NOTES FOR INTERNATIONAL BUSINESS:

TOPIC PAGE NUMBER

International Business Theories 1-3
Globalization 4-6
Political Risks 7-14
International Marketing – The MNC Way 15-16
Strategic Thinking in International Marketing 17-18
Major Decisions in International Marketing 19-34
GATT and WTO 35
Regional Trade Blocks 36
International Finance – AN introduction 37-39
India’s Foreign Trade 40-43
International Product Life Cycle 44-45
Distribution Channels 46-50
Channel Design 51-54

1
INTERNATIONAL BUSINESS THEORIES:

International trade- RATIONALE:

Provides the opportunity for less endowed countries to acquire goods and
products that are either not available or in short supply within the local
economy
Generally traced to: Adam Smiths –Wealth of Nations
Based On: Principles of Absolute Advantage

The impetus for the trade theories stems from the knowledge that although
most nations may have a sufficient variety of productive factors to produce
almost everything every kind of good and product, they are unable to
produce some kind of good or service with same level of effectiveness.

Theories….
May not be definitely conclusive
However do have effect on formulation of trade policies by the national
government

1) Theory of Mercantalism:

 The earliest attempt to explain the role of international trade.

 Basic Belief = Existing correlation between national wealth, power
and security.
 Focus of Mercantilist approach = ACQUIRE GOLD
 Nation can demonstrate Power + Influence by accumulation of
wealth – preferably in GOLD.
 FUNDAMENTALLY NATIONALISTIC APPROACH
 All other export proceeds – also convert in GOLD.
 Increase trade ( predominantly exports ) at any / all costs to other
nations
 Total Prohibition on Imports.

Disadvantages:
 Winner and loser concept
 Accumulation of gold synonymous with accumulation of wealth.

2) Theory of Absolute Advantage:

 Anti- Mercantilist school of thought.- Reaction from English School of

Classical Economics.
 Founded by ADAM SMITH – (1723 –1790 )
 PRINCIPLE: Int’l Trade should be based on primarily cost
considerations and not on Nationalism.
 Wealth Of Nations- Goods can be obtained more cheaply than by
domestic manufacture.- W.O.N.
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  Each Nation possesses absolute advantage in the production of
certain goods and should specialize in these goods –as it is
particularly well equipped to produce

DISADVANTAGES / CRITICISM:
 Suppose a country did not have absolute advantage in any product
?
 Suppose a country had absolute advantage in producing all goods ?

3) Theory of Comparative Advantage:

Argues that if a country could produce all goods more efficiently than
another, it should specialize in export that product in which it was
comparatively more efficient.

Disadvantages:
 Loss to industry / nation which produces goods with comparative
disadvantage and comparative higher costs.
 Simplistic assumptions regarding the distribution of loss / gain in
producing / trading.

4) Factor Endowment Theory / Heckscher-Ohlin Theory:

 Tried to explain why differences in productivity exist between

countries and the impact of these differences in international trade
 Guiding Principles:
 Countries differ in their relative factor intensities.
 Countries differ in relative factor intensities.
 In other words…
 Countries will have a comparative advantage in producing the goods
using their abundant factor relatively intensively and each country
will export its abundant factor good in return for the import of the
good which uses it “scarce” factor relatively intensively.

5) Leontief Paradox:

General Assumptions for the US of A.

 Has comparative advantage in production of capital intensive goods.
 Has comparative less advantage in labor intensive goods.
Using 1947 Int’l Trade Data., Leontif proved that:

 Exports of Capital intensive goods = US $ 14,010.

 Exports of Labor intensive goods = US $ 18,180.
 Other economists reaffirmed this data but still H-O theorem provides
an analytical framework for predicting the likely pattern between two
countries
3
GLOBALIZATION:

The death of distance as a determinant of the cost of

communication will probably be the single most important economic
force shaping the growth of international business .

A global industry is an industry in which the strategic positions of

competitors in major geographic or national markets are fundamentally
affected by their overall global positions.

GLOBAL FIRM: Fords – World Truck ?

Chasis in NAM , Assembly in Brazil, Imported in
USA for Sale.

Appraising the GLOBAL market ENVIRONMENT:

 Rapid Growth of World Trade and Investment

 Rising Economic power of South East Asia
 Growing power of Regional Trade Blocks
 Gradual opening of major new markets like China, East Europe and
Arab countries.
 Severe debt problems of countries like Mexico, Brazil
 Privatization of public owned companies to make them more
efficient.
 Increased forming of Strategic Alliances – like GM and Toyota, Ciba-
Giegy, Compaq-HP.
 Substantial speed up of International Transportation.

Another School of thought…

GLOBALIZATION = Corner stone of the unending human journey,

embracing COOPERATION and COMPETITIVENESS.

Cooperation: - Represents a deep understanding of interdependence and

joint responsibility at work, across firms and national boundaries.

Competitiveness:- Conveys the perception that cooperation without

motivation is doomed to failure and that only through practical inducement
can continuous improvement and progress be a way of life.
Taking a company international is one thing, transforming it into a global
corporation is another.This process occurs when companies loose their
“HOME-MARKET” orientation and become “WORLD ORIENTED
ENTERPRISES”. That is they choose markets , manufacturing sites,
personnel and raw material sources without regard to national prejudices.

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GOING GLOBAL

 Research and development facilities are located where there are

suitable market conditions and talented personnel.
 Financial resources are drawn from countries with the lowest capital
costs.
 Manufacturing is based where companies obtain optimal cost-quality
combinations.
 CEO’s play big roles in inculcating this non-nationalistic philosophy
into executives and workers.
 -In a nutshell, operate in more than one country capturing the above
in its cost and reputation that are not available to purely domestic
competitors.

The Global Evolution Of a Company…

Prof. Jagdish Seth – Emory University

Crux of the Model…

 Almost all organizations began initially as domestically oriented

 As they grow, they tend to evolve from their initial structures and
operations on a replicative basis.
 With Time and evolution - Metamorphosis's into GLOBAL PLAYERS
wherein they are driven by a number of “Contextual Determinants”

The major change for an organization as it moves from a multi-domestic

approach to a global system is how it views the creation of values.

Seth uses the measure that he calls as share holder value to determine
the success of the global - organization.

CREATE VALUES THRU: (Respective) Domestic Portfolio Management.

i.e. managing successfully, a variety of brands or products or services.

Like NESTLE in foods – appealing to global pallets

HOWEVER NOW: Drift from multi portfolio management to success in

global orientation thru FOCUS ON CORE BUSINESS.

Globalization- Factors Evaluating which markets to enter

Indicators such as:

 GNP / capita
 Prior business dealings
 Whether country is a low cost producer
 Whether senior management can work comfortably
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  Risk level of each country – political stability, currency stability and
repatriation rules.
 ROI

ARRIVE AT DECISION BY INDEXING,WEIGHING AND COMBINING

THE VARIOUS NUMBERS ALLOTTED TO THE ABOVE PARAMETERS.

Globalization- Problems weighing on Management Minds prior to deciding

entry into foreign markets.

 Huge foreign indebtedness.

 Unstable governments – political instability, high unemployment,
which expose foreign firms to risks of nationalization, profit
repatriation.
 Forex Problems
 Foreign-Government entry requirements
 Tariffs and trade barriers
 Corruption and bureaucracy
 Technological pirating
 High cost of product and communication adaptation

Globalization – International product standardization and adaptation

FACTORS ENCOURAGING STANDARDIZATION:

 Economies of scale in production
 Economies in product R&D
 Shrinking of the world market place
 Global competition
 Economies in marketing.

FACTORS ENCOURAGING ADAPTATION:- JAPANESE CARS IN USA

 Differing use conditions
 Government and regulatory influences
 Differing consumer behavior patterns
 Local competition
 -Global market segmentation of product – (photocopiers)
 Consistent Company image – (health care products)
 High cost of R&D (boeing)
 Mass production (steel)
 Similar need characteristics (watches / diamonds)
 Small user base (s/ware for rocket sciences)
 Intellectual property rights (patented products)
 Availability of communications and distribution networks.

