Saturday, 3 December 2011

UNIT 5


Unit 5 Political and Legal Environment
Structure
5.1 Analysing the Political and Legal Environment
5.2 The Political System
5.2.1 Political System Stability
5.2.2 Form of Government
5.2.2.1 Two-party System
5.2.2.2 Multiparty System
5.2.2.3 Single Party System
5.2.2.4 Dominated One-party System
5.2.3 Classification of Government based on Economic Systems
5.2.3.1 Communism
5.2.3.2 Socialism
5.2.3.3 Capitalism
5.3 Political Risks
5.3.1 Confiscation
5.3.2 Expropriation
5.3.3 Nationalisation
5.3.4 Domestication
5.3.5 Creeping Expropriation
5.4 Privatisation
5.5 Indicators of Political Instability
5.5.1 Social Unrest
5.5.2 Attitude of Nationals
5.5.3 Policies of the Host Government

5.6 Management of Political Risk
5.6.1 Measures to Minimise Political Risk
5.6.1.1 Stimulation of the Local Economy
5.6.1.2 Employment of Nationals
5.6.1.3 Sharing Ownership
5.6.1.4 Political Neutrality
5.6.1.5 Behind-the-Scenes Hobby
5.6.1.6 Observation of Political Mood and Reduction of Exposure
5.6.2 Political Insurance
5.6.2.1 Private Insurance
5.6.2.2 Government Insurance
5.7 Legal Environment
5.7.1 Legal Systems
5.7.1.1 Common Law System
5.7.1.2 Statute Law System
5.8 Bribery
5.8.1 Reasons for Bribery
5.9 Branch Versus Subsidiary
5.9.1 Reasons why a Subsidiary is a Prefered Structure
5.9.1.1 Recruitment of Management
5.9.1.2 Quick access to a market
5.9.1.3 Flexibility
5.9.1.4 Tax Benefits
5.9.1.5 Limited Liability
5.10 Intellectual Property
5.10.1 Patent
5.10.2 Trade Mark
5.10.3 Copyright
5.10.4 Trade Secret

5.11 Counterfeiting
5.12 Grey Market

Learning objectives:
After studying this unit you will be able to
 Discuss the importance of the stability of the political and legal environment
to a firm.
 Explain the effects of a governments political objectives on an international
marketers business.
 Classification of Governments based on number of parties and economic
systems.
 Understand the meaning of political risks and its importance to international
marketers.
 Identify various sources of political instabilities.
 Understand the measurement of political risks and various measures to
reduce political risks.
 Understand legal system and the importance of legal system to international
marketer.
 Understand the meaning and importance of bribery for international
marketers.
 Understand how intellectual property could be protected in various countrymarkets.
 Understand the meaning and dangers of grey market for an international
marketer.

5.1 Analysing the Political and Legal Environment
The political systems of the countries served or being considered by an
international marketer are an important part of the firm’s macro-environment.
Most companies are not able to influence their political and legal environment

directly but their opportunities for successful business activities largely depend
on its structure and content. A marketer serving international markets or planning
to do so, therefore has to assess carefully the political and legal environments of
the current or potential markets to lead to successful managerial consequences.
Such consequences may be resource investments, adaptations of competitive
strategy, policies and actions, or even divestments.




Fig. 5.1 shows various steps in assessing the political and legal environments.
The first step in assessing the political and legal environments of countrymarkets
is to determine which parts or characteristics of the political or legal
environment are relevant to the product-market(s) of the company.
Having determined the relevant factors of influence from the political and legal
environment, the marketer may analyse their current state in the country-markets
under consideration. To fully assess the potential impact of the relevant factors
on the success of the firm, their potential states of development at the planning
horizon will need to be anticipated.
An evaluation of the impact of the current state and future potential development
of all relevant characteristics of the political and legal environment in the countrymarkets
under consideration will allow the international marketer to decide how
to manage those environments. That is, the company’s management will decide
how to react to the expected development. For example, it may decide to
withdraw from a market, to search for a local business partner to improve its
situation, or to invest heavily in order to profit from a promising development.

5.2 The Political System
The political system is characterised by the form of government, which may take
various forms between the two extremes of democracy and dictatorship. But for
doing business successfully it is more important for the international marketers to
know what political parties and interest groups exist in a specific country-market,
what their goals are and how much influence they can exert on the local
government.


5.2.1 Political System Stability
For the international marketer the most important factor of the political
environment is the stability of the served markets political systems. The extent of political stability can have a major impact on the economic development of a
country or region because it influences the perceived risk of potential investors.

5.2.2 Form of Government
A knowledge of the form of Governments can take, can be useful in appraising
the political climate. On way to classify Governments is to consider them as
either Parliamentary (open) or absolutist (closed). Parliamentary Governments
consult with citizens from time to time for the purpose of learning about opinions
and preferences. Government policies are thus intended to reflect the desire of
the majority segment of the society.
At the other end of the spectrum are absolutist Governments, which include
monarchies and dictatorships. In an absolutist system, the ruling regime dictates
Government policy without considering citizens needs or opinions.
Many countries political systems do not fall neatly into one of these categories.
Some monarchies and dictatorships (e.g. Saudi Arabia and North Korea) have
Parliamentary elections. The former Soviet Union had elections and mandatory
voting but was not classified as Parliamentary because the ruling party never
allowed on alternative on the ballot.
Another way to classify governments is by number of political parties. This
classification results in four types of Governments:
a) two-party system
b) multiparty
c) single party and
d) dominated-one party.

5.2.2.1 Two-Party System
In a two party system, there are typically two strong parties that takes turns
controlling the Government, although other parties are allowed. The United
States and the United Kingdom are prime examples. The two parties generally have different philosophies, resulting in a change in Government policy when one
party succeeds the other. In United States, the Republican party is often viewed
as representing business interests, where as the Democratic party is often
viewed as representing labour interests as well as the poor and disaffected.

