics, notably in NGOs.
3.4
AGREEMENT
ON
TRADE-RELATED
INVESTMENT
MEASURES
Members, considering that Ministers agreed in the Punta del Este
Declaration that "Following an examination of the operation of GATT
Articles related to the trade restrictive and distorting effects of
investment measures, negotiations should elaborate, as appropriate,
further provisions that may be necessary to avoid such adverse effects on
trade"; Desiring to promote the expansion and progressive liberalisation
of world trade and to facilitate investment across international frontiers
so as to increase the economic growth of all trading partners, particularly
developing country Members, while ensuring free competition; Taking
into account the particular trade, development and financial needs of
developing country Members, particularly those of the least-developed
country Members; Recognizing that certain investment measures can
cause trade-restrictive and distorting effects; Hereby agree as follows:
Article 1: Coverage
This Agreement applies to investment measures related to trade
in goods only (referred to in this Agreement as "TRIMs").
Article 2: National Treatment and Quantitative Restrictions
1.
Without prejudice to other rights and obligations under GATT
1994, no Member shall apply any TRIM that is inconsistent with
the provisions of Article III or Article XI of GATT 1994.
2.
An illustrative list of TRIMs that are inconsistent with the
obligation of national treatment provided for in paragraph 4 of
Article III of GATT 1994 and the obligation of general
elimination of quantitative restrictions provided for in paragraph
1 of Article XI of GATT 1994 is contained in the Annex to this
Agreement.
Article 3: Exceptions
All exceptions under GATT 1994 shall apply, as appropriate, to
the provisions of this Agreement.
Article 4:
Developing Country Members
A developing country Member shall be free to deviate
temporarily from the provisions of Article 2 to the extent and in such a
manner as Article XVIII of GATT 1994, the Understanding on the
Balance-of-Payments Provisions of GATT 1994, and the Declaration on
Trade Measures Taken for Balance-of-Payments Purposes adopted on 28
November 1979 (BISD 26S/205-209) permit the Member to deviate
from the provisions of Articles III and XI of GATT 1994.
Article 5 : Notification and Transitional Arrangements
1.
Members, within 90 days of the date of entry into force of the
WTO Agreement, shall notify the Council for Trade in Goods of
all TRIMs they are applying that are not in conformity with the
provisions of this Agreement. Such TRIMs of general or specific
application shall be notified, along with their principal features.1
2.
Each Member shall eliminate all TRIMs which are notified under
paragraph 1 within two years of the date of entry into force of the
WTO Agreement in the case of a developed country Member,
within five years in the case of a developing country Member,
and within seven years in the case of a least-developed country
Member.
3.
On request, the Council for Trade in Goods may extend the
transition period for the elimination of TRIMs notified under
paragraph 1 for a developing country Member, including a least-
developed country Member, which demonstrates particular
difficulties in implementing the provisions of this Agreement. In
considering such a request, the Council for Trade in Goods shall
take into account the individual development, financial and trade
needs of the Member in question.
4.
During the transition period, a Member shall not modify the
terms of any TRIM which it notifies under paragraph 1 from
those prevailing at the date of entry into force of the WTO
Agreement so as to increase the degree of inconsistency with the
provisions of Article 2. TRIMs introduced less than 180 days
before the date of entry into force of the WTO Agreement shall
1 In the case of TRIMs applied under discretionary authority, each specific application
shall be notified. Information that would prejudice the legitimate commercial interests
of particular enterprises need not be disclosed.
not benefit from the transitional arrangements provided in
paragraph 2.
5.
Notwithstanding the provisions of Article 2, a Member, in order
not to disadvantage established enterprises which are subject to a
TRIM notified under paragraph 1, may apply during the
transition period the same TRIM to a new investment (i) where
the products of such investment are like products to those of the
established enterprises, and (ii) where necessary to avoid
distorting the conditions of competition between the new
investment and the established enterprises. Any TRIM so applied
to a new investment shall be notified to the Council for Trade in
Goods. The terms of such a TRIM shall be equivalent in their
competitive effect to those applicable to the established
enterprises, and it shall be terminated at the same time.
Article 6:
Transparency
1.
Members reaffirm, with respect to TRIMs, their commitment to
obligations on transparency and notification in Article X of
GATT 1994, in the undertaking on "Notification" contained in
the Understanding Regarding Notification, Consultation, Dispute
Settlement and Surveillance adopted on 28 November 1979 and
in the Ministerial Decision on Notification Procedures adopted on
15 April 1994.
2.
Each Member shall notify the Secretariat of the publications in
which TRIMs may be found, including those applied by regional
and local governments and authorities within their territories.
3.
Each Member shall accord sympathetic consideration to requests
for information, and afford adequate opportunity for consultation,
on any matter arising from this Agreement raised by another
Member. In conformity with Article X of GATT 1994 no
Member is required to disclose information the disclosure of
which would impede law enforcement or otherwise be contrary to
the public interest or would prejudice the legitimate commercial
interests of particular enterprises, public or private.
Article 7:
Committee on Trade-Related Investment Measures
1.
A Committee on Trade-Related Investment Measures (referred to
in this Agreement as the "Committee") is hereby established, and
shall be open to all Members. The Committee shall elect its own
Chairman and Vice-Chairman, and shall meet not less than once
a year and otherwise at the request of any Member.
2.
The Committee shall carry out responsibilities assigned to it by
the Council for Trade in Goods and shall afford Members the
opportunity to consult on any matters relating to the operation
and implementation of this Agreement.
3.
The Committee shall monitor the operation and implementation
of this Agreement and shall report thereon annually to the
Council for Trade in Goods.
Article 8:
Consultation and Dispute Settlement
The provisions of Articles XXII and XXIII of GATT 1994, as
elaborated and applied by the Dispute Settlement Understanding, shall
apply to consultations and the settlement of disputes under this
Agreement.
Article 9:
Review by the Council for Trade in Goods
Not later than five years after the date of entry into force of the
WTO Agreement, the Council for Trade in Goods shall review the
operation of this Agreement and, as appropriate, propose to the
Ministerial Conference amendments to its text. In the course of this
review, the Council for Trade in Goods shall consider whether the
Agreement should be complemented with provisions on investment
policy and competition policy.
3.5
AGREEMENT
ON
TRADE-RELATED
ASPECTS
OF
INTELLECTUAL PROPERTY RIGHTS (TRIPS)
GENERAL PROVISIONS AND BASIC PRINCIPLES
Article 1:
Nature and Scope of Obligations
1.
Members shall give effect to the provisions of this Agreement.
Members may, but shall not be obliged to, implement in their law
more extensive protection than is required by this Agreement,
provided that such protection does not contravene the provisions
of this Agreement. Members shall be free to determine the
appropriate method of implementing the provisions of this
Agreement within their own legal system and practice.
2.
For the purposes of this Agreement, the term "intellectual
property" refers to all categories of intellectual property that are
the subject of Sections 1 through 7 of Part II.
3.
Members shall accord the treatment provided for in this
Agreement to the nationals of other Members.2 In respect of the
relevant intellectual property right, the nationals of other
Members shall be understood as those natural or legal persons
that would meet the criteria for eligibility for protection provided
for in the Paris Convention (1967), the Berne Convention (1971),
the Rome Convention and the Treaty on Intellectual Property in
Respect of Integrated Circuits, were all Members of the WTO
members of those conventions.3 Any Member availing itself of
the possibilities provided in paragraph 3 of Article 5 or
paragraph 2 of Article 6 of the Rome Convention shall make a
notification as foreseen in those provisions to the Council for
Trade-Related Aspects of Intellectual Property Rights (the
"Council for TRIPS").
Article 2:
Intellectual Property Conventions
2 When "nationals" are referred to in this Agreement, they shall be deemed, in the case
of a separate customs territory Member of the WTO, to mean persons, natural or legal,
who are domiciled or who have a real and effective industrial or commercial
establishment in that customs territory.
3 In this Agreement, "Paris Convention" refers to the Paris Convention for the
Protection of Industrial Property; "Paris Convention (1967)" refers to the Stockholm
Act of this Convention of 14 July 1967. "Berne Convention" refers to the Berne
Convention for the Protection of Literary and Artistic Works; "Berne Convention
(1971)" refers to the Paris Act of this Convention of 24 July 1971. "Rome Convention"
refers to the International Convention for the Protection of Performers, Producers of
Phonograms and Broadcasting Organizations, adopted at Rome on 26 October 1961.
"Treaty on Intellectual Property in Respect of Integrated Circuits" (IPIC Treaty) refers
to the Treaty on Intellectual Property in Respect of Integrated Circuits, adopted at
Washington on 26 May 1989. "WTO Agreement" refers to the Agreement Establishing
the WTO.
1.
In respect of Parts II, III and IV of this Agreement, Members
shall comply with Articles 1 through 12, and Article 19, of the
Paris Convention (1967).
2.
Nothing in Parts I to IV of this Agreement shall derogate from
existing obligations that Members may have to each other under
the Paris Convention, the Berne Convention, the Rome
Convention and the Treaty on Intellectual Property in Respect of
Integrated Circuits.
Article 3:
National Treatment
1.
Each Member shall accord to the nationals of other Members
treatment no less favourable than that it accords to its own
nationals with regard to the protection4 of intellectual property,
subject to the exceptions already provided in, respectively, the
Paris Convention (1967), the Berne Convention (1971), the Rome
Convention or the Treaty on Intellectual Property in Respect of
Integrated Circuits. In respect of performers, producers of
phonograms and broadcasting organizations, this obligation only
applies in respect of the rights provided under this Agreement.
Any Member availing itself of the possibilities provided in
Article 6 of the Berne Convention (1971) or paragraph 1(b) of
Article 16 of the Rome Convention shall make a notification as
foreseen in those provisions to the Council for TRIPS.
4 For the purposes of Articles 3 and 4, "protection" shall include matters affecting the
availability, acquisition, scope, maintenance and enforcement of intellectual property
rights as well as those matters affecting the use of intellectual property rights
specifically addressed in this Agreement.
2.
Members may avail themselves of the exceptions permitted under
paragraph 1 in relation to judicial and administrative procedures,
including the designation of an address for service or the
appointment of an agent within the jurisdiction of a Member,
only where such exceptions are necessary to secure compliance
with laws and regulations which are not inconsistent with the
provisions of this Agreement and where such practices are not
applied in a manner which would constitute a disguised
restriction on trade.
Article 4: Most-Favoured-Nation Treatment
With regard to the protection of intellectual property, any
advantage, favour, privilege or immunity granted by a Member to
the nationals of any other country shall be accorded immediately
and unconditionally to the nationals of all other Members.
Exempted from this obligation are any advantages, favour,
privilege or immunity accorded by a Member:
(a)
deriving from international agreements on judicial assistance or
law enforcement of a general nature and not particularly confined
to the protection of intellectual property;
(b)
granted in accordance with the provisions of the Berne
Convention (1971) or the Rome Convention authorizing that the
treatment accorded be a function not of national treatment but of
the treatment accorded in another country;
(c)
in respect of the rights of performers, producers of phonograms
and broadcasting organizations not provided under this
Agreement;
(d)
deriving from international agreements related to the protection
of intellectual property which entered into force prior to the entry
into force of the WTO Agreement, provided that such agreements
are notified to the Council for TRIPS and do not constitute an
arbitrary or unjustifiable discrimination against nationals of other
Members.
Article 5: Multilateral Agreements on Acquisition or Maintenance of
Protection
The obligations under Articles 3 and 4 do not apply to procedures
provided in multilateral agreements concluded under the auspices of
WIPO relating to the acquisition or maintenance of intellectual property
rights.
Article 6: Exhaustion
For the purposes of dispute settlement under this Agreement,
subject to the provisions of Articles 3 and 4 nothing in this Agreement
shall be used to address the issue of the exhaustion of intellectual
property rights.
Article 7: Objectives
The protection and enforcement of intellectual property rights
should contribute to the promotion of technological innovation and to the
transfer and dissemination of technology, to the mutual advantage of
producers and users of technological knowledge and in a manner
conducive to social and economic welfare, and to a balance of rights and
obligations.
Article 8: Principles
1.
Members may, in formulating or amending their laws and
regulations, adopt measures necessary to protect public health
and nutrition, and to promote the public interest in sectors of vital
importance to their socio-economic and technological
development, provided that such measures are consistent with the
provisions of this Agreement.
2.
Appropriate measures, provided that they are consistent with the
provisions of this Agreement, may be needed to prevent the
abuse of intellectual property rights by right holders or the resort
to practices which unreasonably restrain trade or adversely affect
the international transfer of technology.
3.6
THE PRIVATE SECTOR
For some years now there have been regular contacts between the
financial service industries in Europe, North America and East Asia over
WTO services issues, with a view to establishing common ground and
putting shared recommendations to Governments. A good current
example of this work is the insurance model schedule, which insurance
associations from the EU, the US, Canada and Japan have drawn up
together and are jointly recommending to their Governments. The
authors of this schedule see it as a framework of insurance regulation
which will both promote competition in the market place and sound
solvency-based regulation.
However, private sector views on regulatory issues are not
always identical. Some sections of the US financial services community,
perhaps influenced by the views of their own regulatory authorities, are
more cautious than their European counterparts in drawing up new
disciplines under GATS Article VI.4. These differences are best seen in
the debate which is emerging a Government level.
3.6
VIEWS OF EU AND US GOVERNMENTS
It is common ground across the North Atlantic that regulatory
requirements applied to services should be objective and transparent. But
hitherto the US have been reluctant to go beyond transparency into
criteria based on necessity and proportionality, to reflect the Article VI.4
provision that requirements should be no more burdensome than
necessary to ensure the quality of the service. The EU by contrast has
argued that the criteria should relate to necessity and proportionality as
well as transparency, although they have not yet elaborated these ideas in
any great detail.
3.7
DEVELOPING COUNTRIES
There are now more than 140 member countries of the WTO. In
some of the smaller and poorer countries, regulatory systems, where they
exist, are fairly basic. A number of Governments of developing countries
have expressed resistance to new regulatory disciplines, mainly on the
grounds that they do not have the skilled staff to administer them and
that existing WTO commitments are more than they can readily cope
with. There may also be an element of bargaining, since developing
countries know that services are a high priority for the US and EU.
3.8
THE REGULATORS
It is difficult to attribute to regulators around the world a single
view on what is or should be in the GATS agreement. The existing
provisions, couched as they are in very broad terms, should cause them
no great difficulty, although there are worries about how the powerful
dispute settlement procedures of the WTO might be applied to breaches
of WTO rules on domestic regulation. Understandably, perhaps,
regulators have been mainly concerned with international agreements in
their own fields (the Basel Accord, IOSCO, IAIS). Some of them may
not yet have grappled with the fact that they are bound by the WTO
agreements, particularly the GATS, and that their Governments are
committed in the WTO to efforts to work out, and get agreed
internationally, regulatory disciplines for service industries.
There are of course good reasons for such disciplines, and for
preventing obscure or unnecessary regulation from impeding the growth
of trade in services. But there is plenty of scope for misunderstanding or
worse between trade negotiators and regulators, and the two need to stay
close together as the work goes forward. Equally, there should be contact
between the regulators and those in the financial services industry who
take an interest in WTO matters. In the United Kingdom, for example, a
senior representative of the Financial Services Authority sits on the
private sector committee (the Liberalisation of Trade in Services, or
LOTIS, committee) which pulls together views from the City of London
and UK financial services.
3.9
THE OUTSIDE CRITICS
Several NGOs advocating third world development concerns
have been critical of GATS, and not least of the provisions on regulation.
They argue that GATS does, or may, deny developing countries the
ability to regulate in their own best interests, and to control foreign
service suppliers and investors. These criticisms seem misconceived. Not
only does GATS encourage prudential regulation, but it permits any
member country to exclude Foreign Service suppliers or to admit them
subject to conditions. It is difficult to argue that it is against the interests
of developing countries that regulation should be transparent, or no more
burdensome, or restrictive of trade, than necessary to secure its
objectives. It is certainly not in the interests of Foreign Service suppliers
to operate in a weak or badly-run regulatory environment. Conversely,
the presence of foreign service suppliers familiar with an efficient
regulatory environment should serve to strengthen the hand of local
regulators who are still learning the ropes.
3.10 SOLUTION IN SERVICE INDUTRIES
The WTO debate on domestic regulation will not be concluded
quickly. Any solution will need to respect the central concerns of the
main players. The regulators will need to be convinced that international
agreements reached in the WTO will not weaken their ability to put in
place and implement necessary prudential regulation at home. The
private sector will want to be sure that opportunities to export and invest
abroad will not be frustrated by obscure or unnecessary regulation which
is in fact protectionism in disguise. Developing countries will expect
understanding of the need for sequencing, to cater for the practical limits
on their ability to staff and finance new disciplines to be applied across
all service sectors. The EU and the US, with the backing of their
respective service industries, will need to find ways of reconciling their
differences over the Article VI.4 mandate, possibly by a combination of
regulatory principles which apply across all service sectors with other
principles which will apply to certain sectors alone.
3.11 SUMMARY
These are not impossible tasks, given the amount of common
ground, both intellectual and practical, which already exists. But they
have, understandably, been low on the agenda of Governments and
financial regulators who have faced more immediate issues, political and
economic, in the last couple of years. This is the moment for a fresh
impetus and for trade negotiators and regulators to work together on a
coherent solution to be in place by mid-2004, ahead of the deadline for
the conclusion of the GATS negotiations in early 2005.
3.12 QUESTIONS FOR DISCUSSION
1
Explain the background to the WTO negotiations.
2.
Explain the current scenario of GATS in India.
3.
What are the views of EU and US Governments regarding
GATS?
4.
What are the regulations for developing countries regarding
GATS?
5.
Explain the provisions of TRIPS.
6.
Explain the provisions of TRIMS.
LESSON NO. 4: WORLD BANK
STRUCTURE
4.1
Introduction
4.2
International Development Association
4.3
International Finance Corporation
4.4
Multilateral Investment Guarantee Agency
4.5
International Centre for Settlement of Investment Disputes
4.6
Summary
4.7
Questions for Discussion
OBJECTIVES
After studying the lesson, you should be able to understand the
working, structure of different international financing agencies like
World Bank, International Development Association, International
Finance Corporation, Multilateral Investment Guarantee Agency, and
International Centre for Settlement of Investment Disputes.
4.1
INTRODUCTION
Conceived during World War II at Bretton Woods, New
Hampshire, the World Bank initially helped rebuild Europe after the war.
Its first loan of $250 million was to France in 1947 for post-war
reconstruction. Reconstruction has remained an important focus of the
Bank`s work, given the natural disasters, humanitarian emergencies, and
post conflict rehabilitation needs that affect developing and transition
economies. Today's Bank, however, has sharpened its focus on poverty
reduction as the overarching goal of all its work. It once had a
homogeneous staff of engineers and financial analysts, based solely in
Washington, D.C. Today, it has a multidisciplinary and diverse staff
including economists, public policy experts, sectoral experts, and social
scientists. 40 percent of staff are now based in country offices.
The Bank itself is bigger, broader, and far more complex. It has
become a Group, encompassing five closely associated development
institutions: the International Bank for Reconstruction and Development
(IBRD), the International Development Association (IDA), the
International Finance Corporation (IFC), the Multilateral Investment
Guarantee Agency (MIGA), and the International Centre for Settlement
of Investment Disputes (ICSID).
4.2
INTERNATIONAL DEVELOPMENT ASSOCIATION
The International Development Association (IDA) is the part of
the World Bank that helps the earth`s poorest countries reduce poverty
by providing interest-free loans and some grants for programs aimed at
boosting economic growth and improving living conditions. IDA funds
help these countries deal with the complex challenges they face in
striving to meet the Millennium Development Goals. They must, for
example, respond to the competitive pressures as well as the
opportunities of globalization; arrest the spread of HIV/AIDS; and
prevent conflict or deal with its aftermath.
4.2.1 IDA's Mission
The International Development Association (IDA) is the part of
the World Bank that helps the earth`s poorest countries reduce poverty
by providing interest-free loans and grants for programs aimed at
boosting economic growth and improving living conditions. IDA funds
help these countries deal with the complex challenges they face in
striving to meet the Millennium Development Goals. They must, for
example, respond to the competitive pressures as well as the
opportunities of globalization; arrest the spread of HIV/AIDS; and
prevent conflict or deal with its aftermath. IDA`s long-term, no-interest
loans pay for programs that build the policies, institutions, infrastructure
and human capital needed for equitable and environmentally sustainable
development. IDA`s goal is to reduce inequalities both across and within
countries by allowing more people to participate in the mainstream
economy, reducing poverty and promoting more equal access to the
opportunities created by economic growth.
4.2.2 IDA's History
The International Bank for Reconstruction and Development
(IBRD), better known as the World Bank, was established in 1944 to
help Europe recover from the devastation of World War II. The success
of that enterprise led the Bank, within a few years, to turn its attention to
the developing countries. By the 1950s, it became clear that the poorest
developing countries needed softer terms than those that could be offered
by the Bank, so they could afford to borrow the capital they needed to
grow. With the United States taking the initiative, a group of the Bank`s
member countries decided to set up an agency that could lend to the
poorest countries on the most favourable terms possible. They called the
agency the "International Development Association." Its founders saw
IDA as a way for the "haves" of the world to help the "have-nots." But
they also wanted IDA to be run with the discipline of a bank. For this
reason, US President Dwight D. Eisenhower proposed, and other
countries agreed, that IDA should be part of the World Bank (IBRD).
IDA's Articles of Agreement became effective in 1960. The first
IDA loans, known as credits, were approved in 1961 to Chile, Honduras,
India and Sudan. IBRD and IDA are run on the same lines. They share
the same staff and headquarters, report to the same president and
evaluate projects with the same rigorous standards. But IDA and IBRD
draw on different resources for their lending, and because IDA`s loans
are deeply concessional, IDA`s resources must be periodically
replenished (see "IDA Funding" below). A country must be a member of
IBRD before it can join IDA; 165 countries are IDA members.
4.2.3 IDA's Borrowers
IDA lends to those countries that had an income in 2005 of less
than $1,025 per person and lack the financial ability to borrow from
IBRD. Some "blend borrower" countries like India and Indonesia are
eligible for IDA loans because of their low per person incomes but are
also eligible for IBRD loans because they are financially creditworthy.
Eighty-one countries are currently eligible to borrow from IDA.
Together these countries are home to 2.5 billion people, half of the total
population of the developing world. Most of these people, an estimated
1.5 billion, survive on incomes of $2 or less a day.
4.2.4 IDA Lending
IDA credits have maturities of 20, 35 or 40 years with a 10-year
grace period before repayments of principal begins. IDA funds
are allocated to the borrowing countries in relation to their income levels
and record of success in managing their economies and their ongoing
IDA projects. There is no interest charge, but credits do carry a small
service charge, currently 0.75 percent on funds paid out. See the terms of
IDA lending. In fiscal year 2005 (which ended June 30, 2005), IDA
commitments totaled $8.7 billion. New commitments in FY05 comprised
160 new operations in 64 countries. Forty-five percent of new
commitments went to Sub Saharan Africa, 33 percent to South Asia, 12
percent to East Asia and the Pacific, 6 percent to Eastern Europe and
Central Asia (ECA), and the remainder to poor countries in North Africa
and in Latin America. The leading IDA borrowers in FY05 are listed in
Table 4.1.
Since 1960, IDA has lent $161 billion to 108 countries. Annual
lending figures have increased steadily and averaged about $8.4 billion
over the last three years. Most loans address basic needs, such as primary
education, basic health services, and clean water and sanitation. IDA also
funds projects that safeguard the environment, improve conditions for
private business, build infrastructure, and support reforms to liberalize
countries` economies and strengthen their institutions. All these projects
pave the way toward economic growth, job creation, higher incomes and
better living conditions.
Table 4.1: Top Ten IDA Borrowers in Financial Year 2005
$
Top Ten IDA Borrowers
million
1
India
138
6
Vietnam
99
6
Bangladesh
00
5
Pakistan
00
4
Ethiopia
50
3
Ghana
64
3
Tanzania
56
3
Nigeria
30
3
Uganda
28
2
Afghanistan
85
4.2.5 IDA Funding
While the IBRD raises most of its funds on the world's financial
markets, IDA is funded largely by contributions from the governments of
the richer member countries. Additional funds come from IBRD's
income and from borrowers' repayments of earlier IDA credits.
See the list of cumulative contributions to IDA Replenishments
and donor shares of total contributions. Donors get together every three
years to replenish IDA funds. Donor contributions account for more than
half of the US$33 billion in the IDA14 replenishment, which finances
projects over the three-year period ending June 30, 2008. The United
States, the United Kingdom, Japan, Germany, France, Italy and Canada
made the largest pledges to IDA14, but less wealthy nations also
contribute to IDA. Turkey and Korea, for example, once IDA borrowers,
are now donors. Countries currently eligible to borrow from IBRD (but
not from IDA) ?Brazil, Czech Republic, Hungary, Mexico, Poland,
Russia, the Slovak Republic, and South Africa ? are also IDA14 donors.
Other contributors include Australia, Austria, Barbados, Belgium,
Denmark, Finland, Greece, Iceland, Ireland, Israel, Kuwait,
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Saudi
Arabia, Singapore, Slovenia, Spain, Sweden, Switzerland and
Venezuela.
To increase openness and help ensure that IDA`s policies are
responsive to country needs and circumstances, representatives from
each IDA region were invited to take part in the IDA13 and IDA14
replenishment negotiations. The number of borrower representatives was
expanded ? to a total of nine ? during the IDA14 replenishment
negotiations. In both IDA13 and IDA14, background policy papers were
publicly released, as well as drafts of the replenishment reports prior to
their finalization.
4.2.6 IDA's Role in Reducing Poverty
IDA helps to reduce poverty by collaborating with other
development partners, as well as through its own programs. IDA has
learned from experience that development programs are most successful
when the borrower country ? not just the government, but non-
governmental organizations (NGOs) and other of civil society ? acquires
a sense of ownership of the programs through deep involvement in their
design and execution. The borrower country now leads in preparing the
Poverty Reduction Strategy (PRS) that establishes priorities for IDA
support. In each country, IDA works with local development partners to
ensure that the PRS is carried out in a coherent way and that IDA focuses
on areas where it has comparative advantage. In IDA13, IDA targeted
human-development projects in areas like education, health, social safety
nets, water supply and sanitation (36%); law, justice and public
administration (23%); industry (18%); infrastructure (14%), and
agriculture and rural development (8%).
4.2.7 IDA's Performance
In India, the National AIDS Control project supported training of
52,500 physicians and 60 percent of nursing staff in HIV/AIDS
management topics. In Yemen, the Taiz Flood Disaster Prevention and
Municipal Development project prevented serious damage from the 1996
floods, benefiting 21,000 households directly and over half a million
people indirectly. In Africa, more than 5 million textbooks (mostly
locally developed and produced) were supplied to primary schools. In
Asia, over 6,700 health care facilities were constructed or upgraded, then
equipped and staffed to provide basic health care to rural populations.
The social investment fund projects in Latin America reached some 9.5
million beneficiaries. Activities supported by these projects generated
almost a million person-months of employment.
IDA emphasizes broad-based growth, including:
(i)
Sound economic policies, rural development, private business
and sustainable environmental practices,
(ii)
Investment in people, in education and health, especially in the
struggle against HIV/AIDS, malaria and TB,
(iii)
Expansion of borrower capacity to provide basic services and
ensure accountability for public resources,
(iv)
Recovery from civil strife, armed conflict and natural disaster,
and
(v)
Promotion of trade and regional integration
IDA carries out analytical studies to build the knowledge base
that allows intelligent design of policies to reduce poverty. IDA also
advises governments on ways to broaden the base of economic growth
and protect the poor from economic shocks.
The one billion children who live in countries that receive funds
from IDA are the main beneficiaries of IDA-backed investments in basic
health, primary education, literacy and clean water. IDA is now the
single largest source of donor funds for basic social services in the
poorest countries. IDA also coordinates donor assistance to provide relief
for poor countries that cannot manage their debt-service burden.
Globalization ? the increasing integration of world markets and
societies ? has allowed China, India and many other developing
countries to achieve faster growth through expanded foreign direct
investments and access to export markets. IDA is re-invigorating its
work in trade to assist the poorest and most marginalized countries to
limit adverse disruptions from globalization and to enhance net benefits
from it. IDA`s work in this area emphasizes measures to improve the
investment climate; enhance regional integration, particularly in Africa;
strengthen competitiveness; remove barriers to the markets of industrial
countries; and forge partnerships that enable acquisition of appropriate
skills and infrastructure.
4.3
INTERNATIONAL FINANCE CORPORATION
The world was a different place when the International Finance
Corporation (IFC) was established in 1956. No one spoke of emerging
markets. There was no worldwide trend toward privatization, no
communications revolution, no globalized economy. World population
was less than half of what it is today. The economies of poor countries
were still in very early stages of development, lacking the human
resources, physical infrastructure and sound institutions needed to raise
incomes and improve living standards. The responsibility for
development was almost universally assigned to the public sector.
Private sector investment in developing countries was small, and not
much thought was given to increasing it. It was into this environment
that IFC was born.
For several years officials of the World Bank had been
supporting the creation of a new and different entity to complement their
own. The Bank had been founded to finance post-World War II
reconstruction and development projects by lending money to member
governments, and had been doing so effectively. Yet in its initial years,
some senior staff had seen the need for creating a related institution to
spur greater private sector investment in poor countries.
Major international corporations and commercial financial
institutions at the time showed relatively little interest in working in
Africa, Asia, Latin America or the Middle East. Entrepreneurs in these
regions had few domestic sources of capital to draw upon and even less
from abroad. They needed a catalyst.
At the 1944 Bretton Woods Conference that led to the creation of
the Bank and the International Monetary Fund, initial proposals for this
kind of support had been made--and rejected. These proposals would
have given the Bank the ability to meet some of these goals by lending to
private companies without government guarantees. Then, in the late
1940s, the concept was greatly refined by Bank President Eugene R.
Black and his Vice President, former U.S. banker and General Foods
Corporation executive Robert L. Garner.
Garner was an ardent believer in the role of private enterprise.
Addressing the Inaugural Meeting of IFC`s Board of Governors on
November 15, 1956, he said, "I believe deeply that the most dynamic
force in producing a better life for people, and a more worthy life, comes
from the initiative of the individual--the opportunity to create, to
produce, to achieve for himself and his family--each to the best of his
individual talents. And this is the essence of the system of competitive
private enterprise--20th century model--as it has been developed by the
most enlightened and successful business concerns. It holds the promise
of rewards according to what the individual accomplishes. It is based on
the concept that it will benefit most its owners and managers if it best
satisfies its customers; if it promotes the legitimate interests of its
employees; if in all regards it acts as a good citizen of the community. It
is moved by the desire to earn a profit--a most respectable and important
motive, so long as profit comes from providing useful and desirable
goods and services. It is my belief that the best services and the best
profits result from a competitive system wherein skill and efficiency get
their just reward."
Garner worked with his assistant Richard Demuth and others to
create a new private sector investment arm affiliated with the Bank,
rather than having it lend directly from its own resources to the private
sector. This new multilateral entity, at first internally termed the
International Development Corporation, would be owned by
governments but act like a corporation and be equally comfortable
interacting with the public and private sectors. It would lend money, take
equity positions and provide the technical expertise in appraising private
investment proposals in developing countries, as the Bank was doing for
public sector projects. It also would work alongside private investors,
assuming equal commercial risks. In the process of removing some of
the major barriers to new private investment in developing countries, it
would encourage the domestic capital formation needed to create jobs,
increase foreign exchange earnings and tax revenues, and transfer
knowledge and technology from north to south.
The idea received its first official backing in the March 1951
report of a U.S. development policy advisory board headed by Nelson
Rockefeller. This panel conceived of a package to add considerable
value to the Bank`s own product by encouraging the growth of
productive private enterprises that would contribute many key
components
to
development.
One such component, Garner wrote, was entrepreneurship "that elusive
combination of imagination to see an opportunity and to mobilize the
necessary resources to seize it." Another was the mobilization of new
capital from private investors willing to take substantial risks in return
for potentially large rewards. Others included job creation, new labor
skills, management capacity and technological advances. In the process
business owners in developing countries would "successfully transmute
machines, labor and capital into a dynamic going concern, producing at a
competitive cost goods of a quality that the market will accept."
Garner actively marketed the concept. After the 1952 presidential
elections, the United States reduced its support for the idea, eventually
endorsing a modified proposal two years later that left IFC to start
business with no equity investment powers (this provision was changed
in 1961). Other nations then came aboard, and the Bank drafted the
formal Articles of Agreement in 1955.
4.3.1 IFC's Articles of Agreement
The IFC Articles of Agreement came into force on July 20, 1956,
when the requisite number of at least 30 member countries subscribing at
least $75 million to IFC`s capital was attained. The initial total
authorized capital was $100 million. The first thirty-one member
countries as of July 20, 1956 were: Iceland, Canada, Ecuador, United
States, Egypt, Australia, Mexico, Costa Rica, Ethiopia, Peru, Dominican
Republic, United Kingdom, Panama, Ceylon, Haiti, Guatemala,
Nicaragua, Bolivia, Honduras, India, El Salvador, Pakistan, Jordan,
Sweden, Norway, Japan, Denmark, Finland, Colombia, Germany and
France. On that date the capital subscriptions amounted to $78,366,000.
IFC`s Articles of Agreement enshrined three critical principles. The
founders insisted that IFC adopt a business principle, taking on the full
commercial risks of its investments, accepting no government guarantees
and earning a profit from its operations; be an honest broker, using its
unique abilities as a corporation owned by governments to "bring
together investment opportunities, domestic and private capital, and
experienced management," and; play a catalytic role, investing only in
projects for which "sufficient private capital is not available on
reasonable terms."
4.3.2 IFC Launched
Robert L. Garner was appointed President of IFC by its Board of
Directors on July 24, 1956. He holds the distinction of being the only
person to hold the position of President of IFC without also being
President of the World Bank. All of Garner`s successors have been titled
"Executive Vice President", with the President of the Bank being
President of IFC also. Garner opened IFC`s inaugural press conference
the next day by saying that IFC was the first inter-governmental
organization, which had as its main objective the promotion of private
enterprise. He believed private enterprise to be the most effective and
dynamic force for economic development. IFC would benefit not only
the underdeveloped but also the industrial countries. There was
increasing interest in overseas investment and expansion on the part of
established companies in the developed countries. Private enterprise was
the only weapon the free world possessed which the communists did not.
That was one of the reasons, Garner said, why he welcomed the
establishment of this new organization, after several years of preparation.
4.3.3 IFC Staff
Garner appointed John G. Beevor to be Vice President of IFC,
Richard H. Demuth, who had done much to foster the establishment of
IFC, to be Assistant to the President, and Davidson Sommers to be
General Counsel. Beevor had been engaged in preparatory work on the
organization of IFC since March 1956, when he was released from his
position as Managing Director of the Commonwealth Development
Finance Company Limited of London to join the staff of the Bank.
Demuth was Director of the Bank`s Technical Assistance and Liaison
Staff, and Sommers was the Bank`s General Counsel. Both Demuth and
Sommers had been associated with the Bank since 1946, and would
continue to hold their positions in the Bank while serving in IFC. The
Treasurer, Secretary, Director of Administration and Director of
Information of the Bank were appointed to the same positions in IFC.
Apart from its management, IFC`s own staff consisted at the outset of an
Engineering Adviser, with one assistant, and of eight operations officers,
of six different nationalities. IFC also had its own administrative
assistants.
4.3.4 Initial Inquiries
IFC received a large number and variety of inquiries and proposals
with reference to possible investments in many of its member countries. As
was inevitable with a new type of international financial organization, many
inquiries were based on a misunderstanding of its purpose, which is to use its
funds for investment in private enterprises, and not to finance transactions
such as export credits, installment sales, ship mortgages, and the like. Other
inquiries involving commercial or agricultural projects were declined in
view of IFC`s policy to confine its activities, in the earlier years, to the field
of industrial enterprise, which includes processing of agricultural products
and mining. A number of investment proposals, which at first appeared
promising, showed, after investigation, weaknesses of various types making
them unsuitable for IFC financing. On the other hand, several proposals on
which considerable work was done were postponed or withdrawn by the
sponsors for various reasons. Some decided to do the entire financing them;
some secured financing from other sources. A few were withdrawn because
of inability to agree on financial terms.
4.3.5 First Operations
On June 20, 1957, IFC reached agreement for a $2 million
investment in Siemens do Brasil Companhia de Electricidade. This
investment, together with the equivalent of $8.5 million being invested
by Siemens of Germany, was to be used to expand the plant facilities and
business of Siemens do Brasil for the manufacture of electric generating
equipment, switchgear, transformers, large motors and accessories for
utility and industrial application as well as telephone equipment. This
was the first integrated plant for manufacture of such a broad range of
heavy electrical apparatus in Brazil.
On August 13, 1957, IFC reached agreement for an investment
equivalent to $600,000 in Engranesy Productos Industriales, S.A., a
Mexican company owned by Mexican and American stockholders. The
investment would help to expand the plant facilities and business for the
manufacture and sale of a variety of industrial products and components,
to include the addition of machine tooling for the manufacture of
automotive and other mechanical parts, a forge shop, and an electric steel
furnace.
4.4
MULTILATERAL
INVESTMENT
GUARANTEE
AGENCY
As a member of the World Bank Group, MIGA's mission is to
promote foreign direct investment (FDI) into developing countries to
help support economic growth, reduce poverty, and improve people`s
lives. The development needs today are stark. Nearly 28 percent of the
world's population--1.7 billion people live on less than a dollar a day.
Billions of people live without access to safe drinking water or sewage
treatment. Children can't attend school because there's no electricity to
light classrooms in some countries, and no roads to get to school in
others. The list goes on. Developing country governments cannot
shoulder the burden--financially or technically--of addressing these
needs alone. Foreign direct investors can play a critical role in reducing
poverty, by building roads, for example, providing clean water and
electricity, and above all, providing jobs. By taking on these tasks, the
private sector can help economies grow and avert the need for
governments to use funds better spent on acute social needs, while taking
advantage of the opportunity to make profitable investments.
4.4.1 MIGA and FDI
Concerns about investment environments and perceptions of
political risk often inhibit foreign direct investment, with the majority of
flows going to just a handful of countries and leaving the world's poorest
economies largely ignored. MIGA addresses these concerns by providing
three key services: political risk insurance for foreign investments in
developing countries, technical assistance to improve investment
climates and promote investment opportunities in developing countries,
and dispute mediation services, to remove possible obstacles to future
investment. MIGA's operational strategy plays to our foremost strength
in the marketplace--attracting investors and private insurers into
difficult operating environments.
The agency's strategy focuses on specific areas where we can
make the greatest difference:
Infrastructure development is an important priority for MIGA,
given the estimated need for $230 billion a year solely for new
investment to deal with the rapidly growing urban centers and
underserved rural populations in developing countries.
Frontier markets--high-risk and/or low-income countries and
markets--represent both a challenge and an opportunity for the agency.
These markets typically have the most need and stand to benefit the most
from foreign investment, but are not well served by the private market.
Investment into conflict-affected countries is another operational
priority for the agency. While these countries tend to attract considerable
donor goodwill once conflict ends, aid flows eventually start to decline,
making private investment critical for reconstruction and growth. With
many investors wary of potential risks, political risk insurance becomes
essential to moving investments forward.
South-South investments (investments between developing
countries) are contributing a greater proportion of FDI flows. But the
private insurance market in these countries is not always sufficiently
developed and national export credit agencies often lack the ability and
capacity to offer political risk insurance.
MIGA offers comparative advantages in all of these areas--from our
unique package of products and ability to restore the business community's
confidence, to our ongoing collaboration with the public and private
insurance market to increase the amount of insurance available to investors.
4.4.2 Confidence, Security, and Credibility
MIGA gives private investors the confidence and comfort they
need to make sustainable investments in developing countries. As part of
the World Bank Group, and having as our shareholders both host
countries and investor countries, MIGA brings security and credibility to
an investment that is unmatched. Our presence in a potential investment
can literally transform a "no-go" into a "go." We act as a potent deterrent
against government actions that may adversely affect investments. And
even if disputes do arise, our leverage with host governments frequently
enables us to resolve differences to the mutual satisfaction of all parties.
4.4.3 Market Leader
MIGA is a leader when it comes to assessing and managing
political risks, developing new products and services, and finding
innovative ways to meet client needs. But we don't stop there. We also
provide expert advice to help countries attract and retain quality foreign
investment, and a host of online services to make sure investors know
about business opportunities in our developing member countries.
4.4.4 Complex Deals
MIGA can be the difference between make or break, by
providing that all-critical lynchpin that enables a complex transaction to
go ahead. MIGA offers innovative coverage of the nontraditional sub-
sovereign risks that often accompany water and other infrastructure
projects. We can also cover interest rate hedging instruments, as we did
for a power project in Vietnam, as well as provide capital markets
guarantees, which we recently did for residential mortgage-backed
securities in Latvia.
4.4.5 Private Market
MIGA complements the activities of other investment insurers
and
works
with
partners
through
its
coinsurance
and
reinsurance programs. By doing so, we are able to expand the capacity of
the political risk insurance industry to insure investments, as well as to
encourage private sector insurers into transactions they would not have
otherwise undertaken.
4.4.6 Our Development Impact and Priorities
Since its inception in 1988, MIGA has issued nearly 800
guarantees worth more than $14.7 billion for projects in 91 developing
countries. MIGA is committed to promoting socially, economically, and
environmentally sustainable projects that are above all, developmentally
responsible. They have widespread benefits, for example, generating
jobs and taxes, and transferring skills and know-how. Local communities
often receive significant secondary benefits through improved
infrastructure. Projects encourage similar local investments and spur the
growth of local businesses. We ensure that projects are aligned with
World Bank Group country assistance strategies, and integrate the best
environmental, social, and governance practices into our work.
MIGA specializes in facilitating investments in high-risk, low-
income countries--such as in Africa and conflict-affected areas--which
account for 42 percent of our portfolio. By partnering with the World
Bank and others, MIGA is able to leverage finance for guarantee trust
funds in these difficult or frontier markets. The agency also focuses on
supporting complex infrastructure projects and promoting investments
between developing countries.
MIGA's technical assistance services also play an integral role in
catalyzing foreign direct investment by helping developing countries
define and implement strategies to promote investment. MIGA develops
and deploys tools and technologies to support the spread of information
on investment opportunities. Thousands of users take advantage of our
suite of online investment information services, which complement
country-based capacity-building work.
The agency uses its legal services to further smooth possible
impediments to investment. Through its dispute mediation program,
MIGA helps governments and investors resolve their differences, and
ultimately improve the country's investment climate.
4.5 INTERNATIONAL CENTRE FOR SETTLEMENT OF
INVESTMENT DISPUTES
On a number of occasions in the past, the World Bank as an
institution and the President of the Bank in his personal capacity have
assisted in mediation or conciliation of investment disputes between
governments and private foreign investors. The creation of the
International Centre for Settlement of Investment Disputes (ICSID) in
1966 was in part intended to relieve the President and the staff of the
burden of becoming involved in such disputes. But the Bank's overriding
consideration in creating ICSID was the belief that an institution
specially designed to facilitate the settlement of investment disputes
between governments and foreign investors could help to promote
increased flows of international investment.
ICSID was established under the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States (the
Convention) which came into force on October 14, 1966. ICSID has an
Administrative Council and a Secretariat. The Administrative Council is
chaired by the World Bank's President and consists of one representative
of each State which has ratified the Convention. Annual meetings of the
Council are held in conjunction with the joint Bank/Fund annual
meetings.
ICSID is an autonomous international organization. However, it
has close links with the World Bank. All of ICSID's members are also
members of the Bank. Unless a government makes a contrary
designation, its Governor for the Bank sits ex officio on ICSID's
Administrative Council. The expenses of the ICSID Secretariat are
financed out of the Bank's budget, although the costs of individual
proceedings are borne by the parties involved.
Pursuant to the Convention, ICSID provides facilities for the
conciliation and arbitration of disputes between member countries and
investors who qualify as nationals of other member countries. Recourse
to ICSID conciliation and arbitration is entirely voluntary. However,
once the parties have consented to arbitration under the ICSID
Convention, neither can unilaterally withdraw its consent. Moreover all
ICSID Contracting States whether or not parties to the dispute, are
required by the Convention to recognize and enforce ICSID arbitral
awards.
Besides providing facilities for conciliation and arbitration under
the ICSID Convention, the Centre has since 1978 had a set of Additional
Facility Rules authorizing the ICSID Secretariat to administer certain
types of proceedings between States and foreign nationals, which fall
outside the scope of the Convention. These include conciliation and
arbitration proceedings where either the State party or the home State of
the foreign national is not a member of ICSID. Additional Facility
conciliation and arbitration are also available for cases where the dispute
is not an investment dispute provided it relates to a transaction which has
"features that distinguishes it from an ordinary commercial transaction."
The Additional Facility Rules further allow ICSID to administer a type
of proceedings not provided for in the Convention, namely fact-finding
proceedings to which any State and foreign national may have recourse
if they wish to institute an inquiry "to examine and report on facts."
A third activity of ICSID in the field of the settlement of disputes
has consisted in the Secretary-General of ICSID accepting to act as the
appointing authority of arbitrators for ad hoc (i.e., non-institutional)
arbitration proceedings. This is most commonly done in the context of
arrangements for arbitration under the Arbitration Rules of the United
Nations Commission on International Trade Law (UNCITRAL), which
are specially designed for ad hoc proceedings.
Provisions on ICSID arbitration are commonly found in
investment contracts between governments of member countries and
investors from other member countries. Advance consents by
governments to submit investment disputes to ICSID arbitration can also
be found in about twenty investment laws and in over 900 bilateral
investment treaties. Arbitration under the auspices of ICSID is similarly
one of the main mechanisms for the settlement of investment disputes
under four recent multilateral trade and investment treaties (the North
American Free Trade Agreement, the Energy Charter Treaty, the
Cartagena Free Trade Agreement and the Colonia Investment Protocol of
Mercosur).
Under the ICSID Convention, ICSID proceedings need not be
held at the Centre's headquarters in Washington, D.C. The parties to an
ICSID proceeding are free to agree to conduct their proceeding at any
other place. The ICSID Convention contains provisions that facilitate
advance stipulations for such other venues when the place chosen is the
seat of an institution with which the Centre has an arrangement for this
purpose. ICSID has to date entered in such arrangements with the
Permanent Court of Arbitration at The Hague, the Regional Arbitration
Centres of the Asian-African Legal Consultative Committee at Cairo and
Kuala Lumpur, the Australian Centre for International Commercial
Arbitration at Melbourne, the Australian Commercial Disputes Centre at
Sydney, the Singapore International Arbitration Centre, the GCC
Commercial Arbitration Centre at Bahrain and the German Institution of
Arbitration (DIS). These arrangements have proved their usefulness in
many ICSID cases and have helped to promote cooperation between
ICSID and these institutions in several other respects.
The number of cases submitted to the Centre has increased
significantly in recent years. These include cases brought under the
ICSID Convention and cases brought under the ICSID Additional
Facility Rules. In addition to its dispute settlement activities, ICSID
carries out advisory and research activities relevant to its objectives and
has a number of publications. The Centre collaborates with other World
Bank Group units in meeting requests by governments for advice on
investment and arbitration law. The publications of the Centre include
multi-volume collections of Investment Laws of the World and of
Investment Treaties, which are periodically updated by ICSID staff.
Since April 1986, the Centre has published a semi-annual law journal
entitled ICSID Review-Foreign Investment Law Journal. The journal
was recently rated as one of the top 20 international and comparative law
journals in the United States.
Since 1983, the Centre has also co-sponsored, with the American
Arbitration Association (AAA) and the International Chamber of
Commerce (ICC) International Court of Arbitration, colloquia on topics
of current interest in the area of international arbitration.
4.6
SUMMARY
The World Bank is a vital source of financial and technical
assistance to developing countries around the world. Basically it is not a
bank in the common sense. It is made up of two unique development
institutions owned by 184 member countries; the International Bank for
Reconstruction and Development (IBRD) and the International
Development Association (IDA). Each institution plays a different but
supportive role in our mission of global poverty reduction and the
improvement of living standards. The IBRD focuses on middle income
and creditworthy poor countries, while IDA focuses on the poorest
countries in the world. It provides low-interest loans, interest-free credit
and grants to developing countries for education, health, infrastructure,
communications and many other purposes.
4.7
QUESTIONS FOR DISCUSSION
1.
Define World Bank and its role at international level.
2.
What do you mean by International Development Association?
Explain its functioning.
3.
Explain the structure and role of International Finance
Corporation.
4.
Discuss the Multilateral Investment Guarantee Agency and
International Centre for Settlement of Investment Disputes as the
part of World Bank.
UNIT II
1
INTERNATIONAL MARKETING ENVIRONMENT
LESSON
LESSON OUTLINE
International marketing
environment
Risks involved in international
marketing
Economic environment
Political and legal environment
Cultural environment
Tariff barriers
Non-tariff barriers
Summary
LEARNING
OBJECTIVES
After reading this lesson
you should be able to:
Various
factors
constituting
international
business
environment
Risks involved in
international
marketing
Meaning
and
importance
of
analysis
of
international
business
environment
Effects of various
tariff and non-tariff
barriers
on
international
business
Liberalisation, privatisation and dynamic business activities
taking place all over the world have lured many business firms to
undertake international marketing activities. Even some national
companies are merging to gain strength to enter into international
marketing as no country or business enterprise can be sheltered from
the winds of change and global competition. Therefore, the business
organisations, in order to cope up with these challenges, have to
adapt and adjust accordingly.
When a business firm crosses its national frontiers to market its
products or services, it is called International Marketing`. Thus, international
marketing is the performance of business activities of a business firm in one or
more countries other than its country of origin.
According to Terpstra, International marketing can be defined as
marketing carried across national boundaries.1
According to Cateora, International Marketing is the
performance of business activities that direct the flow of a company`s goods and
services to consumers or users in more than one nation for a profit.2
According to Ramaswami and Namakumari, International
Marketing involves all the activities that form part of domestic marketing. An
enterprise engaged in international marketing has to correctly identify, assess
and interpret the needs of the overseas customers and carry out integrated
marketing to satisfy those needs.3
From the gist of these various definitions, it may be made out that
the basic functions of international marketing as well as domestic marketing are
the same but there are some specific characteristics that are unique in
international marketing.
1. Terpstra Vern, International Marketing, Holt, Reinhart and Winston, 1977, p. 4.
2. Cateora Phillip R., International Marketing, McGraw Hill, Irwin, 1997, p. 6.
3. Ramaswami V.S. and Namakumari, S., Marketing Management: Planning,
Implementation and Control, Macmillan India Ltd., New Delhi, 2004, p. 667.
INTERNATIONAL MARKETING ENVIRONMENT
As international marketing involves in marketing across a firm`s
national boundaries, it has to confront with varying legal, political, cultural and
sociological dimensions, which add many complexities to the task of marketing
activities of the firm.
As international marketing management is the undertaking of the
marketing management activities and functions keeping in mind as how to meet
best the requirements of the customers of the countries to be served, this requires
a detailed analysis of the likings and disliking of the customers, the prevailing
product classes and standards etc. Thus, international marketing environment
possess some new challenges in addition to the domestic marketing management
challenges.