-THUS, STANDARDIZE WHATEVER YOU CAN AND WHEREVER U

MUST, ADAPT
6
POLITICAL RISK:

The Environment Of Political Risk

INTERNATIONAL BUSINESS ACTIVITIES TAKE PLACE IN MULTIPLE

AND COMPLEX ENVIRONMENTS. THESE INCLUDE FORCES THAT
AFFECT A FIRMS IMMEDIATE OPERATING ENVIRONMENT SUCH AS
CUSTOMERS, SUPPLIERS, COMPETITORS, LABOR MARKET AND
THE REMOTE ENVIRONMENT WHICH CONSISTS OF :

 Economic
 POLITICAL
 Socio Cultural
 Technological and
 Legal Considerations.

External factors = Seen as remote factors.

- However their impact on International Business activities is by no means

remote.
- Rather they have a direct impact on performance of a MNE.

The political process in international business environment Constitutes a

“POLITICAL BARGAINING” in which :

different groups,
representing different interests,
Conflict over different preferred outcomes.
( conflicts like groups that favor free trade , lower tariff barriers and those
that advocate protectionism. )

MAJOR PARTICIPANTS IN THE INTERNATIONAL POLITICAL SYSTEM

INCLUDE:
Various countries, trade blocs like NAFTA, EU, , different int’l
organizations like IMF, United Nations, The World Bank etc.

Characteristic Differentiating factor :

NO ONE LEGITIMATE BODY HAS THE AUTHORITY TO MANAGE
CONFLICT OR ACHIEVE COMMON GOALS BY MAKING AND
ENFORCING DECISIONS FOR THE SYSTEM, INSTEAD DECISION
MAKING IS DISPERESED AMONG MANY GOVERNMENTAL ,
INTERGOVERNMENTAL AND NON-GOVERNMENTAL GROUPS.
Absence of rules , procedures and institutions to manage int’l conflicts and
cooperation may unfortunately rise to undesirable levels and may even
escalate to war. Thus, the political environment in which int’l business is

7
conducted consists of three important elements that are generally complex
and intertwined.

Int’l marketing decisions are strongly affected by development within these

respective political environments.

 HOME COUNTRY POLITICAL ENVIRONMENT

 HOST COUNTRY POLITICAL ENVIRONMENT
 GLOBAL POLITICAL ENVIRONMENT.

These are influenced by – respective (intra) laws, governments agencies,

and pressure groups.

1) HOME COUNTRY ENVIRONMENT:

 normally not expected to affect int’l business

 -at times may have greater far reaching consequences -e,.g. –
frontier military technology, scientific innovations
 Export of these products may be banned completely or subject

EXAMPLE 1991- case where the directors of the British Company MATRIX
CHURCHILL ENGG in ENGLAND were Prosecuted by the British
Government for exporting heavy steel pipes to IRAQ bcos they were
suspected to have possible military applications there.

-domestic firms ignoring home countries are often accused of exacerbating

domestic unemployment problems

2) HOST COUNTRY ENVIRONMENT:

Can range from welcome and supportive to outright hostile.

The political atmosphere tends to be hospitable where both the perceived
and actual benefits of hosting foreign firms outweigh the costs.
Construction of manufacturing facilities which create employment
opportunities and other social benefits.

EXAMPLE - The Nigerian govt nationalized the assets of Br.Ptrlm. When it

was revealed that the company was clandestinely selling Nigerian Crude
Oil to the apartheid regime in South Africa, despite an embargo against
such activities.

3) GLOBAL POLITICAL ENVIRONMENT:

best described as the combined politics of the home, host and the 3rd
countries.
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Major impact in ways that may not be immediately apparent. -- eg
multilateral agreements between int’l organizations like GATT, the U.N.
and the common wealth may constitute an impediment to free trade as well
as to the nature and the scope of the operation of the int’l firm.

EXAMPLE: - The economic embargo on Iraq by the Security Council of the

U.N. in 1991 meant that conducting trade with that country became illegal
for all international firms.

The Core Political Trends and their implications for marketing

management:

SUBSTANTIAL AMOUNT OF LEGISLATION REGULATING BUSINESS:

 laws passed to define and prevent unfair competition.

 protect consumers from unfair business practices.
 Protect the interests of society against unbridled business behavior.

Case in point – Thailand National Food Processors and India’s special
approval to launch brands that duplicate what already exists.

CHANGING GOVERNMENT AGENCY FORMATION:

Regulatory agencies like FDA, Civil Aeronautics Board, Consumer

Protection Body, Environmental protection agency.

Case in point – Mazda automobile smooth ride , low pollution, ran into
bumpy curves – 11 miles / gallon – environmental protection agency.
Fuel efficiency vis-a-vis reduced air pollution – sales dropped by 39%
Bharat II , Euro II

GROWTH OF PUBLIC INTEREST GROUPS

Watchdog for consumer interests

Political action committees , task forces lobby government officials and
pressurizes business barons to pay more attention to consumer rights,
women rights, senior citizen rights, minority rights etc.

-TRANSITION FROM:
What does the consumer want ?
To
What can the consumer have ????

POLITICAL RISK DEFINED:

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Political risk is the likelihood that the political forces will cause unexpected
and drastic changes in a country’s environment that significantly affect the
opportunities and operations of a business enterprise.

OR

Political risks are the likelihood that political factors will cause drastic
changes in a country’s business envrnmt that adversely affect the political
and other goals of a particular business enterprise.

They tend to be greater in countries experiencing social unrest and

disorder or in countries where the underlying nature of a society increases
the likelihood of social unrest.

These s/u typically find expression in strikes, demos, terrorism , conflicts

etc.

CASE IN POINT I : -
In the after math of the 1979 Islamic revolution in IRAN, the Iranian govt.
assets of numerous US companies were seized by the new govt. without
compensation.

GOVERNMENTS GOING THE ” BUY NATIONAL WAY”

 consider employment effects of sourcing
 consideration to national interests eg defense research programs /
projects which are heavily funded by the govt finance
 Move towards single sourcing – base.
 Specific guidelines / procurement codes
 Most favored nations

THUS,

Economic risks are not independent of political risks, economic

mismanagement may give rise to significant social unrest and hence
POLITICAL RISKS.

EXTENT OF POLITICAL RISKS:

OBVIOUS – where a new govt comes into power with fixed and favorable /
unfavorable pre determined ideas on the role of foreign companies in the
economy.
Eg Russia- embraced Capitalism and Free enterprise system after the
demise of the FSU. ( + ve )
LATENT – like a slow burning fuse, here exists a danger of sudden and
unexpected loss of ones assets in a possible act of nationalization –
Eg- freezing the assets of the USA.

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PARTIAL – may refer particularly to certain sectors of industry and
commerce and not others with regard to investment, local / national
pricing, local content laws , taxation.
Eg. The US imposition of embargo on export of all equipment of US origin
to the FSU, even if made overseas under license. – political boycott of the
SOVIET PIPE LINE- led to problems for the British company – John Brown
Engineering ( license for turbine blades from G.E.) found itself in the
impossible predicament of being threatened with repercussions from US
administrations from one side and that of the British Govt.on the other.

COUNTRY-COMPANY-PROJECT SPECIFIC RISKS:

political risks are country specific when manifested by mutual hostility

between two countries eg Israel and Palestine.

company specific risk involves either a favorable or unfavorable response

aimed at a particular country.eg HP, Motorola may receive favorable
treatment in form of special incentives as inducements to form JV’s or on
the other hand they nay be barred for fear of destroying local firms
elsewhere.

project-specific risks involves special treatment bestowed on certain type

of project. Eg Libya , Iran are unfriendly to US foreign investments
nonetheless are eager to collaborate with US forms on oil exploration and
drilling.

TYPES OF POLITICAL RISKS:

TYPE 1) Transfer Risks:

 Associated with change in degree of ease or difficulty experienced in

making transfers of capital , goods, technology, human resource.
 Make take form of restriction placed on remittance of money to or
from a country thru foreign exchange controls.
 Control on flow of goods thru quotas, tariff barriers.
 Constraints in technology transfer.

TYPE 2) Operational Risks:

 Is the impact on the operations of a firm caused by the changes in

the governments policies.
 May take form of enforcement of strict new environmental protection
legislation – which may cause a firm to shift base

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  Or a change in the minimum wages laws may induce a company to
farm out some production work to contractors in countries with more
competitive wage rates. ( contract manufacturing )

TYPE 3) Ownership Risks:

 Involves a change in the proportion of equity owned by a company in

a foreign subsidiary.
 Current trends = +ve
 Foreign companies that were once asked to divest their share of
equity in foreign subsidiaries are now being asked too increase their
share to a majority or wholly owned status.
 In brief, ownership risk has now shifted from negative to positive. Eg
MARUTI – SUZUKI.

THE DIFFERENT FORMS OF POLITICAL RISK:

 Import restrictions
 Price control
 Exchange control
 Forced equity transfer
 Confiscation
 Domestication
 Nationalization
 Boycotts
 Economic nationalization – tariff / non tariff barriers , subsidies ,
quotas , compulsions.

The most severe political risk is Confiscation that is seizing of a company’s

assets without payment.- (confiscation of the US assets in Cuba when
Fidel Castro became the leader in Cuba)

Less drastic, but still severe is Expropriation – which requires some

reimbursement for the government- seized investment.

Domestication – which occurs when host countries take steps to transfer

foreign investments to national control and ownerships through a series of
govt. decrees.

MANDATING DOMESTICATION:

a)Transfer of ownership in part or totally to nationals.

b)The promotion of a large no. of nationals to higher levels of
management.
c)Greater decision making powers resting with nationals.
d)A greater no. of component products – locally produced.
12
e)Specific export regulations designed to dictate participation in world
markets.

THE ULTIMATE GOAL OF DOMESTICATION IS TO FORCE FOREIGN

INVESTORS TO SHARE MORE OF THE OWNERSHIP AND
MANAGEMENT WITH NATIONALS THAN WAS THE CASE BEFORE
DOMESTICATION

STRATEGIES TO LESSEN POLITICAL RISKS:

a)Joint Ventures:

Less susceptible to political harassment. Can be with either the locals or

other third country multinational companies. In both cases company’s
financial exposure is limited. Helps minimize anti MNC feelings.

b) Expanding the Investment Base:

include several (local) banks in financing an investment. Can thus engage

power of the banks in event of a hostile takeover.

c) Marketing and Distribution.

Controlling distribution in markets outside the country can be used

effectively if an investment should be expropriated. The expropriating
country would loose world markets.

d) Licensing:
A strategy that practically eliminates almost all risks is to license
technology for a fee. Most effective for high end technology applications.

e) Planned Domestication:
Is not preferred business practice but the alternative of a (host)
government-initiated domestication can be disastrous and possibly lead to
confiscation…

POLITICAL RISK ANALYSIS:

Object of political risk analysis is to mitigate these non-commercial risks

caused by political change. The greater is the firms bargaining power, the
less likely is the investment to be vulnerable to political factors.
Characteristics of an investment that will give the investor greater
bargaining power and ensure less political vulnerability:

13
a)The bargaining power tends to be greater, the larger the size of the
required fixed investment.

b)The higher is the technical intensity of production.

c) The higher is the marketing intensity of production. (marketing

companies whose sales are determined to a large degree by brand
identification and consumer loyalty occupy a strong position vis-à-vis host
governments.

d) The less the extent of competition amongst the investors. (more

investors mean more alternatives for host authorities to choose from and
more rivals to play off against one another, thereby increasing the strength
of the host government.)

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INTERNATIONAL MARKETING – THE MNC WAY

- Developing orientations that focus on building collaborative relationships

to promote long term alliances and seek continuous mutually beneficial
exchanges instead of one time sales or events – “COLLABORATIVE
RELATIONSHIPS”

- These are relational exchanges (a mind set characterizing an approach

to management) can occur:
(a) internally among functionally departments, business units, subsidiaries
or employees.
(b) externally among customers, suppliers, competitors, government
agencies etc where a mutually beneficial goal is sought.

Can be grouped into:

- relationship marketing
- strategic business alliances.

RELATIONSHIP MARKETING:

- focuses on marketing process I.e. on creation, development and support

of successful relational exchanges throughout the marketing process.

- Its ultimate goal – achieve a competitive advantage by establishing long

term, mutually beneficial associations with loyal, satisfied customers.

- IN brief – the focus shifts from product to process , with process defined
as a group of activities with a common purpose and expectations of
results.

RELATIONSHIP MARKETING:- CASE IN POINT

- Whirlpool corporation, a one example has formal agreements with

Procter and Gamble and Unilever to exchange basic information and
ideas. Together they are involved at the engineering and technology
levels of product development.

- The basic rationale for this relationship is that the two industries –
washing machines and detergent are co-dependent. - They cant be
designing detergents for 10 years out for washing machines that cant
use them and Whirlpool cannot design washing machines without the
knowledge of the detergents that will be available.

15
STRATEGIC INTERNATIONAL ALLIANCES:

- The other category of collaborative relationships, which are sought to

shore up weaknesses and increase competitive strengths.
- An SIA is a business relationship established by two or more companies
to cooperate out of mutual need and to share risks in achieving a
common objective. ( a synergistic relationship established to achieve a
common goal where both parties benefit. )

- A SIA implies:
(a) that there is a common objective
(b) one partners weakness is offset by another ones strength
(c) that reaching the objective alone would be too costly, take too much
time or be too risky.
(d) that together their respective strengths make possible what otherwise
would be unattainable.

Reasons for a firm to enter into a SIA:

- Acquire needed current market bases

- Acquire needed technological bases
- Utilize excess manufacturing bases
- Reduce new market risks and entry costs
- Accelerate product introductions demanded by rapid technological
changes and shorter PLC’s
- Produce economies of scale
- Overcome legal and trade barriers
- Extend the existing scope of operations.

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 STRATEGIC THINKING IN INTERNATIONAL MARKETING:

The three levels:

As a concept……….To produce company and stake holder benefits and

produce profitable exchanges.

As a process……….Realize “global” environmental opportunities.

As a subject of decision making…….To ensure coordinated and targeted

marketing operations.

INT’L MARKET DEFINITION AND SEGMENTATION:

The heart of strategic marketing - STP

S: dividing into distinct groups who might require separate product / market
mixes. – generate SPECIALIZATION

T: developing measures of segment attractiveness and selecting one or

more target markets to enter.

P: establishing a viable competitive positioning of the firm and its offer in

each target market.

- heterogeneity of international market place.

- cater to customer groups that differ in terms of response to marketing
strategies.
- tailor the marketing policies to the need of each specific segment

Segment Evaluation:
MEASURABILITY: The degree to which segments can be identified and
their size /purchasing power be measured.

ACCESSIBILITY:The degree to which the resulting segments can be

effectively reached and served.

PROFITABILITY:The degree to which the resulting segments are large

and / or profitable enough to be worth considering for separate marketing
attention.

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If costs are high (product conditional factors, patent rights) the markets can
be approached thru investments or strategic alliance.

ACTIONABILITY:degree to which effective programs can be formulated for

serving the segments.

SEGMENTATION VARIABLES:
a) General Market
those that do not vary across purchase situations.

b)Specific Product Indicators

vary with individual purchase situation or particular product.

c) Increase Market Penetration:

- obtaining larger share of the pie by persuading them to switch over
- particularly common in high growth market
- calls for gaining competitive edge in all the elements of a marketing mix
rather than mere promotion or hard sell.
- strategy requires a sophisticated understanding of purchase criteria and
competitive marketing.

Eg Teenage savings market in the UK – free cash cards – ATM

with drawls – freebies like calc’s, personal organizers etc.

d) Develop Products:
- objective is to increase market by improving product performance by
using new technologies.
- Approach requires planned research, development and marketing
programs for specific untouched niches.
- Eg: Nintendo.

e) Extend Markets:
- Enter new market segments with core product offerings.
- Changes include higher degree of sophistication, changes in the promo
mix.
Eg Cadbury’s , Nintendo A- Version

f) Widen Activities:
- Here the company looks for new product and market opportunities.
- Strategy often requires the largest amount of investment and is most
successful when synergies can be found with current operations.

Eg: Kellogs developing new frozen foods for the dual working family, lever
group into Genomics.

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 MAJOR DECISIONS IN INTERNATIONAL MARKETING

Stage 1) Deciding whether to go abroad

Stage 2) Deciding which markets to enter

Stage 3) Deciding how to enter the market

Stage 4) on the marketing program

Stage 5) Deciding on the marketing organization

DECIDING WHETHER TO GO ABROAD:

Assumptions:
potential risks have been weighed
foreign customer preferences have been understood
Proper Understanding of the forex regulations / commercial laws
Proper understanding of the SLEPT-factors

DECIDING WHICH MARKETS TO ENTER.