MOTIVATION FOR INTERNATIONAL MARKETING
The business firms enter into international marketing only when
they perceive some factors, which motivate them to do so. If there exists no
motivational factors for a firm to enter into international marketing, the firm
would rather prefer to remain domestic.
According to Kotler and Keller, Most companies would prefer
to remain domestic if their domestic market were large enough. Managers would
not need to learn other languages and laws, deal with volatile currencies, face
political and legal uncertainties or redesign their products to suit different
customer needs and expectations. Business would be easier and safer. Yet
several factors are drawing more and more companies into the international
arena8
From the above definition, it can be made out that it is not only
the size of the domestic market which motivates the business firms to go in for
international market, but, besides this, there are some other factors also which
create attractions for international marketing.
There could be one or more of the following reasons which may
influence a business firm`s decisions to go in for international marketing.
1.
Higher profit margins for exports: If the profit margins for exports are
higher than in domestic sales, the firm may be attracted to export its
produce than selling domestically.
2.
Under-utilisation of Capacity: If the domestic sales are not sufficient
enough to make the fullest utilisation of the installed production capacity
of the firm, then these firms seek export orders in order to fully utilize
their production capacity.
3.
Economies of Scale: Sometimes, business firms also undertake exports
to attain economies of scale of production, as the additional production
required for exports will result into division of fixed costs over more
number of units. Thus, this will bring in the economies of scale, as the
cost per piece will reduce.
4.
Reduction of dependence on one market: International marketing is
also undertaken in order to lower down the risk involved while,
marketing only domestically. Because in the domestic market, the
demand may fall on account of local competition or some other factors.
The foreign markets sales may reduce these risks.
8. Kotler Phillip and Keller Kevin L., Marketing Management, Pearson Education, Pte. Ltd.,
Delhi, 2006, p. 617.
5.
Export obligation for obtaining imported inputs: Sometimes, the
government may impose export obligation on the firms, which want to
import some inputs of production. This is done in order to attain balance
of payments.
6.
Business Expansion: Some firms undertake to exporting as an
opportunity for business expansion as this way, the firms can expand
their business and thus find new markets and hence more profits.
RISKS INVOLVED IN INTERNATIONAL MARKETING
Despite of the various advantages or motivations for entering into
international marketing, there are some business risks also which are associated
with it due to the variations of business environmental factors from country to
country. The firms must also weigh these risks before deciding for going in for
international marketing.
According to Ramakumari and Namakumari, The difference
between domestic and international marketing is essentially environmental and
cultural in character. And cultural diversity continues despite the world getting
closer. Modern communication and transport systems have, no doubt, brought
the nations of the world closer, but the cultural differences continue. So,
understanding the cultural variances and nuances, and responding to them in a
manner and style that is appealing to the foreign buyer becomes the crucial task.
It is not enough if the international marketer communicates in the buyer`s
language. Language is only one aspect of culture. A nation`s history, its social
and religious heritage, the value system of its people, the code of conduct
handed down through generations ? all these are components of a nation`s
culture. Moreover, culture is not a static entity. It undergoes a continuous
evolution. So, sizing up the cultural dynamics of the different markets of the
world is quite a difficult exercise. And that explains the difficulty of
international marketing10.
The various types of risks involved in international marketing can
be divided into the following categories:
(a)
Business Environmental Factors,
(b)
Foreign Exchange Regulations and Rates,
(c)
Tariff and Non-tariff barriers,
(d)
Balance of Payment conditions.
In this chapter the various types of risks relating only to business
environmental factors have been discussed:
International Marketing Environmental Factors
Each nation has its own culture, value, customs, attitudes, faiths,
habits, taboos, languages, social organisations, classes and ethnic groups. Each
of these elements varies from country to country. These various factors affect
10. Ramaswami V.S. and Namakumari, S., Marketing Management: Planning,
Implementation and Control, Macmillan India Ltd., New Delhi, 2004, p. 668.
the life styles and the consumption patterns of its citizens. Therefore, the
marketers, while designing their strategies for international marketing must take
care of their needs, wants, requirements, tastes and preferences while entering
into negotiations with them and doing business abroad.
There are the following three types of environmental risks
involved in international marketing:
(i)
Economic Environment
(ii)
Political and Legal Environment
(iii)
Cultural Environment
(i) Economic Environment
Economic environment is filled with various factors like general
economic conditions, market conditions, industrial structure, competitors
and nature of competition; economic system, fiscal and monetary policies,
financial facilities and constraints, level of economic development.
These various factors of the economic environment pose risks for many
firms wishing to enter into international marketing, as they may not have
adequate information and knowledge about these various factors.
(ii) Political and Legal Environment
Political environment includes political atmosphere and stability,
political parties and their philosophies, government administration and
policies concerning business and international policies of the government.
Legal environment includes various types of laws. Therefore the various
factors relating to political as well as legal environment both have direct and
immediate impact on marketing and seller-buyer relationships.
The marketing managers must take these political and legal factors into
consideration. Particularly, the aspects to be considered are the political
stability of the host country, their attitude toward foreign business firms and
investments, importance of the company`s product to the host nation,
monetary regulations, currency convertibility, custom clearance procedures,
price controls, efficiency of administrative system, nature of procedures
concerned with imports, legal laws and restrictions pertaining to marketing
mix decisions etc.
(iii)
Cultural Environment
Various nations differ among themselves on the basis of the
prevailing cultural environment, which has an important bearing on the various
consumption and marketing activities.
According to Louis, Cultural environment refers to the
traditions, Laws, rules and beliefs11.
The international marketing offer must suit and fit the foreign
customers` culture. The marketing programmes for international marketing must
be developed keeping in mind the cultural environment of the import country.
11 . Louis Allen A., Management and Organisation, Macstraw Hill, New York, 1958, p. 118.
The cultural differences pose a great challenge for the marketer
and necessary adjustments must be made to cope with the cultural pattern of the
buyers.
Tariff Barriers
Tariff barriers are also a major factor of international marketing
environment. Tariff barriers imposed by various nations demotivate the exports
and imports of the items on which these countries impose some sort of tariffs or
duties.
A tariff or duty may be levied either according to the value of the
goods or according to its weight or quantity. The former type of duties is known
as ad-valorem duty and the later is a specific duty. An ad-valorem duty is
charged as a fixed percentage of the imported/exported article.
The various types of tariff barriers have been discussed below.
a)
Export duties: Export duties are imposed on those items, which are
scarce in the exporting country itself or in order to provide exhaustible
natural resources for domestic industries. Certain countries levy export
duties to collect funds for defraying the expenses of export promotion
activities. Sometimes the duties are levied to charge higher prices from
foreigners for the commodities, which are in short supply.
b)
Import duties: One of the important purposes of import duties is to
obtain revenue for the public treasury. Tariffs are also very popular for
protecting domestic industries from foreign competition. The protection
of domestic industries is very essential for the development of a country.
Domestic industries may also require protection against the aggressive
and unfair practices of foreign competitors. In recent years, tariffs are
often employed to restrict imports with a view to correcting
disequilibrium in the balance of payments.
In order to achieve uniformity amongst countries as to customs duties
and other levies, products have been grouped into various categories, depending
upon the material of which they are made. The nomenclature system has been
worked out by an international committee of exports under the aegis of the
Customs Co-operation Council. This classification of goods adopted by them
came to be known as the Brussels Tariff Nomenclature (BTN), which is
presently being followed by a number of countries when they impose customs
duties for imported goods.
c)
Transit duties: Transit duties were very common during the period of
mercantilism and in the early nineteenth century. At that time,
transportation was very slow and costly. The use of the shortest route,
therefore, was very important. Countries situated in a favourable
geographical position fully exploited their position and levied heavy
transit duties on the merchandise passing through their territories.
Progress in the field of transportation during the nineteenth century
robbed transit duties of their earlier profitability and decreased the
incentive for their maintenance. Another important factor, which led to
the elimination of transit duties, is the desire among nations for
international economic co-operation. The burden of transit duties is
borne either by the consumers in the importing country or by the
producers in the exporting country, depending upon the conditions of
demand and supply in the two countries. Transit duties, like other duties,
have a tendency to restrict the volume of world trade.
d)
Anti-dumping duties: Dumping is the practice of selling goods abroad at
a price below their normal price (or even below their marginal cost). The
purpose of this may be to maintain a stable or oligopolistic domestic
market structure by disposing of temporary surpluses abroad, or as a
means of disrupting the domestic market of a foreign competitor. Anti-
dumping duty is levied when the selling price of an important product is
lower than the normally prevailing domestic price. To meet a situation of
this nature whenever it arises, most countries, under their own
legislation, have the power to impose anti-dumping duties on the ground
of injury to their domestic industries. Anti dumping duties normally take
the form of additional import duties and charges.
e)
Countervailing duties: Countervailing duties are levied in the same way
as anti-dumping duties, and the explanation for their levy is generally the
charge that imports from a specified country are directly or indirectly
subsidised. The amount of countervailing duty normally corresponds to
the amount of the subsidy. The intention of this levy is to neutralise the
benefit of export subsidy given by the exporting country to its exporters.
Non-Tariff Barriers
A non-tariff barrier is any measure other than a tariff that raises
an obstacle to the free flow of goods in the overseas market. Non-tariff barriers
are normally erected in the form of prior import deposits, import
quota/licensing, foreign exchange regulations, exchange formalities, government
procurements, state trading, health and safety measures, canalisation of trade,
preferential arrangements, trading blocks, technical and administrative
regulations, economic and political wards.
A government to protect its domestic market or to avoid the
balance of payment conditions to go unfavourable generally imposes non-tariff
barriers.
i)
Prior Import Deposits: Some countries impose a condition that
importers in their countries should deposit money upto 100 percent of
the value of their imports in advance with any specified authority,
normally their Central Bank. Such deposits are generally for a specific
period; and whenever any country introduces such a policy, its
government ensures that the required amount has been deposited before
the issue of an import licence.
ii)
Quantitative Restrictions Through Quota Licence System: Quantitative
restrictions are normally imposed in the form of quotas and import
licences, or a combination of both. Quotas are generally global, bilateral
or historical, and are based on imports during the previous period. These
are often more selective than tariffs and tend to be adjusted more
frequently. Under this system, the importing country specifies the
quantities of a commodity that would be allowed to import from various
countries. The fixation of quotas depends on the relationship of the
importing country with the supplier of the commodity.
iii)
Foreign Exchange Regulations: Exchange control methods have been
widely used by a number of countries to regulate imports, and are
usually adopted by most of the developing nations who experience an
unfavourable balance of payments. Under this scheme, the importer has
to ensure that adequate foreign exchange is available for import of goods
by obtaining a clearance from the exchange control authorities prior to
the concluding of a contract with the supplier.
iv)
Consular Formalities: A number of importing countries demand that
consular documents ? such as certified invoices, import certificates, etc.
? must necessarily accompanies the shipping documents. Sometimes,
they even insist that such consular documents should be drawn in the
languages of the importing countries. The fees payable for such
documentation are often quite high, sometimes upto 3 percent of the
f.o.b. value of a product. Heavy penalties are levied by importing
countries if there are any errors in documentation.
v)
Technical and Administrative Regulations: These regulations are in
respect of physio-sanitary and veterinary regulations, technical visas,
food and drugs regulation-often in the language of the importing country.
Administrative regulations take the shape of technical standards, e.g., of
electrical goods, machinery, etc. and the countries practising such
regulations insist that the exporters should strictly adhere to the same
standards laid down by them. In the case of pharmaceutical products, the
importing countries normally specify the pharmacopic standards that
should be satisfied before their import is permitted. Such specifications
exclude the import of commodities, which, though of good quality do not
conform to standards that have been laid down. Often, documentation
formalities relating to technical and administrative regulations are
difficult and time-consuming, and even a minor error or omission may
result in the holding up of goods by the customs authorities of the
importing country. These technical and administrative regulatory
measures impede the free flow of internal trade to a large extent.
vi)
Health and Safety Regulations: Many countries impose strict health and
safety regulations on the import or sale of products, particularly food
products. Regulations based on environmental considerations are
becoming increasingly. A specific duty is a fixed sum of money charged
upon each unit of the commodity imported. Some times specific and Ad
Valorem duties are simultaneously levied on a commodity. A duty in
which both these forms of duties are combined is generally known as the
compound or mixed tariff.
(d)
Balance of Payment Conditions
Some times if the balance of payment conditions of country goes
unfavourable, in order to control it, the government imposes some restrictions
on the import of some items. This may result into unfavourable conditions for
the exporters in these markets.
Balance of payment and balance of trade are discussed side by
side in order to understand the basis differences between the two.
Balance of trade describes the difference between merchandise
exports and merchandise imports of a country. If the volume of merchandise
exports exceeds imports then it is favourable balance of trade otherwise
unfavourable balance of trade.
Favourable balance of trade is not necessarily a symptom of
prosperity. Balance of trade represents only one of the various components of
foreign transactions.
Balance of payment of a country has been defined as systematic
record of all economic transaction between the residents of reputing country
with the rest of the countries of global. Balance of payment is very wide term
and it includes both visible and invisible transactions. The payment made for
merchandise imports and receipts for merchandise exports, loans to and
investments in foreign countries and enterprises, foreign investments in
domestic enterprises, borrowings from foreign countries, tourists` expenditures
of the citizens of reporting country made abroad and that made by foreign
tourists in the reporting country. Money paid to the foreign carriers and receipts
for carrying foreign goods, Insurance premiums, cable and telephone payment
made to foreign agencies and received from the foreign countries by these
agencies of the reporting countries, commission and exchange charges received
by the banks of the reporting country, and paid to the foreign country`s banks.
Besides the above, balance of payment includes all the other expenses made by
the citizens of the reporting country in foreign land.
The two sides of the balance of payment must always balance. If
a country has more receipts than expenditure, it is called to have positive
balance of payment and if has to make more payments than receivables then it is
negative balance of payment. Balance of payment is considered to be the
economic barometer of a country`s health. Balance of payment can also be used
to evaluate a country`s international solvency and to determine the
appropriateness of the external value of its currency.
There are two types of transactions viz. autonomous and induced. The
autonomous transactions take place as a matter of routine and if there is a
deficient i.e. (positive or negative balance of payment) then the same is adjusted
by induced transactions of compensatory transactions. The example of
compensatory transaction is official borrowings, grant, received from abroad
and changes in the country`s foreign exchange reserves.
SUMMARY
International marketing is the performance of business activities that direct the flow of a goods
and services to consumers or users at one or more foreign countries. The basic functions of international marketing as
well as domestic marketing are the same but there are some specific characteristics, which are unique in international
marketing.
When a company operates in a large number of countries by making necessary adaptations or
adjustments to its products and the various other components of the marketing mix, it tends to become a global company.
The business firms enter into international marketing when they perceive some factors, which
motivate them to do so. If there are no motivations for a firm to enter into international marketing then the firm rather
prefers to remain domestic.
The various factors, which may motivate the business firm to enter into international marketing
are: higher profit margin for exports, under utilisation of capacity, economies of scale, reduction of dependence on one
market, export obligation for obtaining imported inputs and business expansion.
Despite of various advantages of international marketing, there are many risks also which are
mainly due to varying business environment among the different countries of the globe. These risks relate to business
environment factors, foreign exchange regulation and rates, various tariff and non-tariffs barriers and balance of
payments conditions etc. The firm must weigh these various risks before deciding for going in for international
marketing.
REVIEW QUESTIONS
1.
What do you understand by international marketing environment? Discuss its and importance.
2.
What are the various risks involved in international marketing?
3.
Discuss the various environmental factors which affect the international marketing.
4.
What are tariff barriers? How they effect international marketing operations.
5.
What are non-tariff barriers? How they effect international marketing operations.
6.
What do you understand by the term balance of payment?
7.
How balance of payment effect international marketing of a country?
8.
Discuss in detail the various motivational factors for a firm for entering into international marketing.
9.
Discuss the various factors which business firms should take utmost care of while undertaking international
marketing operations.
10.
Define international marketing environment. Distinguish between the marketing environment for domestic
marketing and international marketing.
UNIT II
2
POLITICAL AND LEGAL SYSTEMS
LESSON
LESSON OUTLINE
Political environment
Political risks
Managing political risks
The legal environment
International marketing and legal
systems
Legal issues in international
marketing
Summary
LEARNING
OBJECTIVES
After reading this lesson
you should be able to:
Meaning
and
importance
of
political
environment
To understand the
various
political
risks
To learn about the
prevailing
legal
systems
in
the
world
To understand the
importance of the
legal issues for
international
marketing
management
The global environment of business continues to pose new challenges for
managers. Today businesses are pursuing a variety of international business
activities (not just exporting and direct investment) in order to achieve a
complex set of motives. The global marketplace is becoming increasingly
crowded by a constant flow of new entrants from new countries. Managers are
busily forming international partnerships in search of synergistic alliances in
procurement, distribution, marketing, and technology.
These dynamic elements of the global marketplace are
compelling firms to rethink their organizational structures, business
processes, and market positioning. The more alert managements turn
to market research and intelligence for staying abreast of customer
and product markets. Many are searching for best practices, an d they
benchmark against the very best in their industry globally. In an era
of substantial outsourcing and collaborations, managers are also
sharpening their interorganizational partnering skills.
There are several stages through which a firm may go as it becomes
increasingly involved across borders. A purely domestic firm focuses only on its
home market, has no current ambitions of expanding abroad, and does not
perceive any significant competitive threat from abroad. Such a firm may
eventually get some orders from abroad, which is seen either as an irritation (for
small orders, there may be a great deal of effort and cost involved in obtaining
relatively modest revenue) or as "icing on the cake." As the firm begins to
export more, it enters the export stage, where little effort is made to market the
product abroad, although an increasing number of foreign orders are filled. Such
firms which are involved in international marketing are suggested to various
types of legal and political systems which pose many opportunities as well as
threats.
All firms entering international business start with just exporting and
later on reach to the international stage. As certain country markets begin to
appear especially attractive with more foreign orders originating there, the firm
may go into countries on an ad hoc basis--that is, each country may be entered
sequentially, but with relatively little learning and marketing efforts being
shared across countries. In the multi-national stage, some efficiency is pursued
by standardizing across a region (e.g., Central America, West Africa, or
Northern Europe). Finally, in the global stage, the focus centers on the entire
World market, with decisions made optimize the product`s position across
markets--the home country is no longer the center of the product. An example
of a truly global company is Coca Cola.
The various political and legal systems and environment confronted by
the multinational market firms has been discussed below:
The Political Environment
An international business entity is a guest of the host country
and, therefore, the host country reserves the right of not only
allowing it access but also of expropriating it. It also can influence
the scale and dimensions of the operations through its policies.
Political risk is thus the vulnerability of returns of a project to the
political acts of a sovereign government.
While the economic and financial environments are of critical
importance to the MNC, the political environment and the prevailing
legal systems also influence most international business activities.
Almost from the beginning of multinational business operations,
MNCs have been regarded as threats to national sovereignty, and
while the zenith of this outlook probably occurred in the 1970s, it is
still alive and flourishing in the 1990s. Naturally, different ideologies
will be reflected in different economic systems, with the People`s
Republic of China and the USA being at opposite ends of the
spectrum. While the number of centrally planned economies has
shrunk rapidly following the massive political changes in Eastern
Europe, a new factor may be the rise of the fundamentalist Moslem
approach to state management of the political and economic
environments.
Another facet of the political environment, which has come to
the fore in recent years, has been the involvement of governments in
different areas of business. For example, in virtually every
industrialized country the government controls the postal services
and the railways. During the 1980s, however, there has been a boom
in privatization, particularly in telecommunications, energy, steel and
shipbuilding.
Finally, the force of nationalism can never be ignored. While
this was relatively dormant during the period 1975-86, it has become
a very potent factor in Europe, with a significant number of former
Soviet client states regaining sovereignty. Perhaps as a result,
nationalism has also raised its profile within the EC affecting, for
example, Catalonia, Brittany, Belgium (Flemings and Walloons),
Scotland and the Basque Country.
Political Risks
The principal concept used by international businessmen in
appraising the political environment is known as political risk. This
expresses itself through government-inspired events and actions that
impact on the international companies working within a particular
state. Political risk can be defined as: the risk of loss of assets,
earning power, or managerial control due to events or actions that are
politically based or politically motivated`.
The immediate association of political risk is with developing
countries in terms of nationalization and expropriation of assets, but
it is also present in industrialized countries, as the following
examples may demonstrate:
The election of conservative Prime Minister Thatcher in the
United Kingdom in 1979.
The election of socialist President Mitterrand in France in
1981.
The accession of Portugal and Spain to the EC in 1986.
The accession of Portugal and Spain to the EC in 1986.
The reunification of Germany in 1990.
The great mass of political decisions by member states upon
which the whole concept of the Single European Market
(1992) rests.
Perhaps the most difficult political risk assessment the MNC
must make is when it contemplates its initial entry into a particular
country. Daniels and Radebaugh (1986) suggest a simple check-list
for the primary appraisal:
1.
What is the political structure of the country?
2.
Under what type of economic system does the country
operate?
3.
Is my industry in the public or private sector?
4.
If it is in the public sector, does the government also allow
private competition in that sector?
5.
If it is in the private sector, is there any tendency to move it
toward public ownership?
6.
Does the government view foreign capital as being in
competition or in partnership with public or local private
enterprises?
7.
In what ways does the government control the nature and
extent of private enterprise?
8.
How much of a contribution is the private sector expected to
make in helping the government formulate overall economic
objectives?
If the situation is especially complex, or if the new foreign
investment is very large, most MNCs would move beyond such a
simple assessment and call on the assistance of specialist political
risk assessment consultants, most of whom have had extensive
previous experience working with or within government or
international bodies like the UN or the World Bank.
Assessing Political Risks
It has been observed that international managers when
entering new markets recognize the existence of political risk but
refuse to give it the required significance. This is more so because
although the existence of political risk has been widely accepted, the
definition of political risk does not explain whether such risk is
country specific or firm specific. Here the discussion entails
assessment of both country specific risk and firm specific risk.
Country Specific Risks
Country specific risk refers to risk arising out of doing
business with a specific country.
What is the current political system in existence?
What is the stability and permanency of government policy?
What are the encouragements the business firms will receive
as a result of political activity?
Firm Specific Risk
Although business units undertake country risk assessment
they have realized that political risk does not manifest itself equally
among various firms. This is the major assumption underlying
country risk assessment. It has been observed that sometimes firms
in the same country receive differential treatment.
It is commonly believed that firm specific political risk arises
because of the following:
size and visibility
product handled
attitude of the company.
Management of Political Risk
The insecurity arising out of political risk especially, risk of
loss of investment and information, in foreign lands can be
minimized through proper management of political risk. Political
risk management process can be undertaken either before the
investment is made or after the investment is made. The former
refers to pre-investment planning whereas the latter refers to post-
investment planning.
Pre-investment Planning
Under the pre-investment planning for political risk
management, four options are available to the international marketer.
They are:
Avoidance
Insurance
Negotiating the Environment
Structuring the Investment
The Legal Environment
The legal environment within which MNCs have to conduct
operations could be regarded as a subset of the political environment,
as the two are completely intertwined. However, the legal factors are
put in a separate section here to emphasize their importance.
Unfortunately for MNCs, they do not work within a single, unified
international legal environment; on the contrary, an MNC faces a
different legal context in every country within which it operates.
These codes are usually put in place by governments in an attempt to
control the amount, rate and impact of both outward and inward
investment.
Industrial intellectual property rights: this includes all aspects of
trade names, trade secrets, copyrights and patents. As business
has become progressively internationalized, so MNCs and their
home governments have brought pressure to bear ? particularly,
but not solely, on developing countries ? to bring regulations into
line with those of the industrialized countries. In industries like
pharmaceuticals, MNCs often refuse to set up manufacturing or
R&D facilities in countries with insufficient safeguards in this
sphere.
Trade obstacles: this includes tariffs and quotas, which are
usually clearly laid down by regulations, and other less well-
defined factors. A good example here is product labeling where
the requirements are not only legal, but also culture-bound; for
instance, foreign companies trading in France must produce all
labels, warranties, instructions, etc. in French. Also, in the
pharmaceutical industry, safety and efficacy regulations show a
bewildering variety from one country to another, with no
individual country's standards being acceptable in another.
Product liability: this has been a boom area for the legal
profession in many industrialized countries in the last ten years,
though this is hardly surprising when the long list of product
manufacturing problems is considered. Again, the pharmaceutical
industry could be quoted as a case in point, although the most
spectacularly disastrous example must be the Bhopal incident. In
1984, an explosion occurred at Union Carbide's plant at Bhopal in
India, as a result of which poisonous emissions killed over 2,000
people. As a result; not only were Indian regulations tightened up,
but also there was a wave of environmental legislation throughout
the industrialized world.
Monopoly and restrictive trades practices: this type of legislation
is common throughout the developed world. US regulations are
regarded as tightest, followed by Germany, However, unlike
other areas of legislation, there is a move towards uniformity
here, with the EC taking the lead in the approach to the Single
European Market.
Home-Country Legislation
This includes all legislation passed in a particular country to
regulate the activities of MNCs based in that country while operating
overseas. The best-known example is the US Foreign Corrupt
Practices Act, which was passed following a number of highly
publicized bribery cases in the 1970s involving American
multinationals. It forbids US firms giving bribes or any other
questionable payments anywhere in the world as these are regarded
as 'ethically repugnant' (President Carter's words) and bad for the
international reputation of American business.
International Marketing and the Legal Systems
Every business operates within the jurisdiction of legal
system. The legal system is an inevitable component of the
environment within which a business operates. The commercial law
existing within any country influences not only each and every
variable of marketing mix but also the environment within which a
business operates. This has a direct bearing on the management of
global marketing plan. Thus for example, the advertising laws in
West Germany are so strict that it is best advised for the international
marketer to get himself good legal counsel before framing his
advertising strategy in West Germany. In fact all over Europe, there
exists different set of laws preventing promotion of products through
price discounting. These laws are based on the premise that such
practices differentiate buyers. This example reflects the influence on
only one of the variable of marketing mix. Laws may exist for other
variables of marketing mix viz. product, price, and place. Thus
monitoring the legal environment is also essential. International
business came out with an article indicating areas where
management should consider the laws before framing their strategy.
They include watching out for rules regarding:
Retail price maintenance
Product quality
Packaging
After sales commitment
Price controls
Property rights, which include immovable property and patent
& trade, mark regulations.
Cancellation of agreements
The Development and Scope of International Law
The domestic marketer is aware of the jurisdiction of the legal
system and the bearing it has on his activities. But when he crosses
national frontiers to market or produce his product in a host country;
the problem of legal system arises on two counts. They are:
a)
Every country has its own legal system.
b)
The legal systems of the world are not harmonized and are in
fact based on contradicting political philosophers.
The legal system that exists in different countries of the world
are antecedents of one of the two legal philosophies. They are
common law and code law philosophies.
Legal Issues in International Marketing
The field of international law is wide and cannot be dealt with
fully here. However, certain issues like entering into contract, the
method at seeking recourse, protecting property rights, tax laws, and
foreign exchange are some of the major issues facing the
international marketer. These issues can be illustrated as under:
The decision to market product across the national frontier
imply that agreements have to be entered into with parties on the
other side. For this legal counsels advice on contract act as it exists
in the foreign land is absolutely essential.
Not only must the marketer be aware of laws regarding
contract, and termination of contracts but he must also be aware of
the legal formalities that he is subjecting himself to. Thus as per
Coelso Doctrine a person desirous of doing business in Latin
America must agree to subject himself as a national. This has
important bearings for an executive doing business with Latin
American countries. The entry decision may be influenced to a great
extent by such laws as they exist in that country.
A marketer must also be aware of and monitor laws regarding
product quality, packaging, price control, retail price maintenance,
after sales service. If it he wishes to continue his marketing efforts in
that country.
SUMMARY
Although a firm regards it as an economic entity it is drawn
and affected by political developments. It therefore becomes
necessary for the firm, particularly an international firm to monitor
not only the domestic but also the international political
environment. Since the international business firm operates in a host
country and as a guest of that country, it becomes particularly
important for it to monitor the developments taking place in the
domestic political environment of the host country.
The three main concerns facing any international business
entity are political stability, the government`s orientation and
nationalism.
While political stability is necessary for a business entity, it is
particularly important for an international marketing firm because
they reflect the success or failure of any business concern, for
political stability is often associated with stability of economic
policies. The other concerns facing international business are
orientation of the government and nationalism. The orientation of the
government can very often reveal whether international marketing
can survive in that country or not. Nationalism also influences this
variable because the business entity has to exist and operate within
that country. These concerns, through their impact, give rise to
political risks.
The legal systems in different countries of he world are by no
means identical. This difference between code law and common law
puts the international marketing firms into various types of legal
complications.
A marketer must also be aware of and monitor laws regarding
product quality, packaging, price control, and retail price
maintenance and after sales service etc.
IMPORTANT QUESTIONS
1.
What do you understand by the term Political Environment`?
2.
Discuss the importance of political environment for
international marketing management.
3.
What are the various types of political risks for international
marketing? How a business firm can assess the political risks?
4.
How political risks can be managed?
5.
Define and elaborate term, Legal Environment`.
6.
Discuss the international marketing and legal systems.
7.
Discuss the development and scope of international law.
8.
Discuss the various legal issues relating to international
marketing.
9.
Discuss the various political risks which are firm specific.
10. Briefly summarise the various issues concerning international
marketing on account of political and legal environment.
UNIT II
3 MULTILATERAL AND GEOGRAPHICAL
LESSON
GROUPINGS
LESSON OUTLINE
Patterns of Multilateral and
Geographical Groupings
Regional Co-operative Groups
Free Trade Area
Customs Union
Common Market
Political Union
Major Multilateral and
Geographical Economic Groups
Conflict between Multilateralism
and Regionalism
Summary
LEARNING
OBJECTIVES
After reading this lesson
you should be able to:
The rationale of
cross border trade
and
forms
of
economic
groupings.
Patterns of regional
economic
groups
for cross border
trade.
Major forms of
multilateral
and
geographical
economic groups.
Major
Geographical and
Multilateral groups
of the world.
Conflict between
multilateralism and
regionalism.
Among the important global trends today is the evolution of the
multinational market region ? those groups of countries that seek mutual
economic benefit from reducing intraregional trade and tariff barriers.
Organizational form varies widely among market regions, but the universal
orientation of such multinational cooperation is economic benefit for the
participants. Political and social benefits sometimes accrue, but the dominant
motive for affiliation is economic, as countries, all over the world, now look for
economic alliances to expand their access to free markets.
Regional economic cooperative agreements have been around since the
end of World War II. The most successful has been the European Community
(EC), the world`s largest multinational market region and foremost example of
economic cooperation.
Multilateral and Geographical market groups form large markets
that provide potentially significant market opportunities for international
business. When it became apparent that the EC was to achieve its long-term goal
of a single European market, a renewed interest in economic cooperation was
sparked. The European Economic Area (EEA), a 17-country alliance between
the European Union (EU) and members of EFTA (European Free Trade Area),
became the world's largest single unified market. Canada, the United States, and
Mexico entered into a free-trade agreement to form NAFTA (North American
Free Trade Agreement). Many countries in Latin America, Asia, Eastern
Europe, and elsewhere are either planning some form of economic cooperation
or have entered into such agreements. With the dissolution of the USSR (Soviet
Union) and the independence of Eastern European countries, linkages among the
independent states and republics are also forming. The Commonwealth of
Independent States (CIS) is an initial attempt at realignment into an economic
union of some of the Newly Independent States (NIS)-former republics of the
USSR.
The growing trend of economic cooperation is increasing
concerns about the effect of such cooperation on global competition.
Governments and businesses are concerned that the EEA, NAFTA, and other
cooperative regional groups have become regional trading blocs without trade
restrictions internally but with borders protected from outsiders.
Patterns of Geographical and Multilateral Groupings
Many countries of the world started forming some multilateral
market groups which are mainly based on their geographic locations. These
groups took several forms, varying significantly in the degree of cooperation,
dependence, and inter relationship among participating nations. There are five
fundamental groupings for regional economic integration ranging from regional
cooperation for development, which requires the least amount of integration, to
the ultimate integration of political union.
Regional Cooperation Groups: The most basic economic integration
and cooperation is the regional cooperation for development (RCD). In the RCD
arrangement, governments agree to participate jointly to develop basic industries
beneficial to each economy. Each country makes an advance commitment to
participate in the financing of a new joint venture and to purchase a specified
share of the output of the venture. An example is the project between Colombia
and Venezuela to build a hydroelectric generating plant on the Orinoco River.
They shared jointly in construction costs and they share the electricity produced.
Free-Trade Area (FTA): A free-trade area requires more cooperation
and integration than the regional cooperation of groups. It is an agreement
among two or more countries to reduce or eliminate customs duties and nontariff
trade barriers among partner countries while members maintain individual tariff
schedules for external countries.
The FTA consists of a number of countries within which trade is free in
the sense that customs duties are not levied at the frontier on trade but in
practice it is limited to specified products with specified exceptions.
Essentially, an FTA provides its members with a mass market without
barriers that impede the flow of goods and services. The United States has free-
trade agreements with Canada and Mexico (NAFTA) and separately with Israel.
The seven-nation European Free Trade Association (EFTA), among the better-
known free-trade areas, still exists although five of its members also belong to
the EEA.
Customs Union: A customs union represents the next stage in economic
cooperation like FTA, there are no internal tariff barriers on intra-union trade.
The customs union is a logical stage of cooperation in the transition from an
FTA to a common market. The European Community was a customs union
before becoming a common market. Customs unions exist between France and
Monaco, Italy and San Marino, and Switzerland and Liechtenstein.
Common Market: Common market is the succeeding stage of economic
integration. A common market agreement eliminates all tariffs and other
restrictions on internal trade, adopts a set of common external tariffs, and
removes all restriction on the free flow of capital and labor among member
nations. Thus a common market is a common marketplace for goods as well as
for services (including labor) and for capital. It is a unified economy and lacks
only political unity to become a political union.
The European Economic Community (EEC) is the most successful
experiment so far as a common market is concerned. The Treaty of Rome
(which established the European Economic Community) called for common
external tariffs and the gradual elimination of intra-market tariffs, quotas, and
other trade barriers. The treaty also called for elimination of restrictions on the
movement of services, labor, and capital; prohibition of cartels; coordinated
monetary and fiscal policies; common agricultural policies; use of common
investment funds for regional industrial development; and similar rules for wage
and welfare payments.
Latin America boasts two common markets, the Central
American Common Market (CACM) and the: Andean Common Market. Both
have roughly similar goals and seek eventual full economic integration.
Political Union: Political union is the most fully integrated form of
regional cooperation. It involves complete political and economic integration; it
may be voluntary or enforced. The most notable enforced political union was the
Council for Mutual Economic Assistance (COMECON), a centrally controlled
group of countries organized by the USSR. With the dissolution of the USSR
and the independence of Eastern Europe, COMECON was disbanded.
The Commonwealth of Nations is a voluntary organization
providing for the loosest possible relationship that can be classified as economic
integration. The British Commonwealth is comprised of Britain and countries
formerly part of the British Empire. Its members recognize the British Monarch
as their symbolic head although Britain has no political authority over the
Commonwealth. Its member states had received preferential tariffs when trading
with Great Britain but, when Britain joined the European Community, all
preferential tariffs were abandoned. The Commonwealth can best be described
as the weakest of political unions and is mostly based on economic history and a
sense of tradition. Heads of state meet every three years to discuss trade and
political issues they jointly face, and compliance with any decisions or directives
issued is voluntary. Two new political unions have come into existence in this
decade, the Common-wealth of Independent States (CIS), made up of the
republics of the former USSR, and the European Union (EU).
The European Union was created when the 12 nations of the
European community ratified the Maastricht Treaty. The members committed
themselves economic and political integration. The treaty allows for the free
movement of goods, persons, services, and capital throughout the member
states; a common currency; common foreign and security policies, including
defense; a common justice system; and cooperation between police and other
authorities on crime, terrorism, and immigration issues. However, no all the
provisions of the treaty have been universally accepted. The dismantling of
border controls to permit passport-free movement between countries, for
example, has been implemented by only 7 out of 15 EU member states.
MAJOR MULTILATERAL AND GEOGRAPHICAL GROUPING
European Union (EU)
The most successful regional economic grouping so far has been
the EU. The EU, earlier known as European Common Market, was formed as a
result of the Rome Treaty signed in 1957 and came into existence on January 1,
1958. The basic objective was to accelerate economic grow and promote
stability within the member-countries through free, movement of trade as the
initial step. The original members were: Belgium, France, Germany, Italy,
Luxembourg and Netherlands. Subsequently, the U.K., Ireland, Denmark, Spain,
Greece and Portugal joined the ECM. (It later changed its name to European
Economic Community and it became European Union on January 1. 1993.)
Austria, Finland and Sweden have joined the Union with effect from January
1995.
The EU, after 1992, is the largest, most developed consumer
market in the world with a population of 370 million, as against a population of
261 million in the USA and 125 million in Japan. The per capita income varies
from $ 11,030 for Portugal which is the lowest to $ 42,930 for Luxembourg
which is the highest. The Union also accounts for about 40 per cent of world
trade. The somewhat disconcerting fact for the non-EU countries is that an
increasing proportion of the trade is being accounted for by the intra-group
trade.
The Treaty of Rome, 1957 which established the grouping,
envisaged establishment of a common market comprising all the member-
countries, where people, goods, services and capital could move freely. There
have been no intra tariffs from 1968 when a customs union was formed. But it
still falls short of being a single market; for example, in financial services,
technical standards and mutual recognition of professional qualifications.
In February 1986, the twelve member-countries signed the Single
European Act, whose objective was to create a market without borders on
January 1, 1993. This involved, among other measures, elimination of technical
and tax barriers as well as various types of national trade protection measures
then being administered by the member-countries.
The EU has negotiated various types of trade agreements and co-
operation agreements with a very large number of countries. The European
Union is linked by bilateral free-trade agreements to the countries in Central and
Eastern Europe, a group of which are linked by CEFTA, while another group is
linked by the Baltic Free- Trade Area. The EU is negotiating second-generation
bilateral free-trade agreements based on a reciprocal exchange of preferences
with partners in the Mediterranean and North Africa, as part of the process of
establishing a Euro-Med free trade area by 2010. The EU also concluded a free-
trade agreement with South Africa and with Mexico which entered into force in
2000. The EU has also proceeded with discussions with the Gulf Cooperation
Council (GCC). India has also signed a trade and economic co-operation
agreement with the EU. This provides for mutual co-operation in economic,
agricultural and industrial development in addition to preferential trade
European Free Trade Area (EFTA)
The EFTA was formed at the same time as the EEC, almost as a
counter- measure. The UK, Portugal, Ireland and Denmark left it to join the
EEC. Austria, Finland and Sweden left it to join the EEC with effect from
January 1, 1995. The EFTA now continues with Iceland, Liechtenstien, Norway
and Switzerland.
The EEC and EFTA have formed a European Trading Area
where trade in industrial products is free of all tariffs. The EFTA is pursuing
free trade, agreements with extra-regional trade partners notably with Canada
and Mexico.
North American Free Trade Area (NAFTA)
The goal of NAFTA, the world's largest free trade area, is to
eliminate barriers to trade and investment between the three countries, the
U.S.A., Canada and ~ex1co. The implementation of NAFTA on January I, 1994,
brought the immediate elimination of tariffs on more than one half of U.S.
imports from Mexico and more than one third of U.S. exports to Mexico. Within
10 years of implementation of the agreement, all U.S.-Mexico tariffs should be
eliminated except for some U.S. agricultural exports to Mexico that will be
phased out in 15 years. Most U.S.-Canada trade is already duty free. NAFTA
also seeks to eliminate non-tariff trade barriers.
The NAFTA agreement commits all parties to end restrictions on
NAFTA- member foreign investors, provide a high-level of intellectual property
rights protection, liberalize trade in services, and establish dispute settlement
mechanisms to be used among the three partners. NAFTA has side agreements
on environmental and labour standards making it the first U.S. trade accord to be
formally linked to such commitments.
Southern Common Market (SCM)
The Southern Common Market, best known by its Spanish
acronym MERCOSUR was established in 1991 and is tl1e largest of tl1e
regional grouping. Argentina, Brazil, Paraguay and Uruguay are members. Chile
and Bolivia are associate-members. MERCOSUR was established with the
objective of encouraging economic integration among member states by means
of tl1e free flow of goods and services. A common market among members
which removed tariffs from 85 per cent of intra-regional trade, went into effect
on January 1, 1995.
The Andean Community (AC)
The Andean community was established 1996 as a successor to
the Andean Group which had its origins in the 1969 Cartegena Agreement also
known as the Andean Pact. The Andean community's members are Bolivia.
Colombia. Ecuador. Peru and Venezuela. Panama has observer status. Chile a
founding member of the Andean pact withdrew in 1976. The Andean Group's
original intent was to increase trade among the members and to devise joint
industrial programmes for industries such as petrochemicals, Metalworking and
Automobiles. There was also an effort to launch a new common currency.
Central American Common Market (CACM)
The Central American Common Market was founded in 1960
under the General Treaty of Central American Integration. CACM's members
are Costa Rica, Guatemala, EI Salvador, Honduras, and Nicaragua. The General
Treaty's original intent was to create a free trade area among the central
American countries while establishing a common tariff with nonmember
countries. In late 1993, the CACM country presidents and the president of
Panama signed a protocol to the' 1960 treaty pledging themselves to the full
economic integration of the region.
Caribbean Community and Common Market (CARICOM)
CARICOM was founded in 1973 and succeeded the Caribbean
Free Trade Association (Cartfta) established in 1968.
CARICOM'S 14 members included 13 former British territories
and Suriname. The members are: Antigua and. Barbuda, the Bahamas,
Barbados, Belize. Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts
and Nevis, St. Lucia. St. Vincent and the Grenadines, Suriname, and Trinidad
and Tobago. The British Virgin islands and the Turks and Caucus islands are
associate members. CARICOM's objectives are the economic integration of the
members through a common market, coordination of the foreign policies of
member states and functional cooperation especially in areas of social and
human development. CARICOM maintains a common external tariff with
exceptions.
Association of South East Asian Nations (ASEAN)
This is an important regional economic grouping which is
emerging as a major force in world trade. It was formed in 1967 but started
making progress only in 1970s. Its members are Brunei, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The
first step towards economic integration was through partial liberalisation of trade
in select range of products. The other important step was to identify several
regional projects which would cater to the requirements of all the member-
countries. Each country will have one regional project.
ASEAN has developed a Common Effective Preferential Tariffs
(CEPT) plan to reduce tariffs systematically for manufactured and processed
products, leading to an ASEAN free trade area in 15 years.
Intra -ASEAN trade has so far covered only a small percentage of
total trade of the group. Intra-group trade stood at $ 24 billion in 1990 as against
the group's total trade turnover of $ 265 billion. ASEAN has decided to invite as
'guest country' both China and India.
Global System of Trade Preferences among Developing Countries
(GSTP)
The Agreement establishing the Global System of Trade Preferences
(GSTP) 'among developing countries was signed on 13th April, 1988 at
Belgrade" following conclusion of the First Round of Negotiations. The
Agreement was '(signed by 48 developing countries, which exchanged
concessions in the course, of that Round. The Agreement came into force from
19th April, 1989 and 40 \countries including India have ratified it so far.
The GSTP established a framework for the exchange of trade
concessions among the members of the Group of 77. It provides a mechanism
for negotiations in successive stages for establishing trade preferences with a
view to promo~ trade and economic co-operation among developing countries.
It lays down rules, principles and procedures for conduct of negotiations and for
implementation of the result of the negotiations. The coverage of the GSTP
extends to arrangements in the area of tariffs, non-tariff measures, direct trade
measures including medium and long-term contracts and sectoral agreements.
One of the basic principles of the Agreement on GSTP is that it Is
to be negotiated step by step, improved and extended in successive stages.
Accord- ingly, the Ministerial Meeting on GSTP held in Teheran on 21st
November, 1991 adopted the Teheran Declaration on the launching of the
Second Round of GSTP negotiations. The aim of the Second Round is to
facilitate the process of accession to the GSTP Agreement and to carry forward
the exchange of trade concessions.
South Asian Preferential Trading Arrangement (SAPTA)
The Agreement establishing the SAARC Preferential Trading
Arrangement (SAPTA) was signed on 11th April, 1993 at the Seventh SAARC
Summit held in Dhaka, and the SAPTA came into effect on December 7, 1995.
The Agreement establishes a framework for the exchange of trade concessions
among the Member States of SAARC. It lays down rules, principles and
procedures for the conduct of negotiations and for implementation of the results
of the negotiations. The coverage of SAPTA extends to arrangements in the
areas of tariffs, para-tariffs, non-tariff measures and direct trade measures. The
Agreement is, however, limited to merchandise trade and excludes services from
its scope.
In the first round of SAPTA negotiations, India offered import
tariff concessions on 106 items whereas the number of items on which the other
SAARC countries offered concessions is as follows: Pakistan 35: Sri Lanka 31:
Maldives 17: Nepal 14; Bangladesh 12 and Bhutan 11. Further, the tariff
concessions offered by India in respect of most items go up to 50 per cent
whereas the range of concessions offered by the other countries is 5 to 15 per
cent.
The Second Round of SAPTA Negotiations resulted in exchange
of tariff concessions of 1972 tariff lines. Out of this, India has offered
concessions on 911 tariff lines and received concessions on 456 tariff lines at the
six digit level. The Third Round of Negotiations is to be completed soon. The
ultimate objective is to establish a Free Trade Area in the region (SAFI'A) by
2001 A.D.
Bangkok Agreement
The First Agreement on Trade Negotiations among Developing
Member- Countries of ESCAP, popularly known as the Bangkok Agreement,
was signed on 31st July, 1975 in Bangkok. Bangladesh, Republic of Korea, Sri
Lanka and India are members of the Agreement. The Agreement provides for
liberalisation of both tariff and non-tariff barriers in inter se trade among
participating countries. At present, the operation of the Agreement .is limited to
tariff concessions only. The Agreement envisages special concessions to least
developed countries. The Agreement could not generate the anticipated trade
flows on account of limited membership and product coverage. The product
coverage increased considerably as a result of the Second Round of Negotiations
which concluded in May 1990. In addition, Papua New Guinea has acceded to
the agreement. Afghanistan and China have also expressed their interest in
joining the Bangkok Agreement but they have yet to initiate the process.
Asia-Pacific Economic Cooperation (APEC)
Formed in 1989 as an informal dialogue group With limited
Participation. APEC has become a forum for negotiations to achieve the goal of
freer trade and investment in the Asia-Pacific region.
APEC has 18 members: Australia. Brunei, Canada. Chile. China.
Hong Kong. Indonesia, Japan. South Korea. Malaysia. Mexico, New Zealand,
Papua New Guinea, Philippines, Singapore, Taiwan, Thailand and the United
States.
In Indonesia in 1994, the APEC leaders agreed via their Bogor
Declaration "to achieve free and open trade and investment in the region" by
firm dates - 2010 for the industrial economies that make up 85 per cent of APEC
trade and 2020 for the rest. This is potentially the most sweeping trade
agreement in history, corI1mitting half the world economy to eliminate all
ban1ers to exchange among themselves. In addition, APEC has consistently
pledged to promote further liberalization of the global trading system tender its
doctrine of open regionalism.
CONFLICT
BETWEEN
MULTILATERALISM
AND
REGIONALISM
Both GA'IT and WTO accommodated regional arrangements.
The major argument for regionalism has been that smaller group of countries
would find it easier to move towards integration than in a much wider
multilateral system. However, as the groupings become larger, this argument
tends to lose validity. Many of the new regional arrangements contain countries
as diverse in outlook, economic size and level of development as any countries
in the multilateral system. Thus the fact remains that regional and geographical
arrangements are an exception to the MFN principle which is the essence of the
WTO rules.
Conclusion
The formation of the various economic groupings on account of
attaining multilateral benefits, the groupings have led to the change in the
complexion of the entire world market place significantly. These international
business firms and multinational groups spell opportunity in bold letters through
access to greatly enlarged markets with reduced or abolished country-by-country
tariff barriers and restrictions. Production, financing, labor, and marketing
decisions are affected by the remapping of the world into market groups.
As goals of the EEA and NAFTA are reached, new marketing
opportunities are created; so are new problems. World competition will intensity
as businesses become stronger and more experienced in dealing with large
market groups. European and non-European multinationals are preparing to deal
with the changes in competition in a fully integrated Europe. In an integrated
Europe, U.S. multinationals may have an initial advantage over expanded
European firms because U.S. businesses are more experienced in marketing to
large, diverse markets and are accustomed to looking at Europe as one market.
The advantage, however, is only temporary as mergers, acquisitions, and joint
ventures consolidate operations of European firms in anticipation of the benefits
of a single European market. International managers will still be confronted by
individual national markets with the same problems of language, customs, and
instability, even though they are packaged under the umbrella of a common
market.
Summary
The globalization of markets, the restructuring of Eastern Europe
into independent market-driven economies, the dissolution of the Soviet Union
into independent states, the worldwide trend toward economic cooperation, and
enhanced global competition make it important that market potential be viewed
in the context of regions of the world rather than country by country. Formal
economic cooperation agreements such as the EC are the most notable examples
of multilateral and geographical economic groups.
Multilateral and economic cooperative agreements have been around
since the end of World War II. These economic groupings give rise to many
benefits to the member countries which are multilateral in nature and scope.
Geographical and multilateral market groups take several forms,
varying significantly in degree of cooperative, dependence and their relationship
among participating nations.
There are five fundamental groups for multilateral and
geographical integration. The various possible multilateral and geographical
groupings are: regional cooperation groups, free trade area, customs union,
common market and political union. The major multilateral and geographical
groupings in the world are: European union (EU), European Free Trade Area
(EFTA), North American Free Trade Area (NEFTA), Southern Common Market
(SCM), The Andean Community (AC), Central American Common Market
(CACM), Caribbean Community and Common Market (CARICOM),
Association of South East Asian Nations (ASEAN), Global System of Trade
Preferences among Developing Countries (GSTP) and South Asian Preferential
Trading Arrangement (SAPTA) and the Bank of Agreement of Asia Pacific
Economic Cooperation (APEC).
Among the important global trends today is the evolution of the
multinational market region ? the groups of countries that seek mutual economic
benefit from reducing intraregional trade and tariff barriers.
Multinational market groups from large markets that provide
potentially significant market opportunities for international business.
Multinational market groups take several forms, varying significantly in the
degree of cooperation, dependence, and interrelationship among participating
nations.
Important Questions
1.
Discuss the significance of formation of multilateral and geographical
groupings.
2.
Discuss the various firms of multilateral and geographical groupings in
the world for cross border trade.
3.
Is it possible to form a political union? Comment.
4.
Discuss the major multinational and geographical economic groups in
the world.
5.
What is GSTP? Discuss its importance and significance to the member
countries.
6.
What are the reasons for conflict between multilateralism and
regionalism?
7.
Discuss the various trade benefits to the countries forming ASEAN.
8.
Distinguish between the formation and scope of EU, EFTA and NAFTA.
9.
Discuss in detail the formation of Central Asian Common market.
10.
Discuss the importance of various regional groupings in the present era
formation of WTO.