- Define its international marketing objectives and strategies.

- Define what proportion of foreign to total sales will it seek ?
- Decide whether to market in a few countries or many countries
- (market entry and control costs are high / product & communication
costs / population and income size and growth / dominant foreign firms
can establish high barriers to entry.)

DECISION VARIABLE:-
- Index points on the MARKET ATTRACTIVENESS vis-à-vis
COMPETITIVE ADVANTAGE grid.

Five steps in estimating the probable rate of return on investment:

- Estimate of the current market potential
- Forecast of future market potential and risk
- Forecast of the Sales potential
- Forecasts of Costs and Profits
- Estimates of rate of ROI

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Market selection could involve proactive / reactive / expansive / Nearest
neighbor approaches.

REACTIVE:
- selection process is informal, unsystematic and purchase oriented.
- However in a survey of manufacturers of the USA it cane out to be that
41% of the regular exporters and 62.5% of the sporadic
exporters began by reacting to an unsolicited inquiry.

PROACTIVE:
- formal process wherein the exporter is active in initiating the selection
of foreign markets and also in the further segmentation of these
markets.
- Is a formal well defined process.- result of systematic market research.
- Involves expansive and contractible methods.

EXPANSIVE:- Scandinavian, British Isles, Iberian, N.America’s etc

- Existing home market is the starting point.
- market selection over time is based on similarities between the national
market.
- Structures of political, social, economical, or cultural nature.
- Tend to expand with minimum adaptation of product and marketing
parameters.

THE NEAREST NEIGHBOUR APPROACH.

The marketer – adapts products and segments markets, and markets

mainly to a nearest neighbor.

The quasi-marketer – adapts either products or segments but not both.

Exports are mainly to a nearest neighbor.

The seller – who does no product adaptation and no market segmentation

and sells mainly to nearest neighbor.

CONTRACTIBLE APPROACH:

- Selection starts with the total number or a large number, of national

markets, which are eventually broken down into regional groupings.
- This method involves a systematic screening of all markets leading to
immediate elimination of the least promising and further investigation of
the more promising.

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The procedure involves 3 stages:

- Identify the Preliminary screening criteria for examining countries.

- Weighing opportunities and Examining variables of operating risks,

market potential, costs and potential local / foreign competition.

- Countries are evaluated on the basis of above criteria and ranked on

the basis of the scores derived.

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DECIDING HOW TO ENTER:

INTERNATIONAL MARKET – ENTRY STRATEGIES.

An entry strategy should reflect an analysis of market potential, company

stabilities and the degree of marketing involvement and the commitment
the management is prepared to make.

Approaches could either require minimal investment and be limited to

infrequent exporting or large investments of capital and management effort
to capture and maintain a permanent, specific share of world markets. –
BOTH APPROACHES CAN BE PROFITABLE.

Some of the common entry strategies are:

Direct Exporting
Indirect Exporting
Licensing
Joint Ventures
Franchising
Consortia
Contract Manufacturing
Direct Investments

Criteria for Selection

Speed of Market Entry Desired:

Setting up a WOS vis-à-vis Agent / Distributor to ensure quick /
effective distribution in the foreign market.

Costs (to include direct as well as indirect):

Indirect like inland freights, strikes, disruptions to output, lack of
power supply, irregularity of raw materials.

Flexibility Required:
Appointment of agent / distributor required only where it is deemed
unlikely that there will be much future expansion by the company
directly into that market.

Risk Factors:
Risk may be diminished by minimizing the investment stake in the
company by accepting local joint venture partner etc. Also important
are third country risks – boycotts (Arab world for Israel )

Investment Payback Period:

22
Short term pay back realized from licensing and franchising deals
whereas joint ventures or wholly owned subsidiaries will tie up
capital for a number of years.

Long-term profit Objectives:

Related to the growth envisaged in that market for the years ahead.

Entry Strategies – Outward Manifestations of a Company

The main features of the alternative modes of foreign market entry:

FEATURE CHARACTERISTIC
Ethnocentric Perceived as being closely related to its
country of origin
Polycentric Based in a few countries with no conspicuous
image
Regiocentric Overall image identifiable not with a country
but a region.P&G in Europe
Geocentric Globally coordinated with their own complex
global sourcing, management reporting
systems etc Pepsi, IBM, Coca-Cola
National Unilever in India
Responsiveness

23
 DIRECT EXPORTING

This means is the easiest and most common. Risks and financial losses
can be minimized ( over indirect exporting ). The early motives are to skim
the cream form the market or gain business to absorb overheads. Potential
of return is also relatively higher

Forms:
A) export department
B) overseas sales branch or subsidiary
C) Traveling representative
D) Foreign based distributors / agents – who would buy the goods and own
it – might be given exclusive rights to represent the manufacturer.

LICENSING

Means of establishing foothold in foreign markets without large capital

outlays

Patented rights / trademark rights and rights to use technological

processes are granted in foreign licenses.
Confers only a right to use a company specific and paten-protected
process in manufacturing.

Right is conveyed in the transferal of original blueprints and designs.

In its simplest form, it may involve the transmittal of original designs.

Important criteria = “KNOW –HOW” agreements.

Advantages
Advantageous when capital is scarce, import restrictions forbid other
means of entry, a country is sensitive to foreign ownership or when it is
necessary to protect patents and trademarks against cancellation or non
use.

This mode of entry Increases the income on products developed as a

result of expensive research.

Useful to retain a market to which export is no longer viable cos of import

prohibitions, quotas, duties, transportation costs, lack of production
facilities etc.

To make possible the rapid exploitation of new ideas on world markets

before competitors get into the act. For the licensor it becomes easier to
handle more export markets this way.

24
Licensing is a viable option where manufacture near to the customers base
is required.

Disadvantages
Potential Disadvantage:

the firm has less control over the licensee than if they were to set up their
own facility.

The danger of fostering competition

The fact that there is often a ceiling to licensing income per product,
sometimes about 5% on the selling price, innovating products at least
could rate higher rewards if marketed in other ways.

The licensee may prove less competent than expected at marketing or

other management activities, hence the licensor may find his commitment
is greater than expected. Eventually costs may grow faster than income.

Negotiations with licensee and or the local govt are costly and often
protracted.

JOINT VENTURES

One of the more important types of collaborative relationships

Provide less risky way to enter markets that pose legal and cultural
barriers than would be the case in an acquisition of an existing company.
( eg – in mid 90’s – USA acquired 225 Eu firms and entered into 67 JV’s ,
however in Asia, they acquired only 27 existing companies but formed 97
JV’s )

A JV is differentiated from other types of SA’s or Collaborative

relationships in that a JV is a partnership of two or more participating
companies that have joined forces to create a separate legal entity. JV’s
are classified as SA’s but not all SA’a are in the strictest sense a JV.

Can be defined as “The commitment for more than a short duration of

funds, facilities and services by two or more legally separate interests to an
enterprise for their mutual benefit”

JV’s go deeper than mere trade relationships since it concentrates on the

deliberate alliance of resources between two independent organizations in
order to mutually improve their market growth potential.

25
JV’s are of TWO TYPES:

- Joint Equity Venture

- Contractual joint Venture.

Joint Equity Venture

Wherein each of the respective partners contributes a sum either in equity

or technological know-how in return for a given stake in the operation of a
joint venture.

- Are open ended and not fixed.

- Suffer in that the absorption of local equity capital from the foreign
market will dilute the company / country equity base.

Contractual Joint Venture

Commonly referred to as industrial co-operation (ICA’s coined by the UN)

- Unlike joint-equity ventures the investment stake may be say in

technology on one side only.
- The duration is well defined and laid down in the contract which
designates the respective tasks and responsibilities of each party over
the period of a joint venture.

- Eg – Boeing pressed by capacity shortages, averted an operational

crisis by turning to its rival LOCKHEED for a loan of 600 workers.

Four factors associated with JV’s:

1) are established , separate legal entities

2) they acknowledge intent by the partners to share in the management of

the JV

3) they are partnerships between legally incorporated entities such as

companies , chartered organizations or governments

4) equity positions are held by each of the partners.

26
POSSIBLE DRAWBACKS:

The partners might disagree over investment , marketing , and other

policies

Can hamper a MNC from carrying out specific manufacturing and

marketing policies on a worldwide basis.