UNIT II
4 CULTURE AND BUSINESS CUSTOMS
LESSON
LESSON OUTLINE
Marketing environment
International marketing
environment
Social cultural factors
Culture
Cultural dynamism
Elements of Culture
Business customs
Host country culture
Coping international cultural
differences
Cultural Adaptation
Summary
LEARNING
OBJECTIVES
After reading this lesson
you should be able to:
International
marketing
environment
Various elements
of culture
Importance of
business customs of
host country for
international
marketing
management
The importance of
culture for
international
marketing
The cultural
dynamism
Need and
importance of
adaptation of
culture for
international
marketing
Aids for coping
international
cultural differences
MARKETING ENVIRONMENT
Every business is run in a given set of environment, which
constitutes of various factors some of which are internal to the business while
some others are external. It is a proven truth that the success of a business, to a
great extent, depends on its ability to foresee the environmental changes and to
modify its business strategies appropriately. It is also true that only those
businesses survive for long, which keep pace with the changing environment.
A business is an open system and marketing functions performed
by a business are a sub-system of its overall business system. As the business,
being an open system has a continuous interface with the external environment,
which in turn affects its overall functioning in general and its marketing
functions in particular.
The marketing environment of a business consists of several
factors some of which are controllable by it while some others are non-
controllable. Further, out of the various components of the environment, some
factors may be internal to the business organization while some others may be
external to it. All these types of the constituents of the environment are dynamic
in nature, which interact with one another and also the business organizations.
To some extent the business organisations also affect the environment. The
businesses have to adjust their activities in tune with the changes in the
components of the environment. Thus, a constant monitoring of the environment
is necessary for a business to draw plans for its adaptation to the environmental
forces. These forces of the business environment cause both threats as well as
opportunities for it.
International Marketing Environment
The environment to a business varies from time to time and
country to country. All the business functions are directly related to the existing
environment in which it operates. The marketing activities are the most affected
ones due to the changes in environmental conditions in the various different
countries operation.
The business firms must adapt to the changing conditions of the
environment for their long run survival, as those firms, which do not keep pace
with the changes in the environment are surely to fail ? sooner or later. Thus the
marketing management of a business rests squarely on the knowledge of the
marketing environment. It has to know where the environment is heading, what
trends are emerging therein and how a marketing firm should respond to the
changes in the environment.
The international marketing environment constitutes a number of
forces, which are all dynamic in nature, though the degree varies amongst them.
The marketers have to upgrade their policies and tune up their marketing
programmes in accordance with the trends in the marketing environment.
Various authors have many varying factors to be considered
important for inclusion in the list constituting the components of the marketing
environment.
According to Kotler and Keller, Within the rapidly changing
global picture, marketers must monitor six major environmental forces:
demographic, economic, social-cultural, natural technological and political
legal.1
According to Chhabra and Grover, Marketing environment may
be broadly classified into economic and non-economic. Economic environment
comprises economic system, structure and quality of economic development,
fiscal, industrial and foreign trade polices, factor endowment, economic
planning and international economic relations. Non-economic environment
comprises social, demographic, political, legal, cultural and educational
factors.2
According to Ramaswami and Namakumari, Marketing
environment involves of mega environment that is specific to the given business.
1.
Kotler Phillip and Keller K.L., Marketing Management, Pearson Education Pte. Ltd.,
Delhi, 2006, p.92.
2.
Chhabra T.N. and Grover S.K., Marketing Management, Dhanpat Rai and Co. (Pvt.)
Ltd., New Delhi, 1998, p.1.53.
Mega environment covers the political, the demographic, and the socio-cultural
and economic environment. It also includes the legal environment and the
government policies. The environment specific to the given business includes
such aspects as structure of the industry, nature of competition and factors
relating to customers and demand.3
According to Saxena, A systematic approach to environmental
analysis and diagnosis involves understanding of the forces namely socio-
economic, competition, technology, government policies and suppliers.4
The various experts have included various terms to define the
important components of the international marketing environment but on
synthesizing the views of all these experts, we can conclude that the forces in
the environment which have a considerable influence on the marketing functions
and decisions can be divided into the following three categories:
a)
Economic
b)
Non-economic
c)
Physical / Natural
Each of the above three types of the forces act and interact with
each other. In other words the economic factors have non-economic implications
and non-economic factors have economic implications and both of these are also
influenced and influence the factors prevalent in the physical environment.
SOCIO-CULTURAL FACTORS
3.
Ramaswamy V.S. and Namakumari V., Marketing Management ? Planning,
Implementation and Control, Macmillan India Ltd., New Delhi, 2002, p.27.
4.
Sexena Rajan, Marketing Management, Tata McGraw Hill Publishing Company
Limited, New Delhi, 2002, p.51.
For international marketing, the modern business thinking
advocates the business to take on the responsibility for serving or safeguarding
socio-cultural interests as one of its important objectives as the business owes its
existence to the society served and is itself deeply influenced by the society`s
social institutions.
The international socio-cultural environment constitutes factors
like family background, caste, structure, customs, conventions, values and
attitudes, the cultures and subcultures and the knowledge levels and the belief
system of the people. These factors influence the international market demand
level for many products as their consumption decisions depend upon people`s
attitudes, beliefs, customs, social norms and social cultural values etc.
The business firm engaged in international need to understand
people`s views about the consumption of a good or service and rest of the
marketing decisions should be based on it.
OVERALL IT CAN BE CONCLUDED THAT THE SOCIO-
CULTURAL FABRIC IS AN IMPORTANT ENVIRONMENTAL
FACTOR THAT SHOULD BE ANALYSED WHILE FORMULATING
THE INTERNATIONAL MARKETING STRATEGIES. THE COST
OF IGNORING IT COULD BE VERY HIGH.
Culture
Culture can be regarded as the sum total of attitudes, beliefs and lifestyles of the citizens of a country. Thus,
the international manager must be aware of attitudes toward material culture, work and achievement, time, change,
authority, family, decision-making, and risk. Since this description includes a vast number of intangible factors, it should
come as no surprise that the cultural environment of international business gives MNC managers so many problems.
The prevailing culture and practiced business customs at a place are one of the very important dimensions of
international marketing. These influence all aspects of consumer behaviour ones are pervasive in all marketing activities
in product design, packaging, pricing, promotion, distribution and communication etc. The marketers wishing to expand
than operation cross borders, operations must be fullyfamilier with the cultural dimensions of the consumer their and also
about the prevalent business customers as these ---- as significant implications for trade.
Cultural dimension is one of the important dimensions of
international marketing environment, other dimensions being
political, economic, legal, technological, geographic etc. These
influences all aspects of consumer behaviour and is pervasive in all
marketing activities in product design, packaging, pricing,
promotion, distribution, communication and the like. Since the scope
of marketing concept is to satisfy consumer needs, it is quite clear
that the marketer must be fully familiar with the cultural dimensions
of consumer behaviour in target markets and must understand their
implications for specific marketing functions.
Cultural Dynamics
Man uses the media of culture in adapting to the physical,
biological, psychological, social, anthropological, and historical components of
human existence. Each culture evolves its own modes and norms to solve
problems created by man`s existence in society. Accidental solutions were found
for some problems; inventions and innovations have provided solutions to other
problems. But more commonly a society found answers to most of its problems
through direct or indirect interaction with and borrowing from other cultures.
Inter-cultural borrowing is a significant phenomenon of cultural dynamics. What
a culture adopts from another culture becomes adapted to its needs in course of
time and once the adaptation becomes assimilated, it is passed on as cultural
heritage of that society. In other words, culture is a living and dynamic
phenonon which keeps on constantly interacting with other culture and passes
through the continuing process of adopting, adapting and assimilitating.
A significant characteristic of human society is that the culture is
passed on to succeeding generations which constantly build upon and expand
the inherited culture, from which man learns a wide range of behaviour that is of
relevance to marketing.
Elements of Culture
Culture includes all facets of life. In order to obtain a total picture
of a culture it is necessary to investigate every possible side of it. For facilitating
an accurate study of culture, the anthropologists have evolved a cultural
scheme which embodies all the various elements of culture. The main elements
included within the meaning of the term culture` are:
1.
Material Culture
Technology
Economics
2.
Social Institutions
Social organization
Education
Political structures
3.
Man and the Universe
Belief systems
4.
Aesthetics
Graphic and plastic arts
Folklore
Music, drama and the dance
5.
Language
These five broad dimensions of culture embrace all the major aspects
of man`s social heritage. They serve as a framework for the analysis of
cultural ramifications. The foreign marketer may find such cultural scheme`
as a useful instrument in assessing the potential and intricacies of a foreign
market. Each of these elements of culture has some influence on the
marketing process and they differ from culture to culture. It is therefore
necessary to study the implications of these differences in analyzing specific
foreign markets.
A brief analysis of the elements of the cultural scheme` of a society
will illustrate the variety of ways in which culture and marketing are
interlinked.
Business Customs
Business customs are as much a cultural element of a society as is the
language. Culture not only establishes the criteria for day-to-day business
behavior but also forms general patterns of attitude and motivation.
Executives are to some extent captives of their cultural heritages and cannot
totally escape language, heritage, political and family ties, or religious
backgrounds.
As culture and business customs play a very significant role for the
success of a business firm engaged in international marketing, these firms
must adopt some measures to adapt the required changes.
One report notes that Japanese culture, permeated by Shinto precepts,
is not something apart from business but determines its very essence. Thus,
the many business and trade problems between Japan and the U.S. reflect the
widespread ignorance of Japanese culture by American businesspeople.
Although international business managers may take on the trappings and
appearances of the business behaviour of another country, their basic frame
of references is most likely to be that of their own people.
As host countries have come to resent the' cultural imperialism' of so
many MNCs, so these companies have come to realize, particularly in the last
ten years, the critical importance of this area. Culture is all-pervasive, and
represents a dilemma for both operating and strategic management. It is a truism
of strategic management that any strategy which runs counter to the corporate
culture is certain to fail. The same is true of an international strategy which runs
counter to a national or regional culture, but the results of failure will become
apparent even more quickly. The broad prescription for MNC managers is to
avoid insensitivity toward, or ignorance of, the aspects of local culture which
will have most influence on commercial success in any particular country. This
requires a high level of cultural awareness and a sufficient degree of cultural
empathy; at the operational level, it also demands a significant level of cultural
training for expatriate managers before a new posting.
Finance and accounting is the functional area least involved; cultural
considerations are most important in marketing, with human resource
management coming a close second. The question of language is crucial, and
arouses great sensitivity in many countries. While there is a trend toward the
acceptance of English as the universal business 'language, MNC managers
should be aware that such a presumption causes great offence in for example,
France. Non-verbal communication also holds its pitfalls, with different
elements having different intrinsic meanings; this .includes the use of eye
contact, touching, personal appearance, relative position between people having
a discussion, bodily postures, distance apart, and non-verbal aspects of speech
like accents and tones.
Host-Country Culture
Host-country religion also has a fundamental part to play, with each
major religion having an impact on the overall attitude to business. The so-
called 'Protestant work ethic' is a noticeable feature of Christianity; however, not
only is this rather obviously shared by Roman Catholics, but it also finds a
resonance in Confucianism. MNCs operating in Islamic countries have to be
keenly aware that Moslems pray at five specific times during the day, and that
there must be no requirement to work during these intervals. The concept of the
(extremely) extended family is important to Hindus, -and includes support of all
family members in the business world; thus, MNC managers have" to be extra
sensitive to the problems of pay, promotion, discipline and dismissal, Buddhists
lay little stress on material wealth, arid so are much' less susceptible to western
methods of motivating the workforce. Animism is probably the oldest religion
and is widespread in Africa and Latin America. The Animist puts all problems
down to the action of evil spirits which must be exorcized; this can cause some
odd situations for the expatriate production manager who has to cope with the
Animist response to defective quality, machine breakdowns, and industrial
accidents.
Coping International Cultural Differences
Asheghian and Ebrahimi (1990) give a useful check-list for the MNC
managers as an aid to coping with international differences in culture:
1.
Be culturally prepared: forewarned is forearmed.
2.
Learn the local language and its non-verbal elements.
3.
Mix with host nationals, including socially.
4.
Be creative and experimental without fear of failure.
5.
Be culturally sensitive; do not stereotype or criticize.
6.
Recognize complexities in the host culture.
7.
Perceive yourself as a culture bearer and ambassador.
8.
Be patient, understanding and accepting of your hosts.
9.
Be most realistic in your expectations.
Accept the challenge of intercultural experiences.
A lack of empathy for and knowledge of foreign business practices
can create insurmountable barriers to successful business relations. Some
businesses plot their strategies with the idea that counterparts of other
business cultures are similar to their own and are moved by similar interests,
motivations, and goals ? that they are just like us. Even though they may
be just like us in some resects, many differences exist and that can lead to
frustration, miscommunication, and, ultimately, failed business opportunities
if they are not understood and responded to properly.
Knowledge of the business culture, management attitudes, and
business methods existing in a country and a willingness to accommodate
the differences are important to success in an international market. Unless
marketers remain flexible in their own attitudes by accepting differences in
basic patterns of thinking, local business tempo, religious practices, political
structure, and family loyalty, they are hampered, if not prevented, from
reaching satisfactory conclusions to business transactions. In such situations,
obstacles take many forms, but it is not unusual to have one negotiator`s
business proposition accepted over another`s simply because that one
understands us.
Cultural Adaptation
Adaptation is a key concept in international marketing and willingness to
adapt is a crucial attitude. Adaptation, or at least accommodation, is required
on small matters as well as large ones. In fact, the small, seemingly
insignificant situations are often the most crucial. More than tolerance of an
alien culture is required. There is a need for affirmative acceptance, that is,
open tolerance of the concept different but equal. Through such
affirmative acceptance, adaptation becomes easier because empathy for
another`s point of view naturally leads to ideas for meeting cultural
differences.
As a guide to adaptation, there are 10 basic criteria that all who wish to
deal with individuals, firms, or authorities in foreign countries should be
able to meet. They are (1) open tolerance, (2) flexibility, (3) humility, (4)
justice/fairness, (5) adjustability to varying tempos, (6) curiosity/interest, (7)
knowledge of the country, (8) liking for others, (9) ability to command
respect, and (10) ability to integrate oneself into the environment.
Summary
Culture can be defined as a sum total of man`s knowledge,
beliefs, art, morals, laws customs and any other capabilities and habits acquired
by him as a member of the society. It is the distinctive way of life of a group of
people, their complete design for living. Culture, thus, refers to man`s entire
social heritage ? a distinctive life-style of a society and its total value system
which is intricately related to the consumption pattern of the people.
Business customs are as much a cultural element of a society as is the
language. Culture not only establishes the criteria for day-to-day business
behavior but also forms general patterns of attitude and motivation.
Executives are to some extent captives of their cultural heritages and cannot
totally escape language, heritage, political and family ties, or religious
backgrounds.
As host countries have come to resent the' cultural imperialism' of so
many MNCs, so these companies have come to realize, particularly in the
last ten years, the critical importance of this area. Culture is all-pervasive,
and represents a dilemma for both operating and strategic management. It is
a truism of strategic management that any strategy which runs counter to the
corporate culture is certain to fail. The same is true of an international
strategy which runs counter to a national or regional culture, but the results
of failure will become apparent even more quickly. The broad prescription
for MNC managers is to avoid insensitivity toward, or ignorance of, the
aspects of local culture which will have most influence on commercial
success in any particular country. This requires a high level of cultural
awareness and a sufficient degree of cultural empathy; at the operational
level, it also demands a significant level of cultural training for expatriate
managers before a new posting.
Important Questions
1.
What is international marketing environment? Discuss the main
constituents of international marketing environment.
2.
Discuss the socio-culture factors important for international marketing
management.
3.
Define culture. Discuss its importance for international marketing.
4.
What do you understand by the term, Cultural Dynamism`? Discuss the
various elements of cultural dynamism.
5.
What do you understand by the term, Cultural Adaptation`? Discuss.
6.
Discuss the various means for coping cultural differences for
international marketing.
7.
How culture and business customs influence international marketing?
8.
What do you understand by the term Business Customs`?
9.
Discuss the need and importance of adaptation of business customs of
host country for the firms engaged in international marketing.
10.
How the religion of host country can effect the business of an
international marketing firms.
UNIT II
5 ECONOMIC AND FINANCIAL DIMENSIONS
LESSON
LESSON OUTLINE
Economic Environment
Economic System
Government Policies
Structural Anatomy
Market Conditions
Factor Endowment
Financial Environment
The Foreign Exchange Market
The Money Market
The Long-term Capital Market
International Monetary Fund
IBRD
International Development
LEARNING
Association
OBJECTIVES
International Financial
Corporation
After reading this lesson
you should be able to:
The various factors
which constitute
the economic
environment of a
country
The role of
government in
influencing the
international
marketing
management
Functions
The various
constituents of
financial
environment for
international
marketing
The money market
and long-term
capital market
Various
international
financial
institutions
ECONOMIC ENVIRONMENT
The various constituents of the economic environment affecting
international marketing management functions and decisions of business firms
include:
i) Economic system
ii) Government policies
iii) Structural autonomy
iv) Market conditions
v) Factor endowment
ECONOMIC SYSTEM
There are three types of economic systems existing in the world. These are
(i) centrally planned economies or communist system, (ii) market driven
economies or free economies called market driven economies and (iii) mixed
economies.
In case of a centrally planned economy, all the means of
production are strictly controlled by the state and the role of private firms is bare
minimum. In such type of economies, the firms from can not make their own
decisions and the firms from other countries cannot directly export goods or
services directly.
In case of capitalist economies there is a greater freedom to
marketing firms for domestic operations and also for exports and imports subject
to the confinement to the laws and procedures.
In case of mixed economies, there are restrictions on some of the
businesses, which the state takes up to itself or those, which are of strategic
importance. Thus in such types of economies there is lesser freedom as
compared to the capitalistic economies.
GOVERNMENT POLICIES
The ideology of the party, which forms the government in a
country, its various decisions and its various policies related to business, greatly
affects the marketing environment of the business firms operating there.
If a government has a liberal export import policy and allows
exports and imports without much restriction then the business and thus the
marketing activities will flourish there but the same will not happen where the
Ex-im policy poses many restrictions. Similarly if excise duties are reduced on
the production of a consumer product, there is will be move demand for the
same and the market size for this product will increase.
Industrial policies relate to licensing policies for manufacturing
or service industry. If the government has liberal licensing policy then its
business and service sector will grow faster and there will be more marketing
activities.
Public policy or social policy intersects the field of marketing
when public policy makers believe that government intervention in
the process or outcome of marketing exchanges will benefit society
as a whole.
Consumers all over the world have become more and more aware
of their due rights and have become consequently very demanding and choosy
as for the Indian firms; the foreign buyers have started now to look for the ISI,
ISO, AGMARK, and FPO trademarks on the products. These trademarks give
the consumers a legal guarantee of the quality of the products bearing them.
They also help in protecting the consumers against unfair trade practices.
In order to influence the marketing decisions of companies, the
role of Government has assumed one or a combination of the following:
- Participative
- Institutional
- Commercial
- Legislative
1.
PARTICIPATIVE
By taking marketing activities by its own self, the government
entails active participation in the country`s marketing operations. Major forms
of the state participation may be:-
(a) To stabilize prices and protect consumers the government may
undertake supply of certain product e.g. In India, Food Corporation of
India and Cotton Corporation of India in order to stabilize prices and
protect consumers.
(b) Promotion or discouraging consumption of certain commodities e.g.
G.O.I. promotes the sale of family planning devices through its own
purchases and mass-consumption campaigns.
(c) Infrastructural facilities on preferential basis e.g. in India Railways
extend preferential treatment for dairy products and food items.
Thus by about governments extend a lot of influence on the marketing
decisions of the companies.
2.
INSTITUTIONAL
The governments set up their own institutions for protecting
consumers e.g. in India the government has set up National Consumer Service
(NCS and the National Co-operative Federation etc.).
3.
COMMERCIAL
Another reason to which government`s influence on marketing
decision may be attributed is the need to regulate the commercial relations
amongst the country`s citizens. The government does so by legislating and
enforcing relevant laws.
4.
LEGISLATIVE
Laws of the land play a decisive role in shaping the marketing
and consumption activities in a state. The countries pass various laws to
influence the trade and marketing activities in their countries. For example, in
India, there are various laws, which influence the marketing decisions of the
firms. Some important ones prevailing in India have been listed below:
1. Indian Contract Act, 1872 (i) Gen and (ii) Agency Relationship.
2. Indian Sales of Goods Act 1930
1. MRTP Act, 1969
2. The Companies Act 1956
3. The Patents Act 1970
4. Essential Commodities Act, 1956
5. Prevention of Food Adulteration Act, 1954.
6. Drugs and Medical Remedies (Objectionable Ads), Act, 1954.
7. Sales Promotion Employees (Conditions of Service) Act, 1976.
Overall it may be said that government can influence various marketing
activities of business by its intervention in the form of framing some policies
governing business, passing some legislations and even sometimes by taking up
some of the commercial activities of its own.
The monetary and the various other policies of the government
also affect the progress and development of business.
STRUCTURAL ANATOMY
An economy consists of various sectors like agriculture,
production, service etc. The structural anatomy means the composition of these
sectors in the structure of the economy. According to Chhabra and Grover, The
structural anatomy comprises the structure of national output, the occupational
distribution of labour-force employed, capital formation composition and trade
compositions etc.1
The environment for international marketing activities gets a
boost if there is an equal level of development of these various sectors of the
economy and the imbalances among their development hampers the marketing
functions of the other sectors.
MARKET CONDITIONS
The factors prevailing in a market also greatly influence the
marketing decisions of a business. The market conditions where there are a large
number of buyers and there is a rising pattern of demand for a product, these
factors create opportunities for the marketers of such products. On the contrary
when there is recession in the market and product demand is declining, these
market forces are not favorable for the marketers of such products.
FACTOR ENDOWMENT
The availability and the supply condition of the various factors of
production (men, money, materials and machinery) effect many marketing
decisions of the affected firms. The market locations, where the factors of input
for the production of a product are available cheaply and easily, will be at an
advantageous position than the other locations where there is the scarcity of such
factors. Thus the variance in the degree of the supply of factors of input also has
a direct bearing on the economic environment and through this on the business
and particularly marketing.
1.
Chhabra, T.N. and Grover, S.K., Marketing Management, Dhanpat Rai and Co. Pvt.
Ltd., New Delhi, 1998, p. 1.60.
So, overall it can be summed up that the various economic factors
affect the marketing functions of a business though there may be variations in
their level of affect. Further, in the economic arena, marketers need to focus on
income distribution and levels of savings, debt and credit availability and the
working of the various financial institutions.
FINANCIAL ENVIRONMENT
The international financial scene has undergone a sea change in
the two decades. The major development sin International Finance can be
summarized under the following markets constituting the International Financial
System.
The Foreign Exchange Market
Since the advent of generalized floating in 1973, the currency
rates in the Foreign Exchange Market are determined by the forces of demand
and supply under the present arrangement. This courses a tremendous variability
in the exchange rates of major currencies on day-to-day basis. This enhanced
variability has proved to be major problem both for the policy-markers at
national level as well as the corporate manager.
A great deal of time has to be devoted in managing foreign
currency risks, and the cost of buying a cover to protect against foreign currency
fluctuations has to be incorporated in normally international business
transactions. On the other hand, however, however, variability in exchange rates
has opened up profit opportunities for the speculators who take positions in a
currency as well as the arbiters who take advantage of the differences in rates in
various markets at a given point of time. An arbiter buys a particular currency in
a market where it is cheaper and sells the same currency (same amount) in
another market where the rate is slightly higher and makes the profit in the
process: This has forced the foreign exchange markets continuously buy and sell
different currencies with a view to make profit. The developments in
information technology have also helped the spatially dispersed markets to come
closer. The foreign exchange market happens to be the largest market where
transactions worth $500-700 billion take place everyday.
There are a lot of new hedging products such as forward rates,
currency options, currency futures, and roll over covers etc. which have become
available in the recent times.
The Money Market
The world money markets have seen a mushroom growth in
various short-term financing and treasury products. The forward exchange
market acts as a bridge between the exchange market and the money market.
In the International money market, funds in any currency are
traded outside the regulations governing domestic markets in that currency. For
instance, when the US dollar deposits are traded outside the banking regulations
governing domestic US dollar deposits, this type of transaction is the core of the
so-called Eurodollar market. When speaking of all the currencies traded in
foreign markets one usually refers to them as Euro-currency markets.
The Euro-currency markets have witnessed a tremendous
increase in the volume of transactions during the current decade. The
deregularization of these markets have been a major feature in the past. The
availability of short-term financing products such as the commercial paper has
increased the access of corporate borrowers in these markets. Also, due to the
tremendous flexibility available in these markets, it is possible to totally separate
the financial aspect of a project from its investment aspect by accessing the
short-term money markets. Since there are no regulations governing these
markets, the borrowing costs tend to be slightly lower than in the domestic
markets. Similarly, the depositor is also offered a slightly higher return than
what he would be carrying to the domestic markets. The products in these
markets are of short-term nature because the interest rates and currency values
fluctuate on a continuous basis.
The Long-term Capital Markets
If one wishes to raise long-term capital from under natural
markets, one can today choose from the array of instruments that are available
for this purpose. These include the syndicated Loans, Bonds, Equity Issues, and
the derivative products. While the syndicated loan markets are accessible by an
ordinary corporate borrower, the Bond and the equity markets are meant only
for the top class corporate clients. These bond markets offer cost advantage to
the syndicate loans to the borrower. To the investor also, they offer a slightly
higher rate of return and liquidity as they are often bearer bonds. If a bond a
multicurrency one, then it automatically provides protection against currency
fluctuations.
Access to international equity markets helps a company to take
advantage of international portfolio diversification and minimize the overall
risks of its operation. Also, the cost of funds may turn out to be lower by
accessing gamut of the segmented markets.
To summarize the trends in all the three markets, it is worth
nothing the following:
1.
Financial risk management has become the major issue today due to the
fact that currencies and interest rates fluctuate continuously in the
foreign exchange and international money markets. This increases the
cost of international operation as a company needs to buy a cover against
these fluctuations.
2.
International integration of various markets has increased the access for
funds by a company, also the cost of funds to same extent.
3.
Increase in volume of transactions, and going deregulation of various
markets have developed healthy competition in these markets, thereby
bringing down the margins of intermediaries.
4.
Due to the availability of various linking and hedging products the three
major markets today seem to overlap with each other a great deal.
International Monetary Fund (IMF)
The IMF was established on 27th December 1945 as an
independent international organization and began operations on 1st March 1947.
The capital resources of the Fund comprise SDRs and currencies that the
members pay under quotas calculated for them when they join the Fund. The
fund headquarters is located in Washington DC with offices in Paris and
Geneva.
The objectives of the bank are to promote international monetary
co-operation, the expansion of international trade and exchange rate stability; to
assist in the removal of exchange restrictions and establishment of a multilateral
system of payments; and to alleviate any serious disequilibrium in members`
international balance of payments by making the financial resources of the Fund
available to them, usually subject to conditions to ensure the revolving nature of
the fund resources.
Each member of the fund undertakes a broad obligation to
collaborate with the Fund and other members to ensure the existence of orderly
exchange arrangements and to promote a system of stable exchange rates. In
addition, members are subject to certain obligations relating to domestic and
external policies that can affect the balance of payments and the exchange rate.
The fund makes its resources available, under proper safeguards, to its members
to meet short-term or medium-term payment difficulties.
International Bank for Reconstruction and Development (IBRD)
IBRD was conceived at the Bretton Woods Conference in July
1994 and began its operations in June 1946. It has its operations in June 1946. It
has its headquarters at Washington DC and is also known as World Bank`. The
Bank`s purpose is to provide funds and technical assistance to facilitate
economic development in its poorer member countries.
The bank obtains its funds from capital paid in by member
countries; sales of its own securities; sale of parts of its loan; repayments and net
earnings.
The bank furnishes a wide variety of technical assistance. It acts as
executing agency for a number of pre-investment surveys financed by the UN
Development Programme. The Bank helps member countries to identify and
prepare projects for the development of agriculture, education and water supply
by drawing an expertise of the FAO, WHO, UNIDO, and UNESCO through its
co-operative agreements with these organizations.
International Development Association (IDA)
IDA is a lending agency which came into existence on 24th
September 1960. Administered by the World Bank, IDA is open to all members
of the Bank.
IDA concentrates its assistance on those countries with an annual
per capital GNP of less than $481 (1987 rates). Its resources consist mostly of
subscriptions, general replenishments from its more industrialized and
developed members, special contributions, and transfer from the net earnings of
the Bank. IDA credits are made to Governments only.
International Finance Corporation (IFC)
The Corporation, an affiliate of the World Bank, was established
in July 1956. IFC supplements the activities of the World Bank by encouraging
the growth of productive in the form of subscription to the share capital of
privately owned companies, or long-term loans or both. The corporation will
help finance new ventures and assist established enterprises to expand, improve
or diversify. It also provides a variety of advisory services to public and private
sector clients.
Summary
International trade is concerned the relationship with output,
income and expenditure.
In the great majority of cases, economic factors are the most
influential subset that the international manager has to consider in his analysis of
the remote environment.
Economic parameters are even more significant in dealing with
international markets, because the MNC manager is trying to evaluate many and
varied national and regional economies. These are likely to exhibit a number of
different themes, including the different rates of economic growth, improving or
deteriorating balance of payment, various fiscal approaches, with governments
increasing or decreasing the levels of spending and taxation, a wide spectrum of
monetary policies, where monetary stability and the increase or decrease in
money supply are strategic elements in any government`s armory and the stage a
country is at in the never-stationary business cycle ? boom, depressions,
recession, recovery, and back to prosperity again.
Thus it could be argued that these factors are even more important in
international markets than they are at home; in taking its business activities
overseas, the MNC faces the problem of assessing and understanding many
economies whose characteristics are likely to prove highly divergent.
There are a number of economic indicators which the individual MNC is
required to scrutinize carefully before entering a market; in turn, even the largest
of international markets is likely to show marked change in these indicators as a
result of substantial inward investment activity by MNCs. These economic
indicators include the gross national product (GNP), GNP per capita, the rate of
private (as opposed to public/governmental) investment, the level of personal
consumption (especially that made out of discretionary income), variations in
unit labour costs, and the distribution of incomes as measured by total
disposable income per household or disposable income per capita.
The breakdown of the gold standard during the inter-war years
resulted in a period of unstable exchange rates, inadequate world activity and
protectionism. The Bretton Woods Agreement, signed in 1945, was intended to
provide the basis for a new world economic order, with a liberal yet stable
system of trade evolving. The two fundamental institutions created by the
Agreement were the International Monetary Fund (IMF) and the Bank of
Reconstruction and Development (World Bank). The latter is purely a lending
institution and its main concern is for the economic development of the Third
World, although it is now becoming involved in the economic restructuring of
eastern Europe. The IMF was set up to monitor the economic policies of its
member countries, to extend them credit when in temporary difficulties with
balance of payments, and to allow changes in the rates of exchange when a
permanent imbalance is seen to have developed. While the Bretton Woods
framework had no direct linkage with MNCs, yet these organizations have had
to work within the international financial environment set up by the Agreement.
At a regional level, the European Monetary System (EMS) has
been developed by the twelve member states of the EC in an effort to bind their
currencies together more tightly so that fluctuations between them are reduced
to an acceptable minimum; this increases the efficiency of internal trade within
the EC by lowering the overall transaction costs, and is therefore very attractive
to MNCs. In addition, the effort to develop the European Currency Unit (ECU)
as a single denominator for intra-EC trade is likely to magnify these beneficial
factors. In fact, the EMS has become one of the main driving forces for
economic integration of a very high degree within the EC; in turn, this is likely
to increase the pressures for further political integration, a trend which may not
be quite so attractive to MNCs.
When considering individual foreign countries, MNCs will
obviously be influenced by different tax regimes, and minimization of global tax
payouts by declaring foreign profits in appropriate countries is a very
worthwhile activity. An international firm can also achieve a formidable
competitive advantage by borrowing funds in countries with low interest rates
and investing these funds in other parts of its global network, including the
home country.
Important Questions
1.
Discuss the various constituents of the economic environment which
affects international marketing management functions.
2.
How the government policies of the host country can influence the
functioning of a business firm engaged in international marketing.
3.
What do you understand by the term, Structural Autonomy`? How this
affects international marketing?
4.
Discuss the various constituents of the prevalent financial environment
in the global markets.
5.
Discuss the terms international money market and long-terms capital
markets.
6.
Discuss in detail the functioning of IMF.
7.
Discuss in detail the objectives and functions of international
development association (IDA).
8.
Discuss the various economic systems prevalent in the world. How these
can affect international marketing functions?
9.
Discuss the importance of government policies of the host country for
international marketing.
10.
Discuss the role, importance and significance of foreign exchange
market for international market management.
UNIT-III
ASSESSING INTERNATIONAL MARKET OPPORTUNITIES
Whether an organization markets its goods and services domestically or
internationally, the definition of marketing still applies. However, the scope of
marketing is broadened when the organization decides to sell across
international boundaries, this being primarily due to the numerous other
dimensions which the organization has to account for. For example, the
organization`s language of business may be "English", but it may have to do
business in the "French language". This not only requires a translation facility,
but the French cultural conditions have to be accounted for as well. Doing
business "the French way" may be different from doing it "the English way".
This is particularly true when doing business with the Japanese.
It is recognized that in the "postmodern" era of marketing, even the
assumptions and long standing tenants of marketing like the concepts of
"consumer needs", "consumer sovereignty", "target markets" and
"product/market processes" are being challenged. The emphasis is towards the
emergence of the "customizing consumer", that is, the customer who takes
elements of the market offerings and moulds a customized consumption
experience out of these. Even further, post modernism, posts that the consumer
who is the consumed, the ultimate marketable image, is also becoming liberated
from the sole role of a consumer and is becoming a producer. This reveals itself
in the desire for the consumer to become part of the marketing process and to
experience immersion into "thematic settings" rather than merely to encounter
products. So in consuming food products for example, it becomes not just a case
of satisfying hunger needs, but also can be rendered as an image - producing act.
In the post modern market place the product does not project images, it fills
images. This is true in some foodstuffs. The consumption of "designer water" or
"slimming foods" is a statement of a self image, not just a product consuming
act. Acceptance of postmodern marketing affects discussions of products,
pricing, advertising, distribution and planning. However, given the fact that this
textbook is primarily written with developing economies in mind, where the
environmental conditions, consumer sophistication and systems are not such that
allow a quantum leap to postmodernism, it is intended to mention the concept in
passing. Further discussion on the topic is available in the accompanying list of
readings. When organizations develop into global marketing organizations, they
usually evolve into this from a relatively small export base. Some firms never
get any further than the exporting stage. Marketing overseas can, therefore, be
anywhere on a continuum of "foreign" to "global". It is well to note at this stage
that the words "international", "multinational" or "global" are now rather
outdated descriptions. In fact "global" has replaced the other terms to all intents
and purposes. "Foreign" marketing means marketing in an environment different
from the home base, it's basic form being "exporting". Over time, this may
evolve into an operating market rather than a foreign market. One such example
is the Preferential Trade Area (PTA) in Eastern and Southern Africa where
involved countries can trade inter-regionally under certain common modalities.
Marketing research
Marketing research is traditionally defined as the systematic gathering,
recording, and analyzing of data to provide information useful in marketing
decision making. While the research processes and methods are basically the
same whether applied in Columbus, Ohio, or Colombo, Sri Lanka, international
marketing research involves two additional complications. First, information
must be communicated across cultural boundaries. That is, executives in
Chicago must be able to "translate" their research questions into terms that
consumers in Guangzhou, China, can understand. Then the Chinese answers
must be put into terms (i.e., reports and data summaries) that American
managers can comprehend. Fortunately, there are often internal staff and research
agencies that are quite experienced in these kinds of cross-cultural communica-
tion tasks. Second, the environments within which the research tools are applied
are often different in foreign markets. Rather than acquire new and exotic
methods of research, the international marketing researcher must develop the
ability for imaginative and deft application of tried and tested techniques in
sometimes totally strange milieus. The mechanical problems of implementing
foreign marketing research often vary from country to country. Within a foreign
environment, the frequently differing emphases on the kinds of information
needed, the often limited variety of appropriate tools and techniques available,
and the difficulty of implementing the research process constitute the challenges
facing most international marketing researchers.
Breadth and Scope of International Marketing Research
The basic difference between domestic and foreign market research is the
broader scope needed for foreign research .Research can be divided into three
types based on information needs: (1) general information about the country,
area, and/or market; (2) information necessary to forecast future marketing
requirements by anticipating social, economic, consumer, and industry trends
within specific markets or countries; and (3) specific market information used to
make product, promotion, distribution, and price decisions and to develop
marketing plans. In domestic operations, most emphasis is placed on the third
type, gathering specific market information, because the other data are often
available from secondary sources. A country's political stability, cultural
attributes, and geographical characteristics are some of the kinds of information
not ordinarily gathered by domestic company marketing research departments
but which are required for a sound assessment of a foreign market. This broader
scope of international marketing research is reflected in Unisys Corporation's
planning steps, which call for collecting and assessing the following types of
information:
1. Economic: General data on growth of the economy, inflation, business cycle
trends, and the like; profitability analysis for the division's products; specific
industry economic studies; analysis of overseas economies; and key
economic indicators for the United States and major foreign countries.
2. Sociological and political climate: A general non economic review of
conditions affecting the division's business. In addition to the more obvious
subjects, it also covers ecology, safety, leisure time, and their potential
impact on the division's business.
3. Overview of market conditions: A detailed analysis of market conditions
the division faces, by market segment, including international.
4. Summary of the technological environment: A summary of the "state of the
art" technology as it relates to the division's business, carefully broken down
by product segments.
5. Competitive situation: A review of competitors' sales revenues, methods
of market segmentation, products, and apparent strategies on an
international scope.
Such in-depth information is necessary for sound marketing decisions.
For the domestic marketer, most such information has been acquired after years
of experience with a single market, but in foreign markets this information must
be gathered for each new market. There is a basic difference between
information ideally needed and that which is collectible and/or used. Many firms
engaged in foreign marketing do not make decisions with the benefit of the
information listed. Cost, time, and the human elements are critical variables.
Some firms have neither the appreciation for information nor adequate time or
money for implementation of research. As a firm becomes more committed to
foreign marketing and the cost of possible failure increases, however, greater
emphasis is placed on research. Consequently, a global firm is or should be
engaged in the most sophisticated and exhaustive kinds of research activities.
The Research Process
A marketing research study is always a compromise dictated by limits of
time, cost, and the present state of the art. The researcher must strive for the most
accurate and reliable information within existing constraints. A key to successful
research is a systematic and orderly approach to the collection and analysis of
data. Whether a research program is conducted in New York or New Delhi, the
research process should follow these steps:
1. Define the research problem and establish research objectives.
2. Determine the sources of information to fulfill the research objectives.
3. Consider the costs and benefits of the research effort.
4. Gather the relevant data from secondary and/or primary sources.
5. Analyze, interpret, and summarize the results.
6. Effectively communicate the results to decision makers.
Although the steps in a research program are similar for all countries,
variations and problems in implementation occur because of differences in
cultural and economic development. While the problems of research in England
or Canada may be similar to those in the United States, research in Germany,
South Africa, or Mexico may offer a multitude of different and difficult
distinctions. These distinctions become apparent with the first step in the research
process--formulation of the problem. Subsequent text sections illustrate some
frequently encountered difficulties facing the international marketing researcher.
Defining the Problem and Establishing Research Objectives
The research process should begin with a definition of the research
problem and the establishment of specific research objectives. The major
difficulty here is converting a series of often ambiguous business problems into
tightly drawn and achievable research objectives. In this initial stage, researchers
often embark on the research process with only a vague grasp of the total
problem. This first, most crucial step in research is more critical in foreign
markets because an unfamiliar environment tends to cloud problem definition.
Researchers either fail to anticipate the influence of the local culture on the
problem or fail to identify the self-reference criterion (SRC) and so treat the
problem definition as if it were in the researcher's home environment. In
assessing some foreign business failures it is apparent that research was
conducted, but the questions asked were more appropriate for the U.S. market
than for the foreign one. For example, all of Disney's years of research and
experience in keeping people happy standing in long lines could not help them
anticipate the scope of the problems they would run into at Euro Disney. The
firm's experience had been that the relatively homogeneous clientele at both the
American parks and Tokyo Disneyland were cooperative and orderly when it
came to queuing up. Actually, so are most British and Germans. But the rules
about queuing in other countries such as Spain and Italy are apparently quite
different, creating the potential for a new kind of intra-European "warfare" in the
lines. Understanding and managing this multinational customer service problem
has required new ways of thinking. Isolating the SRC and asking the right
questions are crucial steps in the problem formulation stage.
Other difficulties in foreign research stem from failure to establish
problem limits broad enough to include all relevant variables. Information on a
far greater range of factors is necessary to offset the unfamiliar cultural
background of the foreign market. Consider proposed research about
consumption patterns and attitudes toward hot milk-based drinks. In the United
Kingdom, hot milk-based drinks are considered to have sleep-inducing, restful,
and relaxing properties and are traditionally consumed prior to bedtime. People
in Thailand, however, drink the same hot milk-based drinks in the morning on
the way to work and see them as being invigorating, energy-giving, and
stimulating. If one's only experience is the United States, the picture is further
clouded since hot milk-based drinks are frequently associated with cold weather,
either in the morning or the evening, or for different reasons each time of day.
The market researcher must be certain the problem definition is sufficiently
broad to cover the whole range of response possibilities and not be clouded by
his or her self-reference criterion.
Once the problem is adequately denned and research objectives
established, the researcher must determine the availability of the information
needed. If the data are available--that is, if they have been collected already by
some other agency--the researcher should then consult these secondary data
sources.
Problems of Availability and Use of Secondary Data
The breadth of many foreign marketing research studies and the
marketer's lack of familiarity with a country's basic socioeconomic and cultural
patterns result in considerable demand for information like that generally
available from secondary sources in the United States. The U.S. government
provides comprehensive statistics for the United States; periodic censuses of
U.S. population, housing, business, and agriculture are conducted and, in some
cases, have been taken for over 100 years. Commercial sources, trade
associations, management groups, and state and local governments also provide
the researcher with additional sources of detailed U.S. market information.
Unfortunately, the quantity and quality of marketing-related data
available on the United States is unmatched in other countries. The data
available on and in Japan is a close second, and several European countries do a
good job of data collection and reporting them. Indeed, on some dimensions the
quality of data collected in these latter countries can actually exceed that in the
U.S. However, in many countries substantial data collection has been initiated
only recently. Through the continuing efforts of organizations such as the United
Nations and the Organization for Economic Cooperation and Development
(OECD) improvements are being made worldwide. The problems of availability,
reliability, comparability of data, and validating secondary data are described
below.
Availability of Data
Much of the secondary data an American marketer is accustomed to
having about United States markets is just not available for many countries.
Detailed data on the numbers of wholesalers, retailers, manufacturers, and
facilitating services, for example, are unavailable for many parts of the world, as
are data on population and income. Most countries simply do not have
governmental agencies that collect on a regular basis the kinds of secondary data
readily available in the United States. If such information is important, the
marketer must initiate the research or rely on private sources of data.
Reliability of Data
Available data may not have the level of reliability necessary for
confident decision making for many reasons. Official statistics are sometimes
too optimistic, reflecting national pride rather than practical reality, while tax
structures and fear of the tax collector often adversely affect data. Although not
unique to them, less-developed countries are particularly prone to being both
overly optimistic and unreliable in reporting relevant economic data about their
countries. China's National Statistics Enforcement Office recently
acknowledged that it had uncovered about 60,000 instances of false statistical
reports since beginning a crackdown on false data reporting several months
earlier. Seeking advantages or hiding failures, local officials, factory managers,
rural enterprises, and others filed fake numbers on everything from production
levels to birthrates. For example, a petrochemical plant reported one year's
output to be $20 million, 50 percent higher than its actual output of $13.4
million. Finally, if you believe the statistics, Chinese in Hong Kong are the
world-champion consumers of fresh oranges--64 pounds per year per person,
twice as much as Americans. However, apparently about half of all the oranges
imported into Hong Kong, some $30 million worth, actually find their way into
Greater China, where U.S. oranges are (wink, wink) illegal. Willful errors in the
reporting of marketing data are not uncommon in the most industrialized
countries, either. Often print media circulation figures are purposely
overestimated even in OECD countries.5 The European Community (EC) tax
policies can affect the accuracy of reported data also. Production statistics are
frequently inaccurate because these countries collect taxes on domestic sales.
Thus, some companies shave their production statistics a bit to match the sales
reported to tax authorities. Conversely, foreign trade statistics may be blown up
slightly because each country in the EU grants some form of export subsidy.
Knowledge of such "adjusted reporting" is critical for a marketer who relies on
secondary data for forecasting or estimating market demand.
Comparability of Data
Comparability of available data is the third shortcoming faced by foreign
marketers. In the United States, current sources of reliable and valid estimates of
socioeconomic factors and business indicators are readily available. In other
countries, especially those less developed, data can be many years out of date as
well as having been collected on an infrequent and unpredictable schedule.
Naturally, the rapid change in socioeconomic features being experienced in
many of these countries makes the problem of currency a vital one. Further,
even though many countries are now gathering reliable data, there are generally
no historical series with which to compare the current information. A related
problem is the manner in which data are collected and reported. Too frequently,
data are reported in different categories or in categories much too broad to be of
specific value. The term supermarket, for example, has a variety of meanings
around the world. In Japan a supermarket is quite different from its American
counterpart. Japanese supermarkets usually occupy two-or three-story
structures; they sell foodstuffs, daily necessities, and clothing on respective
floors. Some even sell furniture, electric home appliances, stationery, and
sporting goods, and have a restaurant. General merchandise stores, shopping
centers, and department stores are different from stores of the same name in the
United States. Furthermore, data from different countries are often not
comparable. One report on the problems of comparing European cross-border
retail store audit data states, "Some define the market one way, others another;
some define price categories one way, and others another. Even within the same
research agency, auditing periods are defined differently in different countries." As
a result, audit data are largely not comparable.
Validating Secondary Data
The shortcomings discussed here should be considered
when using any source of information. Many countries have similarly high
standards of collection and preparation of data generally found in the United States,
but secondary data from any source, including the United States, must be checked
and interpreted carefully. As a practical matter, the following questions should be
asked to effectively judge the reliability of secondary data sources:
1. Who collected the data? Would there be any reason for
purposely misrepresenting the facts?
2. For what purposes were the data collected?
3. How were the data collected? (methodology)
4. Are the data internally consistent and logical in light of known data
sources or market factors?
Checking the consistency of one set of secondary data with other data of
known validity is an effective and often-used way of judging validity. For
example, a researcher might check the sale of baby products with the number of
women of childbearing age and with birthrates, or the number of patient beds in
hospitals with the sale of related hospital equipment. Such correlations can also
be useful in estimating demand and forecasting sales. In general, the availability
and accuracy of recorded secondary data increase as the level of economic
development increases. There are exceptions; India is at a lower level of
economic development than many countries but has accurate and relatively
complete government-collected data. Fortunately, interest in collecting quality
statistical data rises as countries realize the value of extensive and accurate
national statistics for orderly economic growth. This interest to improve the
quality of national statistics has resulted in remarkable improvement in the
availability of data over the last 20 years. However, where no data are available,
or the secondary data sources are inadequate, it is necessary to begin the
collection of primary data.
Gathering Primary Data: Quantitative and Qualitative Research
If, after seeking all reasonable secondary data sources, research questions
are still not adequately answered, the market researcher must collect primary
data--that is, data collected specifically for the particular research project at
hand. The researcher may question the firm's sales force, distributors,
middlemen, and/or customers to get appropriate market information. In most
primary data collection, the researcher questions respondents to determine what
they think about some topic or how they might behave under certain conditions.
Marketing research methods can be grouped into two basic types: quantitative
and qualitative research. In both methods, the marketer is interested in gaining
knowledge about the market. In quantitative research, usually a large number of
respondents are asked to reply either verbally or in writing to structured
questions using a specific response format (such as yes/no) or to select a
response from a set of choices. Questions are designed to get specific responses
to aspects of the respondents' behavior, intentions, attitudes, motives, and
demographic characteristics. Quantitative research provides the marketer with
responses that can be presented with precise estimations. The structured
responses received in a survey can be summarized in percentages, averages, or
other statistics. For example, 76 percent of the respondents prefer product A over
product B, and so on. Survey research is generally associated with quantitative
research, and the typical instrument used is the questionnaire administered by
personal interview, mail, telephone, and most recently over the Internet.
Scientific studies often are conducted by engineers and chemists in product-
testing laboratories around the world. There, product designs and formulas are
developed and tested in consumer usage situations. Often those results are
integrated with consumer opinions gathered in concurrent survey studies. One of
the best examples of this kind of marketing research comes from Tokyo. You
may not know it, but the Japanese are the world champions of bathroom and
toilet technology. Their biggest company in that industry, Toto, has spent millions
of dollars in developing and testing consumer products. "Thousands of people
have collected data [using survey techniques] on the best features of a toilet, and
at the company's 'human engineering laboratory,' volunteers sit in a Toto bathtub
with electrodes strapped to their skulls, to measure brain waves and 'the effects
of bathing on the human body.'"7 Toto is now introducing one of its high-tech
(actually low-tech compared to what they offer in Japan) toilets in the U.S.
market. It's a $600 seat, lid, and control panel that attaches to the regular
American bowl. It features a heated seat and deodorizing fan. In qualitative
research, if questions are asked they are almost always open-ended and/or in-
depth, and unstructured responses that reflect the person's thoughts and feelings
on the subject are sought after. Direct observation of consumers in choice or
product usage situations is another important qualitative approach to marketing
research. One researcher spent two months observing birthing practices in
American and Japanese hospitals to gain insights into the export of health care
services. Nissan Motors Corp. has sent a researcher to live with an American
family (renting a room in their house for six weeks) to directly observe how
Americans use their cars. Qualitative research seeks to interpret what the "people
in the sample are like, their outlooks, their feelings, the dynamic interplay of
their feelings and ideas, their attitudes and opinions, and their resulting actions."
The most often-used form of qualitative questioning is the focus group
interview. However, oftentimes in-depth interviewing of individuals can be just
as effective while consuming fewer resources. Qualitative research is used in
international marketing research to formulate and define a problem more clearly
and to determine relevant questions to be examined in subsequent research. It is
also used where interest is centered on gaining an understanding of a market,
rather than quantifying relevant aspects. For example, a small group of key
executives at Solar Turbines International, a division of Caterpillar Tractor Co.,
called on key customers at their offices around the world. They discussed in great
depth with both financial managers and production engineers potential
applications and the demand for a new size of gas-turbine engine the company was
considering developing. The data and insights gained during the interviews to a
large degree confirmed the validity of the positive demand forecasts produced
internally through macroeconomic modeling. The multi-million-dollar project
was then implemented. Additionally, during the discussions new product features
were suggested by the customer personnel that proved most useful in the
development efforts. Qualitative research is also helpful in revealing the impact
of socio cultural factors on behavior patterns and in developing research
hypotheses that can be tested in subsequent studies designed to quantify the
concepts and relevant relationships uncovered in qualitative data collection.