Difficulty of integrating into a global strategy with cross-border trading.

Operational conflicts of interests eg – as in pricing of a single source input

or raw material.

Conflict in tax interests between the partners particularly where one may
represent the local government interests.

FRANCHISING

Is a rapidly growing form of licensing in which the franchisor provides a

standard package of products, systems and management services and the
franchisee provides market knowledge, capital and personal involvement
in management.

Potentially the franchise system provides an effective blending of skill

centralization and operational decentralization

Termed as marketing oriented method of selling a business service often

to small independent investors with working capital.

Franchising transfers the legal right to a third party to use a company’s

registered name, trademarks and logo, products, packaging and business
system.

In England – for eg – annual franchised sales of fast foods is nearly 2

Billion US $ , which accounts for 30% of all foods eaten outside the home.

KFC (part of Pepsico Foods Int’l) – has a standardized corporate color, a

distinctive trademark, logo and packaging for food. It even stipulates the
sources from which the raw material must be obtained, the recipes for
preparation and the quantity to be served in each portion. (Beijing KFC has
the highest sales volumes of any KFC store in the world.)

27
Types of Franchise Agreement

A) MASTER franchise

gives the franchisee the rights to a specific area with the authority to sell or
establish sub franchises ( eg Mc’Donalds)

B) LICENSING franchise
right to use a product / good / service or any other asset for a fee ( eg
Coco Cola licenses local bottlers in a an area or region to manufacture and
market Coco – Cola using syrup sold by Coco Cola. Rental car companies
often enter foreign market by licensing a local franchisee to operate a
rental system under a trade mark of the parent company. )

Advantages of Franchising as a Mode Of Entry

1) To the Franchisor:

- fast entry and easy withdrawal

- moderate investment
- limited overheads
- avoid import duties and taxes as import/export content is minimal
- access to ready-made market

2) To the Franchisee:

- flexible business structure

- shared financial responsibility
- legal independence
- tried and tested idea
- economies of scale in distribution
- motivation

3) To the Consumer:

- standardized product
- fixed price
- benefits of new technology

4) To the Host Country:

- technology transfer
- creates employment and business opportunity

28
 CONSORTIA AND CONTRACT MANUFACTURING

CONSORTIA:

Are developed for pooling financial and managerial resources and to

lessen risks.- eg for huge construction projects. Similar to a JV except for
the following two characteristics:

1) they typically involve a large number of participants

2) they frequently operate in a country or market in which none of the
participants is currently active.

CONTRACT MANUFACTURING:

A company may manufacture locally to capitalize on low cost labor, avoid

high import taxes, reduce high cost of transportation, gain access to ease
in availability of Raw material.

Disadvantage – less control over manufacturing process and the loss of

potential profits on manufacturing.

FDI

 -FDI phenomenon has become as major influence of market entry

and expansion, particularly for MNC’s.
 -Salient feature = involvement of govt both direct as well as indirect
at local / central levels (Interest for any host country govt to attract
and retain large scale FI/s for industrial / economic and social
reasons )

What is in it for the investing company ?

 -int’l companies / mnc’s seek out host govts. Which offer fiscal and
economic incentives to new investors.
 -Look at govt to protect their existing investments and assets in host
countries.
 -For international competitiveness.
 -Protective duties , measures / tariffs / weakening exchange rate
leading to a situation wherein LANDED PRODUCTS CAN NO
LONGER COMPETE WITH LOCAL PRODUCTS.
 -Operating savings in form of labor / material / resource availability.
 tax another fiscal incentives.

29
FDI- factors that induce / facilitate

-increasing economic growth

-economic de regulation
-privatization programs ( that which allow foreign investors to purchase
state owned enterprises )
-removal of restrictions
-Inward investment from foreign firms eager to share gains created by an
enlarged market.

FDI- in light of options of exporting / licensing

Exporting = producing goods at home and then shipping them to receiving

country for sale.

Licensing = granting a foreign entity the right to produce and sell the firms
product in return for royalty fee on every unit sold.

LIMITATIONS OF EXPORTING:
 -constrained by transportation costs, trade barriers ( low value to
freight ratio eg cold drinks. )-Quotas – protectionist threats / anti
dumping duties etc.

LIMITATIONS OF LICENSING:
 -threat of giving away valuable technological know how to a potential
foreign competitor eg RCA of USA – leading edge tv tech to sony.
 -Does not give a firm the tight control over manufacturing, marketing
and strategy in a foreign country that may be required to maximize
its profitability.
 -when the competitive advantage of a firm lies in its manufacturing /
marketing / manufacturing capabilities.

Eg Toyota – lean manufacturing , excellence in manufacturing.

A) P-L-C ANALOGY:

 Vernons view that firms undertake FDI at particular stages in a life

cycle of a product they have pioneered.
 They invest in other advanced countries when local demand in those
countries grows large enough to support local production.

e.g. – XEROX first introduced the photo copier in the States and
then set up production facilities in Japan ( Fuji- Xerox) and Great Britain (
Rank Xerox )

30
 UNDERSTANDING IMPLIED- once a market is large enough to
support local production , FDI will occur.

B) STRATEGIC BEHAVIOUR:

 Theory to the effect that FDI flows are a reflection of strategic rivalry
between firms in the global market place.
 One to one relationship between FDI and the rivalry in the
OLIGOPOLISTIC INDUSTRY.

- eg- firms A,B,C in the USA

 Firm A establishes subsidiary in France
 B &C reflect that if A is successful they may knock out their export

 Business to France to give A – First mover advtg.

 Firm A discovers competitive advtg in France that could torment B &
C in USA ( their native soil )
 Firms B & C decide to follow Firm A and establish operations in
France

C) LOCATION SPECIFIC ADVANTAGES

 -economist John Dunning Theory.

 Arising from using resource endowments or assets that are tied to
particular foreign location that a firm finds valuable to combine with
its own unique assets.

REQUIRES A FIRM TO ESTABLISH PRODUCTION FACILITIES WHERE

THOSE FOREIGN ASSETS OR RESOURCE ENDOWMENTS ARE
LOCATED.

-Eg - firms A,B,C in the USA

Silicon valley – location specific advantage in the generation of knowledge
related to the computer and semi conductor industries.

D) MARKET IMPERFECTIONS / INTERNATIONALIZAION

THEORY (factors that inhibit markets from working perfectly. )

impediments to the free flow of products between nations.

( decreases profitability of exporting relative to FDI and licensing )

impediments to the sale of know how.

( increase profitability of FDI relative to licensing)

31
IT FOLLOWS THAT THE LARGER THE MARKET IN WHICH THAT
ASSET IS APPLIED, THE GREATER THE PROFITS THAT CAN BE
EARNED FROM THE ASSET.

In summary…. Companies prefer FDI when:

 -High trade barriers

 Accessibility to markets
 Cost considerations
 Growing importance plus the impact of free trade areas.
 Strong economy of the home country ( including strong cash flows /
strong currency / strong corporate profits )

MODES OF FDI

1) FIRMS SEEKING RESOURCES:

Unique + valuable resources eg copper of Chile + linseed oil of Indonesia.

2) FIRMS SEEKING FACTOR ADVANTAGES:

resources needed are inherent in the country of production. – Vernons
product cycle – the same firm may move their own production to locations
of factor advantages as the products and markets mature.

3) FIRMS SEEKING KNOWLEDGE:

firms may locate in and around centres of industrial enterprise unique to
their specific industry like: footwear in milan , semi conductor in silicon
valley.

4) FIRMS SEEKING SECURITY:

Political stability and security
Eg Mexico – tacit support to USA – resulted to their catapult in NAFTA.

5) FIRMS SEEKING MARKETS:

Ability to gain and maintain access to markets.
-PRINCIPLE OF LINDER – firms learn from domestic market and use that
info to go international.