Procter & Gamble has been one of the pioneers of this type of research--the
company has systematically gathered consumer feedback for some 70 years.11 It
was the first company to conduct in-depth consumer research in China. In 1994
P&G began working with the Chinese Ministry of Health to develop dental hy-
giene programs and has now reached over one million children in 28 cities. The
company will soon offer Crest toothpaste in two flavors and toothbrushes in
four colors to Chinese consumers.12 Procter & Gamble also conducts research
with washing-machine manufacturers to develop the best products given the
evolving technology in the home-appliance industry.13 The details of Procter &
Gamble's integration of qualitative and quantitative marketing research efforts
in Egypt provide a good case in point: For years Procter & Gamble had
marketed Ariel Low Suds brand laundry detergent to the 5 percent of homes in
the Egyptian market that had automatic washing machines. P&G planned to
expand its presence in the Egyptian market, and commissioned a study to: (1)
identify the most lucrative opportunities in the Egyptian laundry market; and (2)
develop the right concept, product, price, brand name, package, and advertising
copy once the decision was made to pursue a segment of the laundry market.
The "Habits and Practices" study, P&G's name for this phase, consisted of home
visits and discussion groups (qualitative research) to understand how the
Egyptian housewife did her laundry. The company wanted to know her likes,
dislikes, and habits (the company's knowledge of laundry practices in Egypt had
been limited to automatic washing machines). From this study, it was
determined that the Egyptian consumer goes through a very laborious washing
process to achieve the desired results. Among the 95 percent of homes that
washed in a non automatic washing machine or by hand, the process consisted
of soaking, boiling, bleaching, and washing each load several times. Several
products were used in the process; bar soaps or flakes were added to the main
wash, along with liquid bleach and bluing to enhance the cleaning performance
of the poor quality of locally produced powders. These findings highlighted the
potential for a high-performing detergent that would accomplish everything that
currently required .several products. The decision was made to proceed with the
development and introduction of a superior-performing high-suds granular
detergent. Once the basic product concept (i.e., one product instead of several to do
laundry) was decided on, the company needed to determine the best components for a
marketing mix to introduce the new product. The company went back to focus groups
to assess reactions to different brand names (the choices were Ariel, already in the
market as a low-suds detergent for automatic washers, and Tide, which had been
marketed in Egypt in the 1960s and 1970s), to get ideas about the appeal and
relevant wording for promotions, and to test various price ranges, package design,
and size. Information derived from focus group encounters helped the company
eliminate ideas with low consumer appeal and to focus on those that triggered the
most interest. Further, the groups helped refine advertising and promotion wording to
ensure clarity of communication through the use of everyday consumer language.
At the end of this stage, the company had well-defined ideas garnered from
several focus groups, but did not have a "feel" for the rest of the people in the
target market. Would they respond the same way the focus groups had? To
answer this question, the company proceeded to the next step, a research
program to validate the relative appeal of the concepts generated from focus
groups with a survey (quantitative research) of a large sample from the target
market. Additionally, brand name, price, size, and the product's intended benefits
were tested in large sample surveys. Information gathered in the final surveys
provided the company with the specific information used to develop a marketing
program that led to a successful product introduction and brand recognition for
Ariel throughout Egypt. Often times the combination of qualitative and
quantitative research proves quite useful, as in the example of P&G's research
on Ariel or as demonstrated in other industrial and business-to-business
marketing settings. In one study the number of personal referrals used in buying
legal, banking, and insurance services in Japan was found to be much greater
than in the United States. The various comments made by the executives during
the personal interviews in both countries proved invaluable in interpreting the
quantitative results, suggesting implications for managers and providing ideas
for further research. Likewise, the comments of sales managers in Tokyo during
in-depth interviews helped researchers understand why individual financial
incentives were found not to work with Japanese sales representatives. As we
shall see later in this chapter, using either research method in international
marketing research is subject to a number of difficulties brought about by the
diversity of cultures and languages encountered.
Problems of Gathering Primary Data
The problems of collecting primary data in foreign countries are
different only in degree from those encountered in the United States. Assuming
the research problem is well defined and the objectives are properly
formulated, the success of primary research hinges on the ability of the
researcher to get correct and truthful information that addresses the research
objectives. Most problems in collecting primary data in international
marketing research stem from cultural differences among countries, and range
from the inability of respondents to communicate their opinions to
inadequacies in questionnaire translation.
Ability to Communicate Opinions
The ability to express attitudes and opinions about a product or concept
depends on the respondent's ability to recognize the usefulness and value of
such a product or concept. It is difficult for a person to formulate needs,
attitudes, and opinions about goods whose use may not be understood, that are
not in common use within the community, or that have never been available.
For example, it may be impossible for someone who has never had the benefits
of an office computer to express accurate feelings or provide any reasonable
information about purchase intentions, likes, or dislikes concerning a new
computer software package. The more complex the concepts, the more
difficult it is to design research that will help the respondent communicate
meaningful opinions and reactions. Under these circumstances, the creative
capabilities of the international marketing researcher are challenged. No
company has had more experience in trying to understand consumers with
communication limitations than Gerber. Babies may be their business, but
babies often can't talk, much less fill out a questionnaire. Over the years
Gerber has found that talking to and observing both infants and their mothers
are important in marketing research. In one study Gerber found that breast-fed
babies adapted to solid food more quickly than bottle-fed babies because
breast milk changes flavor depending on what the mother has eaten. For
example, infants were found to suck longer and harder if their mother had re-
cently eaten garlic. In another study, weaning practices were studied around
the world. Indian babies were offered lentils served on a finger. Some Nigerian
children got fermented sorghum, fed by the grandmother through the funnel of
her hand. In some parts of-tropical Asia mothers "food-kissed" pre chewed
vegetables into their babies' mouths. All this research helps the company decide
which products are appropriate for which markets. For example, the Vegetable
and Rabbit Meat and the Freeze-Dried Sardines and Rice flavors popular in
Poland and Japan, respectively, most likely won't make it to American store
shelves.
Willingness to Respond
Cultural differences offer the best explanation for the unwillingness or
the inability of many to respond to research surveys. The role of the male, the
suitability of personal gender-based inquiries, and other gender-related issues can
affect willingness to respond. In some countries, the husband not only earns the
money but also dictates exactly how it is to be spent. Because the husband controls
the spending, it is he, not the wife, who should be questioned to determine
preferences and demand for many consumer goods. In some countries, women
would never consent to be interviewed by a male or a stranger. A French
Canadian woman does not like to be questioned and is likely to be reticent in her
responses. In some societies, a man would certainly consider it beneath his
dignity to discuss shaving habits or brand preference in personal clothing with
anyone--most emphatically not a female interviewer. Anyone asking questions
about any topic from which tax assessment could be inferred is immediately
suspected of being a tax agent. Citizens of many countries do not feel the same
legal and moral obligations to pay their taxes as do U.S. citizens. So, tax evasion
is an accepted practice for many and a source of pride for the more adept.
Where such an attitude exists, taxes are often seemingly arbitrarily assessed by
the government, which results in much incomplete or misleading information
being reported. One of the problems revealed by the government of India in a
recent population census was the underreporting of tenants by landlords trying to
hide the actual number of people living in houses and flats. The landlords had
been subletting accommodations illegally and were concealing their activities
from the tax department.
In the United States, publicly held corporations are compelled by the
Securities and Exchange Commission (SEC) to disclose certain operating
figures on a periodic basis. In many European countries, however, such
information is seldom if ever released and then most reluctantly. Attempts to
enlist the cooperation of merchants in setting up an in-store study of shelf
inventory and sales information ran into strong resistance because of suspicions
and a tradition of competitive secrecy. The resistance was overcome by the
researcher's willingness to approach the problem step-by-step. As the retailer
gained confidence in the researcher and realized the value of the data gathered,
more and more requested information was provided. Besides the reluctance of
businesses to respond to surveys, local politicians in underdeveloped countries
may interfere with studies in the belief that they could be subversive and must be
stopped or hindered. A few moments with local politicians can prevent days of
delay. Although such cultural differences may make survey research more difficult
to conduct, it is possible^ In some communities, locally prominent people could
open otherwise closed doors; in other situations, professional people and local
students have been used as interviewers because of their knowledge of the
market. Less direct measurement techniques and nontraditional data analysis
methods may also be more appropriate. In one study, Japanese supermarket
buyers rated the nationality of brands (foreign or domestic) as relatively
unimportant in making stocking decisions when asked directly; however, when
an indirect, paired-comparison questioning technique was used, brand
nationality proved to be the most important factor.
Sampling in Field Surveys
The greatest problem of sampling stems from the lack of adequate
demographic data and available lists from which to draw meaningful samples. If
current, reliable lists are not available, sampling becomes more complex and
generally less reliable. In many countries, telephone directories cross-index
street directories, census tract and block data, and detailed social and economic
characteristics of the population being studied are not available on a current
basis, if at all. The researcher has to estimate characteristics and population
parameters, sometimes with little basic data on which to build an accurate
estimate. To add to the confusion, in some South American, Mexican, and Asian
cities, street maps are unavailable, and in some Asian metropolitan areas, streets
are not identified nor are houses numbered. In contrast, one of the positive
aspects of research in Japan and Taiwan is the availability and accuracy of
census data on individuals. In these countries, when a household moves it is
required to submit up-to-date information to a centralized government agency
before it can use communal services such as water, gas, electricity, and
education. The effectiveness of various methods of communication (mail,
telephone, and personal interview) in surveys is limited. In many countries,
telephone ownership is extremely low, making telephone surveys virtually
worthless unless the survey is intended to cover only the wealthy. In Sri Lanka,
fewer than 10 percent of the residents--only the wealthy-have telephones. Even
if the respondent has a telephone, the researcher may still not be able to
complete a call. The adequacy of sampling techniques is also affected by a lack
of detailed social and economic information. Without an age breakdown, for
example, the researcher can never be certain of a representative sample requiring
an age criterion because there is no basis of comparison with the age distribution
in the sample. A lack of detailed information, however, does not prevent the use
of sampling; it simply makes it more difficult. In place of probability techniques,
many researchers in such situations rely on convenience samples taken in
marketplaces and other public gathering places. McDonald's recently got into
trouble over sampling issues. The company was involved in a dispute in South
Africa over the rights to its brand name in that fast-emerging market. Part of the
company's claim revolved around the recall of the McDonald's name among
South Africans. In the two surveys the company conducted and provided as
proof in the proceedings, the majority of those sampled had heard the company
name and could recognize the logo. However, the Supreme Court judge hearing
the case took a dim view of the evidence because the surveys were conducted in
"posh, white" suburbs when 76 percent of the South African population is black.
Based in part on these sampling errors, the judge threw out McDonald's case.
Inadequate mailing lists and poor postal service can also be problems for the
market researcher using mail to conduct research. In Nicaragua, delays of weeks
in delivery are not unusual, and expected returns are lowered considerably
because a letter can be mailed only at a post office. In addition to the potentially
poor mail service within countries, the extended length of time required for
delivery and return when a mail survey is conducted from another country
further hampers the use of mail surveys. Although airmail reduces this time
drastically, it also increases costs considerably. The kinds of problems
encountered in drawing a random sample include:
? No officially recognized census of population.
? No other listings that can serve as sampling frames.
? Incomplete and out-of-date telephone directories.
? No accurate maps of population centers. Thus, no cluster (area) samples can
be made.
While all the conditions described do not exist in all countries, they illustrate
why the collection of primary data requires creative applications of research
techniques when firms expand into many foreign markets.
Language and Comprehension
The most universal survey research problem in foreign countries is the
language barrier. Differences in idiom and the difficulty of exact translation
create problems in eliciting the specific information desired and in interpreting
the respondents' answers. Equivalent concepts may not exist in all languages.
Family, for example, has different connotations in different countries. In the
United States, it generally means only the parents and children. In Italy and
many Latin countries it could mean the parents, children, grandparents, uncles,
aunts, cousins, and so forth. The meaning of names for family members can
have different meanings depending on the context within which they are used. In
the Italian culture, aunt and uncle are different for the maternal and paternal
sides of the family. The concept of affection is a universal idea but the manner
in which it is manifest in each culture may differ. Kissing, an expression of
affection in the West is alien to many Eastern cultures and even taboo in some.
Literacy poses yet another problem. In some less-developed countries
with low literacy rates, written questionnaires are completely useless. Within
countries, too, the problem of dialects and different languages can make a
national questionnaire survey impractical. In India, there are 14 official
languages and considerably more unofficial ones. One researcher has used
pictures of products as stimuli and pictures of faces as response criterion in a
study of eastern German brand preferences to avoid some of the difficulties
associated with language differences and literacy in international
research.Furthermore a researcher cannot assume that a translation into one
language will suffice in all areas where that language is spoken. Such was the
case when one of the authors was in Mexico and requested a translation of the
word outlet, as in retail outlet, to be used in Venezuela. It was read by
Venezuelans to mean an electrical outlet, an outlet of a river into an ocean, and
the passageway into a patio. Needless to say, the responses were useless-
although interesting. Thus, it will always be necessary for a native speaker of
the target country's language to take the "final cut" in any translated material.All
marketing communications, including research questionnaires, must be written
perfectly. If not, consumers and customers will not respond with accuracy, or
even at all. The obvious solution of having questionnaires prepared or reviewed
by a native speaker of the language of the country is frequently overlooked.
Even excellent companies like American Airlines bring errors into their
measurement of customer satisfaction by using the exact same questionnaire in
Spanish for their surveys of passengers on routes to Spain and Mexico. To a
Spaniard orange juice is "zumo de naranja"; a Mexican would order "jugo de
naranja." These apparently subtle differences are no such things to Spanish
speakers. In another case, a German respondent was asked the number of
washers (washing machines) produced in Germany for a particular year; the
reply reflected the production of the flat metal disk. Marketers use three
different techniques, back translation, parallel translation, and decentering, to
help ferret out translation errors ahead of time.
? Back Translation. In back translation the questionnaire is translated
from one language to another, and then a second party translates it back into the
original. This process pinpoints misinterpretations and misunderstandings before
they reach the public. A soft-drink company wanted to use a very successful
Australian advertising theme, "Baby, its cold inside," in Hong Kong. They had
the theme translated from English into Cantonese by one translator and then
retranslated by another from Cantonese into English, where the statement came
out, "Small Mosquito, on the inside it is very cold." Although "small mosquito"
is the colloquial expression for small child in Hong Kong, the intended meaning
was lost in translation.
? Parallel Translation. Back translations may not always ensure
an accurate translation because of commonly used idioms in both languages.
Parallel translation is used to overcome this problem. In this process, more than
two translators are used for the back translation; the results are compared,
differences discussed, and the most appropriate translation selected.
? Decentering. A third alternative, known as decentering, is a hybrid of
back translation. It is a successive iteration process of translation and
retranslations of a questionnaire, each time by a different translator. For
example, an English version is translated into French and then translated back to
English by a different translator. The two English versions are compared and
where there are differences, the original English version is modified and the
process is repeated. If there are still differences between the two English
versions, the original English version of the second iteration is modified and the
process of translation and back translation is repeated. The process continues to
be repeated until an English version can be translated into French and back
translated, by a different translator, into the same English. In this process,
wording of the original instrument undergoes a change, and the version that is
finally used and its translation have equally comprehensive and equivalent
terminologies in both languages. Regardless of the procedure used, proper
translation and perfect use of the local language in a questionnaire are of critical
importance to successful research design. Because of cultural and national
differences, confusion can just as well be the problem of the researcher as of the
respondent. The question itself may not be properly worded in the English
version, or English slang or abbreviated words are often translated with a
different or ambiguous meaning. Such was the case mentioned above with the
word outlet for retail outlet. The problem was not with the translation as much
as it was of the term used in the question to be translated. In writing questions for
translation, it is important that precise terms, not colloquialisms or slang, are
used in the original to be translated. One classic misunderstanding which
occurred in a Reader's Digest study of consumer behavior in Western Europe
resulted in a report that France and Germany consumed more spaghetti than did
Italy. This rather curious and erroneous finding resulted from questions that
asked about purchases of "packaged and branded spaghetti." Italians buy their
spaghetti in bulk; the French and Germans buy branded and packaged spaghetti.
Since the Italians buy little branded or packaged spaghetti, the results
underreported spaghetti purchases by Italians. Had the goal of the research been
to determine how much branded and packaged spaghetti was purchased, the
results would have been correct. However, because the goal was to know about
total spaghetti consumption, the data were incorrect. Researchers must always
verify that they are asking the right question. Finally, some of the problems of
cross-cultural marketing research can be addressed after data have been collected.
For example, we know that consumers in some countries such as Japan tend to
respond to rating scales more conservatively than Americans. That is, on a 1 to 7
scale anchored by "extremely satisfied" and "extremely dissatisfied," Japanese
may tend to answer more toward the middle (more 3s and 5s), while Americans'
responses may tend toward the extremes (more Is and 7s). Such a response bias
can be managed through statistical standardization procedures to maximize
comparability. Some translation problems can also be detected and mitigated
post hoc through other statistical approaches as well.
Multicultural Research: A Special Problem
As companies become global marketers and seek to standardize various
parts of the marketing mix across several countries, multicultural studies become
more important. A company needs to determine to what extent adaptation of the
marketing mix is appropriate. Thus, market characteristics across diverse
cultures must be compared for similarities and differences before a company
proceeds with standardization on any aspect of marketing strategy. The research
difficulties discussed thus far have addressed problems of conducting research
within a culture. When engaging in multicultural studies, many of these same
problems further complicate the difficulty of cross-cultural comparisons.
Multicultural research involves dealing with countries that have different lan-
guages, economies, social structures, behavior, and attitude patterns. When
designing multicultural studies, it is essential that these differences be taken into
account. An important point to keep in mind, when designing research is to be
applied across culture is to ensure comparability and equivalency of results.
Different methods may have varying reliabilities in different countries. It is
essential that these differences be taken into account in the design of a
multicultural survey. Such differences may mean that different research
methods should be applied in individual countries. In some cases the entire
research design may have to be different between countries to maximize the
comparability of the results. For example, Japanese, compared to American
businesspeople, tend not to respond to mail surveys. This problem was handled
in two recent studies by using alternative methods of questionnaire distribution
and collection in Japan. In one study, attitudes of retail buyers regarding pioneer
brands were sought. In the U.S. setting a sample was drawn from a national list
of supermarket buyers and questionnaires were distributed and collected by mail.
Alternatively, in Japan questionnaires were distributed through contact people at
16 major supermarket chains and then returned by mail directly to the Japanese
researchers.23 The second study sought to compare the job satisfaction of
American and Japanese sales representatives. The questionnaires were delivered
and collected via the company mail system for the U.S. firm. For the Japanese
firm, participants in a sales training program were asked to complete the
questionnaires during the program. While the authors of both studies suggest
that the use of different methods of data collection in comparative studies does
threaten the quality of the results, the approaches taken were the best (only)
practical methods of conducting the research. The adaptations necessary to
complete these cross-national studies serve as examples of the need for
resourcefulness in international marketing research. However, they also raise
serious questions about the reliability of data gathered in cross-national
research. There is evidence that often insufficient attention is given not only to
non-sampling errors and other problems that can exist in improperly conducted
multicultural studies, but also to the appropriateness of research measures that
have not been tested in multicultural contexts.
Research on the Internet: A New Opportunity
It is literally impossible to keep up with the worldwide growth in
Internet usage. We know that at this writing there are more than 20 million
users in more than 194 countries. While about 58 percent of the hosts are in the
United States, international Internet usage is growing almost twice as fast as
American usage. Growth in countries such as Costa Rica has been spurred by
the local government's early (1989) decision to reclassify computers as
"educational tools," thus eliminating all import tariffs on the hardware. The
demographics of users worldwide are: 60%-40% male-female; average age about
32; about 60% college educated; median income of about $60,000; usage time
about 2.5 hours/week; and main activities are e-mail and finding information.27 The
percentage of home pages by language is English--82.3%, German--4.0%,
Japanese-1.6%, French--1.5%, Spanish--1.1%, and all others less than 1%. For
many companies the Internet provides a new and increasingly important
medium for conducting a variety of international marketing research. New product
concepts and advertising copy can be tested over the Internet for immediate
feedback. Worldwide consumer panels might be created to help test marketing
programs across international samples. Indeed, it has been suggested that there are
six different uses for the Internet in international research:
(1) On-line surveys--these can include incentives for participation, and they
have better "branching" capabilities (asking different questions based on
previous answers) than more expensive mail and phone surveys.
(2) On-line focus groups--bulletin boards can be used for this
purpose.
(3) Web visitor tracking--servers automatically track and time visitors' travel
through Web sites.
(4) Advertising measurement--servers track links to other sites and
their usefulness can therefore be assessed.
(5) Customer identification systems--many companies are installing
registration procedures that allow them to track visits and purchases over
time, creating a "virtual panel."
(6) E-mail marketing lists--customers can be asked to sign up on e-mailing
lists for future direct marketing efforts via the Internet.
It is quite clear that as the Internet continues to grow, even more kinds of
research will become feasible, and it will be quite interesting to see the extent to
which new translation software has an impact on marketing communications and
research over the Internet.30 Finally, as is the case in so many international
marketing contexts, privacy is and will continue to be a matter of personal and
legal consideration. A vexing challenge facing international marketers will be the
cross-cultural concerns about privacy and the enlistment of cooperative consumer
and customer groups. The ability to conduct primary research is one of the
exciting aspects about the Internet. However, there are some severe limitations
because of the potential bias of a universe composed solely of Internet
respondents. Nevertheless, as more of the general population in countries gains
access to the Internet, this tool will be all the more powerful and accurate for
conducting primary research. Today the real power of the Internet for
international marketing research is the ability to easily access volumes of
secondary data. These data have been available in print form for years but now
they are much easier to access and, in many cases, more current. Instead of
leafing through reference books to find two- or three-year-old data, as is the case
with most printed sources, you can often find up-to-date data on the Internet. Such
Internet sites as http://stat-usa.gov provide almost all data that are published by
the U.S. government.
Problems in Analyzing and Interpreting Research Information
Once data have been collected, the final steps in the research process are
the analysis and interpretation of findings in light of the stated marketing
problem. Both secondary and primary data collected by the market researcher
are subject to the many limitations just discussed. In any final analysis, the
researcher must take into consideration these factors and, despite their
limitations, produce meaningful guides for management decisions. Accepting
information at face value in foreign markets is imprudent. The meanings of
words, the consumer's attitude toward a product, the interviewer's attitude, or
the interview situation can distort research findings. Just as culture and tradition
influence the willingness to give information, they also influence the
information given. Newspaper circulation figures, readership and listener ship
studies, retail outlet figures, and sales volume can all be distorted through local
business practice. To cope with such disparities, the foreign market researcher
must possess three talents. First, the researcher must possess a high degree of
cultural understanding of the market in which research is being conducted. In
order to analyze research findings, the social customs, semantics, current
attitudes, and business customs of a society or a sub-segment of a society must
be clearly understood. Indeed, at some level it will be absolutely necessary to
have a native of the target country involved in the interpretation of the results of
any research conducted in a foreign market. Second, a creative talent for
adapting research findings is necessary. A researcher in foreign markets often is
called on to produce results under the most difficult circumstances and short
deadlines. Ingenuity and resourcefulness, willingness to use "catch as catch can"
methods to get facts, patience, a sense of humor, and a willingness to be guided
by original research findings even when they conflict with popular opinion or
prior assumptions are all considered prime assets in foreign marketing research.
Third, a skeptical attitude in handling both primary and secondary data is
helpful. For example, it might be necessary to check a newspaper press run over
a period of time to get accurate circulation figures, or deflate or inflate reported
consumer income in some areas by 25 to 50 percent on the basis of observable
socioeconomic characteristics. Indeed, where data are suspect, such
"triangulation" through the use of multiple research methods will be crucial.
These essential traits suggest that a foreign marketing researcher should be a
foreign national or should be advised by a foreign national who can accurately
appraise the data collected in light of the local environment, thus validating
secondary as well as primary data. Moreover, regardless of the sophistication of
a research technique or analysis, there is no substitute for decision makers
themselves getting into the field for personal observation.
Responsibility for Conducting Marketing Research
Depending on the size and degree of involvement in foreign marketing,
a company in need of foreign market research can rely on an outside foreign-
based agency or on a domestic company with a branch within the country in
question. It can conduct research using its own facilities or employ a
combination of its own research force with the assistance of an outside agency.
Many companies have an executive specifically assigned to the research function
in foreign operations; he or she selects the research method and works closely
with foreign management, staff specialists, and outside research agencies. Other
companies maintain separate research departments for foreign operations or
assign a full-time research analyst to this activity. For many companies, a
separate department is too costly; the diversity of markets would require a large
department to provide a skilled analyst for each area or region of international
business operations. A trend toward decentralization of the research function is
apparent. In terms of efficiency, it appears that local analysts are able to provide
information more rapidly and accurately than a staff research department. The
obvious advantage to decentralization of the research function is that control
rests in hands closer to the market. Field personnel, resident managers, and
customers generally have a more intimate knowledge of the subtleties of the
market and an appreciation of the diversity that characterizes most foreign
markets. One disadvantage of decentralized research management is possible
ineffective communications with home-office executives. Another is the
potential unwarranted dominance of large-market studies in decisions about
global standardization. That is to say, the larger markets, particularly the United
States, justify more sophisticated research procedures and larger sample sizes,
and results derived via simpler approaches that are appropriate in smaller
countries are often unnecessarily discounted. A comprehensive review of the
different approaches to multicountry research suggests that the ideal approach is
to have local researchers in each country, with close coordination between the
client company and the local research companies. This cooperation is important
at all stages of the research project from research design to data collection to
final analysis. Further, two stages of analysis are necessary. At the individual
country level, all issues involved in each country must be identified, and at the
multicountry level, the information must be distilled into a format that
addresses the client's objectives. Such recommendations are supported on the
grounds that two heads are better than one and that multicultural input is
essential to any understanding of multicultural data. With just one interpreter of
multicultural data, there is the danger of one's self-reference criterion (SRC)
resulting in data being interpreted in terms of one's own cultural biases. Self-
reference bias can affect the research design, questionnaire design, and
interpretation of the data. If a company wants to use a professional marketing
research firm, many are available. Most major advertising agencies and many
research firms have established branch offices worldwide. There also has been a
healthy growth in foreign-based research and consulting firms. Of the 10 largest
(based on revenues) marketing research firms in the world, four are based in the
U.S. including the biggest, two are in France, two are in Germany, one is in the
U.K., and one is in Japan. In Japan, where it is essential to understand the unique
culture, the quality of professional market research firms is among the best. A
recent study reports that research methods applied by Japanese firms and
American firms are generally quite similar, but with notable differences in the
greater emphasis of the Japanese on forecasting, distribution channels, and sales
research. A listing of international marketing research firms is printed every
July as an advertising supplement in the Marketing News.
Estimating Market Demand
In assessing current product demand and forecasting future demand,
reliable historical data are required. As previously noted, the quality and
availability of secondary data frequently are inadequate; nevertheless, estimates
of market size must be attempted to plan effectively. Despite limitations, there
are approaches to demand estimation usable with minimum information. The
success of these approaches relies on the ability of the researcher to find
meaningful substitutes or approximations for the needed economic and
demographic relationships. Some of the necessary but frequently unavailable
statistics for assessing market opportunity and estimating demand for a product
are current trends in market demand. When the desired statistics are not
available, a close approximation can be made using local production figures plus
imports, with adjustments for exports and current inventory levels. These data are
more readily available because they are commonly reported by the United Nations
and other international agencies. Once approximations for sales trends are
established, historical series can be used as the basis for projections of growth. In
any straight extrapolation, however, the estimator assumes that the trends of the
immediate past will continue into the future. In a rapidly developing economy,
extrapolated figures may not reflect rapid growth and must be adjusted
accordingly. For this reason, three other methods are recommended: expert
opinion, analogy, and income elasticity.
Expert Opinion
For many market estimation problems, particularly in new foreign
countries, expert opinion is advisable. In this method, experts are polled for their
opinions about market size and growth rates. Such experts may be companies'
own sales managers or outside consultants and government officials. The key in
using expert opinion to help in forecasting demand is triangulation that is,
comparing estimates produced by different sources. One of the tricky parts is
how best to combine the different opinions. Developing scenarios is useful in
the most ambiguous situations, such as predicting demand for accounting
services in emerging markets like China and Russia.
Analogy
Another technique is to estimate by analogy. This assumes that demand
for a product develops in much the same way in all countries as comparable
economic development occurs in each country. First, a relationship must be
established between the item to be estimated and a measurable variable in a
country that is to serve as the basis for the analogy. Once a known relationship
is established, the estimator then attempts to draw an analogy between the
known situation and the country in question. For example, suppose a company
wanted to estimate the market growth potential for a beverage in country X, for
which it had inadequate sales figures, but the company had excellent beverage
data for neighboring country Y. In country Y it is known that per capita
consumption increases at a predictable ratio as per capita gross domestic product
(GDP) increases. If per capita GDP is known for country X, per capita
consumption for the beverage can be estimated using the relationships established
in country Y. Caution must be used with analogy because the method assumes
that factors other than the variable used (in this example GDP) are similar in
both countries, such as the same tastes, taxes, prices, selling methods,
availability of products, consumption patterns, and so forth. Despite the
apparent drawbacks to analogy, it is useful where data are limited.
Income Elasticity
Measuring the changes in the relationship between personal or family
income and demand for a product also can be used in forecasting market demand.
In income elasticity ratios, the sensitivity of demand for a product to income
changes is measured. The elasticity coefficient is determined by dividing the
percentage change in the quantity of a product demanded by the percentage
change in income. With a result of less than one, it is said that the income-
demand relationship is relatively inelastic; conversely, if the result is greater than
one the relationship is elastic. As income increases, the demand for a product
increases at a rate proportionately higher than income increases. For example, if
the income coefficient elasticity for recreation is 1.20, it implies that for each 1
percent change in income, the demand for recreation could be expected to
increase by 1.2 percent; if the coefficient is 0.8, then for each 1 percent change
in income, demand for recreation could be expected to increase only 0.8 percent.
The relationship also occurs when income decreases, although the rate of
decrease might be greater than when income increases. Income elasticity can be
very useful, too, in predicting growth in demand for a particular product or
product group. The major problem of this method is that the data necessary to
establish elasticities may not be available. However, in many countries income
elasticities for products have been determined and it is possible to use the
analogy method described (with all the caveats mentioned) to make estimates
for those countries. Income elasticity measurements only give an indication of
change in demand as income changes and do not provide the researcher with any
estimate of total demand for the product. As is the case in all market demand
estimation methods described in this section, income elasticity measurements
are no substitute for original market research when it is economically feasible
and time permits. Indeed, the best approach to forecasting is almost always a
combination of such macroeconomic data base approaches and interviews with
potential and current customers. As more adequate data sources become
available, as would be the situation in most of the economically developed
countries, more technically advanced techniques such as multiple regression
analysis or input-output analysis can be used.
Communicating with Decision Makers
Most of the discussion in this chapter has regarded getting information
from or about consumers, customers, and competitors. It should be clearly
recognized, however, that getting the information is only half the job. That
information must also be given to decision makers in a timely manner. High-
quality international information systems design will be an increasingly
important competitive tool as commerce continues to globalize, and resources
must be invested accordingly. Decision makers, often top executives, should be
directly involved not only in problem definition and question formulation, but
when the occasion warrants it (as in new foreign markets), they should also be
involved in the field work of seeing the market and hearing the voice of the
customers in the most direct ways. Top managers should have a "feel" for their
markets which even the best marketing reports cannot provide. )
INTERNATIONAL MARKETING MANAGEMENT
International Marketing is not the same thing as International Trade. Only a part
of the international trade flows represents international marketing. Marketing in an
internationally competitive environment, no matter whether the market is home or
foreign is known as international marketing.
Special problems in international marketing
Special problems in international marketing are as follows
1. Political and legal differences, 2. Cultural differences, 3. Economic
differences, 4. Differences in the currency Unit, 5. Differences in languages, 6.
Differences in marketing infrastructure, 7. Trade restrictions, 8. High cost of distance, 9.
Differences in trade practices.
Motives of International marketing
The motives for international marketing can be classified into Pull
factors and push factors. Some of these factors are
1. Profit motive, 2. Growth opportunities, 3. Domestic market Constraints, 4.
Competition, 5. Government policies and regulations, 6. Monopoly power 7. Spin ? off
Benefits and 8. Strategic vision.
INTERNATIONAL PLANNING ORGANISATION
There are different organizational structures for doing international
business. The structure is determined by factors such as the extent of commitment
of the organisation to the international business and the nature of its international
orientation, the size of international business and expansion plans, the number
and consistency of product lines, characteristics of the foreign markets etc.The
nature of the organisational structure is also influenced by the relative sizes of
the domestic and foreign markets or their relative importance. Taggart and
McDermott point out that while during the 1960s many US MNCs established an
international division to oversee : their growing overseas operations, the
international division was largely redundant for European MNCs. This was
because the US MNCs still relied upon their large domestic market whereas the
European MNCs -- specially those from the smaller countries (like the
Netherlands, Sweden, and Switzerland) -- did not have a large domestic market.
International sales often accounted for the bulk of their turnover, rather than a
small proportion as was the case in the 1960s for many US MNCs. The
European MNCs were, thus, more disposed to internationalisation. The
organisational structure would undergo changes during the different stages of the
evolution of a domestic firm into a transnational one. The common
organisational types are described below:
Built-in Export Department
The built-in export department is the simplest form of export organisation
and, I therefore, the easiest to establish. Under this arrangement, as the name
indicates, the export organisation is built into the regular domestic system. The
function of the special department is usually confined to the actual selling or
directing; and all such different functions connected with export transactions as
advertising, credit, traffic, shipping and accounting are handled by the
appropriate domestic departments. The built-in export department is suitable
under certain conditions, such as when the export business is small, the company
is new to international marketing, the management philosophy is not oriented
towards growth in overseas business, the company resources are limited, etc.
The built-in export department may also be regarded as the initial arrangement
to do export business. In course of time, as the business expands, it may be
developed into a separate export department. The built-in export department
surfers from some disadvantages. Under this arrangement, many of the activities
connected with international business are carried out by domestic departments.
Sometimes, therefore, there may be a tendency to regard export activities as
subsidiary to domestic business. Further, the personnel of the domestic
departments may not have sufficient knowledge or experience to deal with
matters connected with the overseas market. Another danger is that the export
manager may not get the required amount of cooperation from the personnel of
other departments who are not under his control.
Separate Export Department
Although a relatively large volume of export business may be handled by a
built-in form of organisation, this arrangement, when the overseas business
substantially increases, becomes unsatisfactory. A separate export department
may, therefore, be established to take effective care of all the activities connected
with the export business.
Pres
ident
Produ
R
Ma
F
Pers
ction
& D
rketing
inance
onnel
E
Fig.7.1 Export Depa
x r
po trm
t ent Structure
Further, a company which wants to expand its international business
substantially would find a separate export department more useful than the
built-in arrangement. Unlike the built-in department, the separate export
department is essentially self-sufficient; and it is well equipped to handle all the
activities connected with the export business. It is not, therefore, at the mercy of
domestic departments. The organisational structure of the export department
may vary between companies. The internal organisational structure of a
separate export department may be based upon functions, territory, product or a
combination of these. Needless to say, any such orientation of the internal
organisational structure of the department will depend primarily upon how the
marketing task varies. A separate marketing department avoids some of the
problems of the built-in department, such as the clash between the international
and domestic sides of the firm regarding the time to be spent by domestic
marketing personnel on overseas business matters. As a separate department is a
full-fledged department, it can do the job more efficiently. It can have personnel
trained to perform the international marketing functions. A separate department
will also impart an export orientation to the company. Another advantage is that
a separate export department may, unlike the built in department, be located at
the most suitable place, which may not be the headquarters of the company.
Fig. 7.1 and Fig. 7.2 show two alternate organisational structures. In Fig. 7.1, the
export is a division of the marketing department which undertakes both
domestic marketing and exports.Fig. 7.2 depicts an organisational structure
with a separate, full-fledged, export; department.
Pres
ident
Pro
R
Ma
E
F
Per
duction
& D
rketing
xport
inance
sonnel
Fig.7.2 Export
Department Structure
Export Sales Subsidiary
Firms with large export business may establish export subsidiary
companies and 1 divorce international marketing activities from domestic
operations because of certain I advantages associated with it. Although an
export sales subsidiary is a separate company, it is wholly owned and controlled
by the parent company and is quasi-independent. The subsidiary company
purchases products from the parent company and markets them abroad. The
subsidiary may ' even deal in some non-competing products of other
companies.An export sales subsidiary enjoys certain advantages. It is more
independent than a department, and, therefore, more flexible and adaptable to
changing situations. It can more easily develop export marketing facilities and
expertise and organise international marketing tasks more effectively. Another
advantage of establishing a separate company and dividing the total business is
a lower burden of tax. In terms of internal organisation and the specific
activities performed, the sales subsidiary differs very little from a separate
export department. Some companies establish subsidiary companies with the
main objective of developing export markets and doing export business in a big
way. The HMT (International) Ltd., the export marketing subsidiary of the
HMT Ltd., has been assigned the tasks of exploring, developing and expanding
export markets and enlarging international business.
International Division
An export department or export subsidiary may be suitable for handling
large exports but they may not be sufficient for managing the non-exporting
international market entry modes. So companies, having foreign subsidiaries
whose role is not to sales alone tend to establish an international division to
manage the international business. Fig. 7.3 depicts one possible organisation
structure with international division. An international division will facilitate
concentrated attention on the international business. "However, creating an
international division may generate internal problems. Coordinating activities
may prove difficult because domestic activities are organised on a product line
basis, while international side is organised on an area basis, i.e., non-
domestic.The global organisational structures like the global product structure
and global geographical structure which seek to integrate domestic and
international operations emerged as a solution to this problem.
Global Organizational Structures
The growth of business into global dimensions and the competition on a global
basis resulted in the development of different global structures. The basic types of global
structures are described below.
Pr
esident
Central
Staff
Domestic
International
Division
Vice
President(s)
Vice President
Planni
ng and
Financ
Global Product Structure
Foreign
Foreign
e Staff Foreign
Subsidiary 1 The product division structur
S e i
ub s ip
dop
iarul
y a
r
2 with large conglomerates w
S ith
ub
s m
id ul
ia tripl
y e
3 ,
unrelated, business. Under this structure, different subsidiaries pertaining to different
Prperosidu
de ctnst within the same foreign count
P rrye s riep
de ontr t to the head of different pro
P dreuscit dent
groups at the head quarters. Fig. 7.4 illustrates a product based global organisational
Fig 7.3 Export
structure. The product division structure enhances coordination between different
Department .Structure
areas for any one product line but it reduces coordination of all product lines within
each zone.
Global Geographic Structure
Under the global geographic divisional structure the market is divided
geographically. For example, when the Ranbaxy has restructured its organisation as a
part of its global orientation, its export department has been abolished and the world
market has been divided into four regions (India along with the Middle East forms one
of the four regions). Fig. 8.5 depicts a global geographic divisional structure. In
contrast to the product division structure, the geographic division structure is
appropriate for MNCs with narrow product lines. Naturally, this pattern tends to
improve coordination of all product lines within each zone but to reduce coordination
between areas for any one product line.
Global Functional Structure
Under the functional structure, the head of functional areas, such as
production, marketing, finance and personnel, are responsible for the worldwide
operations of their own functional areas. In certain industries like energy and
mining, a variation of the functional structure known as the process structure, which
uses processes as the basis for the structure, is common.
Global Customer Structure
If the global customer groups are so diverse requiring distinctive
approaches, the organisational structure may be based on the diversity of the
customer groups. This structure would not be appropriate if the product lines are
very diverse making customer groups different for each product group.
Global Matrix Structure
All the global organisational patterns depicted above have certain
advantages and disadvantages. The mixed, hybrid or matrix structure seeks to
combine the advantages and overcome the disadvantages of other alternative
structures.
MARKET ENTRY STRATEGIES
One of the most important strategic decisions in international business is
the mode of entering the foreign market. On the one extreme, a company may
do the complete manufacturing of the product domestically and export it to the
foreign market. On the other extreme, a company may do, by itself, the
complete manufacturing of the product to be marketed in the foreign market
there itself. There are several alternatives in between these two extremes. The
choice of the most suitable alternative is based on the relevant factors related to
the company and the foreign market. In some cases, the alternatives available
may also be limited. For example, the policy of some governments may not be
very positive towards foreign investments. Several governments have a definite
preference for joint ventures over complete foreign ownership. In some cases,
the government may prefer foreign investment leading to import substitution to
perpetual import of a product. Thus, in some cases, government policies may
rule out the best alternative if the environment were free.
Important foreign market entry strategies are the following:
(i) Licensing / franchising
(ii) Exporting
(iii) Contract manufacturing
(iv) Management contract
(v) Assembly operations
(vi) Fully owned manufacturing facilities
(vii) Joint venturing
(viii) Counter trade
(ix) Mergers and acquisitions
(x) Strategic
alliance
(xi) Third country location
LICENSING AND FRANCHISING
Licensing and Franchising, which involve minimal commitment of
resources and effort on the part of the international marketer, are easy ways of
entering the foreign markets. Under international licensing, a firm in one
country (the licensor) permits a firm in another country (the licensee) to use
its intellectual property (such as patents, trade marks, copyrights, technology,
technical know-how, marketing skill or some other specific skill). The
monetary benefit to the licensor is the royalty or fees which licensee pays. In
many countries, such fees or royalties are regulated by the government; it does
not exceed five per cent of the sales in many developing countries. A licensing
agreement may also be one of cross licensing, wherein there is a mutual
exchange of knowledge and /or patents. In cross-licensing, a cash payment
may or may not, be involved. Franchising is a form of licensing in which a
parent company (the franchiser) grants another independent entity (the
franchisee) the right to do business in a prescribed manner. This right can take
the form of selling the franchisor`s products, using its name, production and
marketing techniques, or general business approach. One of the common
forms of I franchising involves the franchisor supplying an important
ingredient (part, material etc.) for the finished product, like the Coca Cola
supplying the syrup to the bottlers. Usually franchising involves a combination
of many of the elements mentioned above. The major forms of franchising are
manufacturer-retailer systems (such as automobile dealership), manufacturer-
wholesaler systems (such as soft drink companies), and service firm-retailer
systems (such as lodging services and fast food outlets). There are also cases
of cross or reverse franchise agreements. For example, the I.T.C. Hotels and
ITT Sheraton Corporation had such an agreement under which ITC Hotel`s
Welcome Group franchised two of its hotels in Bangkok and Hong Kong ITT
Sheraton, holding, in exchange, the franchise for Sheraton in India. Later the
partners decided to set up a joint venture -- ITC-Sheraton -- with Sheraton
having a majority stake, to manage all new ITC hotel projects in India. One of
the growing trends recently has been trademark licensing. Czinkota and
Ronkainen point out that trademark licensing has become a substantial source
of worldwide revenue. The total volume of trademark licensing was expected to
reach $ 75 billion by 1990. The names or logos of designers, literary
characters, sports teams, and movie stars appear on clothing, games, foods and
beverages, gifts and novelties, toys and home furnishings. A number of
foreign companies have entered the Indian market, both industrial and
consumer goods, by licensing. The IFB washing machine, for example, was
manufactured in India under license from Bosch of Germany. The U.S.
multinational General Electric (GE) has licensed its patented technology to a
small scale unit in India established for the manufacture of high intensity
discharge (HID) fittings. As electrical fittings were reserved for the small scale
sector, GE, had, perhaps no alternative to enter the market. After four years of
scouting around, Nike International Ltd., the world's largest sports shoe and
Apparel Company finally decided in 1995 to enter the Indian market by
licensing. Sierra Industrial Enterprises Ltd., the licensee, will invest in setting
up the complete quality control, marketing and distribution operations and
will pay Nike 5 per cent royalty on ex-factory price of both footwear and
apparel for the use of the brand name. International licensing/franchising have
grown very substantially. Czinkota and Ronkainen succinctly describe their
attractiveness or reasons for popularity: As an entry strategy, it requires
neither capital investment nor knowledge and marketing strength in foreign
markets. By earning royalty income, it provides an opportunity to exploit
research and development already committed to Licensing reduces risk of
exposure to government intervention in that the licensee is typically a local
company that can provide leverage against government action. Licensing will
help to avoid host country regulations that are more prevalent in equity
ventures. Licensing may also serve as a stage in the internationalization of the
firm by providing a means by which foreign markets can be tested without
major involvement or capital or management time. Another advantage of
licensing is that it may be employed as a preemptive strategy against
competitors by combing the foreign markets before the competitors could enter.
Thus, as pointed out under the section competition in Chapter 1, the General
Electric of U.S.A. by licensing its advanced gas turbine technology to foreign
producers who were potential competitors could eliminate possible
competition from them. Licensing has been used by many companies also to
harvest their obsolete products. This strategy has been employed, in
particular, in developing countries. When the market is closed by the host
country regulations either to imports or to foreign investment, licensing may
provide a viable opportunity to enter such a market. From the point of view of
the licensee, licensing provides the great advantage of entering the market with
a proven product/technology or marketing intangible without having to run
the risk of R & D failures. It also reduces the investment requirements. In the
past many U.S. companies with prevalent attitude that we have enough
business right here in the States, were not seriously looking to expand
globally licensing appeared to be a very attractive proposition. For example,
between 1960-67, about 200 licensing agreements were concluded between
the U.S. and Japanese firms for transfer of T.V. technology to Japan. Firms in
several other industries also licensed their technology etc. to foreign firms.
But several of them were shocked to learn that they had grossly
underestimated the vast potential of the foreign markets. For example, one
U.S. firm that licensed an English firm to manufacture and sell its products in
the United Kingdom, but agreed to give the English firm an exclusive right to
sub-licence the U.S. expertise in other countries, for it then had no marketing
commitment to exports. Within a few years, global markets developed for the
company`s products, and were stuck with another party getting the benefits.
Another U.S. firm, a drug manufacturer, gave an Asian Company a
manufacturing license. The Asian market, which up to then had been nothing at
all, boomed, leaving the U.S. firm as almost an outsider.
One of the important risks of licensing is that the licensor would be
developing a potential competitor; the licensee would become a competitor after
the expiry of the licensing agreement. The licensee may even develop capabilities
to introduce better products. The skill of the Japanese in product improvement is
well-known. In several electronic products, including T.V., the Japanese have
become world leaders or strong competitors in due course. Licensees in the
developing countries might gain an edge over the licensor, after the term of the
license, because of their low cost of labor which would enable them to compete
with the erstwhile licensor in his own home market as well as in the foreign
markets. Some companies are, therefore, hesitant to enter into licensing
agreements.
EXPORTING
Exporting, the most traditional mode of entering the foreign market is
quite a common one even now. As pointed out in Chapter 1, international trade
has been growing much faster than the world output resulting in greater world
economic integration. Exporting is the appropriate strategy when one or more
of the following conditions prevail:
1.
The volume of foreign business is not large enough to justify production
in the foreign market.
2.
Cost of production in the foreign market is high.
3.
The foreign market is characterized by production bottlenecks like
infrastructural problems, problems with materials supplies etc.
4.
There are political or other risks of investment in the foreign country.
5.
The company has no permanent interest in the foreign market concerned
or that there is no guarantee of the market available for a long period.
6.
Foreign investment is not favored by the foreign country concerned.
7.
Licensing or contract manufacturing is not a better alternative.
Exporting is attractive than other modes particularly when underutilized
capacity exists. Even when there is no excess capacity, expansion of the
existing facility may sometimes be easier and less costly than setting up
production facilities abroad. Further, many governments, as in India, provide
incentives for establishing facilities for export production. The alternatives to
making in foreign countries by the international marketer for marketing the
goods in the foreign countries are licensing and contract manufacturing.
Although these have certain advantages, there are also certain risks. Hence, if a
company does not want to go in for licensing or contract manufacturing, the
only avenue open is exporting. Although exporting may turn out to be the best
alternative under a given set of conditions or environmental factors, there are
several sets of conditions which make exporting less attractive than one or
more of other alternatives. Policies of some foreign governments discriminate
against imports; in some cases import is even banned. It may be noted that
hostility against imports have been encouraging substitution of exports by
production in the foreign markets. A number of foreign companies have set up
production facilities in the European Community to overcome the import
barriers. Japanese transplants in North America have also been caused to a
considerable extent by the hostility towards imports. Besides, in a number of
cases cost considerations make foreign production or assembly preferable to
other entry strategies. Further, as noted in the introductory chapter, exporting
marks the first stage in the evolution of international business of many
companies. As the international business grows or as the environment changes
or to expand the business it may become necessary to change the strategies.
There are, broadly, two ways of exporting, viz., indirect exporting and direct
exporting. They are described in the chapter on International Distribution.
CONTRACT MANUFACTURING
Under contract manufacturing, a company doing international marketing
contracts with firms in foreign countries to manufacture or assemble the products
while retaining the responsibility of marketing the product. This is a common practice
in international business. There are a number of multinationals and affiliates of
multinationals which employ this strategy in India in respect of some of the products
they market, like Park Davis, Hindustan Lever, etc.
Contract manufacturing has the following advantages:
1.
The company does not have to commit resource for setting up
production facilities.
2.
It frees the company from the risks of investing in foreign countries.
3. If idle production capacity is readily available in the foreign country, it enables the
marketer to get started immediately.
4. In many cases, the cost of the product obtained by contract manufacturing is
lower than if it were manufactured by the international firm. For example, the
product cost in the small scale sector is much lower than in the large scale sector
for many products because of the lower wages, lower overheads, and tax
concessions. Moreover, if excess capacities are available with existing units, it
may even be possible to get the product supplied on the marginal cost basis.
5. Contract manufacturing also has the advantage that it is a less risky way to start
with. If the business does not pick up sufficiently, dropping it is easy; but if the
company had established its own production facilities, the exit would be difficult. It
may be interesting to note that the availability of excess capacity with some soap
manufactures enabled several foreign companies to experiment With new brands
of toilet soap in the Indian market. For example, Godrej soaps manufactured Dettol
for Reckittand Coleman; Clearton for Nicholas Laboratories; Johnson's Baby Soap
for Johnson and Johnson; and Ponds Dreamflower, Cold Cream and Sandalwood
for Ponds. It may be noted that some of these brands have not succeeded in the
market. The cost to the company of the product failure is relatively low when it did
not invest in production facilities.
6. Moreover, contract manufacturing may enable the international firm to enlist
national support.
Contract manufacturing, however, has the following disadvantages:
1. In some cases, there will be the loss of potential profits from
manufacturing.
2. Less control over the manufacturing process.
3. Contract manufacturing also has the risk of developing potential
competitors.
4. It would not be suitable in cases of high-tech products and cases which
involve technical secrets etc.
MANAGEMENT CONTRACTING
Under the management contract, the firms providing the management know-how
many not have any equity stake in the enterprise being managed. In short, "in a
management contract the supplier brings together a package of skills that will provide
an integrated service to the client without incurring the risk and benefit of ownership.
Thus, as Kotler observes, management contracting is a low-risk method of getting into
a foreign market and it starts yielding income right from the beginning. The
arrangement is especially attractive if the contracting firm is given an option to
purchase some shares in the managed company within a stated period.
Management contract could, sometimes, bring in additional benefits for the
managing company. It may obtain the business of exporting or selling otherwise
of the products of the managed company or supplying the inputs required by the
managed company. Management contract enables a firm to commercialize
existing know-how that has been built up with significant investments and
frequently the impact of fluctuations in business volumes can be reduced by
making use of experienced personnel who otherwise would have to be laid off.
Management contracts, obviously, have clear benefits for the clients. They can
provide organizational skills not available locally, expertise that is immediately
available rather than built up, and management assistance in the form of support
services that would be difficult and costly to replicate locally. Management
contracts have disadvantages under certain conditions. As Kotler observes, the
arrangement is not sensible if the company can put its scarce management talent
to better use, or if there are greater profits to be made by undertaking the whole
venture. Management contract may prevent a company from setting up its own
operations for a particular period. One possible risk from the point of view of
the client is over-dependence and loss of control. The client should enable itself
to steadily develop its own capabilities. Some Indian companies--Tata Tea,
Harrisons Malayalam and AVT--have contracts to manage a number of
plantations in Sri Lanka. Tata Tea also has a joint venture in Sri Lanka, namely,
Estate Management Services Pvt. Ltd.
TURNKEY CONTRACTS
Turnkey contracts are common in international business in the supply,
erection and commissioning of plants, as in the case of oil refineries, steel mills,
cement and fertilizer plants etc.; construction projects and franchising
agreements. A turnkey operation is an agreement by the seller to supply a buyer
with a facility fully equipped and ready to be operated by the buyer's personnel,
who will be trained by the seller. The term is sometimes used in fast-food
franchising when a franchiser agrees to select a store site, build the store, equip
it, train the franchisee and employees and sometimes arrange for the financing.
Many turnkey contracts involve government/public sector as buyer (or
seller in some cases). A turnkey contractor may subcontract different
phases/parts of the project.
FULLY OWNED MANUFACTURING FACILITIES
Companies with long term and substantial interest in the foreign market
normally establish fully owned manufacturing facilities there. As Drucker
points out, "it is simply not possible to maintain substantial market standing in
an important area unless one has a physical presence as a producer. A number
of factors like trade barriers, differences in the production and other costs,
government policies etc. encourage the establishment of production facilities in
the foreign markets. More information about this is provided in the chapter on
International Investment. Establishment of manufacturing facilities abroad has
several advantages. It provides the firm with complete control over production
and quality. It does not have the risk of developing potential competitors as in the
case of licensing and contract manufacturing. Wholly owned manufacturing
facility has several disadvantages too. In some cases, the cost of production is
high in the foreign market. There may also be problems such as restrictions
regarding the types of technology, non-availability of skilled labour, production
bottlenecks due to infrastructural problems etc. If the market size is small, a
separate production unit for the market may be uneconomical. Foreign
investment also entails political risks. Fully owned enterprises may not be
allowed or favoured in some countries, particularly in low priority areas.
Moreover, this method demands sufficient financial and managerial resources
on the part of the company.
ASSEMBLY OPERATIONS
As Miracle and Albaum point out, a manufacturer who wants many of
the advantage that are associated with overseas manufacturing facilities and yet
does not want to go that far may find it desirable to establish overseas assembly
facilities in selected markets. In a sense, the establishment of an assembly
operation represents a cross between exporting and overseas manufacturing.
Having assembly facilities in foreign markets is very ideal when there are
economies of scale in the manufacture of parts and components and when
assembly operations are labour intensive and labour is cheap in the foreign
country. It may be noted that a number of U.S. manufacturers ship the parts and
components to the developing countries, get the product assembled there and
bring it back home. The U.S. tariff law also encourages this. Thus, even products
meant to be marketed domestically are assembled abroad. Assembling the
product meant for the foreign market in the foreign market itself has certain
other advantages, besides the cost advantage. The import duty is normally low
on parts and components than on the finished product. Assembly operations
would satisfy the 'local content' demand, at least to some extent. Because of the
employment generation, the foreign government's attitude will be more
favorable than towards the import of the finished product. Another advantage is
that the investment to be made in the foreign country is very small in
comparison with that required for establishing complete manufacturing
facilities. The political risk of foreign investment is, thus, not much.
JOINT VENTURES
Joint venture is a very common strategy of entering the foreign market.
In the widest sense, any form of association which implies collaboration for
more than a transitory period is a joint venture (pure trading operations are not
included in this concept). Such a broad definition encompasses many diverse
types of joint overseas operations, viz.,
1. Sharing of ownership and management in an enterprise.
2. Licensing/franchising agreements.
3. Contract manufacturing.
4. Management contracts.
Three of the above have already been discussed in the preceding
sections. The following paragraphs are confined to the first category referred to
above, i.e., joint ownership ventures. What is often meant by the term joint
venture is joint ownership venture. The essential feature of a joint ownership
venture is that the ownership and management are shared between a foreign firm
and a local firm. In some cases there are more than two parties involved. For
example, Pepsi's Indian joint venture involved Voltas and Punjab Agro
Industries Corporation. A joint ownership venture may be brought about by a
foreign investor buying an interest in a local company, a local firm acquiring an
interest in an existing foreign firm or by both the foreign and local entrepreneurs
jointly forming a new enterprise.
It is also a common practice to split the local interest between a partner
and various public participation (including public sector firms or industrial
development organisations). Such a strategy may enable the international firm
to retain much control despite a minority holding as the power of the remaining
shares is spread out. Further, equity holding by the public would help the
enterprise get some public support. Partnership with government organisation
may help to obtain favourable treatment from the government. In countries
where fully foreign owned firms are not allowed or favoured, joint venture is the
alternative if the international marketer is interested in establishing an enterprise
in the foreign market. Many foreign companies entered the communist, socialist
and other developing countries by joint venturing. One important advantage of
joint venturing is that it permits a firm with limited resources to enter more
foreign markets than might be possible under a policy of forming wholly owned
subsidiaries. In some cases, it is also possible to swap know-how (such as
patent rights for equity) in forming joint venture as a means of securing
ownership in foreign operations. Partnership with local firms has certain specific
advantages. The local partner would be in a better position to deal with the
government and the publics. Further, there would not be much public hostility
when there is a local partner; it would be much less when there is equity holding
by the government sector and the public. A right local partner for a joint venture
can have a major impact on a firm's competitiveness because such a partner can
serve as a cultural bridge between the manufacturer and the market. For
example, several successful foreign affiliated companies have demonstrated
how the right partnership can strongly enhance a firm's competitive edge and its
ability to adapt to and cope with the idiosyncrasies of the Japanese market. As
pointed out in the chapter on Globalisation of Indian Business many Indian
firms have used the joint venture route to enter foreign markets.The economic
liberalisation has caused a spurt in joint ventures in India. In the five years since
the liberalisation of 1991, more than four thousand joint ventures were entered
into between Indian companies and transnationals. Joint ventures present a
mixed picture of success and failure. While some joint ventures are very
successful, some face problems from the very beginning and in case of some
others problems develop after a period of mutual benefit and success.A
Mckinsey world wide study of more than 200 alliances (principally joint ventures)
has shown that the median life span of them is only seven years and in more
than 80 per cent of the cases, it ends in one partner selling out to the other.In
fact, joint ventures are not necessarily meant to be permanent. They are meant
to serve specific objectives within a period of time and once the objectives are
achieved the continuation depends on the reassessment of the situation by the
partners. A number of joint ventures fail to achieve the objectives by either or
both the partners and this could naturally result in the breakdown of the
alliance. A joint venture may go through several points of crisis, caused by the
realisation on the part of either -- sometimes both -- of the partners that its
expectations are not being fulfilled and, perhaps, even being negated. Chances
of such flash points are more with the flattening out of the gains curve on any of
the parameters that govern either partner's decision to be involved in the joint
venture. For, at this point, the gains of one of the partners become
disproportionate to those of the other, leading the former to re-examine the
rationality of retaining the relationship." Such flash points, however, need not
necessarily result in the termination of the joint venture, they may be managed
so that there will be more equitable gains from the joint venture. One of the
important reasons for the failure of joint ventures in India is the unequal
resource and bargaining powers of the partners. The new business environment
that resulted from the liberalisation has increased the cases of failures on
account of this factor. Many transnationals wanted to hike their share in the
equity of the joint venture. This was the reason for the end of the 28 year old
partnership between Royal Dutch Shell and NOCIL. Now that foreign firms are
able to set up fully owned subsidiaries, a number of foreign firms have turned to
such ventures, discarding or neglecting their existing joint ventures in the
country. There are also several cases of the Indian partner`s stake, fully or
partially, sold to the foreign partner because of financial problems. Similarly, the
Indian partner is unable to match with the resourceful foreign firm in bringing in
additional funds for expansion, the Indian partner`s share of the equity holding
falls. A joint venture can succeed only if both the partners have something
definite to offer to the advantage of the other, and reap definite advantages, and
have mutual trust and respect.
THIRD COUNTRY LOCATION
Third country location is some times used as an entry strategy. When
there is no commercial transactions between two nations because of political
reasons or when direct transactions between two nations are difficult due to
political reasons or the like, a firm in one of these nations which wants to enter the
other market will have to operate from a third country base. For example,
Taiwanese entrepreneurs found it easy to enter People`s Republic of China
through bases in Hong Kong. Third country location may also be helpful to take
advantage of the friendly trade relations between the third country and the
foreign market concerned. Thus, for example, Rank Xerox found it convenient
to enter the USSR through its Indian joint venture Modi Xerox. There are
several cases of countries not having direct commercial transactions. For
example, it was true of Israel and Arab Countries. In the past, government of
India did not permit trade with South Africa and Mauritius. Sometimes
commercial reasons encourage third country location. For example, several
Japanese companies established production facilities in developing countries to
circumvent the non-tariff barriers (like quotas, voluntary export restraints and
orderly marketing arrangement) to imports to countries like the United States
and also to avail of the preferential treatment accorded by the developed
countries to the imports from the developing countries. Further, third country
location may be resorted to reduce cost of production and thereby to increase
price competitiveness to facilitate market entry or for improving/maintaining the
market position. The incentives offered by governments, particularly of the
developing countries, for investment and exports encourage such third country
location. The export processing zones are particularly attractive in this respect.
MERGERS AND ACQUISITIONS
Mergers and Acquisitions (M & A) have been a very important market
entry strategy as well as expansion strategy. A number of Indian companies
have also used this entry strategy as noted towards the end of this chapter.
Mergers and acquisitions have certain specific advantages. It provides instant
access to markets and distribution network. As one of the most difficult areas in
international marketing is the distribution, this is often a very important
consideration for M & A. The General Electric, (GE), USA, took over
Hungary's light bulb maker Tungsram. Instead of starting a greenfield`
operation in Hungary by building a new factory and hiring the people needed,
why did the multinational giant take over Tungsram, a typical Hungarian
enterprise bogged down with so many problems calling for a painful
restructuring? The answer is that Tungsram gave GE entry to the East European
light bulb market, from which it had been virtually excluded by Philips and
Osram. Tungsram`s share erf the market in the 1980s was a respectable 9 to 10
per cent. Another important objective of M and A is to obtain access to new
technology or a patent right. M and A also has the advantage of reducing the
competition. Mergers and acquisitions may also give rise to some problems
which arise mostly because of the deficiencies of the evaluation of the case for
acquisition. Sometimes the cost > of acquisition may be unrealistically high.
Further, when an enterprise is taken over, all its problems are also acquired with
it. The success of the enterprise will naturally depend on the success in solving
the problems. It has also been observed that the takeover spree lands several
companies in trouble, For example, in the early 1990s a number of Japanese
companies began to sell some of the foreign businesses which they had
acquired a few years ago. The main reason for this was the financial crunch.
STRATEGIC ALLIANCE
Strategic alliance has been becoming more and more popular in
international business. Also known by such names as entente and coalition, this
strategy seeks to enhance the long term competitive advantage of the firm by
forming alliance with its competitors, existing or potential in critical areas,
instead of competing with each other. The goals are to leverage ; critical
capabilities, increase the flow of innovation and increase flexibility in
responding to market and technological changes. Strategic alliance is also
sometimes used as a market entry strategy. For example, a firm may enter a
foreign market by forming an alliance with a firm in the foreign market for
marketing or distributing the former`s products. A U.S. pharmaceutical firm may
use the sales promotion and distribution infrastructure of a Japanese
pharmaceutical firm to sell its products in Japan. In return, the Japanese firm can
use the same strategy for the sale of its products in the U.S. market. Strategic
alliance, more than an entry strategy, is a competitive strategy. Strategic
alliances which enable companies to increase resource productivity and
profitability by avoiding unnecessary fragmentation of resources and duplication
of investment and effort are growing in popularity and are very conspicuous in
such industries as pharmaceuticals, computer, nuclear, telematics etc. which are
characterised by high fixed costs in K and D and manufacturing and/or high and
fast changing technology. Examples of cross boarder alliances in the telematics
sector which essentially bring together two separate streams of technology --
that related to information gathering and processing and that related to
information transmission -- include IBM's agreements with STET, Italy's state
owned telecommunications company and Nippon Telegraph and Telephone
(Japan) to develop computer communications services, and a joint research
venture with Ericson (Sweden) to explore the linking of data-management
technology with digital switching technology.
The automobile industry has been witnessing several alliances for
overseas operations. The Isuzu Motors Ltd. and Fuji Heavy Industries Ltd. of
Japan have set up a joint plant in the U.S. which can build cars for Fuji and
trucks for Isuzu in the same line. Some Japanese automakers have joined forces
with foreign big names like General Motors and Chrysler. The European car
manufacturers are also teaming up to enhance their competitiveness, often in
one-off projects to produce, say, an engine of transmission. Peugeot, Renault
and Volvo already share V6 engine. According to an alliance between Tatas and
TFR, a leading French leather finisher and European marketer, Tatas will
integrate its production with the exact colour, texture and other requirements of
large European buyers, while TFR will provide the existing marketing network,
links to key buyers, its name and reputation and knowledge of the latest fashion
trends. Tata Tea has entered in to an alliance with Tetley so that the marketing
expertise of Tetley is available to market tea abroad. Explaining international
production, Dunning observes that within the service sector strategic alliances
are less common, but those between hotels, airlines and tour operators and
between accountants and management consultants are increasing; while
international consortia of investment banking and construction firms have long
been a feature of the world commercial scenario.
COUNTERTRADE
Although the major reason for the substantial growth of counter trade is
its use as a strategy to increase exports, particularly by the developing countries,
countertrade has been successfully used by a number of companies as an entry
strategy. For example, Pepsico gained entry to the USSR by employing this
strategy.Countertrade is a form of international trade in which certain export and
import transactions are directly linked with each other and in which import of
goods are paid for by export of goods, instead of money payments. In the
modern economies, most transactions involve monetary payments and receipts,
either immediate or deferred. As against this, "counter trade refers to a variety of
unconventional international trade practices which link exchange of goods -- directly
or indirectly -- in an attempt to dispense with currency transactions.
Forms of Counter trade
Counter trade takes several forms. The following are the most common
among them.
Barter
Barter refers to direct exchange of goods of equal value, with no money and
no third party involved in it. For example, a counter trade deal between the
Minerals and Metals Trading Corporation of India (MMTC) and a Yugoslavian
company involved import of 50,000 tonnes of rails of the value of about $ 38 million
by the MMTC and the purchase by the Yugoslavian company of iron ore
concentrates and pellets of the same value.
Buy Back
Under the buy back agreement, the supplier of plant, equipment or technology
agrees to purchase goods manufactured with that equipment, or technology. Under
the buy back \ scheme, the full payment may be made in kind or a part may be made in
kind and the balance in cash. Thus, a Rs. 20 crore buy back agreement with the
Soviet Union provided for the import of 200 sophisticated looms by the National
Textiles Corporation. The buy back ratio j was 75 per cent.
Compensation Deal
Under this arrangement, the seller receives a part of the payment in cash and
the rest in products.
Counter purchase
Under the counter purchase agreement the seller receives the full payment in
cash but agrees to spend an equivalent amount of money in that country within a
specified period. A classic example of this kind of an agreement was Pepsi Cola's trade
with the USSR. Pepsi Cola got paid in Rubles for the sale of its concentrates in the
USSR but spent this amount for purchase of Russian products like Vodka and
wine.
The array of counter trade transactions reported in the trade press is
intriguing. Coca Cola has traded its syrup for cheese from a factory it built in the Soviet
Union, for oranges from an orchard it planted in Egypt, for tomato paste from a plant it
installed in Turkey, for Polish beer, and for soft drink bottles from Hungary. A Swedish
band was paid in coal for its concerts in Poland, Boeing exchanged ten 747s for 34
million barrels of Saudi Arabian oil. Argentina awarded a fertilizer factory contract to
Czechoslovakian firms with the stipulation that suppliers buy vegetables and other
agricultural goods produced with fertilizer. Many counter trade deals involve more
than two parties and the process becomes complex and intricate. If the sel er can get
in exchange from the buyer the products which he wants or for which he has a ready
market, the counter trade deal would be very smooth. However, in several cases the
buyer will not be in a position to offer in exchange goods which the seller really needs.
In such cases, it may become necessary, for the deal to be struck, for the seller to
accept the products the buyer can offer and hunt for buyers for such products, Kolter,
for example, cites a very interesting case: Daimler Benz agreed to sel thirty trucks to
Romania and accept in exchange 150 Romanian made jeeps, which it sold in
Ecuador in exchange for bananas which it brought back to West Germany and sold
to a West German super market chain in exchange for Deutsch marks. Through this
circuitous transaction, it finally achieved payment in German currency. Such
complexities involved in many counter trade deals have given an important role
to the international trading houses in such transactions. The insurmountable
problem of finding suitable goods in return by the exporters "has redefined the
importance in Japan of the trading houses and "Japan's nine major general
trading houses have all now established divisions specifically to research
counter trade opportunities. Counter deals were used by the Japanese trading
houses as a means to boost their business with hard currency strapped China
and the former USSR. These trading houses can take massive and complex
counter trade deals in their strides as they possess expertise in almost every
field, practice every conceivable trading pattern, and can mobilize everything
from staff to technology to finance. In addition, most are under the umbrellas
of Zaibatsu that include powerful banks and/or construction firms. As if this
were not enough, the trading houses are prepared to join forces with each other
if necessary under the auspices of the awesome Nihon Boekikai, the body they
set up themselves for the handling of joint ventures.
Growth of Counter trade
A significant volume of international trade is covered by counter trade.
Counter trade, of course, is not a new phenomenon but the nineteen seventies
and eighties witnessed a remarkable growth in this type of international trade,
encouraged by many governments and actively involved by many trading
houses, both private and public, although organizations like GATT (WTO)
AND IMF do not favors it. According to one report, the number of countries
practicing counter trade increased from 27 in 1973 to more than 90 by mid
1980s. A study by the US Departments of Commerce found that counter trade
covered 38 per cent of East-West trade in 1981 compared to 28 percent in 1976.
According to the estimates made by the Economist quite some time ago, counter
trade accounted for one-fourth of all world trade. However, the GATT in a report
had noted that in 1983 counter trade accounted for about 8 per cent of the global
trade. A source in the U.S. Department of Commerce expected some time ago
that counter trade would be reflected, in one way or the other, in 50 per cent of
the world trade by the end of the 20th current century. The political and
economic changes in the former USSR and Eastern Europe do not appear to
adversely affect the growth of counter trade.
Counter trade has been growing with government patronage. According
to Terone report, more than 81 countries across the world had actual pro-counter
trade government policies. Counter trade has been made mandatory by a number
of countries including Indonesia, South Korea, Malaysia, and Australia in case
of government/public sector purchases of above certain specified value. Even
though a number of other countries like Bangladesh, Burma, China, Pakistan,
Philippines, Singapore, Thailand and Taiwan have no mandatory provisions, all
encourage their importers to settle transactions on counter trade basis. Indian
public sector agencies like STC and MMTC are active in counter trade.
Government of India set up a special cell in the Ministry of Commerce to
monitor international developments in counter trade and to develop appropriate
policy to enable Indian canalizing agencies to make best use of opportunities
available to boost India`s exports through counter trade.
It may be noted that the South Commission has advocated counter trade
as a useful mechanism for overcoming difficulties of payments, export credit,
and foreign exchange which might otherwise be serious obstacles to the
expansion of trade between developing countries. As the commission points
out, so far the bulk of counter trade between developing countries has been
conducted mostly through intermediaries in the industrial countries. It is the
developed countries who have benefited most from this type of trade, and they
obviously have no interest in helping the indirect trading partners in the LCDs to
establish direct contacts and develop durable trading relationships. Therefore,
the developing countries need to organize themselves of counter trade as this
can also pave the way for the growth of more conventional trading relations.
Reasons for the Growth of Counter trade
There have been several reasons for the counter trade to become
popular. Obviously, the countries or companies concerned have encouraged
or involved in counter trade due to certain specific advantages, although some
of the benefits may be purely temporary.
(i) Counter trade was very common between the communist countries. It
also became popular in respect of trade between the Communist Block and
many developing countries because many developing countries were eagerly
looking towards this block for increasing their exports, among other things,
and this naturally led to the acceptance of the trade practice, preferred by these
centrally planned economies.
(ii) Counter trade became popular in the East-West trade mainly due to
the foreign exchange problems faced by the East Block. Pepsi Cola is just one
example of a multinational corporation which made considerable international
business with the USSR by counter trade.
(iii) When the foreign exchange problem became more severe for the
developing countries following the oil price hikes, they began to actively
pursue counter trade in a frantic l bid to increase their exports by all means.
(iv) Many companies in the advanced countries have resorted to counter
trade for various reasons like selling obsolete products, increasing the sale of
capital goods, increasing the aggregate business etc. Countertrade has also been
resorted to by several companies to mitigate the effects of recession. Such
recessionary situations in the capital goods industries in the advanced countries
gave the developing countries an opportunity to push their exports by tying the
imports of capital goods with exports by counter trade.
The results of a survey of 35 British companies involved in international
counter trade by Shipley and Neale accorded with the descriptive literature in so
far as the Eastern Bloc 1 countries were the main group of counter trade
customers, reflecting their acute currency and international debt problems.
Nevertheless, substantial portions of the firms conducted countertrade in the
world's less developed regions while there was some limited support for the
claims that developed nations counter trade among themselves.
(v) The results of the above survey also suggest that countertrade enables
firms to penetrate difficult markets, to increase sales volume and to achieve fuller
capacity utilisation. It has also been revealed that countertrade enables firms to
dispose of declining products, which is particularly important given the very rapid
pace of technological advance. 37 per cent of the companies surveyed reported
this benefit.
(vi) Some countries have also made the countertrade a means to increase
sales through disguised undercutting of the cartel prices (for example the oil
price fixed by the OPEC).
(vii) Having realised the potential of increasing the business by engaging in
countertrade, many international trading corporations became active in the
countertrade .Their trading with ; many countries enabled them even to take up
such complex transactions as the case of Daimler Benz cited earlier.
It may be noted here that, after the deintegration of the erstwhile Soviet
Union, when the Government of India has been finding it difficult to establish two-
way trade flows, the Pepsi Foods Private Ltd. made an attractive offer to the
Government to enter into counter trade deals with individual enterprises in the
Commonwealth of Independent States to import the much needed oil, non-ferrous
metals, fertilizers and newsprint.
Drawbacks
Although counter trade has several justifications, particularly in the short run,
it suffers from a number of disadvantages and problems, particularly in the long run.
Firstly, counter trade encourages bilateralism at the expense of
multilateralism.
Secondly, it adversely affects export market development.
Thirdly, although several developing countries regard counter trade as an easy
route to export, they often stand to lose in terms of price. For instance Poland
bought Libyan oil at a discount and sold it at a higher price on the Rotterdam spot
market.
Fourthly, it very adversely affects competition.
ENTRY STRATEGIES OF INDIAN FIRMS
India`s economic integration with the rest of the world was very limited
because of the restrictive economic policies followed until 1991. Indian firms
confined themselves, by and large, to the home market. Foreign investment by
Indian firms was very insignificant. With the new economic policy ushered in
1991, there has, however, been a change. Globalization has in fact become a buzz-
word with Indian firms now and many are expanding their overseas business by
different strategies. Indian industry can move towards globalization by different
strategies such as developing exports foreign investments including joint ventures and
acquisitions, strategic alliance, licensing and franchising, etc.
Exporting
Exporting is, by far, the most important entry route employed by Indian firms.
Because of the inward looking economic policy pursued until 1991, the progress made
on the export front was not, in general, something commendable. With the economic
liberalization, an environment for globalization of Indian exports, however, is slowly
emerging. In a truly globalize environment, the exports will also be very much global:
the sourcing of finance, materials and managerial inputs will be global, based on
purely business considerations. Several Indian Companies have entered foreign
markets targeting their exports at the ethnic population. West Asia, with a large
expatriate Indian population, naturally is the first target in many of these cases. The
Mumbai based American Dry Fruits (ADF) which began sel ing a range of packaged
foods like chutneys, spices, canned vegetables, ready-to-eat dais etc. under different
brand names later moved to other countries with large Indian population.
As foreign firms, generally, have neither the expertise nor interest in the ethnic
products, Indian firms do not have to face competition from them, making market
entry and growth fairly easy. A firm which makes the ethnic segment of the market its
entry point may, in due course, after gaining experience in doing business and
establishing a foothold in the foreign market, take up marketing of non-ethnic products
and to non-ethnic consumers. Food products are not the only category being targeted at
ethnic population. Raymonds and Birla-VXL, for example, have a number of
showrooms in West Asia top sel their range of textile items. Shaw Wallace launched
a beer brand called Lai Toofan in U.K. through Shaw Wallace Overseas; the
target consumers of this brand sold at the up market Indian restaurants are
Indians. India has potential for significantly increasing the exports of many
products if appropriate measures are taken. As a matter of fact, in case of number
of products several other developing countries which started their exports later
than India have gone much ahead of India while India's progress has been slow.
With the right policy and procedural reforms and institutional support, with
technological up gradation and modernization and enlargement of production
facilities, with thrust on quality and value added products, with improvements in
infrastructural facilities and with right marketing strategy great strides could be
made in the export of a number of products. Broadly there are three strategies to
increase the export earnings, viz.,
(i) Increase the average unit value realization
(ii) Increase the quantity of exports
(iii) Export new products
One of the most important considerations in exports should be to achieve
maximum unit value realization. Value added exports are a much needed
graduation for India to enhance the foreign exchange earnings. A very
disquieting fact is that India's agricultural exports still are mostly commodity
exports, i.e., they are exported mostly in bulk form and the progress achieved
in value added exports is not anything significant. Value added exports assume
greater significance particularly in view of the stagnation or fall in the
exportable surplus of several commodities--like pepper, cardamom, tea, coffee
etc. The major part of India`s manufactured exports end up in the low-price
segments of the foreign markets. Quality up-gradation and marketing efforts
are needed to reach the upper segments and to achieve enhanced value
realization. Technology imports or foreign collaborations are required for this
in many cases. In many cases, what come in the way of increasing exports are
the supply constraints, this is true of a number of manufactured products as well
as agricultural commodities. Given the constraints for area expansion, increase
in agricultural production should come mostly from increase in productivity
which is very low in India. In respect of many industrial products, the production
capacity is very low and highly fragmented so that there are a large number of
cases of Indian firms not being able to accept offers from abroad for purchase
of large quantities of the products which are far beyond the capacity of these
firms to supply. One of the important ways to increase exports is to expand the
export basket by adding new products and achieving substantial sales of them
abroad. The share of non-traditional items in India's exports has increased very
significantly. However, a lot of potential still remains untapped. For identifying
new products for exports there are two courses: (i) Explore the export opportunities
for products currently produced in India, (ii) Identify products with good demand
abroad which can be competitively produced and supplied by India. An
important export opportunity for India and other developing countries is
provided by the vacation of certain industries or market segments by the
developed country firms due to various reasons like environmental
consideration, lack of competitiveness, declining industry attractiveness etc.
For eg. the developed countries are phasing out production of a wide range of
chemicals due to increased expenditure on overheads and high labor costs.
Given the capabilities and limitations of the Indian companies and the
international environment, appropriate strategies should be formulated to
market different products abroad. Market niching is the right strategy for many
Indian companies. Several Indian companies have indeed successfully used this
strategy in the foreign markets. In some cases a company can adopt the strategy
of straight extension, i.e., extending the same product as marketed in the home
country to the foreign markets. It is particularly relevant in respect of other
developing countries with similar market characteristics as that of India. A large
number of the cases, however, demand quality up gradation, product
modification or product development.
Foreign Investment
As pointed out, it is simply not possible to maintain substantial market
standing in an important area unless one has a physical presence as a producer.
Otherwise, one will soon lose the feel` of the market. Besides the advantage of
getting a feel of the market, offshore investments are encouraged by such factors
as cost advantage, trade barriers etc. The demand for 'local content' is also
satisfied by production in the respective countries. In many cases exporting is
the beginning stage of international business which in, due course; will be
replaced by production in the foreign market. Foreign investment by Indian
companies has so far been very limited. The attractiveness of the domestic
market, lack of global orientation, government regulations etc. have been
responsible for this. By the beginning of 1995, a total of 300 wholly owned
subsidiaries (58 in operation and 242 under implementation) were established by
Indian companies. The operational ventures were dispersed in 40 countries.
With the economic liberalization and growing global orientation, many Indian
companies are setting up manufacturing/assembling/trading bases abroad, either
wholly or in partnership with foreign firms. These would help these companies to
increase their international business. Indian companies have also been making
huge investments abroad on acquisitions. The leader in establishing
manufacturing bases abroad is the Aditya Birla group. Aditya Birla, whom the
Forbes called India's only international businessman, made this strategic move
as early as 1970s. The group's drive to set up business overseas is that "we want
predominance in the industries that we enter. The objective is to be a low-cost,
high-quality and global standard player. A number of large and small Indian
companies are investing abroad as part of their globalization strategy. Several
of these overseas investments aim not only at expansion of production base and
business abroad but also at consolidation of the domestic business. The
Ballarpur Industries of the Thapars are setting up a giant paper mill in Indonesia
at an estimated cost of Rs. 1800 crores. A plantation put up on 2,50,000 hectares
of land will feed the mill. Any surplus pulp may be exported to India to feed
Thapar paper mills here. The significance of it should be viewed aganist the
possible wood and pulp shortage in future in India. The Ceat expects that when
the tariff barriers between the SAARC countries come down, part of the South
Indian market could be served by its tyre plant in Sri Lanka. Indian companies
are also establishing production facilities abroad to get an easy entry into the
regional trade blocs. For example, a base in Mexico opens the doors to the
NAFTA region for the Aravind Mills. Similarly Cheminor Drugs, one of the
Dr. Reddy's Labs Group of companies, has set up a subsidiary in New Jersey.
Mergers and Acquisitions
Mergers and Acquisitions (M & As) are very important market entry as
well as growth strategy. M &As have certain advantages. It may be used to
acquire new technology, M &As would have the effect of eliminating/reducing
competition. One great advantage of M &As in some cases is that it provides
instant access to markets and distribution network. As one of the most difficult
areas in international marketing is the distribution, this is sometimes the most
important objective of M &As. For example, Vijay Mallya`s U.B. group acquired
a small British company, Wiltshire Brewery. The attraction of Wiltshire for U.B.
was that the former offered a readymade chain of 300 pubs throughout Britain
which could be used for the marketing of U.B.`s brands of beer like Kingfisher,
Kalyani etc. The U.B. group has gone for such acquisitions in U.S.A. and S.
Africa. A number of other Indian companies have also resorted to acquisition of
companies abroad to gain a foothold in the foreign market and to increase the
overseas business. Apart from the big players, a host of lesser known companies
have bought out cash strapped plants in Europe, USA etc.
Joint Ventures
Joint venturing is a very important foreign market entry and growth
strategy in the context of the deficiencies of the Indian firms in resources,
technology and marketing. This indeed a is very important strategy employed
by Indian firms. It is an important route taken by pharmaceutical firms like
Ranbaxy, Core, Lupin, Reddy`s etc. In several cases joint ventures, as in the
case of foreign subsidiaries, help Indian firms to stabilise and consolidate their
domestic business, besides the expansion of the foreign business. Essar
Gujarat's joint ventures in countries like Indonesia and Bangladesh to
manufacture cold rolled (CR) steel have resulted from a strategy to create an
assured market for its hot rolled (HR) coil mother plant at Hazaria (HR coils are
inputs for manufacturing CR steel products). The Essel Packaging has taken the
joint venture route to expand its business abroad. The joint ventures abroad
convert the laminate into tubes to be marketed in foreign markets. The
centralisation of the laminates production in India enables the company to reap
enormous economies of scale. The high cost of transportation of tubes over
laminates makes the conversion of laminates into tubes in the foreign markets
more profitable. Further, the establishment of tube production facilities in
foreign markets helps to pre-empt competition. The liberalisation of policy
towards foreign investment by Indian firms along with the new economic
environment seems to have given joint ventures a boost. At the beginning of
1995 although there were 177 joint ventures (with a total equity of Rs.179
crores), in operation, there were 347 (total investment Rs. 1400 crores) under
implementation. Not only the number of joint ventures is increasing but also the
number of countries and industries in the map of Indian joint ventures is
expanding. Further liberalisation, like enhancement of the investment limit of
automatic clearance, is needed for a fast expansion of the Indian investment
abroad.
Strategic Alliance
Strategic alliance provides enormous scope for the Indian business to
enter/expand the international business. This is particularly important for
technology acquisition and overseas marketing. Alliance is indeed an important
international marketing strategy employed by several Indian firms.
Licensing and Franchising
Licensing and franchising, which involve minimal commitment of resource
and effort on the part of the international marketer, are easy ways of entering the
international market. Many Indian firms can use licensing or franchising for the
overseas market; particularly the developing countries. For example, Ranbaxy
has licensing arrangement in countries like Indonesia and Jordan.
Conclusion
The limitations of national markets, the diversity and unevenness of resource
endowments of different nations, complexity of technological developments,
differences in the levels of development and demand patterns, differences in
production efficiencies and costs, technological revolution in communication
and other fields etc. mandate globalisation. The intent of globalisation is
efficiency improvement and market optimisation taking advantage of the
opportunities of the global environment. Therefore, in many cases, Indian
companies have to globalise to survive and grow in the emerging competitive
environment. The restrictive economic policies of the past severely affected the
competitiveness and growth of the Indian Industry in general. The new economic
policy, albeit suffers from certain defects, is a welcome change. If the Indian
firms have the facility to obtain the latest technology in the world, to raise
finance from the cheapest source and procure the materials from the best source
in the world, they are on equal footing with the foreign firms in many respects.
And if the Indian firms can muster some edge ever the foreign firms in respect
of labour cost, productivity, product quality/features etc. that could be a
competitive advantage. In many cases, size is an important factor which
influences the competitive power. The economic liberalisation by pruning down
the list of industries reserved for the public sector, delicensing and amending the
MRTP Act has provided an environment which enables companies to grow fast,
both internally and externally. The growth plans of many Indian companies
indicate a great leap forward. The turnover of Reliance is projected to more than
double from Rs.5300 crores to Rs.12000 crores in a short span of 3 to 4 years.
The Modern Group's turnover has more than doubled from Rs.525 crores in
1994-95 in two years time, a fifth of it being exports. The Kirloskar group which
had a turnover of about Rs. 1300 crores in 1995 is targeting Rs.7000 crores by
the year 2000. The Rs.6000 crores ITC group, is positioning itself to become a
prominent Indian MNC by the turn of the century. Out of the turnover of
Rs.4280 crores of its flagship company in 1993-94, Rs.822 crores were from
exports. The Arvind Mills, whose projected turnover is 1996-97 was about Rs
1100 crores, is planning to more than triple it to $ 1 billion by the turn of the
century. The increase in the size could keep the companies on a strong footing to
make further dent into both the domestic and foreign markets. In short, the
Indian industry is where they can make jumbs compared to the past situation of
limping forward. Several Indian companies are already leading players. The Ispat
group of the Mittals which has units in countries like the U.Sc, Canada, Indonesia,
Trinidad and Tobago is the largest sponge iron producer in the world. The Aditya Birla
group is the world's largest player in viscose fibre and carbon black and also the largest
refiner of palm oil. The Essel packaging which is already the world's second largest
integrated producer of laminated tubes is aiming to climb up to the number one poison.
Arvind Mills, one of the world`s largest producers of denim cloth, is making further
thrusts. When its ongoing projects are fully implemented, Reliance Industries would
be the second largest texturiser in the world to be ful y integrated from naphtha to
fabrics. India is also a major player in two-wheelers and bicycles. India is the largest
producer of several agricultural commodities. The liberalisation in India and in
other countries poses a real challenge to the Indian business to prove its mettle.
UNIT?IV
Global Product Management
A Product is often considered in a narrow sense as something tangible
that can be described in terms of physical attributes. Such as sample, dimension,
components, from, color and soon. This is a misconception that has been
extended to international marketing because many people believe that only
tangible product can be exported. But actually in tangible products are a
significant part of the American export market. For example, American movies
are distributed worldwide and business consulting services. In the financial
market, Japanese and European banks have been internationally active in
providing financial assistance. In many situations both tangible and intangible
products must be combined to create a single, total product. Product describe it
as a bundle of utilities or satisfaction.
A product can be defined as a collection of physical,
psychological, services and symbolic attributes that collectively yield
satisfaction, a benefits, to a buyer or user.
Pricing For International Marketing
Price is an integral part of a product-a product can not exist with out a
price. It is difficulty to think or talk about a product with out considering its
price. Setting the right price for a product can be the key to success or failure.
Even when the international marketer produces the right product, promotes it
correctly, and initiates the proper channel of distribution, the effort fails if the
product is not properly priced. A product`s price must reflect the quality and
value the consumer perceives in the product. The company operating in
international markets have to identify the best approach for setting price
worldwide.
Marketing Industrial Products And Services Globally
Industrial Marketing Consists of all activities involved in the marketing
of products and services to organizations i.e., commercial enterprises, profit and
not ? for profit institutions, government agencies and resellers that use products
and services in the production of consumer or individual goods and services, and
to facilitate the operation of their enterprises.
The critical issue facing industrial marketing is to remain competitive in
what has become an increasingly competitive world. Today all nation complete
with one another for markets, capital, technology supplies and raw materials.
PRODUCTS: Local. National, International. And Global
Many companies find that, as a result of expanding existing businesses
or acquiring a new business, they have products for sale in a single national
market. For example, Kraft Foods at one time found itself in the chewing gum
business in France, the ice cream business in Brazil, and the pasta business in Italy.
Although each of these unrelated businesses was, in isolation, quite profitable, the
scale of each was too small to justify heavy expenditures on R&D, let alone
marketing, production, and financial management from international headquarters.
An important question regarding any product is whether it has the potential for
expansion into other markets. The answer will depend on the company`s goals and
objectives and on perceptions of opportunity.
Managers run the risk of committing two types of errors regarding product
decisions in global marketing. One error is to fall victim to not invented here
(NIH) syndrome, ignoring product decisions made by subsidiary or affiliate
managers. Managers who behave in this way are essentially abandoning any effort
to leverage product policy outside the home-country market. The other error has
been to impose product decision policy on all affiliate companies on the assumption
that what is right for customers in the home market must also be right for customers
everywhere.
The four product categories in the local-to-global continuum--local,
national, international, and global--are described in the following sections.
Local Products
A local product is available in a portion of a national market. In the
United States, the term regional product is synonymous with local product.
These products may be new products that a company is introducing using a
rollout strategy, or a product that is distributed exclusively in that region.
Originally, Cape Cod Potato Chips was a local product in the New England
market. The company was later purchased by Frito-Lay and distribution was
expanded to other regions of the United States.
National Products
National product is one that, in the context of a particular company, is
offered in a single national market. Sometimes national products appear when a
global company caters to the needs and preferences of particular country
markets. For example, Coca-Cola developed a noncarbonated, ginseng-flavored
beverage for sale only in Japan and a yellow, carbonated flavored drink called
Pasturina to compete with Peru`s favorite soft drink, Inca Cola. After years of
failing to dislodge Inca Cola, Coke followed the old strategic maxim, if you
can`t beat them, buy them, and acquired Inca Cola.
International Products
International products are offered in multinational, regional markets. The
classic international product is the Euro product, offered throughout Europe but
not in the rest of the world. Renault was for many years a Euro product. When
Renault entered the Brazilian market, it became a multiregional company. Most
recently, Renault invested in Nissan and has taken control of the company. The
combination of Renault in Europe and Latin America, and Nissan in Asia, the
Americas, Europe, the Middle East and Africa, has catapulted Renault from a
multiregional to a global position. Renault is an example of how a company can
move overnight through investment or acquisition from an international to a global
position.
Global Products and Global Brands
Global products are offered in global markets. A truly global product is
offered in the Triad, in every world region, and in countries at every stage of
development. Some global products were designed to meet the needs of a global
market; others were designed to meel4he needs of a national market but also,
happily, meet the needs of a global market.
Examples: Marlboro, Coke
Sony, Avon, Mercedes, BMW, Volvo
Product positioning
Product positioning is a communications strategy based on the notion of
mental space. Positioning refers to the act of locating a brand in customers`
minds over and against other products in terms of product attributes and
benefits that the brand does and does not offer.
Several general strategies have been suggested for positioning products:
positioning by attribute or benefit, quality/price, use or application, and use/user.
Two additional strategies, high-tech and high-touch, have been suggested for
global products.
Attribute Or Benefit
A frequently used positioning strategy exploits a particular product
attribute, benefit, or feature. In global marketing, the fact that a product is
imported can itself represent a benefit positioning. Economy, reliability, and
durability are other frequently used attribute/benefit positions. Volvo
automobiles are known for solid construction that offer safety in the event of a
crash. In the ongoing credit card wars, VISA`s advertising focuses on the
benefit of worldwide merchant acceptance.
Quality/Price
This strategy can be thought of in terms of a continuum from high
fashion/quality and high price to good value (rather than low quality) at a low
price.The American Express Card, for example, has traditionally been
positioned as an upscale card whose prestige justifies higher annual fees than
VISA or MasterCard. The Discover card is at the other end of the continuum.
Discover`s value position results from no annual fee and a cash rebate to
cardholders each year.
USE/USER
Positioning can also be achieved by describing how a product is used or
associating a product with a user or class of users the same way in every market.
For example, Benetton uses the same positioning for its clothing when it targets
the global youth market Marlboro's extraordinary success as a global brand is
due in part to the product's association with cowboys--the archetypal symbol of
rugged independence, freedom, space, and Americana--and transformation
advertising that targets urban smokers.
Can global positioning work for all products? One study suggests
that global positioning is most effective for product categories that approach either
end of a high-touch / high-techcontinuum. Both ends of the continuum are
characterized by high levels of customer involvement and by a shared language
among consumers.
High-Tech Positioning
Personal computers, video and stereo equipment, and automobiles are
product categories for which high-tech positioning has proven effective. Such
products are frequently purchased on the basis of physical product features,
although image may also be important. Buyers typically already possess--or wish
to acquire--considerable technical information. High-tech products may be
divided into three categories: technical products, special- I interest products, and
demonstrable products.
Computers, chemicals, tires, and financial services are technical products in
the sense that buyers have specialized needs, require a great deal of product
information, and share a common language. Computer buyers in Russia and the
United States are equally knowledgeable about Pentium microprocessors, hard
drives, and random access memory (RAM) requirements. Marketing
communications for high-tech products should be informative and emphasize
features.
Special-interest products also are characterized by a shared experience
and high involvement among users, although they are less technical and more
leisure or recreation oriented. Again, the common language and symbols
associated with such products can transcend language and cultural barriers. Fuji
bicycles, Adidas and Nike sports equipment, Canon cameras, and Sega video
game players are examples of successful global special-interest products.
High-Touch Positioning
Marketing of high-touch products requires less emphasis on specialized
information and more emphasis on image. Like high-tech products, however,
high-touch categories are highly involving for consumers. Buyers of high-touch
products also share a common language and set of symbols relating to themes of
wealth, materialism, and romance. There are three categories of high-touch
products: products that solve a common problem, global village products, and
products with a universal theme. At the other end of the price spectrum from
high-tech, high-touch products that can solve a problem often provide benefits
linked to life`s little moments. Ads that show friends talking over a cup of
coffee in a cafe or quenching thirst with a soft drink during a day at the beach
put the product at the center of everyday life and communicate the benefit
offered in a way that is understood worldwide. Upscale fragrances and designer
fashions are examples of products whose positioning is strongly cosmopolitan in
nature. Fragrances and fashions have traveled as a result of growing worldwide
interest in high-quality, highly visible, high-priced products that often enhance
social status.
Products may have a global appeal by virtue of their country of origin.
The Americanness of Levi`s, Marlboro, McDonald`s, and Harley-Davidson
enhances their appeal to cosmopolitans around the world and offers
opportunities for benefit positioning. In consumer electronics, Sony is a name
synonymous with vaunted Japanese quality; in automobiles, Mercedes is the
embodiment of legendary German engineering.
Some products can be positioned in more than one way, within either the
high-tech or high-touch poles of the continuum. A sophisticated camera, for
example, could simultaneously be classified as technical and special interest.
Other products may be positioned in a bipolar fashion, that is, as both high-tech
and high-touch. For example, Bang & Olufsen consumer electronics products, by
virtue of their design elegance, are perceived as both high-tech and high-touch.
Product Design Considerations
Product design is a key factor in determining success in global marketing.
Should a company adapt product design for various national markets or offer a
single design to the global market? In some instances, making a design change may
increase sales, However, the benefits of such potential sales increases must be
weighed against the cost of changing a product's design and testing it in the
market. Global marketers need to consider four factors when making product
design decisions: preferences, cost, laws and regulations, and compatibility.
Preferences
There are marked and important differences in preferences around the
world for factors such as color and taste. Sometimes, a product design that is
successful in one world region does meet with success in the rest of the world.
BMW and Mercedes dominate the luxury car market in Europe and are strong
competitors in the rest of the world, with exactly the same design, In effect, these
companies have a world design. The other global luxury car manufacturers are
Japanese, and they have expressed their flattery and appreciation for the appeal
of the BMW and Mercedes look by styling cars that are influenced by the BMW
and Mercedes line and design philosophy. If imitation is the most sincere form of
flattery, BMW and Mercedes have been honored by their competition.
Cost
In approaching the issue of product design, company managers must
consider cost factors broadly. Of course, the actual cost of producing the product
will create a cost floor. Other design-related costs--whether incurred by the
manufacturer or the end user--must also be considered . The cost of repair
services varies around the world and has an impact on product design. Another
example of how labor cost affects product decisions is seen in the contrasting
approaches to aircraft design adopted by the British and the Americans. The
British approach, which resulted in the Comet, was to place the engine inside the
wing. This design meant lower wind resistance and, therefore, greater fuel
economy. The American approach to the question of engine location was to
hang the engines from the wings at the expense of efficiency and fuel economy to
gain a more accessible engine and, therefore, to reduce the amount of time
required for engine maintenance and repair. Both approaches to engine location
were rational. The British approach took into account the relatively lower cost of
the labor required for engine repair, and the American approach took into account
the relatively high cost of labor for engine repair in the United States.
LAWS AND REGULATIONS
Compliance with laws and regulations in different countries has a direct
impact on product design decisions, frequently leading to product design
adaptations that increase costs. This may be seen especially clearly in Europe. In
the food industry, for example, there were 200 legal and regulatory barriers to
cross-border trade within the European Union (EU) in 10 food categories.
Among these were prohibitions or taxes on products with certain ingredients, and
different packaging and labeling laws. Experts predict that the removal of such
barriers will reduce the need to adapt product designs and will result in the cre-
ation of standardized Euro-products.
Compatibility
The last product design issue that must be addressed by company
managers is product compatibility with the environment in which it is used. A
simple thing such as failing to translate the user's manual into various languages
can hurt sales of American-made home appliances built in America outside the
United States. Also, electrical systems range from 50 to 230 volts and from 50 to
60 cycles. This means that the design of any product powered by electricity must
be compatible with the power system in the country of use.
Manufacturers of televisions and video equipment find that the world is
a very incompatible place for reasons besides those related to electricity.
Three different TV broadcast and video systems are found in the world today:
the U.S. NTSC system, the French SECAM system, and the German PAL
system. Companies that are targeting global markets design multisystem TVs
and VCRs that allow users to simply flip a switch for proper operation with any
system. Companies that are not aiming far the global market design products
that comply with a single type of technical requirements. Cell phones
manufactures encounter the GSM standard which has been adapted in Europe
and in many other countries. However, the United States has three different cell
technologies, and Japan has yet another CCU Standard. Measuring systems do
not demand compatibility, but the absence of compatibility in measuring
systems can create product resistance.
Labeling And Instructions
Product labeling and instructions must comply with national law and
regulation. For example, there are very precise labeling requirements for
prescription drugs and poisons. In addition, however, labeling can provide valuable
consumer information on nutrition, for example. Finally, many products require
operating and installation instructions.
In which languages should labeling and instructions be printed? One
approach to this issue is to print labels and instructions in languages that are used
in all of the major markets for the product. The use of multiple languages on labels
and instructions simplifies inventory control: The same packaging can be used for
multiple markets. The savings from simplicity must be weighed against the cost of
longer instruction booklets and more space on labels for information.
Brands in International Markets
Hand in hand with global products and services are global brands. A
global brand is defined as the worldwide use of a name, term, sign, symbol
(visual and/or auditory), design, or combination thereof intended to identify
goods or services of one seller and to differentiate them from those of
competitors.
A successful brand is the most valuable resource a company has. The
brand name encompasses the years of advertising, good will, quality evaluation,
product experience, and other beneficial attributes the market associates with-the
product. Brand image is at the very core of business identity and strategy.
Customers everywhere respond to images, myths, and metaphors that help them
define their personal and national identities within a global context of world
culture and product benefits. Global brands play an important role in that
process. The value of Kodak, Sony, Coca-Cola, McDonald`s, Toyota, and
Marlboro is indisputable. One estimate of the value of Coca-Cola, the world's
most valuable brand.
Global Brands
Naturally, companies with such strong brands strive to use those brands
globally. In fact, it appears that even perceived globalness leads to increases in
sales. The Internet and other technologies are accelerating the pace of the
globalization of brands. Even for products that must be adapted to local market
conditions, a global brand can be successfully used with careful consideration.
Ideally a global brand gives a company a uniform worldwide image that
enhances efficiency and cost savings when introducing other products associated
with the brand name, but not all companies believe a single global approach is
the best. Indeed we know that the same brand does not necessarily hold the same
meanings in different countries. In addition to companies such as Kodak, Kellogg,
Coca-Cola, Caterpillar, and Levi`s that use the same brands worldwide, other
multinationals such as Nestle, Mars, Procter & Gamble, and Gillette have some
brands that are promoted worldwide and other that are country specific. Among
companies that have faced the question of whether or not to make all their brands
global, not all have followed the same path.
National Brands
A different strategy is followed by the Nestle Company, which has a stable
of global and country-specific national brands in its product line. The Nestle name
itself is promoted globally, but its global brand expansion strategy is two-
pronged. In some markets it acquires well-established national brands when it
can and builds on their strengths-there are 7,000 local brands in its family of
brands. In other markets where there are no strong brands to be local, people to be
regional, and technology to be global, It does, however, own some of the world's
largest global brands; Nescafe is but one.