32
FACTORS AFFECTING THE MODES OF ENTRY:

EXTERNAL FACTORS Exporting / Licensing Branch Equity

(Home Country) Agent / Subsidiary investment /
Distributor exporting Production
Large market GF
Small Market GF GF
Low Production Cost GF GF
High Production Cost GF GF
Strong Export Promotion GF GF
Restrictions on Investment GF GF
Abroad

EXTERNAL FACTORS Exporting / Licensing Branch Equity

(Foreign Country) Agent / Subsidiary investment /
Distributor exporting Production
Low Sales Potential GF GF
High Sales Potential GF GF
High Production Costs GF GF
Low Production Costs GF
Restrictive import Policy GF GF
Liberal import policies GF GF
Restrictive Exchange Controls GF GF
Stagnant Economy GF GF
Exchange rate depreciation GF
Exchange rate appreciation GF GF
High Political Risks GF GF

33
INTERNAL FACTORS Exporting / Licensing Branch Equity
Agent / Subsidiary investment /
Distributor exporting Production
Differentiated Products GF GF
Standard Products GF
Service-Intensive Products GF GF
Technology-Intensive products GF
Low product Adaptation GF
High Product Adaptation GF GF GF
Limited Resources GF GF
Substantial resources GF GF
Low Commitment GF GF
High Commitment GF GF

34
 GATT AND WTO:

GATT WTO

It is a set of rules an multilateral agreements. It is a permanent institution with its own

Secretariat.

Its rules are applicable to trade in merchandize Its rules are applicable to trade in
goods. merchandize, services and also trade in related
Aspects of Intellectual Property.

It was designed with an attempt to establish It is established to serve its own purpose.
International Trade Organization.

It was applied on a provisional basis. Its activities are full and permanent.

GATT was originally a multilateral Its agreements are almost multilateral.

instrument,but plurilateral agreements were
added at a later stage.
Was applied on a provisional basis in strict legal WTO commitments are full and permanent and
terms. legally binding under int’l law.

Dispute settlement was not fast and automatic. Dispute settlement was fast and automatic,
much less susceptible to blockages.

GATT – dispute settlement

 Under article XXII and XXIII which call for Consultations between
members and Concept of Nullification and Impairment respectively.
 If consultations fail, members were to examine the matter, issue
rulings or recommendations and authorize possible retaliation.
 Possibility of Blockage action by erring member country.
-WTO – dispute settlement
 System designed to provide security and predictability to the
multilateral trading system.
 Prompt – time bound settlement
 Balancing of rights and obligations
 Objective of satisfactory settlement
35
REGIONAL / TRADE BLOCKS:

Trading Blocks / Economic Integration Schemes.

-Growth of intra regional trade.

-Regionalization v/s globalization of world trade.
-Two or more countries agree to draw their economies closer. – common
thread THE USE OF TARIFFS TO DISCRIMINATE AGAINST GOODS
PRODUCED BY COUNTRIES WHICH ARE NOT PARTY TO THE
AGREEMENT.

 -preferential agreement to the goods produced by member

countries.
 -Forms of economic integration – free trade area / customs union /
common market / economic union

FREE TRADE AREA:

 between countries to about free trade between them.
 abolishment of all restrictions on trade among members.
 each member reserves the right to determine their own commercial
policy with non members.

CUSTOMS UNION:
 one step ahead
 not only eliminates all restrictions among trade members
 also adopts uniform commercial policy against non members.

COMMON MARKET:
 free trade among members and uniform tariff policy among non
members+
 free movement of labor & capital among non members

ECONOMIC UNION:
 still more advanced level of integration
 satisfies overall conditions of common market +

DEGREE OF HARMONIZATION OF ECONOMIC POLICIES SUCH AS

MONETARY POLICY , FISCAL POLICY.

36
INTERNATIONAL FINANCE

Features
 integrated and interdependent nature
 effected by changes in exchange rates, inflation rates, interest rates,
etc.
 at MACRO ECONOMIC level = International Monetary System
 at MICROECONOMIC level = International Financial System

Important in deciding how international (financial / monetary) events will

affect a firm and steps to be taken to exploit positive developments and
insulate the firms from the harmful ones.

INTERNATIONAL MONETARY SYSTEM:

 -The structure within which exchange rates are determined,
international trade and capital flows accommodated and BOP
adjustments made.
 -Evolution from the GOLD STANDARD to the FLOATING
EXCHANGE RATE SYSTEM.

a) Gold Standard
 an attempt to establish some form of value parity of national
currencies in term of gold
 Each participating country committed itself with little coercion to
guaranteeing free convertibility of its currency into gold at a fixed
price.

b) Bretton Woods System:

 Residents of a country were given a guarantee that their money was
freely convertible at a fixed price into other currencies without gold
backing.

c) Floating Exchange Rates:

 currencies are allowed to float freely to determine their market value

injected more volatility than they had been during the fixed
exchange rate system.
 This volatility can be attributed to reasons like the oil crisis 1973, first
weakening of US $ in 1977 etc.

d) The International Monetary Fund:

 with a primary aim to monitor and regulate the international

monetary system, prevent the disruption of forex system and
possible collapse of the monetary and credit system.
37
Purpose of the IMF:
 Promote int’l monetary cooperation thru a permanent institution
 -Provide a machinery for consultancy 7 collaboration of int’l
monetary problems.
 -Facilitate expansion and balanced growth of international trade.
 -Promote exchange stability.
 -Maintain orderly exchange arrangements among members.
 -Establish multilateral system of payments and elimination of foreign
exchange restrictions.

e) General Resources Account:

 Made up of national currencies, special drawing rights and gold.
Contribution of members is based on subscription in the form of a
quota.
 -(this Quota is determined broadly to reflect the importance of the
member countries currency to the global economy – USA = 25%,
EU = 35%, Third World = 40%)

f) International Bank for Reconstruction and Development / World bank

 To complement the activities of the IMF.

 Basis of floating bonds, lending , borrowing = again dependent on
QUOTA SUBSCRIPTIONS.
 funds loaned to to member governments on governmental
guarantees of repayment at prevailing market interest rates.
 Insistence that – borrowing nations embark on currency devaluation,
elimination of trade control measures etc.

INTERNATIONAL FINANCIAL SYSTEM:

Deals with the international payment system, foreign exchange market,

and the role of the international banks.

Transactional (control) orientation.

a)Foreign exchange systems – purchase and sale of of international

international currencies at rates determined by the market forces through
the exchange rate markets.

b)Futures and option market – a contract which commit the parties to buy
and sell financial instruments at set prices on some agreed future dates.

38
PAYMENT FOR INTERNATIONAL BUSINESS:

different legal systems within which the int’l marketer has to decide his
payment policy and issues relating to recovery of goods:

 -fluctuating rate of exchange

 -competitive framework – buyer demanding longer credit periods.
 -political risks.
 -The nature of international payments – financing of international
trade and accounts receivables.

FINANCING INTERNATIONAL TRADE:

 Non financial institution sources – e.g. MNC’s favoring financing their

international operations – ( also known as supplier credit)
 Financial institution sources and
 Government agencies

ACCOUNTS RECEIVABLES:

 Prepayment / advance.
 Documentary Credit
 Consignment
 DA / DP

MANAGEMENT OF INTERNATIONAL FINANCE:

1) Exchange Rate Risk Management

Forecasting forex fluctuations, sources of finance, budgeting and earnings
projection.

2) Risks – political / legal / technical etc.

The real source of uncertainty – changing government policies such as
nationalization, expropriation and indigenization / domestication.

39
INDIA’S FOREIGN TRADE:

TRADE PROMOTION MEASURES:

Free Trade Agreements

i. The establishment of a Free Trade Area through complete or phased

elimination of tariffs.
ii. The FTA does not remove all tariffs on all goods at once.
iii. Negative lists to protect national interests of both countries.
iv. The Rules of Origin (ROO) criteria to ensure a minimum local
content included in all tradable products under the FTA.
v. Economic Rationale for the FTA
vi. Developing countries like Sri Lanka experience adverse effects
arising from existing free trade agreements. The beneficial effects of
such agreements, through trade creation, are enjoyed only by the
members of such trading blocs. Countries outside these blocs are
therefore faced with the negative effects of trade diversion and
decline in export markets.

Eg. COMESA,
EU and NAFTA,

CASE IN POINT - INDIA AND SL

Main Products of Trade between India and SL

Items of Exports from India

dairy products, cereals, diamonds, man-made staple fibres, cotton, woven
fabrics, laminated textile fabrics, electrical machinery and equipment, iron
& steel and plastic and paper product

Items of Imports to India

marine products, especially crustaceans, tea, spices, rubber products,
leather goods and articles of apparel and clothing.