Multinationals must also consider rises in nationalistic pride that occur in
some countries and their impact on brands. In India, for example, Unilever
considers it critical that its brands, such as Surf detergent and Lux and Lifebuoy
soaps, are viewed as Indian brands. Just as is the case with products, the answer
to the question of when to go global with a brand is, It depends--the market
dictates. Use global brands where possible and national brands where
necessary.
Private Brands
Private brands owned by retailers are growing as challenges to
manufacturers' brands, whether global or country specific. In the food-retailing
sector in Britain and many European countries, private labels owned by national
retailers increasingly confront manufacturers` brands. From blackberry jam and
vacuum-cleaner bags to smoked salmon and sun-dried tomatoes, private-label
products dominate grocery stores in Britain and in many of the hypermarkets of
Europe. Private brands captured nearly 30 percent of the British and Swiss
markets and more than 20 percent of the French and German markets. In some
European markets, private-label market share doubled in just the past five years.
As it stands now, private labels are formidable competitors. They
provide the retailer with high margins; they receive preferential shelf space and
strong in-store promotion; and, perhaps most important for consumer appeal,
they are quality products at low prices. Contrast that with manufacturers' brands,
which traditionally are premium priced and offer the retailer lower margins than
they get from private labels.
Employ Global Brand-planning Process
Companies that follow good global brand management practices, use a wel -
defined planning process. The planning process is similar across markets and
products. The similarity can be seen in terms of vocabulary, strategic analysis inputs
such as competitor positions and strategies and brand strategy models, and outputs
such as brand building programs.
A brand strategy model must make clear which person or group is responsible
for the brand and brand strategy. The strategy model must also involve a process
template (or outline). The process template must mention the target segment, the brand
identity or vision, brand equity goals and measures, and brand-building programs.
Effective brand planning programs must.
Involve an analysis of customers, competitors, and the brand.
Avoid an exclusive focus on product attributes.
Involve programs that communicate the brand`s identity.
Include brand equity measurement and goals.
Include a mechanism to the global brand strategies to country brand strategies.
Brilliant Brand Building Strategies
Attaining global brand leadership needs appropriate brand building
strategies. The firm has to first consider what type of brand building strategy to adopt.
It can follow advertising, sponsorship, increasing retail presence, and promotions for
its brand building efforts. The firm has to decide which one best serves its
requirements.P&G comes up with exceptional ideas by giving enough freedom to its
country teams in developing breakthrough brand building programs.
Another way to stimulate creative ideas is to have more than one advertising
agency as the service provider. As mentioned earlier, a single agency can better oversee
a campaign.
Brand measurement is necessary to see that brand building is actually going
on. The measurement system must be designed in such a way that it measures not
only financial performance but also customer awareness, customer loyalty, the
brand`s personality, and the brand associations that resonate with the public.
Brand Piracy
Creation of brand in itself is not enough. The brand also should be protected
from piracy through registrations. Various forms of piracy are: outright piracy, reverse
engineering, counterfeiting, and passing off.
Counterfeiting
Counterfeiting means diluting the product quality and selling under the
same trademark. This is quite prevalent in clothing industry. For example,
counterfeited version of Levi`s branded jeans are available in market at Rs 250 when
the original product costs more than three times this price.
Passing Off
Some times products are modified, and trademarks are adapted. The pirated
product is similar in appearance, phonetic quality or meaning (of its name) to the
original product. Immediately after Sony introduced Walkman in the market, many
other electronic goods manufacturing companies released similar products.
Reverse Engineering
Reverse engineering involves dismantling another firm's product to learn
about its special features. This form of piracy is prevalent in the electronic goods
industry.
Outright Piracy
When a false product is sold in the same form and same trademark as the
original, is referred to as Outright Piracy. Music records and tapes are often sold in this
way.
Single Brands VS Multiple Brands
A company can market a single brand or multiple brands the same time. It
chooses to market a single brand when the brand needs full attention, and multiple
brands when the market is heterogenous and needs to be segmented. (Refer Exhibit
11.3 for P&G`s global branding strategy). Each brand is then targeted at a separate
segment. A company uses the strategy of multiple brands when it wants to move up
or down the segment it is serving. A firm with multiple brands can position some
brands in lower price segments and some brands in premium segments.
New Products in Global Marketing
What is a new product? Newness can be assessed in the context of the
product itself, the organization, and the market. The product may be an entirely
new invention or innovation--for example, the videocassette recorder (VCR) or
the compact disc. It may be a line extension (a modification of an existing
product) such as Diet Coke. Newness may also be organizational, as when a
company acquires an already existing product with which it has no previous
experience. Finally, an existing product that is not new to a company may be
new to a particular market.
In today`s dynamic, competitive market environment, many Companies
realize that continuous development and introduction of new products are keys
to survival and growth. Which companies excel at these activities? Gary Reiner, a
new-product specialist with the Boston Consulting Group, has compiled the
following list: Honda, Compaq, Motorola, Canon, Boeing, Merck, Microsoft,
Intel, and Toyota. One common characteristic: They are global companies that
pursue opportunities in global markets in which competition is fierce, thus
ensuring that new products will be world class. Other characteristics noted by
Reiner are as follows:
1. They focus on one or only a few businesses.
2. Senior management is actively involved in defining and improving the
product development process.
3. They have the ability to recruit and retain the best and the
brightest people in their fields.
4. They understand hat speed in bringing new products to market reinforces
product quality.
New Product Development
There are six distinct steps in new product development. The first step is the
generation of new product ideas. Such ideas can come from any number of sources
(e.g., salespersons, employees, competitors, governments, marketing research firms,
customers, etc.). A 3M company chemist, after spilling some liquid on her tennis
shoes, found that they had become capable of repelling water and dirt, and that is
how Scotch-gard fabric protector was born.
The second step involves the screening of ideas. Ideas must be
acknowledged and reviewed to determine their feasibility. To determine
suitability, a new product concept may simply be presented to potential users, or
an advertisement based on the product can be drawn and shown to focus groups
to elicit candid reactions. As a rule, corporations usually have predetermined
goals that a new product must meet. Kao Corporation, a major Japanese
manufacturer of consumer goods, is guided by the following five principles of
product development: (1) a new product should be truly useful to society, not
only now but also in the future, (2) it should make use of Kao`s own creative
technology or skill, (3) it should be superior to the new products of competitors,
from the standpoint of both cost and performance, (4) it should be able to stand
exhaustive product tests at all stages before it is commercialized, and (5) it
should be capable of delivering its own message at every level of distribution.
The third step is business analysis, which is necessary to estimate
product features, cost, demand, and profit. Xerox has small so-called product
synthesis teams to test and weed out unsuitable ideas. Several competing teams
of designers produce a prototype, and the winning model that meets preset
goals then goes to the product development team.
The fourth step is product development, which involves lab and technical
tests as well as manufacturing pilot models in small quantities. At this stage the
product is likely to be handmade or produced by existing machinery rather than
by any new specialized equipment. Ideally, engineers should receive direct
feedback from customers and dealers.
The fifth step involves test marketing to determine potential marketing
problems and the optimal marketing mix.
Finally, assuming that things go well, the company is ready for full-scale
commercialization by actually going through with full-scale production and
marketing.
It should be pointed out that not all of these six steps in new product
development will be applicable to all products and countries. Test marketing,
for example, may be irrelevant in countries where most major media are more
national than local. If the television medium has a nationwide coverage, it is not
practical to limit a marketing campaign to one city or province for test
marketing purposes.
Unfortunately, it is easier for a new product to fail than to succeed.
Naturally, so many things can go wrong (-see Marketing-Strategy 10-1).
Therefore, it is just as critical for a company to know when to retreat as when
to launch a product. Coca-Cola`s Ambasa Whitewater, a lactic-based drink,
was removed from the market after eighteen months when sales started to
decline.
Standardization Vs Differentiation
Standardization Standardized marketing mix involves developing a
standard product and marketing it across the national border with the same
communication, pricing, and distribution strategy. With the advent and
standardization of technology and more specifically that of communications,
customer needs are globally getting homogenized. This process or homogenization
of needs is getting accelerated as trade barriers come down one after another leading to
globalization of markets. Worldwide communication has raised customers`
expectations and demands for better living standards, work life, and
entertainment. This cuts across cultures and religions. Nothing better confirms this than
the success of brands like Coke, Pepsi, Levis, Benetton readymade garments, Sony
and Panasonic electronic items, and even Hollywood films and soap operas made in
the US and different parts of the world that have diverse cultures and religions.
These commonalities in customer preferences lead conclusively to the
standardization route in corporate strategy.
Standardization helps the firm not only reduce its costs but also to ensure
superior quality and consistent brand image across the world market. It helps the firm
achieve economies of scale which is not possible in any other approach.4 Japanese
firms have relentlessly pursued this strategy and gained substantial scale economies,
often at the expense of their rivals. Global firms compete in different national
markets through a standardization strategy and offer appropriate volume--the
best combination of price, quality, reliability, and delivery of products.
However, there are pitfalls in this decision. A study shows that the success of
a global firm is based on how global decisions are conceptualized, refined, internally
communicated, and implemented across the world market. It concludes that firms
which lose out in the global marketing warfare are the ones that insufficiently used
marketing research, had a tendency to over standardize, did poor follow-up, and
had a narrow global perspective.
Differentiation
Opposed to standardization is the differentiation strategy. This involves
responding to differences in customer preferences arising out of cultural, social,
and religious barriers that divide nations. This strategy does help in building up
sales volumes, but the cost is prohibitive when done at a global level. Imagine
Levis, Benetton, Coke, McDonald`s, Burger King, and Tacobell having to
differentiate their marketing mix to suit different cultural preferences. They will
not be able to derive economies of scale and hence their cost of operations in a
market will be much higher. This will push up prices for consumers or else they
will be out of business. Further, these global firms will never be able to ensure
identical brand image across the world market. This goes against the thesis of
globalization.
Nonetheless, local preferences and conditions will need to be woven into
the marketing mix. The more acceptable route is that of localizing the marketing
mix. This involves decentralizing decision making at the local affiliate level.
This is useful especially when it comes to areas like marketing communication,
distribution, and to a limited extent, in the packaging area. For example, Sunsilk
shampoo from Unilever could achieve a higher penetration in the toiletries
market in South Asia only when it introduced sachet packs for single use and
priced it at an affordable level of Re 1 in India and comparable level in other
South Asian countries as well. Maggi noodles, marketed by Nestle, could
achieve a resounding success only when it included cooking instructions in its
TV commercials and on the pack and also added taste makers to suit Indian taste
buds. However, these and other successful global firms do not leave critical
decisions like brand image, brand identity, product focus or positioning to local
affiliates.
A study showed that two successful global firms, Nestle and Coca-Cola,
standardized their product decisions but adapted their advertising, sales
promotion, distribution, and customer service to suit local country preferences
and conditions .The authors of this study maintain that local aspirations and
strong managements in major country markets must be respected and persuaded
to accept standardized products. Even the headquarters needs to listen to local
managers and do not rigidly implement their standardized marketing mix in
countries showing distinctive customer preferences or needs. The success of
global marketing is based on gaining cooperation from affiliates` managers in
implementing the strategy. The approach of the headquarters towards affiliates
has to focus on both the means and the ends.
Environmental Influences on Pricing Decisions
Global marketers must deal with a number of environmental
considerations when making pricing decisions. Among these are currency
fluctuations, inflation, government controls and subsidies, competitive behavior,
and market demand. Some of these factors work in conjunction with others; for
example, inflation may be accompanied by government controls. Each
consideration is discussed in detail next.
Currency Fluctuations
Fluctuating currency values are fact of life in international business. The
marketer must decide what to do about this fact. When currency fluctuations
result in appreciation in the value of the currency of a country that is an
exporter, wise companies do two things: They accept that currency fluctuations
may unfavorably impact operating margins, and
When Domestic Currency Is
When Domestic Currency
Weak
Is Strong
Engage
in
nonprice
1 Stress price benefits.
com 1petition by improving
quality, delivery, and after-sale
service.
.
.
2 Expand product line
Improve productivity and
. and add more costly features.
engage in cost reduction.
2
3 Shift sourcing to domestic
3 Shift sourcing outside home
.
. market.
. country.
Exploit
market
Give priority to exports to
opp 4
ortunities in all markets.
co 4
untries
with
stronger
currencies.
.
.
Use full-costing approach
Trim profit margins and
but 5employ marginal-cost pricing
use marginal-cost pricing.
to penetrate new or competitive
5
markets.
.
.
Keep the foreign-earned
6
income in host country; slow down
Speed repatriation of
6
collections.
. foreign-earned
income
and
collections.
.
7 Minimize expenditures in
7 Maximize expenditures in
. local or host-country currency.
. local or host-country currency.
Buy advertising, insurance,
Buy needed services abroad
tran 8sportation, and other services in
and pay for them in local
domestic market.
8
currencies.
Bill foreign customers in their
.
.
9
own
9 Bill foreign customers in
.
. the domestic currency.
currency.
They double their efforts to reduce costs. In the short run, lower margins
enable them to hold prices in target markets, and in the longer run, driving down
costs enables them to improve operating margins.
For companies that are in a strong, competitive market position, prices
increases can be passed on to customers without significant decreases in sales
volume. In more competitive market situations, companies in a strong-currency
will often absorb any price increase by maintaining international market prices
at pre-revaluation levels. In actual practice, a manufacturer and its distributor
may work together to maintain market share in international market. If a
country`s currency weakens relative to a trading partner's currency, a producer in
a weak-currency country can cut export prices to hold market share or leave prices
alone for healthier profit margins.
?
Purpose: To protect parties from unforeseen large swings in currencies.
?
Exchange rate review is made quarterly to determine possible
adjustments for the next period.
?
Comparison basis is the three-month daily average and the initial average.
Exchange Rate Clauses
Many sales are contracts to supply goods or services over time. When
these contracts are between parties in two countries, the problem of exchange
rate fluctuations and exchange risk must be addressed.
An exchange rate clause allows the buyer and seller to agree to supply and
purchase at fixed prices in each company`s national currency. If the exchange rate
fluctuates within a specified range, say plus or minus 5 percent, the fluctuations
do not affect the pricing agreement that is spelled out in the exchange rate clause.
Small fluctuations in exchange rates are not a problem for most buyers and
sellers. Exchange rate clauses are designed to protect both the buyer and the
seller from unforeseen large swings in currencies.
Pricing In An Inflationary Environment
Inflation, or a persistent upward change in price levels, is a worldwide
phenomenon. Inflation requires periodic price adjustments. These adjustments are
necessitated by rising costs that must be covered by increased selling prices. An
essential requirement when pricing in an inflationary environment is the
maintenance of operating profit margins.
In particular, it is worth noting that the traditional FIFO (first-in, first-out)
costing method is hardly appropriate for an inflationary situation. A more
appropriate accounting practice under conditions of rising prices is the LIFO
(last-in, first-out) method, which takes the most recent raw material acquisition
price and uses it as the basis for costing the product sold. In highly inflationary
environments, historical approaches are less appropriate costing methods than
replacement cost.
Government Controls And Subsidies
If government action limits the freedom of management to adjust prices,
the maintenance of margins is definitely compromised. Under certain
conditions, government action is a real threat to the profitability of a subsidiary
operation.
Government control can also take the form of prior cash deposit
requirements imposed on importers. This is a requirement that a company has to
tie up funds in the form of a non-interest-bearing deposit for a specified period of
time if it wishes to import products. Such requirements clearly create an incentive
for a company to minimize the price of the imported product; lower prices mean
smaller deposits. Other government requirements that affect the pricing decision
are profit transfer rules that restrict the conditions under which profits can be
transferred out of a country. Under such rules, a high transfer price paid for
imported goods by an affiliated company can be interpreted as a device for
transferring profits out of a country. Government subsidies can also force a
company to make strategic use of sourcing to be price competitive in Europe.
COMPETITIVE BEHAVIOR
Pricing decisions are bounded not only by cost and the nature of demand
but also by competitive action. If competitors do not adjust their prices in
response to rising costs, management--even if acutely aware of the effect of
rising costs on operating margins--will be severely constrained in its ability to
adjust prices accordingly. Conversely, if competitors are manufacturing or
sourcing in a lower-cost country, it may be necessary to cut prices to stay
competitive.
Global Pricing objectives and Strategies
A number of different pricing strategies are available to global
marketers. An overall goal must be to contribute to company sales and profit
objectives world wide. Customer oriented strategies such as market skimming,
penetration, and market holding can be used.
Other Constraints On International Pricing
International pricing is also influenced by factors such as the size of the
company and the cultural background of parent company executives.
? Size of the company
Large multinational companies generally use cost-based systems. Such
companies have the advantages of size and reach. As their operations or activities
spread across different countries they have more opportunities or advantages in
manipulating prices. Operating in markets that are monopolistic or oligopolistic in
nature can lend protection to these companies from competitive pressures, which can
bring down their profitability levels. The advantages these companies enjoy by
operating in these markets allow them to offer their products at low prices in some
other markets, and gain market shares. Thus their size turns out to be a huge advantage
when competing with companies of smaller size.
Cultural background of firms
Pricing decisions are also influenced by the cultural background of the
parent company. For example, firms from the US use cost as the basis in
determining the prices. Similarly, firms from Britain, France, and Japan prefer a
cost-based approach in deciding the prices. On the other hand, Firms with a
Scandinavian or Canadian background use market-based pricesl6. The
Germans, Dutch, and Italian firms use a combination of these.
The French firms prefer cost-based prices because this form of transfer
pricing permits them to transfer their income to regions where the tax rates are
lower. The British firms prefer a cost-based approach to prices because the
British banking community expects a specific return on the investment made by
them in the firms, and also they pay great attention to real rate of return at the
year-end. The Germans are more concerned about the fixed asset position and
stability of the firm in the long run. Their pricing decisions reflect this concern.
Company controls and information systems
Transfer pricing mechanism has to be well understood by people
managing control and evaluation functions. Lack of clear understanding might
lead to unexpected and undesired distortions. Managers might show exceptional
performance on account of the benefits incurred through transfer pricing rather
than the real growth they generated for their company. Thus the transfer pricing
mechanism should not distort the control system and evaluation criteria.
Properly designed information systems can ensure this.
Duty and tariff constraints
High duty and tariff rates provide an incentive to reduce transfer prices.
On the other hand, low tax rate motivates the Finn to increase transfer price to
show income in the low-tax environment. Thus the level of duty, tariff and tax
rate influence the transfer price levels.
Government controls
Government controls often influence the transfer-pricing levels.
Governments also force importers to make cash deposits. Tins type of controls
make companies reduce the price of their products. They reduce the price
because, lower price means they can get away by making smaller mandatory
deposits. Governments also restrict the way firms transfer their profits.
Joint ventures
Companies participating in joint ventures have to reach transfer pricing
agreements on different aspects such as:
?
Fixing transfer prices when there is a change in exchange rate.
? Changes in transfer prices when manufacturing costs come down
due to the learning-curve effect.
? Fixing of royalty rates when the parties of the joint venture build
new technology or source it from other sources.
?
When the competition impacts volume and overall margins.
Such agreements would avoid conflict between joint venture partners
and promote coordination)
Global pricing can also be based on other external criteria such as the
escalation in costs when goods are shipped long distances across national
boundaries.The issued global pricing can also be fully integrated in the product
design process, an approach widely used by Japanese companies. Prices in
global markets are not carved in stone; they must be evaluated at regular
intervals and adjusted if necessary. Similarly, pricing objectives may vary,
depending on a product's life-cycle stage and the country-specific competitive
situation.
Market Skimming
The market skimming pricing strategy is a deliberate attempt to reach a
market segment that is willing to pay a premium price for a product. In such
instances, the product must create high value for buyers. This pricing strategy is
often used in the introductory phase of the product life cycle, when both
production capacity and competition are limited By setting a deliberately high
price, demand is limited to early adopters who are willing and able to pay the
price. One goal of this pricing strategy is to maximize revenue on limited
volume and to match demand to available supply. Another goal of market
skimming pricing is to reinforce customers' perceptions of high product value.
When this is done, the price is part of the total product positioning strategy.
Penetration Pricing
Penetration pricing uses price as a competitive weapon to gain market
position. The majority of companies using this type of pricing in international
marketing are located in the Pacific Rim. Scale-efficient plants and low-cost
labor allow these companies to blitz the market.
It should be noted that a first-time exporter is unlikely to use penetration
pricing. The reason is simple: Penetration pricing often means that the product
may be sold at a loss for a certain length of time. Companies that are new to
exporting cannot absorb such losses. They are not likely to have the marketing
system in place (including transportation, distribution, and sales organizations)
that allows global companies such as Sony to make effective use of a
penetration strategy. However, a company whose product is not patentable may
wish to use penetration pricing to achieve market saturation before the product is
copied by competitors.
When Sony developed the portable compact disc player, the cost per unit
at initial sales volumes was estimated to exceed $600. Since this was a "no-go"
price in the United States and other target markets, Akio Morita instructed
management to price the unit in the $300 range to achieve penetration. Because
Sony was a global marketer, the sales volume it expected to achieve in these
markets led to scale economies and lower costs.
Market Holding
The market holding strategy is frequently adopted by companies that
want to maintain their share of the market. In single-country marketing, this
strategy often involves reacting to price adjustments by competitors. For
example, when one airline announces special bargain fares, most competing
carriers must match the offer or risk losing passengers. In global marketing,
currency fluctuations often trigger price adjustments.
Market holding strategies dictate that source-country currency
appreciation will not be automatically passed on in the form of higher prices. If
the competitive situation in market countries is price sensitive, manufacturers
must absorb the cost of currency appreciation by accepting lower margins in
order to maintain competitive prices in country markets.
A strong home currency and rising costs in the home country may also
force a company to shift its sourcing to in-country or third-country
manufacturing or licensing agreements, rather than exporting from the home
country, to maintain market share.
Cost Plus/Price Escalation
Companies new to exporting frequently use a strategy known as cost-
plus pricing to gain a toehold in the global marketplace. There are two cost-plus
pricing methods: The older is the historical accounting cost method, which
defines cost as the sum of all direct and indirect manufacturing and overhead
costs. An approach used in recent years is known as the estimated future cost
method.
Cost-plus pricing requires adding up all the costs required to get the
product to where it must go, plus shipping and ancillary charges, and a profit
percentage. The obvious advantage of using this method is its low threshold: It
is relatively easy to arrive at a selling price, assuming that accounting costs are
readily available. The disadvantage of using historical accounting costs to arrive
at a price is that this approach completely ignores demand and competitive
conditions in target markets. Therefore, historical accounting cost-plus prices
will frequently be either too high or too low in the light of market and
competitive conditions. If historical accounting cost-plus prices are right, it is
only by chance. Price escalation is the increase in a product's price as
transportation, duty, and distributor margins are added to the factory price.
Using Sourcing As a Strategic Pricing Tool
The global marketer has several options when addressing the problem of
price escalation described in the last section. The choices are dictated in part by
product and market competition. Marketers of domestically manufactured
finished products may be forced to switch to lower-income, lower-wage
countries for the sourcing of certain components or even of finished goods to
keep costs and prices competitive.
Gray market goods
Gray market goods are trademarked products that are exported from one
country to another, where they are sold by unauthorized persons or
organizations. Sometimes, gray marketers bring a product produced in one
country--French champagne, for example^ into a second-country market in
competition with authorized importers. The gray marketers sell at prices that
undercut those set by the legitimate importers. This practice, known as parallel
importing, may .flourish when a product is in short supply or when producers
attempt to set high prices.
In another type of gray marketing, a company manufactures a product in
the home-country market as well as in foreign markets. In this case, products
manufactured abroad by the company's foreign affiliate for sales abroad are
sometimes sold by a foreign distributor to gray marketers. The latter then bring
the products into the producing company's home-country market, where they
compete with domestically produced goods.
Dumping
Dumping is an important global pricing strategy issue. GATT`s 1979
Antidumping Code defined dumping as the sale of an imported product at a
price lower than that normally charged in a domestic market or country of
origin. In addition, many countries have their own policies and procedures for
protecting national companies from dumping. The U.S. Antidumping Act of
1921, which is enforced by the U.S. Treasury, did not define dumping
specifically but instead referred to unfair competition. However, Congress has
defined dumping as an unfair trade practice that results in injury, destruction, or
prevention of the establishment of American industry. Under this definition,
dumping occurs when imports sold in the U.S. market are priced either at levels
that represent less than the cost of production plus, an 8 percent profit margin or
at levels below those prevailing in the producing country.
Transfer pricing refers to the pricing of goods and services bought and
sold by operating units or divisions of a single company. In other words, transfer
pricing concerns intracorporate exchanges--transactions between buyers and
sellers that have the same corporate parent. For example, Toyota subsidiaries
sell to, and buy from, each other. The same is true of other companies operating
globally. As companies expand and create decentralized operations, profit
centers become an increasingly important component in the overall corporate
financial picture.
There are three major alternative approaches to transfer pricing. The
approach used will vary with the nature of the firm, products, markets, and the
historical circumstances of each case. The alternatives are (1) cost-based transfer
pricing, (2) market-based transfer pricing, and (3) negotiated prices.
Cost-Based Transfer Pricing
Because companies define costs differently, some companies using the
cost-based approach may arrive at transfer prices that reflect variable and fixed
manufacturing costs only. Alternatively, transfer prices may be based on full
costs, including overhead costs from marketing, research and development
(R&D), and other functional areas. The way costs are defined may have an
impact on tariffs and duties on sales to affiliates and subsidiaries by global
companies.
Market-Based Transfer Price
A market-based transfer price is derived from the price required to be
competitive in the international market. The constraint on this price is cost.
However, as noted previously, there is a considerable degree of variation in how
costs are defined. Because costs generally decline with volume, a decision must
be made regarding whether to price on the basis of current or planned volume
levels. To use market-based transfer prices to enter a new market that is too
small to support local manufacturing, third-country sourcing may be required.
This enables a company to establish its name or franchise in the market without
committing to a major capital investment.
Negotiated Transfer Prices
A third alternative is to allow the organization`s affiliates to negotiate
transfer prices among themselves. In some instances, the final transfer price may
reflect costs and market prices, but this is not a requirement. The gold standard
of negotiated transfer prices is known as an arm`s-length price: the price that
two independent, unrelated entities would negotiate.
Global Pricing Alternatives
Finns operating in international markets follow three pricing approaches,
predominantly: ethnocentric, polycentric, and geocentric.
Ethnocentric Approach
A company following an ethnocentric approach follows the same pricing
policy throughout the world. The importer of the product will bear the freight
and import duties. This approach is convenient to adopt because there is no need
to make any modifications to price based on competitive or market conditions.
The firm need not put in efforts to collect information on these market
conditions. But by adopting tins approach, a firm might fail to make optimum
profits by not fixing the prices of the products based on regional market
conditions.
Polycentric Approach
A firm following this approach allows its regional managers to fix the
product prices based on the circumstances in which they operate. Tins approach
might prove to be not so good, when the disparity in product prices from one
region to another is higher than transportation costs and duties. When this
condition prevails, customers will buy the products in markets where they are
available at low price and ship them to where the prices are relatively high. This
will result in loss of revenue for the firm following this approach.
Geocentric Approach
A firm adopting this approach takes a medium position between fixing a
single price worldwide and fixing different prices based on the requirements of
subsidiaries. One of the fundamental assumptions underlying tins approach is
that markets are unique, and specific factors related to them have to be taken
into account while making a pricing decision. Also the approach takes into
consideration tire price coordination necessary at headquarters to deal with
international accounts and product arbitrage. This approach is the most practical
of all because it takes into consideration both global competition and local
rivalry in establishing prices.
Forms Of International Market Entry
Regardless of the problems and risks involved in international marketing,
profit enhancement is a major stimulus for marketing in foreign countries.
Increased profit potential rises from the opportunity to utilize unused plant
capacity, to offset seasonal fluctuations in sales, to make wider applications of
R&D findings, to recover manufacturing investments, to offset declining
margins due to saturated markets at home, and to keep pace with competitors
who have overseas plants. The impetus for international marketing can also
originate from government activities, such as assistance in the financing of
export sales, export expansion programs, or trade fairs, as well as through
unsolicited orders from abroad.
The different form of market entry are
Indirect Exporting. The most common and least risky form of market
entry is indirect exporting. Here the firm sells to intermediaries, who, in turn,
sell to foreign markets. While indirect exporting is a good strategy when the
firm has little knowledge of exporting to foreign markets, where markets are
limited in size, or when the firm does not wish to commit its resources, it places
constraints on other marketing strategies as well as on control.
Operational Strategies
Strategic Strategies
Indirect exporting
Joint ventures
Sells to domestic intermediaries; for
Local and foreign firms share
exam- pie, export trading company or export ownership,Foreign production
management company.
Direct exporting
Establishes
solely
owned
production
facilities
in
foreign
country.
Sells directly to foreign buyer or
foreign intermediaries--local company ships
and handles financing and shipping
documentation.
Foreign licensing
Exports
"know-how"
through
management contract.
Direct Exporting.The investment and risk in direct exporting are greater
than in indirect exporting. Under direct exporting, the firm has to establish
foreign distribution, increase production capacity, and adapt products for foreign
markets. Direct exporting places the firm in an overseas market through either a
sales branch or subsidiary, or an agent who represents the firm exclusively in the
host country.
Foreign Licensing. Foreign licensing involves an agreement between a
firm in one country (the licensor) and a firm in another country (the licensee)
whereby the former permits the latter the use of its manufacturing processes,
patents, or trademarks in exchange for a royalty fee.
Joint Ventures. When two or more firms or investors share ownership
and control over operations and investments, they have entered into a joint
venture. Joint ventures provide better knowledge of local markets, a local
identity, and a shared risk.
International Adaptation Of Conventional Marketing Strategies
To illustrate how the use of conventional marketing strategies differs as a
firm enters international marketing, we turn our attention to international market
segmentation, target marketing, and marketing mix strategies.
Segmenting the International Market
In the international arena, market segmentation is usually referred to as
comparative analysis, that is, segmenting countries on the basis of their
similarities and differences. When, a firm selects a number of countries as its
target markets, on the basis of these comparative similarities and differences, it
is said to be employing "comparative marketing" rather than target marketing.
Comparative Analysis and Marketing. Comparative analysis and
marketing sounds simple enough and is no different conceptually from
conventional market segmentation and target marketing. However, the term
comparative emphasizes the international difficulties involved. Given the
economic, cultural, and political/ legal differences among nations, determining
comparative similarities and differences can be a major undertaking not found in
domestic markets.
International Product Strategies
Although products in the international industrial market are more
homogeneous than consumer products, there are more product variations
internationally than domestically due to the greater number of international
economic, cultural, and political/legal variables.
International Pricing Strategies
Although pricing practices appear to be no different internationally than
nationally, in some respects there is wide divergence. These differences occur in
the areas of transfer pricing, dumping, and governmental influence over price.
Transfer Pricing. Transfer prices are the prices placed on products as
they are transferred between units belonging to the same company. Transfer
prices can be used to mitigate the effects of government regulation.
Dumping. Dumping is disposing of goods in a foreign country at less
than their full cost. Goods will sometimes be exported at prices that only cover
direct costs to dispose of excess inventories. Companies sell their excess
inventories overseas to avoid disturbing their own national markets (e.g.,
reducing prices or causing price wars at home.
International Promotional Strategy
In the international industrial market, the primary element of the
promotional mix is personal selling, for only through personal selling can the
coordination so essential to the industrial buyer-seller interface be effectively
achieved.
Sales promotion in the form of trade fairs is playing an increasingly
important role in international marketing because so many prospects can be
contacted in one place and because they enable quick comparisons of products.
Direct mail is also becoming popular, although mailing lists are usually difficult
to obtain. The use of publicity, although growing in popularity, is limited due to
language difficulties and media coverage. Advertising is given little attention in
the international industrial market, perhaps because of the difficulties in
determining media coverage and numerous, widely varying, governmental
regulations. Here our discussion concerns personal selling.
International Distribution Strategies
The primary goal of international marketing is achieving wider
distribution. E just as in the United States, distribution involves more than
physically moving a product. It involves handling, storage, inventorying,
sometimes assembling, protective packaging, paperwork, and forecasting.
WHAT IS INCLUDED IN SERVICES MARKETING
We have seen how HDFC rank in India has emerged as India`s
best bank in a very short period of time. It has taken less than seven years for the
bank to emerge as India`s leading bank leaving the State Bank of India, the
largest bank in the country, far behind. Service marketing is based on very
different paradigms. Since services are highly intangible, its benefits are felt
over a period of time and not immediately. The task of the marketer becomes
one of creating confidence in the customer`s mind that the delivered benefits
will, at the least, be the same as that of the promised ones. Two categories of
products are included in the range of services marketing. These are:
(a)
Products which are 100 percent intangible and truly fall in the
category of services. Typical examples of these are baking, health
care, insurance, airlines, hospitality, restaurants, management
consultancy, education, and so forth.
(b)
Services in manufactured products are different from the services
industry as here the emphasis is more on providing a range of
services which the customer is looking for when he buys a
manufactures product. Services here help is in augmenting the
product and, hence, creates a new set of values for the customer.
Viewed, therefore, from the tangible and intangible perspectives,
products can be put on a continuum. At the one end are products which are
bought principally for their tangible benefits. Here the customer is not willing to
compromise. Typical examples of this category are in industrial products like
plant and machinery, equipments, and high value products like aircrafts or a
limousines (luxury car). At the other end are products that primarily offer
intangible benefits, like medical care. In between the two ends of this continuum
are products and services which have both tangible and intangible and
components. For example, consumer durables are products that are bought for
both tangible and intangible benefits. Hence services in such a category assume
a very different meaning.
Similarly, the hospitability sector in the service industry offers
both tangible and intangible benefits to the customer. The tangible features are
property equipped rooms matching the life style of the target customer, air-
conditioning, facilities like television, internet connectivity, facsimile machines,
bar refrigerator, and other benefits like health care service, swimming pool, and
so on. The intangible dimensions are the services provided by the people in
housekeeping, room service, engineering, and / or restaurant services, on the one
end of the continuum are services in the manufactured products segment and on
the other are the pure services.
Today, the service industry plays a significant role in both the
global and domestic economies.
SERVICES DEFINED
Adriyan Payne has defined service as an activity that has an
element of intangibility associated with it and which involves the service
provider`s integration either with the customers or with the property belonging
to the customer. The service activity does not involve the transfer or ownership
of the output.
According to Philip Kotler, service is any activity of benefits
that one party can offer to another that is essentially intangible and does not
result in the ownership of anything. Its production may or may not be tied to a
physical product.
Therefore, it can be said that services are those activities which
satisfy wants. Some services are offered individually while some services are
offered as a supplement to a product purchased or a major service consumed by
the customer. Essentially, services are intangible but sometimes they may
involve the use of some tangible goods. In such case, the title of goods doesn`t
change from the service provider to the customer.
CHARACTERISTICS OF SERVICES
The major characteristics of services are intangibility,
inseparability, heterogeneity and perishability. They are discussed below:
A product is a physical entity, which can be touched. It can be
seen, heard, touched, smelt, tasted and tested even before purchasing it or
consuming it. For example, when a consumer decides to buy a bike, he can see
it, touch it and test drive it to understand its performance. Therefore, he has a
better idea of the product before deciding whether to buy it or not. But a service
is not tangible unless it is experienced or consumed. The quality of a service
cannot be established as clearly as it could be done in the case of a product. For
example, when a customer decides to employ the services of a bank in obtaining
a loan for the first time, he does have an idea about the services offered by the
bank, but he can really assess the services only after he avails them. A bike can
be defined in terms of its HP and mileage, but a service cannot always be
defined in absolute terms.
HETEROGENEITY
Service is offered by a human being, there is a high probability
that the same level of service may not be delivered all the time. The service
offered by one employee may differ from the service offered by another
although they may belong to the same company. Even the service offered by eth
same employee may be different times of the day. After serving customers
continuously for several hours during the day, an employee may not be able to
offer the same level of service towards the end of the day. Also, the quality of
service offered by employees at tone branch of a service organization may differ
greatly from the service offered at another branch. But if the variation in service
quality becomes extremely obvious, customers may be dissatisfied and switch to
a competing firm. Hence, service organization should try to maintain
consistency in the services they offer by taking special care in recruitment,
selection and training of employees.
INSEPARABILITY
A service is consumed by the customer as soon as it is delivered
by the employee. Thus, production and consumption occur simultaneously in
case of services as opposed to products which are manufactured, inventoried and
then consumed. Services cannot be inventoried and need to be consumed
immediately. Since the delivery and consumption of a service are inseparable,
there has to be interaction between customers and employees of a service are
inseparable, there has to be interaction between customers and employees of a
service organization. For example, the integration between patients an doctor is
essential if the patient has to be treated for an illness. In the case of a hotel, the
interaction between a serve it to the customer is essential for the former to take
the order for food and serve it to the customer for consumption.
PERISHABILITY
Unlike products, services cannot be inventoried or stored for
future consumption. Suppose, a hotel has 40 rooms. But on a particular day,
only 10 rooms are occupied. The hotel has an idle capacity of 30 rooms on that
day. This is a lost business opportunity for the hotel owner. The fact that it may
be fully booked the next day does not compensate for the idle capacity on that
day. It cannot be recovered as it is lost for all time. Thus, the perishability of
services is another factor that leads to complexity in management in the service
sector. Service organizations need to be extremely cautious in their demand and
supply plans.
FACTORS INFLUENCING GLOBALIZATION
Many factors drive globalization. In the Indian scenario, the
economic reforms that were introduced in 1991 have paved the way for the free
flow of goods and services across the borders. This has benefited the country in
many ways, such as creating new business opportunities like in the area of
business process outsourcing. Some of the changes that have boosted
globalization worldwide include
Change in social factors
Changes in technology
Changes in political and legal conditions
Competition in the market
Competitive advantage
Changes in Social Factors
Today, people in one country know more about people in other
countries, their culture, lifestyle, food habits, etc. because of their exposure to
the media as well as personal experience gained by traveling to those places. We
can see that the needs and wants of people across the world are converging, at
least in a few services areas. For example, people in the East enjoy western
music, while the West relishes the cuisines of India and China. Apart from
visiting new places on a holiday, people also travel across the world for higher
education, research, and jobs. Business people from all over the world expect
similar facilities and services on flights and in hotels. With limited extent,
service providers are finding it easier to offer their services on a global scale.
Though this homogenization is superficial, it offers opportunities for local
players to go global.
Changes in Technology
Advances in technology have made it possible for even high
contact services like healthcare and technical support to be offered to remote
customers. For example, if a client based in the US faces a problem with the
application installed by a software solution provider from India, the latter can
access the client`s system and rectify the problem through a server. Similarly, a
specialist surgeon can guide another surgeon operating on a patient, virtually
from anywhere in the world. This is an advanced form of telemedicine, which
enables patients to consult doctors online and be treated. For example, a senior
surgeon at London health Science Centre (LHSC) guided surgeons performing a
heart surgery at LHSC from a far off location.
Changes in Political Condition
In some countries, political changes have facilitated globalization
of services. In China, strict communist principles were followed until the 1970s.
The government owned most of the assets and organization in the country.
These were strong restrictions on the inflow of foreign goods and services.
However, the political leaders of the 70s recognized the need for a policy
change and lifted the restrictions on trade, facilitating a free flow of goods and
services. Russia erstwhile USSR), was also a staunch communist country.
However, it underwent some major changes during them tenures of Michael
Gorbachev and Boris Yeltsin to discover its economic strengths. India too, with
introduction of economics reforms in 1991, became a global economy and a
force to reckon with. With more and more economies opening their gates to the
free flow of goods and services across borders, the world has become a unified
global market.
Competition in the Market
Within a country, there may be intense competition among the
domestic players, forcing some of them to venture outside in search of better
fortunes. When there is no scope for any expansion within the country, a service
provider may seek opportunities in other countries in order to utilize its unused
potential. It identifies new markets that have a potential demand for its services
and exploits the opportunity.
Competitive Advantage
Intense competition in the market forces service providers to
develop competencies that give them a competitive advantage over others. In
addition, service organizations need to offer superior quality services at
attractive prices to customers. To have a completive cost advantage, companies
try to cut down on the cost of operations by choosing places where the cost of
production is minimized. They look for places where there is an abundant
supply of people with the desired skills and the cost of labour and other services
is lower. Therefore, organizations have their headquarters at one place, some
operations at another and a few others at yet another place. And this leads to
globalization. For example, general Motors has based its advertising and
marketing service operations in Grat Britain, data processing services in irelad
and legal, banking, and insurance services in the US. Many IT firms like IBM,
Microsoft, Dell, and Oracle have set up their operations in India, because of the
availability of skilled people and the infrastructure and support offered by the
state governments. GE has customer service, technical support and data
processing operations in India.
Regulations in Home Country
Sometimes, too many regulations imposed by the government in
the home country encourage national players to set up operations in countries
where such regulations do not exist. India had a strong licensing system in place
after independence. As a result, no Indian company could start any new
business, if it was over a certain size. As a result, innovative businessmen like
Aditya Birla opened companies in countries like Malaysia and Thailand. Thus,
the Birla L\company became one of the first global companies from India.
Lack of Demand in Home Country
Sometimes, organizations may find that the demand for their
services within their own country is either non-existent or too low to gain
enough of a margin. For example, IT firms India like Infosys, Satyam, and
Mastek concentrated on the global market in their initial stages primarily
because Indian companies did not come forward to purchase the advanced IT
solutions that they offered.
OVERSEAS MARKET ENTRY DECISIONS
Different organizations enter different markets for different
reasons and in different ways. Some of the modes of entry chosen by
organizations to venture into foreign markets include exporting, taking up
turnkey projects, licensing franchising, getting into joint ventures, and starting a
wholly owned subsidiary. Each of these methods has its own advantages and
disadvantages. The choice of a company depends on a variety of factors
including the nature of the particular product or service and the political, social
and competitive scenario in the target market.
Exporting
Most firms begin their global expansion operations with exports.
During the 1990s, the volume of exports in the world economy increased
significantly due to the demolition of trade barriers in many countries. However,
exporting services remained a challenge owing to their inseparability
characteristic. Firms planning to export goods/services must identify
opportunities in the foreign market, familiarize themselves with the mechanics
of exports and learn to deal with the foreign exchange risk.
Firms can avoid the investment required on technology,
infrastructure, and manpower in the host country by adopting the channel of
exports. For example, an IT firm in India can export the services of its software
engineers to overseas customers.
Exporting benefits firms by enabling them to enter foreign
markets at minimum cost. It reduces the dependence of an organization on
market demand in the home country. It also protects the business from being
adversely affected by seasonal fluctuations in the local market.
Turnkey projects
In a turnkey project, the contractors handle every aspect of the
project for a foreign client, from the planning and inception stage to completion
and hand over. At the completion of the contract, the system or plant is handed
over to the foreign client. Turnkey projects are common in the IT, chemical,
pharmaceutical, and petroleum redefining industries.
The main advantage of turnkey projects is the high financial
returns from the built and installed assets. Turnkey projects are useful in cases
where the foreign direct investment (FDI) is regulated by the host government.
For example, many oil rich countries in the Middle East decided to invest and
build their own petroleum refining industry, thus restricting FDIs in their oil and
refining sectors. However, since many of these countries did not have the
technological knowledge for petroleum refining, they entered into turnkey
projects with foreign firms that had the technology. Thus, foreign firms export
their process technology to the host country. Turnkey projects are desirable in
countries where the political and economic environments do not favor long-term
investment.
Licensing
Licensing is an arrangement through which and organization
(licenser) grants the rights to intangible property like patents, inventions,
formulas, process, designs, copyrights and trade marks to another company
(licenser) for a specified period. The licenser in return receives a royalty fee
from the licensee for the rights. For example, an organization may transfer its
technical expertise to another organization for a specific time, in return for a
royalty fee.
Franchising
Franchising is similar to licensing expect that it requires a long-
term commitment on the part of both the franchiser and the franchising, the
franchiser allows the franchisee to use its intangible property like the brand
name and the operating procedures, but insist that the franchisee follows the
standards and rules of the business specified by it. The franchiser has an
important role to play in a franchise business in terms of marketing and
promoting the service as well as training and supporting the franchisee
employees. The franchiser receives a royalty payment that is usually a
percentage of the franchisee`s revenues. With the franchising strategy, a service
firm can build a global presence faster and cheaper and lower its financial and
operational risks.
Joint Ventures
In contrast to licensing and franchising arrangements, joint
ventures allow companies to own a stake and simultaneously play a role in the
management of foreign operations. Joint ventures require more direct
investment, training, management assistance and technology transfer. For
example, in India, many joint ventures exist between global insurance firms and
Indian banks. There are joint ventures exist between ICICI Bank and Prudential
Insurance; Vysya Bank and ING insurance and the GMR Group; and HDFC and
the Chuub Corporation (global non-life insurer)
Strategic Alliance
A strategic alliance is an understanding or arrangement among
the players in a market. Firms form strategic alliances to expand to new markets,
gain quick access to new technology, extend the product portfolio or avoid
competition. In this case, the partnership can last for a fixed tenure, depending
on the agreement between the parties involved. Strategic alliances may or may
not involve financial commitment. The partners work together on predetermined
goals and objectives, and are free to separate once these goals are achieved or
when the agreement ends. For example, TCS entered into a strategic alliance
with NEC Singapore in 2002, to journey explore new opportunities in the global
market.
Wholly Owned Subsidiaries
In a wholly owned subsidiary, the corporate owns 100% equity in
the local subsidiary. Wholly owned subsidiaries can be established in a foreign
country in two ways. A firm can set up new operations in the foreign country or
it can acquire a local firm with an established business and promote its products
through that firm.
A wholly owned subsidiary is the preferred mode of entry into
foreign countries for firms with strong financial muscle and technological
competence. A wholly owned subsidiary allows an organization to have tight
control over operations, which is not possible in the case of licensing and
franchising. The firm also does not risk letting go of its competitive advantage.
However, a wholly owned subsidiary calls for huge investments and the
company has to bear the complete risk while learning from its own experiences.
Mergers and Acquisitions
Mergers and acquisitions (M&As) are also one of the adventure
for service organizations to enter foreign markets. M&As became quite popular
in the 90s as more and more MNCs expanded their operations across different
countries. In a merger, two organizations come together as one, with mutual
consent, in a view to synergize their operations and gain more. However, in the
absence of effective planning and management, mergers fail to realize the
expected benefits. It is important for two merging firms to have some synergies
and common features the strengthen the merger. In an acquisition can be hostile,
and some, friendly. The acquisition of Daksh e-services by IBM in 2004 has
been explained in exhibit.
Piggyback
In this method, an organization takes the help of another
organization to market its products/services in a foreign market. The
piggyback method is used by organization as a method of entry for various
reasons. The organization which carries the product/service into the foreign
market through its channel is called the carrier. The organization that uses the
partner`s channel is called the rider. When an organization believes that it has a
product/service that has immense potential in the new market, but does not want
to risk investing large amounts in building the distribution channels, it goes in
for the piggybacking method of entry. The partner organization i.e., the carrier)
agrees to the arrangement when the product/service offered by the rider
complements its own products/services and enhances its growth. Sometimes,
the carrier may even offer his brand name to the rider`s products/services. This,
in turn, may help in quick acceptance of the new products/services. If the rider`s
services are well received by customers, the carrier`s image will also be
enhanced and his own business may grow. The carrier may also help the rider by
taking the responsibility for promotion and pricing of products/services. The
rider can gain access to i9nformation on the foreign market and target
customer`s, without actually entering the market.
CHALLENGES IN THE GLOBAL MARKET
Service organizations that operate globally face various
challenges. The special characteristic of services like intangibility,
inseparability, heterogeneity and perishability pose specific challenges to global
service providers. The intangible nature of services requires service providers to
add tangibility to the services they offer, inseparability forces them to train
employees to offer impeccable service, heterogeneity requires organizations to
ensure consistency in delivering service and perishability requires them to
balance demand and capacity effectively. Apart from these challenges,
international service organizations face other challenges too like the following:
Legal Barriers
Legal barriers include discriminating laws, subsides, restrictions
on Foreign Service provider`s operations, infringement of copyrights and trade
marks, etc., specific to each country of operation. For example, in Tanzania, an
organization that seeks to establish its banking operations has to face many legal
restrictions. It has to satisfy all the terms and conditions laid down by the central
bank of Tanzania to earn a license. The proposals for setting up a banking
institution should include plans to offer financial services in the rural sectors and
training and employment programs for citizens. The approval to any proposal
depends on these plans. Further, banks cannot open a new branch or close an
existing branch or declare dividends, without prior approval from the central
bank.
Discriminating laws
Some countries have a legal system with polices that favour
domestic firms and discriminate against foreign firms. For example, the branch
offices of a foreign company in India are treated as a foreign company and
declare liable for higher income tax of 48%, as against 35.7% for companies set
up in India.
Subsidies
Some countries offer subsidies and low interest loans to domestic
organizations and protect them against foreign competition. For example, IT
firms were given tax holidays by the government a few years ago when the
industry was still in the nascent stages in India. The firms were not required to
pay taxes for some years from the date of their establishment. Conversely, some
countries offer sops to foreign players to encourage foreign investment that can
aid development in the country.
Restrictions on foreign company's entry
Some countries do not allow foreign companies to establish
wholly owned subsidiaries. Some impose a ceiling on the investment tah can be
made by foreign companies. In some cases, some of the industries or sectors can
be closed to foreign players. For example, foreign companies cannot invest in
the agriculture and plantation sector in India. Similarly, a foreign company is not
allowed to hold more than a 24% stake in a small-scale industrial unit in India.
Infringement of copyrights and trademarks
Apart from these barriers, Foreign Service organizations also face
the problem of violation of copyrights by local firms. Some local firms market
their services using the trademark of a well-known Foreign Service
organization. This is primarily because of the failure of the local government to
strictly enforce copyrights laws. Firms like Microsoft, Oracle, etc., face
problems with the sale of pirated copies of their software in many countries.
Cultural Barriers
Though convergence of tastes and preferences can be seen in
some developing and developed countries, it is limited. There is a still a large
cultural gap between the vast population of the eastern part of the world and that
of the western countries. People in developing countries from the high-income
group or socio-economic class, who get exposed to western culture, are
influenced by it. There is still a large section of the society in developing
countries, which is unexposed to and uninfluenced by the western culture.
Therefore, differences still do exist in cultures, posing challenges to
international; service organizations. The cultural barriers arise from differences
in language, customs and beliefs, values and attitudes, lifestyle, etc.
Language
People indifferent countries speak different languages and this
poses difficulties to service organizations in effectively communicating with
customers. Communication with internal as well as external customers, as we
have already studied, is very important for services business to survive and
flourish. In the absence of proper translation of messages from one language to
another, service organizations can communicate unintended messages and land
up in trouble.
Customs
Different countries have different customs and manners.
Customs are established practices, while manners are behaviors that are
regarded as appropriate in a particular society. In some countries, people value
time immensely and expect others to do the same. For example, say two parties
from two different countries have an appointment at 5.00pm. the first party from
country A values time immensely and is there at the appointed venue five
minutes before the scheduled the time. The second party of country B however,
does not value time and reaches the venue 10 minutes late. This will naturally
annoy the first party, and he would cancel the business dealing.
In some countries, it is customary to make or avoid some gestures
to show their respect to the other party. The management of a service firm
should learn this business etiquette to maintain positive relations with clients
and partners.
Values and attitudes
Values and attitudes differ from society to society. For example,
most Muslims consider the pig as inauspicious. Hindus revere the cow as a holy
animal. Therefore, international service organizations involved in the hospitality
industry should take special care not to offer beef or pork so as not to hurt
religious sentiments of the people. McDonald`s for example, takes special care
to avoid beef in its menu in India.
Lifestyle
Lifestyle varies across countries. The way people spend their
money, leisure time, etc., differs from one country to another. For example,
earlier, people in India emphasized saving. There were not many who spent
lavishly. However, things have changed and more and more Indians are willing
to spend more on lifestyle and luxury items. The status symbols used by people
to reflect their status, also differ from one country to another. For example, in
India, most people value assets like jewelry. They try to accumulate as much
silver and gold as possible. However, in the west, people prefer to buy luxury
products like expensive cars. The way people spend their leisure time is also
different. People`s perception of beauty and aesthetics also varies across
countries. The knowledge of these differences will help services organizations
choose the right dress code for employees, the right architecture for buildings
and design proper service offerings and marketing programs.
Financial Barriers
Global service organization also faces financial barriers.
Organizations planning to expand globally need more funds than those operating
locally. Even though the returns are higher, they have to bear higher costs. These
costs include the costs due to exchange rates and taxes, investment in a new
business in terms of set-up costs, logistics solutions, communication systems,
traveling etc.,
Changes in currency exchange rates
Different countries have different currencies. Depending on the
economic condition of a country, the value of its currency keeps changing and
so does its exchange rate. This poses problems in payments and collections for
global service organizations. Any appreciation in the currency of the host
country will result in the service provider receiving fewer of home country
currency units from clients. Sometimes, they may also face double taxation, in
both the exporting and importing country or the host and the home country. This
will obviously affect the profitability of the organization. Before making an
investment, service organizations should look for countries, which have double
tax avoidance treaties with their own countries.
Problems with logistics
Service organizations need to invest in various resources to run
their operations successfully in a country. For instance, package carrier
companies have to invest heavily insetting up warehouses at appropriate
locations. DHL invested about $200million to expand its facility in the US near
Kentucky international airport in Cincinnati in 2002. BPO centers need to make
a huge investment on people, equipment and infrastructure.
Fast food outlets like McDonald`s have to procure the best
quality raw materials and other inputs to serve quality food to customers.
McDonald`s has to source bread, bun, batter mixes, meat, cheese, sauce,
potatoes and other vegetables from the best suppliers, which means a lot of
investment.
FACTORS INFLUENCING SUCCESS OF A GLOBAL SERVICE
FIRM
Many factors such as innovation, excellence in customer service,
efficient operations, etc., contribute to the success of an organization at the
global level. A service firm needs to conduct a complete SWOT analysis before
taking any major strategic decision. The success and survival of a company
depends on its understanding of the differences among its countries of operation
in terms of culture, consumer behavior, etc., and its ability to accommodate the
differences.
Select the right entry mode
An organization can enter a foreign market through several
modes, as discussed earlier. However, it should choose its entry mode carefully
so that it does not affect its competitive advantage. If it chooses to enter through
a strategic alliance, for example, it should ensure that the partner has a strong
hold in the market and can support it in gaining a strong foot hold. Moreover,
the partnership should not conflict with the business interest of either party and
should benefit both. If the partnership terms favor one party, then the
relationship may not last long because the losing partner will be on the constant
lookout for exiting from the partnership. Similarly, if an organization decides to
enter a foreign market through merger or acquisition, it might face different
kinds of difficulties. It might have difficulties in merging the operations of both
firms, changing the culture of the workforce, leveraging synergies etc. if an
organization wants to establish a wholly owned subsidiary in a foreign country,
it should look for the right location to gain benefits like cheap infrastructure,
governments support, educated work force, low salaries, political stability,
security, favorable laws and regulations, etc.
Select the right marketing research methods
In some countries, people do not want to answer personal
questions and dislike being monitored. It would be difficult for organizations to
conduct marketing research in such countries. Therefore, service organizations
should use indirect measurement techniques, which do not involve approaching
customers directly. Rather, they may have to collect information from service
provider`s who can provide reliable data and information on consumer behavior.
Customize the service offering
Global service providers should customize their services to suit
the tastes and preference of customers in different countries. For example, in
some countries, people do not like invasion of privacy. In such situations,
service personnel do not take the initiative to try and entertain customers.
However, in some countries people may expect the service personnel to keep
enquiring about their needs and taking care of them. In such cases, the front-line
personnel should be pro-active and approach customers before they feel they are
not being attached to. Similarity, during an economics downturn, companies
might need to customize their service offering to suit the existing needs of the
customers.
Train the service personnel
Service personnel should be educated about the differences in the
culture of the customers they serve. For example, the service personnel in a
Chinese restaurant need to realize that they have to treat an Indian customer and
an American customer differently. The service personnel should be trained to
customize their service offering and delivery to suit the customer`s preference.
In some countries, people are not comfortable talking to a salesperson o the
phone. They expect the salesperson to visit their home/office and explain the
service offer to them in person. Service personnel need to feel trained to catch
the pulse of the customer immediately and change their approach strategy
accordingly.
Select the right promotion strategy
In some countries like Japan, comparative and aggressive
advertising is unacceptable. So, in these countries, service firms should
emphasize the benefits of their service offering rather than point out the
drawbacks of the competitor`s service offerings. In countries like the US and
India, where such advertising is allowed, at least in some sectors, service
organizations should use the opportunity to explain to customers how their
service offers out weight those of their competitors. For example, in India, ICICI
bank advertises that it does not charge any processing fee from customers who
apply for home loans. HDFC claims that it charges a processing fee for home
loans, but provides many valuable supplementary services unlike its
competitors, who might not charge any processing fee, but include hidden costs
for customers.
UNIT - V
GLOBAL LOGISTIC MANAGEMENT
The cost and efficiency of the distribution have direct relationship with the
logistics. Logistics, therefore, is a factor which affects the competitiveness of a
firm.
International logistics is defined as "the designing and managing of a
system that contracts the flow of materials into, through, and out of the
international corporation. It encompasses the total movement concept by
covering the entire range of operations concerned with product movement".
It follows from the above definition that logistics comprises of:
(i) Management of movement of raw materials, parts and supplies into and
through the firm; and
(ii) Management of movement of finished products to the consumer.
The major objective of the logistics management is to make the physical
distribution as effective as required at the lowest cost possible. Attempts to
increase the effectiveness of the distribution may sometimes tend to increase the
cost and attempts to cut costs may impair distribution effectiveness. The trade
off and optimisation, therefore are often a complex problem.
Components of Logistics Management
Logistics management comprises of five major interdependent areas.
Fixed Facilities Location The major consideration is the location of fixed
facilities like production and warehousing in such a way as to maximise the total
efficiency of the logistics system. Factors like future potentials of the markets,
future plans of the company, competitive factors, political stability etc. are also
import considerations.
Transportation:
The modes of transportation, frequency of shipping etc. are determined
on consideration of several factors such as the cost, speed, safety, lead time,
transit time, type of product, natural environmental factors etc.
Inventory Management:
The main objective of inventory management is to minimise the cost of
the inventory while ensuring smooth supplies. Developments in inventory
management by the customers, order processing and in the total logistics system have
made inventory management both challenging and efficient.
Order Processing:
The efficiency of order processing by the client as well as the company have
important implications for inventory levels and other aspects of the logistics. Rapid order
processing shorten the order cycle and allows for lower safety stocks on the part of the
client. Exporters from developing countries like India face the challenge of coping up
with such situations.
Materials Handling and Warehousing:
Materials handling and warehousing are also an important part of the logistics
management. The technologies in use in materials handling and transportation may be
different in different countries. Differences in natural factors like climatic and weather
conditions may also make warehousing requirements varied.
INTERNATIONAL DISTRIBUTION SYSTEM
Channel of Distribution Structures
In every country and in every market, urban or rural, rich or poor, al consumer
and industrial products eventually go through a distribution process.
The distribution process includes the physical handling and distribution of
goods, the passage of ownership (title), and most important from the standpoint of
marketing strategy the buying and selling negotiations between producers and
middlemen and between middlemen and customers.
A host of policy and strategy channel-selection issues confronts the
international marketing manager. These issues are not in themselves very different
from those encountered in domestic distribution, but the resolution of the issues differs
because of different channel alternatives and market patterns.
Each country market has a distribution structure through which goods pass from
producer to user. Within this structure are a variety of middlemen whose customary
functions, activities, and services reflect existing competition, market characteristics,
tradition, and economic development. In short, the behavior of channel members is the
result of the interactions between the cultural environment and the marketing process.
Channel structure ranges from those with little developed marketing infrastructure
found in many emerging markets to the highly complex, multilayered system found in
Japan.
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Import-Oriented Distribution Structure
Traditional channels in developing countries evolved from economies with a
strong dependence on imported manufactured goods. In an import-oriented distribution
structure, typically an importer controls a fixed supply of goods and the marketing
system develops around the philosophy of selling a limited supply of goods at high
prices to a small number of affluent customers. In the resulting seller's market, market
penetration and mass distribution are not necessary since demand exceeds supply and, in
most cases, the customer seeks the supply. This produces a channel structure with a
limited number of middlemen.
Contrast this with the mass consumption-distribution philosophy which
prevails in the United States and other industrialized nations. In these markets, one
supplier does not dominate supply, supply can be increased or decreased within a
given range, and profit maximization occurs at or near production capacity.
Generally a buyer's market exists and the producer strives to penetrate the
market and push goods out to the consumer, resulting in a highly developed
channel structure that includes a variety of intermediaries.
Business attitudes in an import-oriented market system are often the
direct opposite of what you would expect. As one observer notes:
Consumers, retailers, and other intermediaries are always seeking goods. This
results from the tendency of importers to throttle the flow of goods, and from this
sporadic and uneven flow of imports, inventory hoarding as a means of checking the
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market can be achieved at relatively low cost, and is obviously justified because of its
lucrative and speculative yields.
Japanese Distribution Structure
Distribution in Japan has long been considered the most effective non
tariff barrier to the Japanese market. The Japanese distribution structure is
different enough from its United States or European counterparts that it should
be carefully studied by anyone contemplating entry. The Japanese system has
four distinguishing features: (1) a structure dominated by many small
middlemen dealing with many small retailers; (2) channel control by
manufacturers; (3) a business philosophy shaped by a unique culture; and (4)
laws that protect the foundation of the system - the small retailer.
High Density of Middlemen.
There is a density of middlemen, retailers, and wholesalers in the Japanese
market unparalleled in any Western industrialized country. The traditional
Japanese structure serves consumers who make small, frequent purchases at
small, conveniently located stores. An equal density of wholesalers supports the
high density of small stores with small inventories. It is not unusual for
consumer goods to go through three or four intermediaries before reaching the
consumer-producer to primary, secondary, regional, and local wholesaler, and
finally to retailer to consumer. The contrast between shorter U.S. channels and
the long Japanese channels.
Channel Control
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Manufacturers depend on wholesalers for a multitude of services to other
members of the distribution network. Financing, physical distribution,
warehousing, inventory, promotion, and payment collection are provided to
other channel members by wholesalers. The system works because wholesalers
and all other middlemen downstream are tied to manufacturers by a set of
practices and incentives designed to ensure strong marketing support for their
products and to exclude rival competitors from the channel. Wholesalers
typically act as agent middlemen and extend the manufacturer's control through
the channel to the retail level.
Control is maintained by: (1) inventory financing--sales made on
consignment with credits extending for several months; (2) cumulative
rebates--rebates given annually for any number of reasons, including quantity
purchases, early payments, achieving sales targets, performing services,
maintaining specific inventory levels, participating in sales promotions, loyalty
to suppliers, maintaining manufacturer's price policies, cooperation, and
contribution to overall success; (3) merchandise returns-all unsold merchandise
may be returned to the manufacturer; and (4) promotional support--intermedi-
aries receive a host of displays, advertising layouts, management education
programs, in-store demonstrations, and other dealer aids which strengthen the
relationship among middlemen and the manufacturer.
Business Philosophy
Coupled with the close economic ties and dependency created by trade
customs and the long structure of Japanese distribution channels is a unique
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business philosophy that emphasizes loyalty, harmony, and friendship. The
value system supports long-term dealer/supplier relationships that are difficult to
change as long as each party perceives economic advantage. The traditional
partner, the insider, generally has the advantage.
A general lack of price competition, the provision of costly services, and
other inefficiencies render the cost of Japanese consumer goods among the
highest in the world; for example, a bottle of 96 aspirin tablets sells for $20. Yet
the system is slow to change. The Japanese consumer contributes to the
continuation of the traditional nature of the distribution system through frequent
buying trips, small purchases, favoring personal service over price, and the
proclivity for loyalty to brands perceived to be of high quality. Additionally,
Japanese law gives the small retailer enormous advantage over the development
of larger stores and competition. All these factors support the continued viability
of small stores and the system, although changing attitudes among many
Japanese consumers are beginning to weaken the hold traditional retailing has
on the market
Large-Scale Retail Store Law
Competition from large retail stores has been almost totally controlled by
Daitenho the Large-Scale Retail Store Law. Designed to protect small retailers
from large intruders into their markets, the law requires that any store larger
than 5,382 square feet (500 square meters) must have approval from the prefec-
ture government to be "built, expanded, stay open later in the evening, or change
the days of the month they must remain closed." All proposals for new "large"
stores are first judged by MITI (Ministry of International Trade and Industry).
Then, if local retailers unanimously agree to the plan, it is swiftly approved.
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However, without approval at the prefecture level (all small retailers in the area
must agree), the plan is returned for clarification and modification that may take
several years (10 years is not unheard of) for approval. Designed to protect
small retailers against competition from large stores, the law has been imposed
against both domestic and foreign companies. It took 10 years for one of Japan's
largest supermarket chains to get clearance for a new site. Toys "R" Us fought
rules and regulations for over three years before it gained approval for a store.
Besides the Large-Scale Retail Store Law, there are myriad licensing
rules. One investigation of the regulations governing the opening of retail stores
uncovered 39 different laws, each with a separate license that had to be met to
open a full-service store.
Businesspeople in Japan and the United States see the Japanese
distribution system as a major nontariff barrier and, by many Japanese, as a
major roadblock to improvement of the Japanese standard of living. However,
pressure from the United States and the Structural Impediments Initiative (SII)
negotiations to pry open new markets for American companies is producing
strong cracks in the system. As of this writing, it is reported the Japanese
government will repeal the Large-Scale Retail Store Law as early as the end of
fiscal 1998.
Changes in the Japanese Distribution System
Agreements between the United States and Japan under the SII have had
a profound impact on the Japanese distribution system by leading to
deregulation of retailing and by strengthening rules on monopoly business
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practices. The retailing law has been relaxed to permit new outlets as large as
1,000 square meters without prior permission. Limits on store hours and
business days per year have also been lifted. Officially relaxing laws and
regulations on retailing is but one of the important changes signaling the
beginning of profound changes in how the Japanese shop.
SII and deregulation will undoubtedly have a part in changing Japanese
distribution practices, but those merchants willing to challenge traditional ways
and give the consumer quality products at competitive, fair prices will bring
about the demise of the way department stores and small shops wedded to the
traditional distribution system operate. Specialty discounters are sprouting up
everywhere and entrepreneurs are slashing prices by buying direct and avoiding
the distribution system altogether. For example, Kojima, a consumer electronics
discounter, practices what it calls "global purchasing" and buys merchandise
anywhere in the world as long as it can be done as cheaply as possible. Ko-jima's
tie-up with General Electric enables it to offer a 410-liter GE refrigerator for
$640, down from the typical price of $1,925, and the 550-liter model from
$3,462 to $1,585.
Japanese consumers, described as brand loyal and more interested in
services and quality than price, seem to be willing accomplices to the changes
taking place, if the price is right. Japanese consumers have traditionally paid the
highest prices in the world for the goods they buy. Before Toys "R" Us changed
price levels, toys in Japan cost four times as much as toys in any other country.
Japanese-made products imported to the United States can be purchased in the
U.S. for less than they cost in Japan. Such inequities did not seem to matter to
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Japanese consumers when they had no other alternatives. But, more often now,
the Japanese consumer has a choice of prices for everything from appliances to
beer. Before price competition, a can of Coors beer would cost 240 yen; now it
costs 240 yen in a neighborhood liquor store, 178 yen in a supermarket, and 139
yen in a discount store.
Trends: From Traditional to Modern Channel Structures
Today, few countries are so sufficiently isolated that they are unaffected
by global economic and political changes. These currents of change are altering
all levels of economic fabric, including the distribution structure. Traditional
channel structures are giving way to new forms, new alliances, and new
processes--some more slowly than others, but all changing. Pressures for
change in a country come from within and without. Multinational marketers are
seeking ways to profitably tap market segments that are served by costly,
traditional distribution systems. Direct marketing, door-to-door selling,
hypermarkets, discount houses, shopping malls, catalog selling, e-commerce via
the Internet, and other distribution methods are being introduced in an attempt to
provide efficient distribution channels.
Some important trends in distribution will eventually lead to greater
commonality than disparity among middlemen in different countries. Wal-Mart,
for example, is expanding all over the world--from Mexico to Brazil and from
Argentina to Asia. Amway and Avon are expanding into Eastern Europe, Mary
Kay Cosmetics in China, and L. L. Bean and Lands' End have made successful
entry into the Japanese market. In Spain, the Southland Corporation's 7-Eleven
Stores are replacing many of the traditional mom-and-pop stores. Hypermarkets
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developed in France, and their many spin-offs are expanding all over Europe,
Latin America, and Asia. These huge stores, supplied with computerized
inventories, may spell a slow death for small shops and midsize retailers in urban
areas. The effect of all these intrusions into the traditional distribution systems is
change that will make discounting, self-service, supermarkets, and mass
merchandising concepts common all over the world and elevate the competitive
climate to a level not known before.
Distribution Patterns
International marketers need a general awareness of the patterns of
distribution that confront them in world marketplaces. Nearly every international
trading firm is forced by the structure of the market to use at least some
middlemen in the distribution arrangement. It is all too easy to conclude that,
because the structural arrangements of foreign and domestic distribution seem
alike, foreign channels are the same as or similar to domestic channels of the
same name. This is misleading. Only when the varied intricacies of actual
distribution patterns are understood can the complexity of the distribution task
be appreciated. The following description should convey a sense of the variety of
distribution patterns.
General Patterns
Generalizing about internal distribution channel patterns of various
countries is almost as difficult as generalizing about behavior patterns of people.
Despite similarities, marketing channels are not the same throughout the world.
Marketing methods taken for granted in the United States are rare in many
countries.
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Middlemen Services
Service attitudes of trades people vary sharply at both the retail and
wholesale levels from country to country. In Egypt, for example, the primary
purpose of the simple trading system is to handle the physical distribution of
available goods. On the other hand, when margins are low and there is a
continuing battle for customer preference, both wholesalers and retailers try to
offer extra services to make their goods attractive to consumers. When
middlemen are disinterested in promoting or selling individual items of
merchandise, the manufacturer must provide adequate inducement to the
middlemen or undertake much of the promotion and selling effort. Such is the
case in China, where wholesalers see their function as storing the goods and
waiting for their customers to come to them.
Line Breadth.
Every nation has a distinct pattern relative to the breadth of line carried
by wholesalers and retailers. The distribution system of some countries seems to
be characterized by middlemen who carry or can get everything; in others, every
middleman seems to be a specialist dealing only in extremely narrow lines.
Government regulations in some countries limit the breadth of line that can be
carried by middlemen and licensing requirements to handle certain merchandise
are not uncommon.
Costs and Margins
Cost levels and middleman margins vary widely from country to
country, depending on the level of competition, services offered, efficiencies or
inefficiencies of scale, and geographic and turnover factors related to market
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size, purchasing power, tradition, and other basic determinants. In India,
competition in large cities is so intense that costs are low and margins thin; but
in rural areas, the lack of capital has permitted the few traders with capital to
gain monopolies with consequent high prices and wide margins.
Channel Length
Some correlation may be found between the stage of economic
development and the length of marketing channels. In every country channels
are likely to be shorter for industrial goods and for high-priced consumer goods
than for low-priced products. In general, there is an inverse relationship between
channel length and the size of the purchase. Combination wholesaler-retailers or
semi wholesalers exist in many countries, adding one or two links to the length
of the distribution chain. In China, for example, the traditional distribution
system for over-the-counter drugs consists of large local wholesalers divided
into three levels. First-level wholesalers supply drugs to major cities such as
Beijing and Shanghai. The second-level services medium-sized cities, while the
third level distributes to counties and cities with 100,000 people or less. It can
be profitable for a company to sell directly to the two top-level wholesalers and
have them sell to the third level which is so small that it would be unprofitable
to seek out.
Nonexistent Channels
One of the things companies discover about international channel-of-
distribution patterns is that in many countries adequate market coverage through
a simple channel of distribution is nearly impossible. In many instances, appro-
priate channels do not exist; in others, parts of a channel system are available
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but other parts are not. In Peru, for example, the informal distribution network
accounts for almost a quarter of all retail cash sales. The ubiquitous street
markets and ambulatory sellers offer far wider market penetration than formal
distribution companies. Further, their prices are generally lower than traditional
retailers, partly because of lower overhead costs compared with the higher costs
generated by the overextended formal distribution chain of the traditional
retailer. Thus, several distinct distribution channels are necessary to reach
different segments of a market; channels suitable for distribution in urban areas
seldom provide adequate rural coverage.
Blocked Channels
International marketers may be blocked from using the channel of their
choice. Blockage can result from competitors' already-established lines in the
various channels and trade associations or cartels having closed certain channels.
The classic example of blocked channels is Japan, as discussed above, but it is by no
means the only example. Associations of middlemen sometimes restrict the
number of distribution alternatives available to a producer. Druggists in many
countries have inhibited distribution of a wide range of goods through any retail
outlets except drugstores. The drugstores, in turn, have been supplied by a
relatively small number of wholesalers who have long-established relationships
with their suppliers. Thus, through a combination of competition and association,
a producer may be kept out of the market completely. In the U.K., simple
magnifying reading glasses that can be purchased in a dozen different types of
stores in the United States can only be purchase by prescription through
registered optical stores, which are controlled by a few large companies.
Stocking
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The high cost of credit, danger of loss through inflation, lack of capital,
and other concerns cause foreign middlemen in many countries to limit
inventories. This often results in out-of-stock conditions and sales lost to
competitors. Physical distribution lags intensify their problem so that in many
cases the manufacturer must provide local warehousing or extend long credit to
encourage middlemen to carry large inventories. Often large inventories are out
of the question for small stores with limited floor space. Considerable ingenuity,
assistance, and, perhaps pressure are required to induce middlemen in most
countries to carry adequate or even minimal inventories.
Power and Competition
Distribution power tends to concentrate in countries where a few large
wholesalers distribute to a mass of small middlemen. Large wholesalers
generally finance middlemen downstream. The strong allegiance they command
from their customers enables them to effectively block existing channels and
force an outsider to rely on less effective and more costly distribution.
Retail Patterns
Retailing shows even greater diversity in its structure than does
wholesaling. In Italy and Morocco, retailing is composed largely of specialty
houses which carry narrow lines, while in Finland, most retailers carry a more
general line of merchandise. Retail size is represented at one end by Japan's
giant Mitsukoshi Ltd., which reportedly enjoys the patronage of more than
100,000 customers every day. The other extreme is represented in the market of
Iberian, Nigeria, where some 3,000 one- or two-person stalls serve not many
more customers.
Size Patterns
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The extremes in size in retailing are similar to those that predominate in
wholesaling. Exhibit 14-3 dramatically illustrates some of the variations in size
and number of retailers per person that exist in some countries. The retail
structure and the problems it engenders cause real difficulties for the
international marketing firm selling consumer goods. Large dominant retailers
can be sold direct, but there is no adequate way to directly reach small retailers
who, in the aggregate, handle a great volume of sales. In Italy, official figures
show there are 865,000 retail stores, or one store for every 66 Italians. Of the
340,000 food stores, fewer than 1,500 can be classified as large. Thus,
middlemen are a critical factor in adequate distribution in Italy.
Underdeveloped countries present similar problems. Among the large
supermarket chains in South Africa there is considerable concentration. One
thousand of the country's 31,000 stores control 60 percent of all grocery sales,
leaving the remaining 40 percent of sales to be spread among 30,000 stores. It
may be difficult to reach the 40 percent of the market served by those 30,000
stores. Predominantly in Black communities, retailing is on a small scale-
cigarettes are often sold singly, and the entire fruit inventory may consist of four
apples in a bowl.
Retailing around the world has been in a state of active ferment for
several years. The rate of change appears to be directly related to the stage and
speed of economic development, and even the least-developed countries are
experiencing dramatic changes. Supermarkets of one variety or another are
blossoming in developed and underdeveloped countries alike. Discount houses
that sell everything from powdered milk and canned chili to Korean TVs and
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VCRs are thriving and expanding worldwide. Wal-Mart, already in Mexico, is
expanding into Brazil, Argentina, Thailand, Hong Kong, and China.
Direct Marketing
Selling directly to the consumer through the mail, by telephone, or door-
to-door is becoming the distribution-marketing approach of choice in markets
with insufficient and/or underdeveloped distribution systems. Amway, operating
in 42 foreign countries, has successfully expanded into Latin America and Asia
with its method of direct marketing. Companies that enlist individuals to sell
their products are proving to be especially popular in Eastern Europe and other
countries, where many people are looking for ways to become entrepreneurs. In
the Czech Republic, for example, Amway Corporation signed up 25,000 Czechs
as distributors and sold 40,000 starter kits at $83 each in its first two weeks of
business
Direct sales through catalogs have proved to be a successful way to enter
foreign markets. In Japan, it has been an important way to break the trade barrier
imposed by the Japanese distribution system. For example, a U.S. mail-order
company, Shop America, has teamed up with 7-Eleven in Japan21 to distribute
catalogs in its 4,000 stores. Shop America sells items such as compact disks,
Canon cameras, and Rolex watches for 30-50 percent less than Tokyo stores. For
example, a Canon Auto boy camera sells for $260 in Tokyo and $180 in the
Shop America catalog, and a Lady Remington shaver sells for $86 in Tokyo
versus $46 in the catalog.
Resistances to Change
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Efforts to improve the efficiency of the distribution system, new types of
middlemen, and other attempts to change traditional ways are typically viewed
as threatening and thus resisted. Laws abound that protect the entrenched in their
positions. In Italy, a new retail outlet must obtain a license from a municipal board
composed of local trades people. In a two-year period, some 200 applications
were made and only 10 new licenses granted. Opposition to retail innovation
prevails everywhere, yet in the face of all the restrictions and hindrances, self-
service, discount merchandising, liberal store hours, and large-scale
merchandising continue to grow because they offer the consumer convenience
and a broad range of quality product brands at advantageous prices. Ultimately
the consumer does prevail.
World Wide Web
The use of the Internet is rapidly becoming an important distribution
method for multinational companies and a source of products for businesses and
consumers. Computer hardware and software companies, and book and music
retailers are the most experienced "'e-marketers" in using this method of
distribution and marketing. Technically, e-commerce is a form of direct selling;
however, because of its newness and the unique issues associated with this form
of distribution, it is important to differentiate from other types of direct
marketing. E-commerce is used to market business-to-business services,
consumer services, and consumer and industrial products via the World Wide
Web on the Internet. It involves the direct marketing from a manufacturer,
retailer, or some other intermediary to a final user.
Some examples of e-marketers that have an international presence
include Dell Computer Corporation, which generates revenues of more than $3
million per day; in the U.K., 10 percent of its sales are online. Cisco Systems Inc.
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generated $1 billion in sales in 1997. Cisco's Web site appears in 14 languages
and has country-specific content for 49 nations. Gateway 2000 has global sites in
Japan, France, the Netherlands, Germany and Sweden, Australia, the U.K., and
the United States. Sun Microsystems and its after marketing company, Sun
Express, have local language information on more than 3,500 aftermarket
products. Sun Plaza enables visitors in North America, Europe, and Japan to get
information on-line on products and services, and place orders directly and
securely in their native languages.
Web Malls
An indication of the impact U.S. e-retailers have had on retail sales in
the U.K. is the E-Christmas mall created to counter Christmas gift sales that
have been going to the U.S. In an attempt to provide more opportunity for
European e-customers to stay at home, a group of 15& of Europe's best-known
retailers organized E-Christmas on-line in time for the Christmas selling season.
E-Christmas shoppers can choose from one of six languages and 11 currencies.
They are presented with prices that include duty when applicable and delivery
charges for the 25 countries served by UPS worldwide. Germany also has an e-
mail that operates year-around; it is, however, only in German. Both of these
shopping malls have U.S. stores included in their lineup.
Home-Country Middlemen
Home-country middlemen, or domestic middlemen, located in the
producing firm's country, provide marketing services from a domestic base. By
selecting domestic middlemen as intermediaries in the distribution processes,
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companies relegate foreign-market distribution to others. Domestic middlemen
offer many advantages for companies with small international sales volume,
those inexperienced with foreign markets, those not wanting to become
immediately involved with the complexities of international marketing, and
those wanting to sell abroad with minimum financial and management
commitment. A major trade-off for using home-country middlemen is limited
control over the entire process. Domestic middlemen are most likely to be used
when the marketer is uncertain and/or desires to minimize financial and
management investment. A brief discussion of the more frequently used
domestic middlemen follows.
Global Retailers
As global retailers like Costco, Sears Roebuck, Toys "R" Us, and Wal-
Mart expand their global coverage, they are becoming major domestic
middlemen for international markets. Wal-Mart, with 603 stores in nine foreign
markets, is an attractive entry point to international markets for U.S. suppliers if
they can meet Wal-Mart's stringent shipping requirements. For those that can
meet the test, Wal-Mart offers an effective way to enter international markets
with a minimum of experience. Pacific Connections, for example, a California
manufacturer of handbags with $70 million in sales in 1997, ventured into
overseas markets in Argentina, Brazil, Canada, and Mexico through its ties to
Wal-Mart. Wal-Mart executives say that many U.S. vendors lack global
expertise and seem ill prepared to supply the retailer in places like China and
Brazil.
Export Management Companies
The export management company (EMC) is an important middleman for
firms with relatively small international volume or for those unwilling to
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involve their own personnel in the international function. EMCs range in size
from one person upward to 100 and handle about 10 percent of the
manufactured goods exported. An example of an EMC is a Washington, D.C.-
based company that has exclusive agreements with 10 U.S. manufacturers of
orthopedic equipment and markets these products on a worldwide basis.
The major disadvantage is that EMCs can seldom afford to make the kind
of market investment needed to establish deep distribution for products because
they must have immediate sales payout to survive. Such a situation does not offer
the market advantages gained by a company that can afford to use company
personnel. Carefully selected EMCs can do an excellent job, but the
manufacturer must remember the EMC is dependent on sales volume for
compensation and probably will not push the manufacturer's line if it is spread
too thinly, generates too small a volume from a given principal, or cannot
operate profitably in the short run. Then the EMC becomes an order taker and
not the desired substitute for an international marketing department.
Trading Companies
Trading companies have a long and honorable history as important
intermediaries in the development of trade between nations. Trading companies
accumulate, transport, and distribute goods from many countries. In concept, the
trading company has changed little in hundreds of years.
The British firm, Gray MacKenzie and Company, is typical of
companies operating in the Middle East. It has some 70 salespeople and handles
consumer products ranging from toiletries to outboard motors and Scotch
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whiskey. The key advantage to this type of trading company is that it covers the
entire Middle East.
Large, established trading companies generally are located in developed
countries; they sell manufactured goods to developing countries and buy raw
materials and unprocessed goods. Japanese trading companies (sogo shosha),
dating back to the early 1700s, operate both as importers and exporters. Some
300 are engaged in foreign and domestic trade through 2,000 branch offices
outside Japan and handle over $1 trillion in trading volume annually. Japanese
trading companies account for 61 percent of all Japanese imports and 39 percent
of all exports or about a fifth of Japan's entire GDP.
U.S. Export Trading Companies
The Export Trading Company (ETC) Act allows producers of similar
products to form export trading companies. A major goal of the ETC Act was to
increase U.S. exports by encouraging more efficient export trade services to
producers and suppliers in order to improve the availability of trade finance and
to remove antitrust disincentives to export activities. By providing U.S.
businesses with an opportunity to obtain antitrust pre clearance for specified
export activities, the ETC Act creates a more favorable environment for the
formation of joint export ventures. Through such joint ventures, U.S. firms can
take advantage of economies of scale, spread risk, and pool their expertise. In
addition, through joint selling arrangements, domestic competitors can avoid
inter-firm rivalry in foreign markets. Prior to the passage of the ETC Act,
competing companies could not engage in joint exporting efforts without
possible violation of antitrust provisions. The other important provision of the
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ETC Act is to permit bank holding companies to own ETCs. Prior to the ETC
Act, banks could not own commercial enterprises.
Manufacturer's Export Agent
The manufacturer's export agent (MEA) is an individual agent
middleman or an agent middleman firm providing a selling service for
manufacturers. Unlike the EMC, the MEA does not serve as the producer's
export department but has a short-term relationship, covers only one or two
markets, and operates on a straight commission basis. Another principal
difference is that MEAs do business in their own names rather than in the name
of the client. Within a limited scope of operation, the MEAs provide services
similar to those of the EMC.
Home Country Brokers
The term broker is a catchall for a variety of middlemen performing low-
cost agent services. The term is typically applied to import-export brokers who
provide the intermediary function of bringing buyers and sellers together and
who do not have a continuing relationship with their clients. Most brokers
specialize in one or more commodities for which they maintain contact with
major producers and purchasers throughout the world.
Buying Offices
A variety of agent middlemen may be classified simply as buyers or
buyers for export. Their common denominator is a primary function of seeking
and purchasing merchandise on request from principals; as such, they do not
provide a selling service. In fact, their chief emphasis is on flexibility and the
ability to find merchandise from any source. They do not often become involved
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in continuing relationships with domestic suppliers and do not provide a
continuing source of representation.
Selling Groups
Several types of arrangements have been developed in which various
manufacturers or producers cooperate in a joint attempt to sell their
merchandise abroad. This may take the form of complementary exporting or of
selling to a business combine such as a Webb-Pomerene export association. Both
are considered agency arrangements when the exporting is done on a fee or
commission basis.
Webb-Pomerene Export Associations (WPEA)
Webb-Pomerene Export Associations (WPEA) are another major form of
group exporting. The Webb-Pomerene Act of 1918 made it possible for
American business firms to join forces in export activities without being subject
to the Sherman Antitrust Act. WPEAs cannot participate in cartels or other
international agreements that would reduce competition in the United States, but
can offer four major benefits: (1) reduction of export costs, (2) demand
expansion through promotion, (3) trade barrier reductions, and (4) improvement
of trade terms through bilateral bargaining. Additionally, WPEAs set prices,
standardize products, and arrange for disposal of surplus products. Although
they account for less than 5 percent of U.S. exports, WPEAs include some of
America's blue-chip companies in agricultural products, chemicals and raw
materials, forest products, pulp and paper, textiles, rubber products, motion
pictures, and television.
Foreign Sales Corporation (FSC)
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A Foreign Sales Corporation (FSC) is a sales corporation set up in a
foreign country or U.S. possession that can obtain a corporate tax exemption on
a portion of the earnings generated by the sale or lease of export property.
Manufacturers and export groups can form FSCs. A FSC can function as a
principal, buying and selling for its own account, or as a commissioned agent. It
can be related to a manufacturing parent or can be an independent merchant or
broker.
Norazi Agent
Norazi agents are unique middlemen specializing in shady or difficult
transactions. They deal in contraband materials, such as hazardous waste
products or war materials, and in providing strategic goods to countries closed to
normal trading channels. The Norazi is also likely to be engaged in black-market
currency operations, untaxed liquor, narcotics, industrial espionage, and other
illicit traffic. The Norazi exists because tariffs, import taxes, import/export
regulations, and excise taxes make illegal movements of goods more profitable
than legal movements. Because of high tariffs, the amount of contraband entering
Brazil from Paraguay is estimated to be between $4 and $12 billion annually.
Cigarette smuggling accounts for over one-fourth of all cigarettes sold abroad
according to one estimate. In the last few years, money laundering has become a
major activity of Norazi agents; some estimate that $500 billion is laundered
worldwide annually.
Export Merchants
Export merchants are essentially domestic merchants operating in
foreign markets. As such, they operate much like the domestic wholesaler.
Specifically, they purchase goods from a large number of manufacturers, ship
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them to foreign countries, and take full responsibility for their marketing.
Sometimes they utilize their own organizations, but, more commonly, they sell
through middlemen. They may carry competing lines, have full control over
prices, and maintain little loyalty to suppliers, although they continue to handle
products as long as they are profitable.
Export Jobbers
Export jobbers deal mostly in commodities; they do not take physical
possession of goods but assume responsibility for arranging transportation.
Because they work on a job-lot basis, they do not provide a particularly attractive
distribution alternative for most producers.
Summarizes information pertaining to the major kinds of domestic
middlemen operating in foreign markets. No attempt is made to generalize about
rates of commission, markup, or pay because so many factors influence
compensation. Services offered or demanded, market structure, volume, and
product type are some of the key determinants. The data represent the
predominant patterns of operations; however, individual middlemen of a given
type may vary in their operations.
Foreign-Country Middlemen
The variety of agent and merchant middlemen in most countries is
similar to those in the United States. An international marketer seeking greater
control over the distribution process may elect to deal directly with middlemen in
the foreign market. They gain the advantage of shorter channels and deal with
middlemen in constant contact with the market. As with all middlemen,
particularly those working at a distance, effectiveness is directly dependent on
the selection of middlemen and on the degree of control the manufacturer can
and or will exert.
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Manufacturer's Representatives
Manufacturer's representatives are agent middlemen who take
responsibility for a producer's goods in a city, regional market area, entire
country, or several adjacent countries. When responsible for an entire country,
the middleman is often called a sole agent. As in the United States, the well-
chosen, well-motivated, well-controlled manufacturer's representative can
provide excellent market coverage for the manufacturer in certain circumstances.
The manufacturer's representative is widely used in distribution of industrial
goods overseas and is an excellent representative for any type of manufactured
consumer goods.
Distributors
A foreign distributor is a merchant middleman. This intermediary often
has exclusive sales rights in a specific country and works in close cooperation
with the manufacturer. The distributor has a relatively high degree of
dependence on the supplier companies, and arrangements are likely to be on a
long-run, continuous basis. Working through distributors permits the
manufacturer a reasonable degree of control over prices, promotional effort,
inventories, servicing, and other distribution functions. If a line is profitable for
distributors, they can be depended on to handle it in a manner closely ap-
proximating the desires of the manufacturer.
Foreign-Country Brokers
Like the export broker discussed in an earlier section, foreign-country
brokers are agents who deal largely in commodities and food products. The
foreign brokers are typically part of small brokerage firms operating in one
country or in a few contiguous countries. Their strength is in having good
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continuing relationships with customers and providing speedy market coverage
at a low cost.
Managing Agents and Compradors
A managing agent conducts business within a foreign nation under an
exclusive contract arrangement with the parent company. The managing agent in
some cases invests in the operation and in most instances operates under a
contract with the parent company. Compensation is usually on the basis of cost
plus a specified percentage of the profits of the managed company. In some
countries, managing agents may be called compradors and there are some
differences in duties performed.
Dealers
Generally speaking, anyone who has a continuing relationship with a
supplier in buying and selling goods is considered a dealer. More specifically,
dealers are middlemen selling industrial goods or durable consumer goods direct
to customers; they are the last step in the channel of distribution. Dealers have
continuing, close working relationships with their suppliers and exclusive
selling rights for their producer's products within a given geographic area.
Finally, they derive a large portion of their sales volume from the products of a
single supplier firm. Usually a dealer is an independent merchant middleman,
but sometimes the supplier company has equity in its dealers.
Import Jobbers, Wholesalers, and Retailers
Import jobbers purchase goods directly from the manufacturer and sell to
wholesalers and retailers and to industrial customers. Large and small
wholesalers and retailers engage in direct importing for their own outlets and for
redistribution to smaller middlemen. The combination retailer-wholesaler is
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more important in foreign countries than in the United States. It is not un-
common to find large retailers wholesaling goods to local shops and dealers.
Government-Affiliated Middlemen
Marketers must deal with governments in every country of the world.
Products, services, and commodities for the government's own use are always
procured through government purchasing offices at federal, regional, and local
levels. As governments undertake more and more social services, the level of
government purchasing activity escalates. In The Netherlands, the state's
purchasing office deals with more than 10,000 suppliers in 20 countries. About
one-third of the products purchased by that agency are produced outside The
Netherlands; 90 percent of foreign purchases are handled through Dutch
representatives. The other 10 percent are purchased directly from producing
companies.
Factors Affecting Choice of Channels
The international marketer needs a clear understanding of market
characteristics and must have established operating policies before beginning the
selection of channel middlemen. The following points should be addressed prior
to the selection process.
1.
Identify specific target markets within and across countries.
2. Specify marketing goals in terms of volume, market share, and profit
margin requirements.
3. Specify financial and personnel commitments to the
development of international distribution.
4.
Identify control, length of channels, terms of sale, and channel
ownership.
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Cost
There are two kinds of channel cost: (1) the capital or investment cost of
developing the channel and (2) the continuing cost of maintaining it. The latter
can be in the form of direct expenditure for the maintenance of the company's
selling force or in the form of margins, markup, or commissions of various
middlemen handling the goods. Marketing costs (a substantial part of which is
channel cost) must be considered as the entire difference between the factory
price of the goods and the price the customer ultimately pays for the
merchandise. The costs of middlemen include transporting and storing the
goods, breaking bulk, providing credit, and local advertising, sales
representation, and negotiations.
Capital Requirement
The financial ramifications of a distribution policy are often overlooked.
Critical elements are capital requirement and cash-flow patterns associated with
using a particular type of middleman. Maximum investment is usually required
when a company establishes its own internal channels, that is, its own sales
force. Use of distributors or dealers may lessen the capital investment, but
manufacturers often have to provide initial inventories on consignment, loans,
floor plans, or other arrangements. Coca-Cola initially invested in China with
majority partners that met most of the capital requirements. However, Coke
soon realized that it could not depend on its local majority partners to distribute
its product aggressively in the highly competitive, market-share-driven business
of carbonated beverages. To assume more control of distribution it had to assume
management control and that meant greater capital investment from Coca-Cola.
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One of the highest costs of doing business in China is the capital required to
maintain effective distribution.
Control
The more involved a company is with the distribution, the more control it
exerts. A company's own sales force affords the most control but often at a cost
that is not practical. Each type of channel arrangement provides a different level
of control and, as channels grow longer, the ability to control price, volume,
promotion, and type of outlets diminishes. If a company cannot sell directly to
the end user or final retailer, an important selection criterion of middlemen
should be the amount of control the marketer can maintain.
Coverage
Another major goal is full-market coverage to (1) gain the optimum
volume of sales obtainable in each market, (2) secure a reasonable market share,
and (3) attain satisfactory market penetration. Coverage may be assessed on
geographic and/or market segments. Adequate market coverage may require
changes in distribution systems from country to country or time to time.
Coverage is difficult to develop both in highly developed areas and in sparse
markets the former because of heavy competition and the latter because of
inadequate channels.
Character
The channel-of-distribution system selected must fit the character of the
company and the markets in which it is doing business. Some obvious product
requirements, often the first considered, relate to perish ability or bulk of the
product, complexity of sale, sales service required, and value of the product.
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Channel commanders must be aware that channel patterns change; they
cannot assume that once a channel has been developed to fit the character of both
company and market, no more need be done. Great Britain, for example, has
epitomized distribution through specialty-type middlemen, distributors,
wholesalers, and retailers; in fact, all middlemen have traditionally worked
within narrow product specialty areas. In recent years, however, there has been a
trend toward broader lines, conglomerate merchandising, and mass marketing.
The firm that neglects the growth of self-service, scrambled merchandising, or
discounting may find it has lost large segments of its market because its
channels no longer reflect the character of the market.
Continuity
Channels of distribution often pose longevity problems. Most agent
middlemen firms tend to be small institutions. When one individual retires or
moves out of a line of business, the company may find it has lost its distribution
in that area. Wholesalers and especially retailers are not noted for their continuity
in business either. Most middlemen have little loyalty to their vendors. They
handle brands in good times when the line is making money, but quickly reject
such products within a season or a year if they fail to produce during that period.
Distributors and dealers are probably the most loyal middlemen, but even with
them, manufacturers must attempt to build brand loyalty downstream in a
channel lest middlemen shift allegiance to other companies or other inducements.
Locating, Selecting, and Motivating Channel Members
The actual process of building channels for international distribution is
seldom easy, and many companies have been stopped in their efforts to develop
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international markets by their inability to construct a satisfactory system of
channels.
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Locating Middlemen
The search for prospective middlemen should begin with study of the
market and determination of criteria for evaluating middlemen servicing that
market. The company's broad policy guidelines should be followed, but expect
expediency to override policy at times. The checklist of criteria differs according
to the type of middlemen being used and the nature of their relationship with the
company. Basically, such lists are built around four subject areas: (1)
productivity or volume, (2) financial strength, (3) managerial stability and
capability, and (4) the nature and reputation of the business. Emphasis is usually
placed on either the actual or potential productivity of the middleman.
Setting policies and making checklists are easy; the real task is
implementing them. The major problems are locating information to aid in the
selection and choice of specific middlemen, and discovering middlemen
available to handle one's merchandise. Firms seeking overseas representation
should compile a list of middlemen from such sources as: (1) the U.S.
Department of Commerce; (2) commercially published directories; (3) foreign
consulates; (4) chamber-of-commerce groups located abroad; (5) other
manufacturers producing similar but noncompetitive goods; (6) middlemen
associations; (7) business publications; (8) management consultants; (9) carriers
particularly airlines; and (10) Internet-based services such as Unibex, a global
business center.
Selecting Middlemen
Finding prospective middlemen is less a problem than determining which
of them can perform satisfactorily. Low volume or low potential volume
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hampers most prospects, many are underfinanced, and some simply cannot be
trusted. In many cases, when a manufacturer is not well known abroad, the
reputation of the middleman becomes the reputation of the manufacturer, so a
poor choice at this point can be devastating.
Screening
The screening and selection process itself should follow this sequence:
(1) a letter including product information and distributor requirements in the
native language to each prospective middleman; (2) a follow-up to the best
respondents for more specific information concerning lines handled, territory
covered, size of firm, number of salespeople, and other background information;
(3) check of credit and references from other clients and customers of the
prospective middleman; and (4) if possible, a personal check of the most
promising firms. It has become easier to obtain financial information on
prospective middlemen via such Internet companies as Unibex (Exhibit 14--8),
which provides access to Deloitte & Touches International and Dun & Bradstreet
client information resources.
The Agreement
Once a potential middleman has been found and evaluated, there remains
the task of detailing the arrangements with that middleman. So far the company
has been in a buying position; now it must shift into a selling and negotiating
position to convince the middleman to handle the goods and accept a
distribution agreement that is workable for the company. Agreements must spell
out specific responsibilities of the manufacturer and the middleman, including
an annual sales minimum. The sales minimum serves as a basis for evaluation
of the distributor, and failure to meet sales mini-mums may give the exporter
the right of termination.
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Motivating Middlemen
Once middlemen are selected, a promotional program must be started to
maintain high-level interest in the manufacturer's products. A larger proportion
of the advertising budget must be devoted to channel communications than in
the United States because there are so many small middlemen to be contacted.
Consumer advertising is of no value unless the goods are actually available.
Furthermore, few companies operating in international business have the strong
brand image in foreign environments that they have in their own country. In
most countries, retailers and wholesalers are only minimally brand conscious,
and yet, to a large degree, they control the success or failure of products in their
countries.
Terminating Middlemen
When middlemen do not perform up to standards or when market
situations change, requiring a company to restructure its distribution, it may be
necessary to terminate relationships with certain middlemen or certain types of
middlemen. In the United States, it is usually a simple action regardless of the
type of middlemen; they are simply dismissed. However, in other parts of the
world, the middleman typically has some legal protection that makes it difficult
to terminate relationships. In Colombia, for example, if you terminate an agent,
you are required to pay 10 percent of the agent's average annual compensation,
multiplied by the number of years the agent served, as a final settlement. In
some countries, an agent cannot be dismissed without arbitration to determine
whether the relationship should be ended. Some companies make all middlemen
contracts for one year to avoid such problems. However, there have been cases
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where termination under these contracts has been successfully contested.
Competent legal advice is vital when entering distribution contracts with
middlemen. But as many experienced international marketers know, the best rule
is to avoid the need to terminate distributors by screening all prospective
middlemen carefully. A poorly chosen distributor may not only fail to live up to
expectations but may also adversely affixture business and prospects in the
country.
Controlling Middlemen
The extreme length of channels typically used in international
distribution makes control of middlemen particularly difficult. Some companies
solve this problem by establishing their own distribution systems; others issue
franchises or exclusive distributorships in an effort to maintain control through
the first stages of the channels. Until the various world markets are more highly
developed, most international marketers cannot expect to exert a high degree of
control over their international distribution operations. Although control is
difficult, a company that succeeds in controlling distribution channels is likely to
be a successful international marketer. Indeed, the desire for control is a major
reason companies initiate their own distribution systems in domestic as well as in
international business.
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GLOBAL ADVERTISING
Intense competition for world markets and the increasing sophistication of
foreign consumers have led to a need for more sophisticated advertising strategies.
Increased costs, problems of coordinating advertising programs in multiple
countries, and a desire for a common worldwide company or product image have
caused Multinational Companies (MNCs) to seek greater control and efficiency
without sacrificing local responsiveness. In the quest for more effective and
responsive promotion programs, the policies covering centralized or decentralized
authority, use of single or multiple foreign or domestic agencies, appropriation and
allocation procedures, copy, media, and research are being examined.
Pattern Advertising: Plan Globally, Act Locally
As discussed in the chapter on product development , a product is more
than a physical item; it is a bundle of satisfactions the buyer receives. This
package of satisfactions or utilities includes the primary function of the product
along with many other benefits imputed by the values and customs of the culture.
Different cultures often seek the same value or benefits from the primary function
of a product; for example, the ability of an automobile to get from point A to point
B, a camera to take a picture, or a wristwatch to tell time. But while agreeing on
the benefit of the primary function of a product, other features and psychological
attributes of the item can have significant differences.
Consider the different market-perceived needs for a camera. In the
United States, excellent pictures with easy, foolproof operation are expected by
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most of the market; in Germany and Japan, a camera must take excellent pictures
but the camera must also be state-of-the-art in design. In Africa, where
penetration of cameras is less than 20 percent of the households, the concept of
picture-taking must be sold. In all three markets, excellent pictures are expected
(i.e., the primary function of a camera is demanded) but the additional utility or
satisfaction derived from a camera differs among cultures. There are many
products that produce such different expectations beyond the common benefit
sought by all. Thus, many companies follow a strategy of pattern advertising, a
global advertising strategy with a standardized basic message allowing some
degree of modification to meet local situations.5 As the popular saying goes,
"Think Globally, Act Locally." In this way, some economies of standardization
can be realized while specific cultural differences are accommodated.