40
Free Trade Agreement with Sri Lanka

i. Effective from 1st March 2000

ii. India Exports to SL = $602 million in 2001 and $ 835 million in 2002
(increase of 39%)
iii. India imports from SL = $72 million in 2001 and $ 171 million
(increase of 138%)
iv. Total Trade in 2001 US$ 675 million
v. Total Trade in 2003 US $ 1.6 billion
vi. India is Largest supplier of goods for Sri Lanka
vii. India moved from 22nd largest buyer in 1990s to 5th largest buyer in
2002
viii. Impact of FTA on SL
ix. Lower domestic consumer prices
x. Larger volumes of trades for exporters and importers
xi. Expanding market opportunities for exporters
xii. Producers given protection through Negative List
xiii. SL can import 319 items on duty free basis
xiv. FTA promotes efficiency, foreign investment, technology flows and
knowledge spillovers

E.g. NAFTA
SAPTA (SAARC Preferential Trade Agreement)
Reduction of tariffs by SL

Impact of FTA on India

i. Cheaper imports from SL
ii. Intermediaries with plants in SL supply material at cheaper price e.g.
Hong Kong, Singapore
iii. Indian EOU’s can locate plants in SL to make cheaper products e.g.
CEAT
iv. India can import 1,351 items on duty free basis

India’s Trade Agreements:

 ASEAN Nations
 Afghanistan
 Thailand
 Nepal
 Bhutan
 Bangladesh
 Bhutan

41
Other FTAs in process:
 Gulf Cooperation Council (Qatar, Oman, Bahrain, Kuwait,
UAE, Saudi Arabia)
 Brazil
 China
 Taiwan
 Singapore
 Malaysia
 Myanmar

ALSO IN THE PIPELINE - MFN with Pakistan:

Mutually beneficial for both nations India has already offered Most
Favoured Nation to Pakistan

Main Items of Indian Exports to Pakistan :

Tea, spices, oil, fruits and vegetable seeds, iron ore, processed minerals,
drugs and pharmaceuticals, dyes and intermediaries, organic, inorganic
agro chemicals, rubber manufactures, paints and enamels, paper and
wood products, plastics and linoleum, metal manufactures, iron and steel
and manmade fibres

Main Items of Indian Imports from Pakistan :

Fruits and nuts, organic and inorganic chemicals, textile-yarn, fabrics,
sugar, leather, metal scrap, and electronic goods

 600 Items covered

 Trade in 1948-49 was Rs.184.60 Cr
 Trade in 1990-91 was Rs. 240.40 Cr
 Virtually no trade during 1966-1975 Indo Pak war period
 India’s FT during 1950-51 was Rs. 1214 Cr, trade with Pak Rs.
74.47 Cr (6.13% of India’s FT)
 Increase in trade between the two nations in absolute terms, though
insignificant in % of global trade
 Trade in 1999-2000 was Rs. 702.90 Cr against India’s FT of Rs.
317,702.16 Cr (0.22% of India’s FT)
 Trade in 2001-02 was Rs. 983 Cr of which India’s share was Rs.
685.31 Cr
 Trade in April-December 2002-03 Rs. 893.03 Cr against Rs. 803.78
Cr in 2001-02
 India’s Exports grew 44.12%
 India’s Imports dropped by over 50%
 Goods also shipped to Pak via third countries mainly Middle East
and the Far East
 Actual volume estimated to be 4 – 5 times of the official trade
 Informal trade between $1 – 2 billion per annum

42
OTHER INITIATIVES TO PROMOTE EXPORTS:

 Identifying Thrust Areas

 Strengthening Vehicles of Exports
 Rationalising incentives
 Reducing Transaction Costs
 Involving States in Export Promotion
 Export Promotion Measures

Export Production Assistance

EPZ, EOU, FTZ, etc.
Excise and Customs Regulations
Import Policy and ECGC scheme
Duty Exemption schemes
Advance License
Packing Credit, Pre Shipment Credit
etc

Export Marketing Assistance

National Centre for Trade Information (NCTI)
Business Information Network (BISNET)
Export Promotion Organisations (EPOs)
Air Cargo Complexes, Cargo Agents Terminals, Bonded Trucks
Electronic Data Interchange (EDI)
Inland Container Depots/Container Freight Stations
Trading Corporations
Post Shipment Credit, Export Credit Risk Insurance, Foreign Currency
Accounts
Duty Drawback, etc
Useful Links
http://goidirectory.nic.in
http://commerce.nic.in
http://dgft.delhi.nic.in
http://exim.indiamart.com
http://indiabudget.nic.in
www.exportchamber.com
www.india-exports.com
www.indianexportregister.com
www.indiaonestop.com
www.tradenic.nic.in
www.indolankafta.org
www.indopaktrade.com

43
INTERNATIONAL PRODUCT LIFE CYCLE:

Stages are – Local Innovation, Overseas Innovation, Maturity, Worldwide

Imitation and Reversal.

Stage 1 - LOCAL INNOVATION:

Increased wants stemming innovations, new technology and capital
available - develop new products.

Stage 2 – OVERSEAS INNOVATION:

Local advanced country (USA) market is well cultivated and innovating firm
is ready to introduce products in international market and thereby expand
sales and improve profits. This is christened stage of pioneering or
international introduction.

New technology is now seen and need base developed by other advanced
nations like France, Canada , UK etc.

Product introduced in these other advanced nations at premium price.

No local competition from other advanced nations.

Stage 3 - MATURITY:
Growing demand in other advanced nation encourages innovating firm (in
the USA) to start local production with help of the local government.

Direct competition to firm s in innovating home country.

LDC’s now viewed as potential markets.

44
Stage 4 – WORLDWIDE INNOVATION:

The innovating firm faces decline in demand due to lower demand from
other advanced nations and LDC’s

Direct impact on their economies of scale

Firms in other advanced nations use their lower prices to enter the
advanced country (US) markets.

Stage 5

THE REVERSAL: - Disappearance of the Innovating firms competitive

advantage.

LDC’s start production on their own to satisfy their own needs as well as to
produce for the US markets.

Result – product of the advanced country (USA) firm are undersold in their
own country.

CASE IN POINT – TELEVISION MANUFACTURING IN THE USA.

-Theory more applicable to “emerging technology products”

-IN the last stage, it is not practical for the innovating firm to lower its
prices.- Instead it has to improve the quality and sophistication and thus
maintain an ABOVE THE MARKET PRICE.

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DISTRIBUTION CHANNELS:
Can be viewed as sets of interdependent organizations involved in the
process of making a product or service available for consumption or use.

The dual role……OF AN ORCHESTRATED NETWORK THAT CREATES

VALUE FOR END USERS BY GENERATING FORM, POSSESSION,
TIME AND PLACE UTILITIES.

Role 1) That of satisfy demand by supplying goods at right place, time,

quality and price.

Role 2) STIMULATE DEMAND – thru promotional activities of the units.

Should the firm extend its domestic distribution approach to foreign
markets or adapt its distribution strategy to each national market ?

Should the firm use direct or indirect channel in foreign markets ?

Should the firm use selective or widespread channels in foreign markets ?

– case in point Benetton cannibalizing its (700) outlets, The Wrangler aura.

How can the firm manage the channel ?

How can the firm keep its distribution strategy up to date. ? – (boom in
retailing, internet giving new dimension to direct marketing, evolution in
buying behavior, laws affecting distrbn are changing – network mktg
currently non-taxable, technological changes – IT replaces inventory /
COLD CHAIN.)

School of thought – Existing channels should be tried off-shores as they

have been tried an tested already.

However following reasons deter from standardized distribution:

-distribution
infrastructure and pattern vary from country to country.
-Storage and transportation possibilities.
-Dispersion of income.
-Consumer income and buying behavior.
-Strengths and behavior of competitors (forcing a firm to adapt / use the
same channel case in point – Pharma Selling)

Factors affecting Choice of Overseas Channel Partners

COSTS:
Initial, Maintenance and Logistics costs. Include locational costs, setting up
costs Ongoing cost of sales, advantages and profits to intermediaries.
Transportation, storage, break bulking, customs clearance etc.
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CAPITAL REQUIRED:-
Inventory costs, accounts receivables etc.

Offset by cash flow patterns from each channel alternative. Case in point –
Establishment of a direct sales channel thus often require the greatest
capital investment whereas using distributors often reduces the investment
required.

PRODUCT AND PRODUCT LINE:

Nature of product – e.g. perishable products have shorter shelf lives and
must be sold thru shorter channels / Technical products requires either
direct or highly technical channel partners.

CONTROL:
Direct Sales force – greatest degree of control over price, promotion,
amount of sales effort and type of retail outlet.

In contrast longer channels often result in lower levels of control. –

Manufacturer may not know who is buying its products in the foreign
market.

COVERAGE:
Balance between reach of channel in urban and rural markets.

SYNERGY:-
Channel choice can be influenced by the complementary skills that
enhance the total channel systems productivity.

E.g. – potential distributor partner may have local market knowledge

whereas the manufacturer may contribute product and technical
expertise.

HOST COUNTRY FACTORS INFLUENCING INTN’L CHANNEL DESIGN

- Profile of consumers (population characteristics) and decision makers
(private / public sector)
- The Resources:
- GNP and its distribution
- Technology
- Stock of Capital Goods.

Environmental Conditions like :

- Geography
- Urbanization
- Ethnographic Diversity
- Racial homogeneity and identification
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- Religious homogeneity and identification
- Linguistic homogeneity
- Political Stability.

HOST COUNTRY FACTORS INFLUENCING INTN’L CHANNEL DESIGN

Behavior In the government and public sector:

- Imposition of price controls
- Price subsidies
- Control of promotion practices
- Consumer protection laws
- Environment protection laws.

In the private sector:

- R&D expenses
- Promotional budgets
- Physical distribution expenditures
- Price discount structures

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Steps in Purchase Description Corresponding Role of the Channel
process of
Consumers
Product Decision An assortment Creation of the need of a new
decision where product.- AWARENESS.
the consumer
decides which
product to buy. Abstract need – wherein different
products could satisfy the need.-
Channel provides assortment of
goods – to help consumer make
better choice.
Brand Brand decision Make the brand enter the
a)Consideration consideration set. – Window displays
b)Information / POP advt.
c)Evaluation Information Provider – brochures /
displays, info from salesman.
(Satguru)
“OBTAINING From consdrn set to prospecting via
THE DEMAND” promotion.

Steps in Purchase Description Corresponding Role of the Channel

process of
Consumers
Purchase Form / Form – making goods available in
Time / the right Size, quantity, with all
Place / Necessary accessories etc.
Possession Time – Availability at right time –
UTILITIES May require Storage.
Place – Availability at right place.
“SERVICING This would require that the product is
THE DEMAND” transported at the right locations.
(CIP - Maruti dealer )
Possession – To convert a brand
decision to purchase may require
financing (credit), guarantee against
failure (risk transfer) and post
purchase servicing.

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Decision Consid- Info Evalu- Channel Role
Process eration Search ation
set
Picking/ No No No No evaluation process thus -
Impulse ENSURE BRAND VISIBILITY.
Variety Yes No No Buyer forms a consideration
Seeking set and chooses a different
brand each time purchase is
made. – ENSURE BRAND
ENTERS CONSIDERATION
SET THRU RECOGNITION
Habit No No Yes Buyer looks for reinforcements
to continue with the same
brand- thus SUPPLEMENT
THE BUYERS EVALUATION
THRU TESTIMONIAL BASED
POP ADVERTISING.

Decision Consid- Info Evalu- Channel Role

Process eration Search ation
set
Sub No No No Involves sub contracting the
Contract decision process to a
knowledgeable person. -
INCREASE THEIR
CREDIBILITY – ACQUIRING
TECHNICAL SKILLS.
Extnded Yes Yes Yes The channel can play an
Problem important role in ensuring that
Solving the brand enters the
consideration set thru the
process of recognition and
also help the information
search and evaluation by
enhancing its credibility by
acquiring technical knowledge.

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 CHANNEL DESIGN

- The most far-Reaching in marketing decisions.

- Can revamp a promotional program, modify its product line thus it is

very important to carefully design a channel.

- Difficult to change – once designed.

- Channel design does not refer to structures that have simply evolved, it
refers only to those where the management has taken an active role in
the development of the channel.

Channel Design Decision Includes:

- The number of channels to employ

- The number of levels to be included in each channel
- Types of intermediaries to be employ

Channel Design Decision could be based on:

- Channels need to be adopted depending on the target segment and

positioning.
- The goals of the channel may differ
- The alternatives are numerous.

Case In Point – ARVIND MILLS CHANNEL DESIGN FOR TWO OF ITS

OWN PRODUCTS.

Channel for LEE, ARROW:

Company plant – Central Warehouse – Franchisee

Channel for RUF & TUF:

Company plant – Central Warehouse – Distributor – Sub Distributor –
Wholesaler – Retailer.

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CHANNEL PARTNER ROLE PLAYED / VALUE ADDITION

C&F Agent Overall profit from each company he is dealing

with.

Distributor / Stockist ROI – as many companies consider the

distributor / stockist to be an extended arm of
the company and thus co’s would require them
to carry out additional responsibilities of
promotion, prospecting.
Wholesalers Rotation of Money / Liquidity and early return
of cash. Generally they get goods on credit.
These are sold immediately on cash – at very
low margins or even on cost price. – Thus
looms the danger of PRICE CUTTING.
Retailers Increasing Sales

MANUFACTURER BASED CHANNEL FORMATS:

Manufacturer – Direct Product supplied from manufacturers warehouse –

sold by sales force or sales agents.
Manufacturer based Acquired wholesale distribution serving the parent
wholesaler-distributor brand + cos of demand pull also serving competitor
brands.
Company store – Retails product outlets in high density markets often
manufacturer store. used to liquidate seconds and excess inventory.
License Contracting distribution and marketing functions thru
licensing agreements.
RETAILER BASED CHANNEL FORMATS:

Franchising Mc Donald's

Dealer Direct For those products needing high after sales service
support eg – Heavy Equipment dealers.
Buying Club Services requiring membership – CD’s / tapes /
books BARNES and NOBLE.

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RETAILER BASED CHANNEL FORMATS:

Warehouse Clubs Appeal is to a price-conscious shopper. Production

selection is limited and products are usually sold in
bulk sizes.
Mail Order / Catalogue Non store selling thru use of literature sent to
potential customers. Central Distribution network.
Food Retailers Will buy truck loads to take advantage of pricing and
manufacturers rebates.
Department Stores Wide variety of merchandize with a moderate depth
of selection. (SB)
Mass Merchandisers Similar to dept stores except that product selection
is broader and prices are usually lower eg WAL
MART / K MART, TARGET.
Specialty Discounters / Great depth f selection at discounted
Category Killers prices.Manufacturers will ship directly to the store eg
Toys “R” US
Hyper Market Very Large level of merchandize store. Food to
general merchandize is typically 60:40

SERVICE PROVIDER BASED CHANNEL FORMATS:

Contract Warehousing Public warehousing services provided for a fee,

typically with guaranteed service levels eg –
Reliance Logistics.
Sub Processor Outsourcing of assembly or sub-processing,Usually
performed with labor intensive process or high fixed
asset investment. Eg Steel processing.
Cross Docking Trucking companies service high volume inventory
needs by warehousing and backhauling products on
a routine basis for customers narrower inventory
needs. Driver picks up inventory and delivers to
customer on picking up customers shipment.
Value Added Designers Designers, engineers or consultants for a variety of
service industries that JV or have arrangements with
manufacturers of products that are used for their
designs – Computer s/w cos that market hardware
for turnkey products.

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INNOVATIVE CHANNELS ……..

Clinique in Japan Major channel for cosmetic sales thru department

stores. Gave the stores monopoly and in turn
demanded the most desirable floor space + own
staff in own uniform.
McDonald's in Besides outlets, has its own brightly painted driving
Switzerland cars or Swiss trams. Geneva –Basel routes etc.
P&G in Russia Decline of communism - Relatively apolitical outlet,
P&G choose Leningrad State University.
India-Shining !! The 5th P of Marketing.

OTHER CHANNEL FORMATS

Multi Level Marketing Salesperson not only sells but recruits other sales
people who become a leveraged sales force that
gives the original salesperson a commission on
sales.
Co-operatives Companies usually in the same industry create a
organization in which each member becomes a
share-holder. The organization uses a combined
strength of the shareholders to get economies of
scale.
Vending / Kiosks Narrow product line ~ machine Dispensers.

OTHER FORMATS Specialty Catalogs (order by email/phone), Trade

Shows, Database marketing (studying customer
buying behavior and demographics).

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