Levi Strauss and Company has changed from all localized ads to pattern
advertising where the broad outlines of the campaign are given but the details are
not. Quality and Levi's American roots are featured worldwide. In each country
market, different approaches will express these two points.
In Japan, the Blue Diamond brand of almonds was an unknown
commodity until Blue Diamond launched its campaign of exotic new almond-
based products that catered to local tastes. Such things as almond tofu, almond
miso soup, and Clarhond--a nutritional snack concocted from a mixture of dried
small sardines and slivered almonds--were featured in magazine ads and in
promotional cooking demonstrations. Television ads featured educational
messages on how to use almonds in cooking, their nutritional value, the
versatility of almonds as a snack, and the California mystique and health benefits
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of almonds. As a result, Japan is now the Association's largest importer of
almonds.
In Korea, the emphasis was on almonds and the West. Commercials
featured swaying palms, beach scenes, and a guitar-playing crooner singing
"Blue Diamond" to the tune of "Blue Hawaii." And so it goes in the 94
countries where Blue Diamond sells its almonds. Blue Diamond assumes that
no two markets will react the same, that each has its own set of differences--be
they "cultural, religious, ethnic, dietary, or otherwise"-- and that each will
require a different marketing approach, a different strategy. The wisdom of
adapting its product advertising for each market is difficult to question since
two-thirds of all Blue Diamond's sales are outside the United States.
Global Advertising and World Brands
Global brands generally are the result of a company that elects to be
guided by a global marketing strategy. Global brands carry the same name, same
design, and same creative strategy everywhere in the world; Coca-Cola, Pepsi-
Cola, McDonald's, and Revlon are a few of the global brands. Even when
cultural differences make it ineffective to have a standardized advertising
program or a standardized product, a company may have a World brand.
Nescafe, the world brand for Nestle Company's instant coffee, is used
throughout the world even though advertising messages and formulation (dark
roast and light roast) vary to suit cultural differences. In Japan and the United
Kingdom, advertising reflects each country's preference for tea; in France,
Germany, and Brazil, cultural preferences for ground coffee call for a different
advertising message and formulation. Even in this situation, however, there is
some standardization; all advertisements have one common emotional link:
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"Whatever good coffee means to you and however you like to serve it, Nescafe
has a coffee for you." The debate between advocates of strict standardized ad-
vertising and those who support locally modified promotions will doubtless
continue.
Pan-European Advertising
The attraction of a single European market will entice many companies to
standardize as much of their promotional effort as possible. As media coverage
across Europe expands, it will become more common for markets to be exposed to
multiple messages and brands of the same product. To avoid the confusion that
results when a market is exposed to multiple brand names and advertising
messages, as well as for reasons of efficiency, companies will strive for harmony
in brand names, advertising, and promotions across Europe.
Global Market Segmentation and Promotional Strategy
Rather than approach a promotional strategy decision as having to be
either standardized or adapted, a company should first identify market segments.
A market segment consists of consumers with more similarities in their needs,
wants, and buying behavior than differences, and thus more responsive to a
uniform promotional theme. Market segments can be defined within country
boundaries or across countries. Global market segmentation involves identifying
homogeneous market segments across groups of counr tries. Customers in a
global market segment may come from different cultural backgrounds with
different value systems and live in different parts of the world, but their
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commonalities in life-styles and their needs are fulfilled by similar product
benefits. Further, while segments in some countries may be too small to be
considered, when aggregated across a group of countries, they make a very
lucrative total market.
Procter & Gamble has identified mass market segments across the world
and designed brand and advertising concepts that apply to all. The company's
shampoo positioning strategy, "Pro-V vitamin formula strengthens the hair and
makes it shine," was developed for the Taiwan market, and then successfully
launched in several Latin American countries with only minor adaptation for hair
type and language. L'Oreal's "It's expensive and I'm worth it" brand position also
works well worldwide. Unilever's fabric softener's teddy bear brand concept has
worked well across borders, even though the "Snuggle" brand name changes in
some countries; it's Kuschelweich in Germany, Coc-colino in Italy, and
Mimosin in France.
Creative Challenges
The growing intensity of international competition, coupled with the
complexity of multinational marketing, demands that the international advertiser
function at the highest creative level. Advertisers from around the world have
developed their skills and abilities to the point that advertisements from different
countries reveal basic similarities and a growing level of sophistication. To
complicate matters further, boundaries are placed on creativity by legal,
language, cultural, media, production, and cost limitations.
Legal Considerations
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Laws that control comparative advertising vary from country to country
in Europe. In Germany, it is illegal to use any comparative terminology; you can
be sued by a competitor if you do. Belgium and Luxembourg explicitly ban
comparative advertising, whereas it is clearly authorized in the U.K., Ireland,
Spain, and Portugal. The directive covering comparative advertising will allow
implicit comparisons that do not name competitors, but will ban explicit
comparisons between named products. The European Commission has issued
several directives to harmonize the laws governing advertising. However,
member states are given substantial latitude to cover issues under their juris-
diction. Many fear that if the laws are not harmonized, member states may close
their borders to advertising that does not respect their national rules.
Language Limitations
Language is one of the major barriers to effective communication
through advertising. The problem involves different languages of different
countries, different languages or dialects within one country, and the subtler
problems of linguistic nuance and vernacular.
Cultural Diversity
The problems associated with communicating to people in diverse
cultures present one of the great creative challenges in advertising.
Communication is more difficult because cultural factors largely determine the
way various phenomena are perceived. If the perceptual framework is different,
perception of the message it differs.
Knowledge of cultural diversity must encompass the total advertising
project. General Mills had two problems with one product. When it introduced
instant cake mixes in the United States and England, it had the problem of
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overcoming the homemaker's guilt feelings. When General Mills introduced
instant cake mixes in Japan, the problem changed; cakes were not commonly
eaten in Japan. There was no guilt feeling but the homemaker was concerned
about failing. She wanted the cake mix as complete as possible. In testing TV
commercials promoting the notion that making cake is as easy as making rice,
General Mills learned it was offending the Japanese homemaker who believes
the preparation of rice requires great skill.
Media Limitations
Media are discussed at length later, so here we maintain only that
limitations on creative strategy imposed by media may diminish the role of
advertising in the promotional program and may force marketers to emphasize
other elements of the promotional mix.
A marketer's creativity is certainly challenged when a television
commercial is limited to 10 showings a year with no two exposures closer than
10 days, as is the case in Italy. Creative advertisers in some countries have even
developed their own media for overcoming media limitations. In some African
countries, advertisers run boats up and down the rivers playing popular music
and broadcasting commercials into the bush as they travel.
Production and Cost Limitations
Creativity is especially important when a budget is small or where there
are severe production limitations, poor-quality printing, and a lack of high-
grade paper. For example, the poor quality of high-circulation glossy magazines
and other quality publications has caused Colgate-Palmolive to depart from its
customary heavy use of print media in the West for other media in Eastern
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Europe. Newsprint is of such low quality in China that a color ad used by
Kodak in the West is not an option. Kodak's solution has been to print a single-
sheet color insert as a newspaper supplement. The necessity for low-cost re- 1
production in small markets poses another problem in many countries. For
example, hand-painted billboards must be used instead of printed sheets
because the limited number of billboards does not warrant the production of
printed sheets. In Egypt, static-filled television and poor-quality billboards have
led companies such as Coca-Cola and Nestle to place their advertisements on
the sails of feluccas, boats that sail along the Nile. Feluccas, with their triangle
sails, have been used to transport goods since the time of the pharaohs and serve
as an effective alternative to attract attention to company names and logos.
Media Planning and Analysis
Tactical Considerations
Although nearly every sizable nation essentially has the same kinds of
media, there are a number of specific considerations, problems, and differences
encountered from one nation to another. In international advertising, an
advertiser must consider the availability, cost, and coverage of the media. Local
variations and lack of market data require added attention.
Imagine the ingenuity required of advertisers confronted with these
situations:
In Brazil, TV commercials are sandwiched together in a string of 10 to 50
commercials within one station break.
National coverage in many countries means using as many as 40 to 50
different media.
Specialized media reach small segments of the market only. In the
Netherlands, there are Catholic, Protestant, socialist, neutral, and other
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specialized broadcasting systems.
In Germany, TV scheduling for an entire year must be arranged by August
30 of the preceding year, with no guarantee that commercials intended for
summer viewing will not be run in the middle of winter.
In Vietnam, advertising in newspapers and magazines is limited to 10
percent of space, and to 5 percent of time, or three minutes an hour, on radio
and TV.
Availability
One of the contrasts of international advertising is that some countries
have too few advertising media and others have too many. In some countries,
certain advertising media are forbidden by government edict to accept some
advertising materials. Such restrictions are most prevalent in radio and
television broadcasting. In many countries there are too few magazines and
newspapers to run all the advertising offered to them. Conversely, some nations
segment the market with so many newspapers that the advertiser cannot gain
effective coverage at a reasonable cost. Gilberto Sozzani, head of an Italian
advertising agency, comments about his country: "One fundamental rule. You
cannot buy what you want."
Hi China the only national TV station, CCTV, has one channel that must
be aired by the country's 27 provincial/municipal stations. In 1997 CCTV
auctioned off the most popular break between the early evening news and
weather; a secured yearlong, daily five-second billboard ad in this break went
for $38.5 million. For this price, advertisers are assured of good coverage--
over 70 percent of households have TV sets and the government's goal is 90
percent by 2000. One of the other options for advertisers is with the 2,828 TV
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stations that provide only local coverage. For a comparison on how much of the
advertising dollar is spent on different media in the top 10 global markets.
Cost
Media prices are susceptible to negotiation in most countries. Agency
space discounts are often split with the client to bring down the cost of media.
The advertiser may find the cost of reaching a prospect through advertising
depends on the agent's bargaining ability. The per-contract cost varies widely
from country to country. One study showed the cost of reaching one thousand
readers in 11 different European countries ranged from $1.58 in Belgium to
$5.91 in Italy; in women's service magazines, the page cost per thousand
circulation ranged from $2.51 in Denmark to $10.87 in Germany. Shortages of
advertising time on commercial television in some markets have caused
substantial price increases. In Britain, prices escalate on a bidding system. They
do not have fixed rate cards; instead there is a preempt system in which
advertisers willing to pay a higher rate can bump already scheduled spots.
Coverage
Closely akin to the cost dilemma is the problem of coverage. Two points
are particularly important: one relates to the difficulty of reaching certain
sectors of the population with advertising and the other to the lack of
information on coverage. In many world marketplaces, a wide variety of media
must be used to reach the majority of the markets. In some countries, large
numbers of separate media have divided markets into uneconomical advertising
segments. With some exceptions, a majority of the population of less-developed
countries cannot be reached readily through the medium of advertising. In
India, Video Vans are used to reach India's rural population with 30-minute
infomercials extolling the virtues of a product. Consumer goods companies
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deploy vans year-round except in the monsoon season. Colgate hires 85 vans at
a time and sends them to villages that research has shown to be promising.
Lack of Market Data
Verification of circulation or coverage figures is a difficult task. Even
though many countries have organizations similar to the Audit Bureau of
Circulation, accurate circulation and audience data are not assured. For
example, the president of the Mexican National Advertisers Association
charged that newspaper circulation figures are grossly exaggerated. He
suggested that as a rule agencies divide these figures in two and take the result
with a grain of salt. The situation in China is no better; surveys of habits and
market penetration are available only for the cities of Beijing, Shanghai, and
Guangzhou. Radio and television audiences are always difficult to measure, but
at least in most countries, geographic coverage is known. Research data are be-
coming more reliable as advertisers and agencies demand better quality data.
Specific Media Information
An attempt to evaluate specific characteristics of each medium is beyond
the scope of this discussion. Furthermore, such information would quickly
become outdated because of the rapid changes in the international advertising
media field. It may be interesting, however, to examine some of the particularly
unique international characteristics of various advertising media. In most
instances, the major implications of each variation may be discerned from the
data presented.
Newspapers
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The newspaper industry is suffering in some countries from lack of
competition and choking because of it in others. Most U.S. cities have just one
or two major daily newspapers, but in many countries, there are so many
newspapers an advertiser has trouble achieving even partial market coverage.
Uruguay, population three million, has 21 daily newspapers with a combined
circulation of 553,000. Turkey has 380 newspapers and an advertiser must
consider the political position of each newspaper so the product's reputation is
not harmed through affiliations with unpopular positions. Japan has only five
national daily newspapers, but the complications of producing a Japanese-
language newspaper are such that they each contain just 16 to 20 pages.
Connections are necessary to buy advertising space; Asahi, Japan's largest
newspaper, has been known to turn down over a million dollars a month in
advertising revenue.
Magazines
The use of foreign national consumer magazines by international
advertisers has been notably low for many reasons. Few magazines have a large
circulation or provide dependable circulation figures. Technical magazines are
used rather extensively to promote export goods but, as with newspapers, paper
shortages cause placement problems. Media planners are often faced with the
largest magazines accepting up to twice as many advertisements as they have
space to run them in then they decide what advertisements will go in just before
going to press by means of a raffle.
Radio and Television
Possibly because of their inherent entertainment value, radio and
television have become major communications media in most nations. Most
populous areas have television broadcasting facilities. In some markets, such as
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Japan, television has become almost a national obsession and thus finds
tremendous audiences for its advertisers. In China, virtually all homes in major
cities have a television and most adults view television and listen to radio daily.
For number of households covered and rates for TV advertising. Radio has been
relegated to a subordinate position in the media race in countries where
television facilities are well developed. In many countries, however, radio is a
particularly important and vital advertising medium when it is the only one
reaching large segments of the population.
Television and radio advertising availability varies between countries.
Three patterns are discernible: competitive commercial broadcasting,
commercial monopolies, and noncommercial broadcasting. Countries with free
competitive commercial radio and television normally encourage competition
and have minimal broadcast regulations. Elsewhere, local or national
monopolies are granted by the government and individual stations or networks
may then accept radio or TV commercials according to rules established by the
government. In some countries, commercial monopolies may accept all the
advertising they wish; in others, only spot advertising is permissible and
programs may not be sponsored. Live commercials are not permitted in some
countries; in still others, commercial stations must compete for audiences
against the government's noncommercial broadcasting network.
Satellite and Cable TV
Of increasing importance in TV advertising is the growth and
development of satellite TV broadcasting. Sky Channel, a United Kingdom-
based commercial satellite television station, beams its programs and
advertising into most of Europe via cable TV subscribers. The technology that
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permits households to receive broadcasts directly from the satellite via a dish
the "size of a dinner plate" costing about $350 is adding greater coverage and
the ability to reach all of Europe with a single message. The expansion of TV
coverage will challenge the creativity of advertisers and put greater emphasis on
global standardized messages. For a comparison of household penetration by
satellite, cable, and Internet in the top 10 media markets.
Direct Mail
Direct mail is a viable medium in many countries. It is especially
important when other media are not available. As is often the case in
international marketing, even such a fundamental medium is subject to some
odd and novel quirks. For example, in Chile, direct mail is virtually eliminated
as an effective medium because the sender pays only part of the mailing fee; the
letter carrier must collect additional postage for every item delivered.
Obviously, advertisers cannot afford to alienate customers by forcing them to
pay for unsolicited advertisements. Despite some limitations with direct mail,
many companies have found it a meaningful way to reach their markets. The
Reader's Digest Association has used direct-mail advertising in Mexico to
successfully market its magazines.
In Southeast Asian markets, where print media are scarce, direct mail is
considered one of the most effective ways to reach those responsible for making
industrial goods purchases, even though accurate mailing lists are a problem in
Asia as well as in other parts of the world. In fact, some companies build their
own databases for direct mail.
Other Media
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Restrictions on traditional media or their availability cause advertisers to
call on lesser media to solve particular local-country problems. The cinema is
an important medium in many countries, as are billboards and other forms of
outside advertising. Billboards are especially useful in countries with high
illiteracy rates.
In Haiti, sound trucks equipped with powerful loudspeakers provide an
effective and widespread advertising medium. Private contractors own the
equipment and sell advertising space much as a radio station would. This
medium overcomes the problems of illiteracy, lack of radio and television set
ownership, and limited print media circulation. In Ukraine, where the postal
service is unreliable, businesses have found that the most effective form of
direct business-to-business advertising is direct faxing.
In Spain, a new medium includes private cars that are painted with
advertisements for products and serve as moving billboards as they travel
around. This new system, called Publicoche (derived from the words
publicidad, meaning advertising, and coche, meaning car), has 75 cars in
Madrid. Car owners are paid $230 a month and must submit their profession
and "normal" weekly driving patterns. Advertisers pay a basic cost of $29,000
per car per month, and can select the type and color of car they are interested in
and which owners are most suited to the campaign based on their driving
patterns.
The Internet--A Media Mix Alternative
Though still evolving, the Internet is emerging as a viable medium for
advertising and should be included as one of the media in a company's possible
media mix. Its use in business-to-business communications and promotion via
catalogs and product descriptions is rapidly gaining in popularity. Since a large
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number of businesses have access to the Internet, the Internet can reach a large
portion of the business-to-business market.
Another company that is using the Internet as an advertising medium is
Levi Strauss & Company. Levi's is using its Web site as an integral part of a
global advertising campaign. Customers can surf through North American or
European sites, sampling products and brand campaigns. When a new European
jeans ad campaign was launched, an accompanying interactive game, and
mystery story appeared on the European site. In all there are five different
games based on one of five Levi's "brand truths," as established in Levi's
mainstream advertising campaign. The company has also launched a specific
site for Japan, using kanji, the Japanese language characters.
For consumer products the major limitation of the Internet is coverage.
In the United States only a small portion of households have access to a com-
puter, but there are even fewer in other countries. Nevertheless, the small
number of Internet households accessible outside the United States generally
constitutes a younger, better-educated market segment with higher than average
incomes. For many companies, that group is an important market niche.
Furthermore, this limitation is only temporary as new technology allows access
to the Internet via television and as lower prices for personal computers expand
the household base. Net Channel, a new subscription Internet service provider
which offers its service via domestic TV sets, will be available initially in the
U.K. and the U.S., followed by a rollout across Europe and ultimately into Asia.
As an advertising medium it may be the ideal tool for pan-regional areas that
cover various languages and cultures. A company's Web site can have as many
cultural, linguistic options as it needs. If someone in Thailand lands on the
Procter & Gamble site, they can read an ad in Thai for the company's products
available in Thailand.
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As the Internet grows and countries begin to assert control over what is
now virtually a medium without restrictions, limitations will be set. Besides
control of undesirable information, issues such as taxes, unfair competition,
import duties, and privacy are being addressed all over the world. In Australia,
local retailers are calling for changes in laws because of loss of trade to the
Internet; under current law Internet purchases do not carry regular import
duties. The Internet industry is lobbying for a global understanding on
regulation to avoid a crazy quilt of confusing and contradictory rules. As the
director of the Asia-Pacific Internet Association commented, "Internationally
1997 has been the year that the Internet has finally been recognized as requiring
globally coordinated policy and regulatory understanding and development."
Another limitation that needs to be addressed soon is the competition for
Web surfers. The sheer proliferation of the number of Web sites makes it
increasingly difficult for a customer to stumble across a particular page.
Banners or interceptive sites advertising the site can help but that venue is also
becoming crowded. As discussed earlier, serious Internet advertisers or e-
marketers will have to be more effective in communicating the existence of
their Internet sites via other advertising media. Some companies are coupling
their traditional television spots with a Web site; IBM, Swatch Watches,
AT&T, and Samsung electronics are among those going for a one-two punch of
on-air and online. TV spots are used to raise brand awareness of product
regionally, and to promote the company's Web site. Additionally, the company
buys ad banners on the Web that will lead enthusiastic consumers to the
company's Web that also promotes the product. Some TV networks offer a
package deal, a TV spot and ad banners on the network's Web site. For
example, the EBN (European Business News) channel offers cross-media
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program that includes TV spots and the advertiser's ad banner on the EB
Interactive page for $15,000 a quarter.
Sales Promotion
Sales are marketing activities that stimulate consumer purchases and
improve retailer or middlemen effectiveness and cooperation. Cents-off, in-
store demonstrations, samples, coupons, gifts, product tie-ins, contests,
sweepstakes, sponsorship of special events such as concerts and fairs, and
point-of-purchase displays are types of sales promotion devices designed to
supplement advertising and personal selling in the promotional mix.
Sales promotions are short-term efforts directed to the consumer and or
retailer to achieve such specific objectives as (1) consumer-product trial and or
immediate purchase; (2) consumer introduction to the store; (3) gaining retail
point-of-purchase displays; (4) encouraging stores to stock the product; and (5)
supporting and augmenting advertising and personal sales efforts. An example
of sales promotion is the African cigarette manufacturer who, in addition to
regular advertising, sponsors musical groups and river explorations and
participates in local fairs in attempts to make the public aware of the product.
Procter & Gamble's introduction of Ariel detergent in Egypt included the "Ariel
Road Show." The puppet show was taken to local markets in villages, where
more than half of the Egyptian population still lives. The show drew huge
crowds, entertained people, told about Ariel's better performance without the
use of additives, and sold the brand through a distribution van at a nominal
discount. Besides creating brand awareness for Ariel, the road show helped
overcome the reluctance of the rural retailers to handle the premium-priced
Ariel.
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In markets where the consumer is hard to reach because of media
limitations, the percentage of the promotional budget allocated to sales
promotions may have to be increased. In some less-developed countries, sales
promotions constitute the major portion of the promotional effort in rural and
less-accessible parts of the market. In parts of Latin America, a portion of the
advertising-sales budget for both Pepsi-Cola and Coca-Cola is spent on carnival
trucks, which make frequent trips to outlying villages to promote their products.
When a carnival truck makes a stop in a village, it may show a movie or
provide some other kind of entertainment; the price of admission is an un-
opened bottle of the product purchased from the local retailer. The unopened
bottle is to be exchanged for a cold bottle plus a coupon for another bottle. This
promotional effort tends to stimulate sales and encourages local retailers, who
are given prior notice of the carnival truck's arrival, to stock the product. Nearly
100 percent coverage of retailers in the village is achieved with this type of
promotion. In other situations, village stores may be given free samples, have
the outsides of their stores painted, or receive clock signs in attempts to
promote sales.
An especially effective promotional tool when the product concept is
new or has a very small market share is product sampling. Nestle Baby Foods
faced such a problem in France in its attempt to gain share from Gerber, the
leader. The company combined sampling with a novel sales promotion program
to gain brand recognition and to build goodwill. Since most Frenchmen take off
for a long vacation in the summertime, piling the whole family into the car and
staying at well-maintained campgrounds, Nestle provides rest-stop structures
along the highway where parents can feed and change their babies. Sparkling
clean Le Relais Bebes are located along main travel routes. Sixty-four hostesses
at these rest stops welcome 120,000 baby visits and dispense 600,000 samples
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of baby food each year. There are free disposable diapers, a changing table, and
high chairs for the babies to sit in while dining.
As is true in advertising, the success of a promotion may depend on local
adaptation. Major constraints are imposed by local laws, which may not permit
premiums or free gifts to be given. Some countries' laws control the amount of
discount given at retail, others require permits for all sales promotions, and in at
least one country, no competitor is permitted to spend more on a sales
promotion than any other company selling the product. Effective sales
promotions can enhance the advertising and personal selling efforts and, in
some instances, may be effective substitutes when environmental constraints
prevent full utilization of advertising.
Global Advertising and the Communications Process
Promotional activities (advertising, personal selling, sales promotion,
and public relations) are basically a communications process. All the attendant
problems of developing an effective promotional strategy in domestic
marketing plus all the cultural problems just discussed must be overcome for a
successful international promotional program. A major consideration for
foreign marketers is to determine that all constraints (cultural diversity, media
limitations, legal problems, and so forth) are controlled so the right message is
communicated to and received by prospective consumers. International com-
munications may fail for a variety of reasons: a message may not get through
because of media inadequacy; the message may be received by the intended
audience but not be understood because of different cultural interpretations; or
the message may reach the intended audience and be understood but have no
effect because the marketer did not correctly assess the needs and wants of the
target market.
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The effectiveness of promotional strategy can be jeopardized by so many
factors that a marketer must be certain no controllable influences are
overlooked.
Those
international
executives
who
understand
the
communications process are better equipped to manage the diversity they face
in developing an international promotional program.
In the international communications process, each of the seven
identifiable segments can ultimately affect the accuracy of the process. The
process consists of (1) an information source--an international marketing
executive with a product message to communicate; (2) encoding the message
from the source converted into effective symbolism for transmission to a
receiver; (3) a message channel the sales force and/or advertising media that
conveys the encoded message to the intended receiver; (4) decoding the
interpretation by the receiver of the symbolism transmitted from the
information source; (5) receiver consumer action by those who receive the
message and are the target for the thought transmitted; (6) feedback information
about the effectiveness of the message which flows from the receiver (the in-
tended target) back to the information source for evaluation of the effectiveness
of the process; and, to complete the process, (7) noise uncontrollable and
unpredictable influences such as competitive activities and confusion detracting
from the process and affecting any or all of the other six steps.
Unfortunately, the process is not as simple as just sending a message via
a medium to a receiver and being certain that the intended message sent is the
same one perceived by the receiver. The communications-process steps are
encased in Cultural Context A and-Cultural Context B to illustrate the
influences complicating the process when the message is encoded in one culture
and decoded in another. If not properly considered, the different cultural
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contexts can increase the probability of misunderstandings. As one researcher
notes, "Effective communication demands that there exist a psychological
overlap between the sender and the receiver"; otherwise a message falling
outside the receiver's perceptual field may transmit an unintended meaning. It is
in this area that even the most experienced companies make blunders.
Most promotional misfires or mistakes in international marketing are
attributable to one or several of these steps not properly reflecting cultural
influences and/or a general lack of knowledge about the target market. A review
of some of the points discussed in this chapter serves to illustrate this. The
information source is a marketer with a product to sell to a specific target
market. The product message to be conveyed should reflect the needs and wants
of the target market; however, the marketer's perception of market needs and
actual market needs do not always coincide. This is especially true when the
marketer relies more on the self-reference criterion (SRC) than on effective
research. It can never be assumed that "if it sells well in one country, it will sell
in another." For instance, bicycles designed and sold in the United States to
consumers fulfilling recreational-exercise needs are not sold as effectively for
the same reasons in a market where the primary use of the bicycle is
transportation.53 Cavity-reducing fluoride toothpaste sells well in the United
States, where healthy teeth are perceived as important, but it has limited appeal
in markets such as Great Britain and the French areas of Canada, where the
reason for buying toothpaste is breath control. From the onset of the
communications process, if basic needs are incorrectly defined,
communications fail because an incorrect or meaningless message is received
even though the remaining steps in the process are executed properly.
The encoding step causes problems even with a proper message. At this
step such factors as color, values, beliefs, and tastes can cause the international
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marketer to symbolize the message incorrectly. For example, the marketer
wants the product to convey coolness so the color green is used; however,
people in the tropics might decode green as dangerous or associate it with
disease. Another example of the encoding process misfiring was a perfume
presented against a backdrop of rain which, for Europeans, symbolized a clean,
cool, refreshing image, but to Africans was a symbol of fertility. The ad
prompted many viewers to ask if the perfume was effective against infertility.
DeBeers, the South African diamond company, found that its stylish ads
depicting shadow figures conveying engagement, wedding, and anniversary
gifts of diamonds failed among Chinese consumers, some of whom associate
shadows with ghosts and death. A totally different ad was developed for the
Chinese market. In some Muslim countries the ads had to be altered so that the
shadows show silhouettes of women wearing veils, rather than the barefaced
women whose shadows are shown in Western markets.
Problems of literacy, media availability, and types of media create
problems in the communications process at the encoding step. Message
channels must be carefully selected if an encoded message is to reach the
consumer. Errors such as using television as a medium when only a small
percentage of an intended market is exposed to TV, or using print media for a
channel of communications when the majority of the intended users cannot read
or do not read the language in the medium, are examples of ineffective media
channel selection in the communications process.
Decoding problems are generally created by improper encoding, which
caused such errors as Pepsi's "Come Alive" slogan being decoded as "Come out
of the grave." Chevrolet's brand name for the Nova model (which means star)
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was decoded into Spanish as No Va!, meaning "it doesn't go." In another
misstep, a translation that was supposed to be decoded as "hydraulic ram" was
instead decoded as "wet sheep." In a Nigerian ad, a platinum blonde sitting next
to the driver of a Renault was intended to enhance the image of the automobile
but she was perceived as not respectable and so created a feeling of shame. An
ad used for Eveready Energizer batteries with the Energizer bunny was seen by
Hungarian consumers as touting a bunny toy, not a battery.
Decoding errors may also occur accidentally. Such was the case with
Colgate-Palmolive's selection of the brand name Cue for toothpaste. The brand
name was not intended to have any symbolism; nevertheless, it was decoded by
the French into a pornographic word. In some cases, the intended symbolism
has no meaning to the decoder. In an ad transferred from the United States, the
irony of a tough-guy actor Tom Selleck standing atop a mountain with a
steaming mug of Lipton tea was lost on Eastern Europeans.
Errors at the receiver end of the process generally result from a
combination of factors: an improper message resulting from incorrect
knowledge of use patterns, poor encoding producing a meaningless message,
poor media selection that does not get the message to the receiver, or inaccurate
decoding by the receiver so that the message is garbled or incorrect.
Finally, the feedback step of the communications process is important as
a check on the effectiveness of the other steps. Companies that do not measure
their communications efforts are apt to allow errors of source, encoding, media
selection, decoding, or receiver to continue longer than necessary. In fact, a
proper feedback system allows a company to correct errors before substantial
damage occurs.
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In addition to the problems inherent in the steps outlined, the
effectiveness of the international communications process can be impaired by
noise. Noise comprises all other external influences such as competitive
advertising, other sales personnel, and confusion at the receiving end that can
detract from the ultimate effectiveness of the communications. Noise is a
disruptive force interfering with the process at any step and is frequently
beyond the control of the sender or the receiver. The overlapping cultural
contexts, noise can emanate from activity in either culture or be caused by the
influences of the overlapping of the cultural contexts. The significance is that
one or all steps in the process, cultural factors, or the marketer's SRC, can affect
the ultimate success of the communication. For example, the message,
encoding, media, and the intended receiver can be designed perfectly but the
inability of the receiver to decode may render the final message inoperative. In
designing an international promotional strategy, the international marketer can
effectively use this model as a guide to help ensure all potential constraints and
problems are considered so that the final communication received and the
action taken correspond with the intent of the source.
The Advertising Agency
Just as manufacturing firms have become international, U.S., Japanese,
and European advertising agencies are expanding internationally to provide
sophisticated agency assistance worldwide. Local agencies also have expanded
as the demand for advertising services by MNCs has developed. Thus, the
international marketer has a variety of alternatives available. In most
commercially significant countries, an advertiser has the opportunity to employ
(1) a local domestic agency, (2) its company-owned agency, or (3) one of the
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multinational advertising agencies with local branches. There are strengths and
weaknesses with each.
A local domestic agency may provide a company with the best cultural
interpretation in situations where local modification is sought, but the level of
sophistication can be weak. However, the local agency may have the best feel
for the market, especially if the multinational agency has little experience in the
market. Eastern Europe has been a problem for the multinational agency that is
not completely attuned to the market. In Hungary, a U.S. baby-care company
advertisement of bath soap showing a woman holding her baby hardly seemed
risque. But where Westerners saw a young mother, scandalized Hungarians saw
an unwed mother. The model was wearing a ring on her left hand; Hungarians
wear wedding bands on the right hand. It was obvious to viewers that this
woman wearing a ring on her left hand was telling everybody in Hungary she
wasn't married. This is a mistake a local agency would not have made.
The best compromise is the multinational agency with local branches
because it has the sophistication of a major agency with local representation.
Further, the multinational agency with local branches is better able to provide a
coordinated worldwide advertising campaign. This has become especially
important for firms doing business in Europe. With the interest in global or
standardized advertising, many agencies have expanded to provide worldwide
representation. Many companies with a global orientation employ one, or
perhaps two, agencies to represent them worldwide.
Compensation arrangements for advertising agencies throughout the
world are based on the U.S. system of 15 percent commissions. However,
agency commission patterns throughout the world are not as consistent as they
are in the United States; in some countries, agency commissions vary from
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medium to medium. Companies are moving from the commission system to a
reward by results system, which details remuneration terms at the outset. If
sales rise, the agency should be rewarded accordingly. This method of sharing
in the gains or losses of profits generated by the advertising is gaining in
popularity and it may become the standard. Services provided by advertising
agencies also vary greatly but few foreign agencies offer the full services found
in U.S. agencies.
Even a sophisticated business function such as advertising may find it is
involved in unique practices. In some parts of the world, advertisers often pay
for the promotion with the product advertised rather than with cash. Kickbacks
on agency commissions are prevalent in some parts of the world and account in
part for the low profitability of international advertising agencies. In Mexico,
India, and Greece, the advertiser returns half the media commissions to the
agencies. In many of the developing countries, long-term credit is used to
attract clients.
The global firm with branches and/or joint ventures with local firms
dominate advertising globally. Over the last two decades most of the major ad
agencies in the United States, the U.K., and Japan have expanded globally and
can easily represent a global company almost anywhere in the world. The top
agency in the world in 1995 and 1996 was a Japanese firm, Dentsu, Inc.,
followed by the U.S. firm McCann-Erickson Worldwide. If you visit the Web
site of some of these agencies you will see how extensive their range is. These
companies represent the consolidation of advertising agencies that has been
going on over the last decade or so.
International Control of Advertising
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Consumer criticisms of advertising are not a phenomenon of the U.S.
market. Consumer concern with the standards and believability of advertising
may have spread around the world more swiftly than have many marketing
techniques. A study of a representative sample of European consumers
indicated that only half of them believed advertisements gave consumers any
useful information, 6 out of 10 believed that advertising meant higher prices (if
a product is heavily advertised, it often sells for more than brands that are
seldom or never advertised); nearly 8 out of 10 believed advertising often made
them buy things they did not really need, and that ads often were deceptive
about product quality. In Hong Kong, Colombia, and Brazil advertising fared
much better than in Europe. The non-Europeans praised advertising as a way to
obtain valuable information about products; most Brazilians consider ads
entertaining and enjoyable.
European Community officials are establishing directives to provide
controls on advertising as cable and satellite broadcasting expands. Deception
in advertising is a thorny issue since most member countries have different
interpretations of what constitutes a misleading advertisement. Demands for
regulation of advertising aimed at young consumers is a trend appearing in both
industrialized and developing countries.
Decency and the blatant use of sex in advertisements also are receiving
public attention. One of the problems in controlling decency and sex in ads is
the cultural variations around the world. An ad perfectly acceptable to a
Westerner may be very offensive to someone from the Mideast, or, for that
matter, another Westerner. Standards for appropriate behavior as depicted in
advertisements vary from culture to culture. Regardless of these variations,
there is growing concern about decency, sex, and ads that demean women and
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men. International advertising associations are striving to forestall laws by
imposing self-regulation, but it may be too late; some countries are passing laws
that will define acceptable standards.
The difficulty that business has with self-regulation and restrictive laws
is that sex can be powerful in some types of advertisements. European
advertisements for Haagen-Dazs, a premium U.S. ice-cream marketer, and
LapPower, a Swedish laptop computer company, received criticism for their ads
as being too sexy. Haagen-Dazs' ad shows a couple, in various stages of
undress, in an embrace feeding ice cream to one another. Some British editorial
writers and radio commentators were outraged. One commented that "the ad
was the most blatant and inappropriate use of sex as a sales aid." The ad for
LapPower personal computers that the Stockholm Business Council on Ethics
condemned featured the co-owner of the company with an "inviting smile and
provocative demeanor displayed." (She was bending over a LapPower computer
in a low-cut dress.)
The advertising industry is sufficiently concerned with the negative
attitudes and skepticism of consumers and governments and with the poor
practices of some advertisers that the International Advertising Association and
other national and international industry groups have developed a variety of
self-regulating codes.61 Sponsors of these codes feel that unless the advertisers
themselves come up with an effective framework for control, governments will
intervene. This threat of government intervention has spurred interest groups in
Europe to develop codes to ensure that the majority of ads conform to standards
set for "honesty, truth, and decency." In those countries where the credibility of
advertising is questioned and in those where the consumerism movement exists,
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the creativity of the advertiser is challenged. The most egregious control, how-
ever, may be in Myanmar (formerly Burma), where each medium has its own
censorship board that passes judgement on any advertising even before it is
submitted for approval by the Ministry of Information. There is even a
censorship board for calendars. Content restrictions are centered on any
references to the government or military, other political matters, religious
themes, or images deemed degrading to traditional culture.63 In many countries,
there is a feeling that advertising, and especially TV advertising, is too powerful
and persuades consumers to buy what they do not need, an issue that has been
debated in the United States for many years. South Korea, for example, has
threatened to ban advertising of bottled water because the commercials may
arouse public mistrust of tap water.
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Global Strategies
Global strategies do not mean huge companies operating in a single
world market. They are much more complex. Global competitive strategies are
a bit like supernatural creatures: they can be imagined by each individual to suit
his or her own reality while evoking a common concern. The best illustrations
are the slogans companies use to describe themselves. These range from "Think
Local, Act Global" all the way to its opposite "Think Global Act Local, with
everything in between,"
Defining Global Strategies
Some 15 years have gone by since the term "global strategy" entered our
vocabulary, enough time to bring some clarity to its definition. We now know
what it is and what it is not.
Consider first what it is not. Global strategies are not standard product-
market strategies that assume the world to be a single, homogeneous, border-
free marketplace. The Uruguay Round of trade and investment liberalization
notwithstanding, the world is still a collection of different independent
economies, each with its own market characteristics. Each, moreover, has its
own societal aspirations that occasionally find expression in protectionist poli-
cies of one form or another.
Global strategies are also not about global presence or about large
companies. A company can very well operate in all countries of the world; but
if what it does in one country has no meaning for what it does in another
country, it is no different from the domestic companies it competes with in each
location.
To qualify as pursuing a global strategy, a company needs to be able to
demonstrate two things: that it can contest any market it chooses to compete in,
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and that it can bring its entire worldwide resources to bear on any competitive
situation it finds itself in, regardless of where that might be.
Selective Contestability
Just as companies possessing a certain set of technologies and business
competencies choose particular market segments to concentrate on, a global
company can be selective about the countries in which it operates.
Many small, high-technology companies and luxury good manufacturers
do just that. They compete where there is adequate demand to justify the
investments needed to access the market; they focus their investments to
achieve critical mass only in those markets they are interested in.
The important thing is that they can and are prepared to contest any and
all markets should circumstances warrant. They constantly scour the world for
market openings, they process information on a global basis, and they constitute
a "potential" threat even in places they have not yet entered.
Markets where such contestability exists, as a corollary, start to behave
almost as if the company had already entered--provided, of course, the threat
of entry is a credible one. This explains why telecom markets the world over are
so fiercely competitive from the day they are no longer government or private
monopolies. The handful of international players in the equipment business not
only are waiting in the wings but have products that conform to international
standards and resources they can deploy for market access as soon as
opportunity arises.
Global Resources for Each Main Street
The corner shop that carries products by IBM, Philips, Coca-Cola, or Du
Pont knows from experience that there is something special about these
products compared with those supplied by a small local company. In
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comparison, products from companies such as Nestle, Unilever, or even Procter
& Gamble did not seem so special--in the past at least. Their names,
formulations, and the way they were produced and marketed were not too
different from domestic ones.
Just being present in several countries, in other words, does not
constitute a global strategy. Globalism is an earned notion rather than being
entitlement created by the fact of operating in several countries.
A basic characteristic of a global company is its ability to bring its entire
worldwide capabilities to bear on any transaction anywhere regardless of the
products it makes. This underlies the importance of organizational integration in
global strategies. Transporting capabilities across borders on an as-needed basis
requires all local units to be connected and permeable, not isolated from one
another.
This is also what allows global strategies to be "within-border" strategies
while, at the same time, being "cross-border" ones. They are manifest on each
Main Street, with local companies sensing they are dealing with a worldwide
organization even while the latter employs a local competitive formula.
Main Attributes of Global Strategy
This dual notion of market contestability and bringing global resources
to bear on competition wherever a company is present is really what global
strategies are about. Industries where such strategies are prevalent assume a
character of their own in which strategies that are geared to one country alone
cannot be adopted. What companies do in one country has an inevitable
consequence for what they do in others.
There is, of course, nothing absolute about global strategies. Being near-
cousins of multidomestic strategies, the best way to judge them is in terms of
"degrees of globalness." At the risk of oversimplification, the more a company
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scores in each of the following five attributes, the more it can be considered a
global com* petitor based on the definition just given. These include possessing
a standard product (or core) that is marketed uniformly across the world;
sourcing all assets, not just production, on an optimal basis; and achieving
market access in line with the break-even volume of the needed infrastructure.
? Standard products and marketing mix. While the advantages of having
a standard product and marketing mix are obvious, this attribute involves
several trade-offs in practice.
Economies of scale in design, production, and promotion need to be
compared to the greater market acceptance that local adaptation often provides.
If a general conclusion can be drawn, it would be the need at least to aim
for a standard "core" in the product and limiting marketing adaptations to those
absolutely necessary. The more integrated countries become economically, the
less latitude there is anyway for things such as price discrimination and channel
selection. The same applies to situations where buyers themselves are global
and expect similar products and terms on a worldwide basis.
?
Sourcing assets, not just products. Sourcing products and
components internationally based on comparative advantage and availability
has long been a feature of international business. What is new is the possibility
to source assets or capabilities related to any part of the company's value chain.
Whether it is capital from Switzerland or national credit agencies, software
skills from Silicon Valley or Bangalore, or electronic components from Taiwan,
global companies now have wider latitude in accessing resources from
wherever they are available or cost-competitive.
The implication of this is that global strategies are as much about asset
deployment for market access purposes as they are about asset accumulation
abroad. The latter include local capital, technical skills, managerial talent, and
new product ideas, as well as the host competencies that local partners and
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institutions can provide. Also, whereas previously assets accumulated locally
were mainly to support a local business, it is increasingly possible--and
desirable--to separate those needed for local market access from those intended
to support the company's business elsewhere.
It is here that we associate partnerships and alliances with global
strategy. They can supplement what a company already possesses by way of
assets or complement what is missing, thereby speeding up the creation of the
needed infrastructure as well as reducing costs and risks.
?
Market access in line with break-even. For a company to be
a credible global competitor it does not need to be among the biggest in its
industry. But it has to be big enough to generate the volume of sales the
required infrastructure demands and to amortize up-front investments in R&D
and promotion.
Today, it is the latter investments that count most. In the pharmaceutical
industry, for example, it now costs around US$400 million to come up with a
successful new drug, This puts a natural floor on the amount of sales to be
generated over the life of the drug. The greater the presence of a company in all
of the large markets, and the greater its ability to launch the drug simultane-
ously in them, the higher the likelihood of profiting from the investment made.
The same argument applies to other investments in intangibles such as
brands. If we associate global competitiveness with size, it is chiefly on account
of these types of investments. Unlike investments in plants and physical
infrastructure, which can result in diminishing returns to scale, intangibles
almost always translate into "big is better."
?
Contesting assets. Another distinguishing feature of a
global company is its ability to neutralize the assets and competencies of its
competitors. If a competitor switches its supply from a high-cost to a low-cost
factory it too can do so; if a competitor gains access to a critical technology it
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can do the same. Similarly, if a competitor is using one market to generate
excess cash flow in order to "invest" in another, it is able to neutralize this
advantage by going to the relatively more profitable market itself.
Purely domestic companies and even those that are run on a
multidomestic basis, lack such arbitrage possibilities. Just as in sourcing, to
exploit these requires a global view of the business and the capacity to manage
it in an integrated fashion.
? All functions have a global orientation. As much of the foregoing
suggests, global competition today is a lot more than simple cross-border
competition at the product or service level. It is equally about building and
managing a multinational infrastructure. Frequently, the latter means
internationalizing all of the competencies and functions of a company: its R&D,
procurement, production, logistics, and marketing, as well as human resources
and finance.
These functions are all geared to providing customers with superior
products and services on a worldwide basis. The more they have a global
orientation of their own, the greater their contribution to the overall effort.
Hence, even if their focus may be primarily national in scope, supporting a local
business with no trade, for example, any contribution they can make to other
units of the company helps.
These five attributes, taken together, operationalize a global strategy.
The degrees of globalness in a strategy are the extent to which each is fulfilled
in practice. The fact of not having a standard global product, for example,
diminishes the scope of a global strategy but does not entirely destroy it,
provided the company scores high on the other attributes. If anything, stressing
one attribute to the exclusion of others can even be counterproductive and
unfeasible. A good balance between all of them is needed.
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Local Adaptation
Another important point to make about these attributes is that they do not
assume a single, open global marketplace. Trade and investment liberalization
coupled with improvements in transportation and communications are what
have made global strategies possible. Trade protection, labor policies,
investment incentives, and a host of regulations continue to force a country-by-
country adaptation of strategies.
It is also these realities, along with the sociocultural differences between
countries that have caused many companies to stress the "local" dimension in
their business. And rightly so, If all companies confront the same set of market
conditions, advantage goes to those that adapt their strategies best.
The best way to reconcile these local differences with the attributes
required of a global strategy is to see them as constraints to global optimization.
Localness, in other words, is another variable to incorporate in decision making.
Considering it as the basis for the strategy itself, however, is to deny all of the
advantages a global company possesses. This is perhaps the biggest conundrum
companies face today.
While adapting strategies to local conditions offers greater opportunities
for revenue generation, it has two main impacts: it causes overinvestment in the
infrastructure needed to serve markets, and brings about a lack of consistency in
whatever strategy is being pursued.
Neither is intrinsically bad. They can even contribute positively to the
end result if approached correctly. All that is needed is to factor them in as
variables to be considered, without losing sight of the overall objective of
competing effectively both within and across borders.
Consider the issue of overinvestment, especially in capital-intensive
businesses such as semiconductors. Companies such as Texas Instruments,
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NEC, and Mitsubishi Electric have consciously located abroad. This not only
permits them to benefit from generous investment incentives provided by local
governments that want such facilities, but also means they can mobilize local
companies as co-investors to share the capital burden and help with market
access.
More contentious is the issue of strategic focus. Should local subsidiaries
be allowed to modify products and diversify into businesses that make sense for
them only? Or should they be consistent with what the parent company focuses
on? The answer to this depends on several things: a company's definition of its
business scope and growth vectors; the subsidiary's domain within the overall
organization; and the locus of its strategy-making process.
Business scope and growth vectors pertain to a company's attitude to
diversification generally. If its products and technologies provide adequate
growth opportunities on a worldwide basis, it is probably better off restricting
each subsidiary to just those. If, on the other hand, growth is primarily driven
through exploring and creating new market opportunities, then local initiatives
are usually welcome.
Logitech SA, a world leader in pointing devices for the personal
computer industry, for example, permitted and even encouraged its Taiwanese
company to develop special software products for the Chinese market because
that would be an additional product to fuel its growth, reduce its dependence on
the mouse and, incidentally, facilitate access to a new market. A company that
comes up with a new cancer treatment, on the other hand, is likely to want to
invest all its resources in commercializing that worldwide as quickly as
possible.
The more a company's infrastructure and skills become dispersed and the
more global responsibilities individual subsidiaries take on, the greater the need
to see the initiation of strategies as a global process. What the parent knows and
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sees may not be the same as subsidiary management. Giving subsidiaries too
narrow a mission based on a centralized notion of between-country competition
not only constrains their potential for accumulating local resources but
diminishes their potential for competing within their country.
Organizational Implications
How companies ought to structure and manage their international
operations has been debated as long as the debate on strategy itself. Because
organizations need to reflect a wide range of company-specific characteristics--
such as size, diversity, age, culture, technology--in addition to their global
posture, it has proven hard to be normative, There are, however, certain key
design considerations related to global posture that have dominated thinking
and practice in recent years.
The most important consideration has to do with the greater need for
organizational integration that global strategies require.
Hence, when companies first tried to adapt their structures in the 1970s
and early 1980s, most of them created elaborate matrix organizations giving
equal status to products, geography, and functions. While such organizations
worked well for some companies, ABB being the leading example, they did not
for others. ABB succeeded because of the nature of its business, its superior
information system (called Abacus), its investment in developing a number of
globally minded managers, and a small but highly effective top management
team. What ABB was able to do was to balance finely the need for local
autonomy in decision making with the strategic and organizational integration
that managing the business on a global basis demanded.
Others that were not able to achieve this balance opted for tilting their
matrix in favor of one or the other dimension. Most often, the dominant
dimension became product groups or strategic business units, the assumption
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being that integrating each product's business system on a worldwide basis was
the best way to optimize strategy and achieve coherence among different local
units.
Where these "product headquarters" were located mattered less and
many companies consciously spread them around as a better way to integrate
country organizations, give particular local managers a broader domain to look
after, and exploit country-specific assets or competencies. Such dispersal had
the attendant benefit of also reducing the role (and size) of corporate head-
quarters.
This fine-tuning of structures continues today. To the extent one can
discern a trend for the 1990s it would be one consisting of three things:
reverting to a single locus of direction and control, giving greater emphasis to
functional strategies instead of business-by-business ones, and creating simple
line organizations based on a more decentralized "network" of local companies.
The move to a single locus is partly on account of the difficulty
companies have experienced in managing dispersed product headquarters.
The complex interactions between units they gave rise to, the lack of
global reach on the part of some country organizations, and the potential for
confusion between corporate roles and business unit functions were apparently
not compensated by whatever advantage they offered, But it is equally on
account of the recognition of the importance of a coherent set of values, goals,
and identity, as well the need to avoid duplication of functions across the world.
Having functions as the primary dimension to coordinate global
strategies also reflects the dual nature of the latter, combining asset deployment
for market-access reasons and asset accumulation for sourcing purposes.
Another virtue of a functional orientation is that it is usually at this level that
global alliances and asset accumulation takes place--the R&D function
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cooperating with other companies' R&D departments, procurement with sup-
pliers, finance with local finance companies, and so on.
While marketing can and should be managed nationally or regionally,
R&D, finance, and manufacturing lend themselves better to global
coordination, Texas Instruments Inc., for example, used to manage its business,
including manufacturing, on a regional basis. Four years ago, it introduced the
notion of the "virtual fab," linking all its 17 manufacturing sites around the
world into a single organization.
In addition to standardizing equipment and procedures across plants, this
allows the company to transfer expertise across units efficiently, allocate
production optimally, and interact with development on a global basis. Whereas
previously the company had country-by-country sales forces, it now has
market-based teams with global responsibility for a product's success. The latter
has proved particularly effective in serving the needs of global customers who
expect similar conditions worldwide.
Whether to have a single set of global functions or to have them
specialized by business unit depends on how diverse the latter are. The lesson
companies have learned, however, is to avoid overly complex matrix structures
and to allow local units sufficient autonomy at the business level.
The last point refers to the way individual units in a global company
need to be treated. Based on the arguments made earlier, what one is seeing is
an upgrading of their role, both as a locus for independent entrepreneurial effort
and as contributors to the business worldwide.
To perform this expanded role coherently they need greater
empowerment coupled with all of the things that a network organization
possesses: a commonly shared knowledge base, common values and goals, a
common understanding of priorities and pre-commitments others have made,
and a common set of measures to judge performance.
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This post was last modified on 14 March 2022