5.2.2.2 Multiparty System
In a multiparty system, there are several political parties, none of which is strong
enough to gain control of the Government. Eventhough some parties may be
large, their elected representatives fall short of a majority. A Government must
then be formed through coalitions between the various parties, each of which
wants to protect its own interest. The present Indian government is a good
example of such coalition Government.

5.2.2.3 Single-Party System
In a single-party system, there may be several parties, but one party is so
dominant that there is little opportunity for others to elect representatives to
govern the country. Egypt has operated under single-party rule for more than
three decades.

5.2.2.4 Dominated One-Party System
In such a system, the dominant party does not allow any opposition, resulting in
no alternative for the people. The former Soviet Union, Cuba and Libya are good
examples of dominated one-party systems.

5.2.3 Classification of Governments based on Economic Systems
Economic systems provide another basis for classification of Governments.
These systems serve to explain whether businesses are privately owned or
Government owned, or whether there is a combination of private and
Government ownership. Based on Government control of business activity, the
various economic systems can be classified into three categories:

a) Communism
b) Socialism and
c) Capitalism

5.2.3.1 Communism
Communist theory holds that all resources should be owned and shared by all
the people for the benefit of the society. In practice, it is the Government that
controls all productive resources and industries and as a result the Government
determines jobs, production, price, education and just about anything else. The
emphasis is on human welfare. Because profit making is not the Government’s
main motive, there is a lack of incentive for workers and managers to improve
productivity.
The term centrally planned economies is often used to refer to the former Soviet
Union, Eastern European countries, China, Vietnam and North Korea. These
economies tend to have the following characteristics: a Communist Philosophy,
an active government role in economic planning, a non market economy, a weak
economy, large foreign debt, and rigid and bureaucratic political/economic
systems. For example, South Korea's GDP of $ 289 billion dwarfs North Korea's
GDP of $ 20 billion. North Korea's exports of $ 935 million are no match for South
Korea’s exports of $ 81 billion. It should be noted that North Korea is much better
endowed than South Korea in terms of natural resources.

5.2.3.2 Socialism
In case of Socialism, the degree of Government control is somewhat less than
under Communism. A Socialist Government owns and operates the basic, major
industries but leaves small businesses to private ownership. A Socialist country
such as Poland used to learn towards Communism, as evidenced by its rigid
control over prices and distribution. France’s Socialist system, in comparison, is
much closer to capitalism than it is to Communism.


5.2.3.3 Capitalism
The opposite end of the continuum from Communism is capitalism. The
philosophy of capitalism provides for a free-market system that allows business
competition and freedom of choice for both consumers and companies. It is a
market-oriented system in which individuals, motivated by private gain are
allowed to produce goods or services for public consumption under competitive
conditions. Product price is determined by demand and supply. This system
serves the needs of society by encouraging decentralised decision making, risk
taking and innovation. The results include product variety, product quality,
efficiency, and relatively lower prices. United States and Japan are good
examples of capitalistic countries. Japan when compared to United States, is
relatively less capitalistic. Although practically all Japanese businesses are
privately owned, industries are very closely supervised by state. Japan has
various Government agencies that vigorously advice companies what to produce,
buy, sell and so on. Japan’s aim is to allocate scarce resources in such a way as
to efficiently produce those products that have the best potential for the country
overall.
No nation operates under pure Communism or pure capitalism and most
countries find it necessary to make some compromise between the two
extremes. China allows farmers to sell directly to consumers in local market. The
United State is also not a perfect model of capitalism. It has support prices for
many dairy and farm products and has imposed price control from time to time.
Furthermore, the U.S. economy is greatly affected by the Federal Reserve
Boards control of the money supply and interest rates haizzes faire, the purest
form of capitalism, is rare.
Perhaps the only place that bears a great resemblance to an ideal free-trade
market is Hong Kong. It does not even have a Central Bank, and the legal tender
notes are issued by private commercial banks.


5.3 Political Risks
There are a number of political risks with which marketers must contend.
Hazards based on a host Governments actions include:
a) Confiscation
b) Expropriation
c) Nationalisation
d) Domestication and
e) Creeping Expropriation

5.3.1 Confiscation
Confiscation is the process of a Governments taking ownership of a property
without compensation. An example of confiscation is the Chinese Governments
seizure of American property after the Chinese Communists took power in 1949.

5.3.2 Expropriation
It differs somewhat from confiscation in that there is some compensation. More
often than not, a company whose property is being expropriated agrees to sell its
operation not by choice but rather because of some explicit or implied coercion.
Example of expropriation could be Coca-Cola, when it was asked to wind up its
operations from India in 1970s.

5.3.3 Nationalisation
Nationalisation involves Government ownership, and it is the Government that
operates the business being taken over. Good example for nationalisation is the
nationalisation of private banks in India. Another example is the nationalisation of
private petrolium companies in India.

5.3.4 Domestication
In the case of domestication, foreign companies relinquish control and
ownership, either completely or partially, to the nationals. The result is that
private entities are allowed to operate the confiscated or expropriate property.


5.3.5 Creeping Expropriation
It is defined as a set of actions whose cumulative effect is to deprive investors of
their fundamental rights in the investments. Laws that affect corporate ownership,
control, profit and reinvestment (e.g. Currency inconvertibility or cancellation of
import license) can be easily enacted. Because countries can change the rules in
the middle of the game, companies must adopt adequate safeguards.

5.4. Privatisation
Both multinational and local firms should notice a trend toward privatisation and
its competitive implications among the objectives of privatisation are: promotion
of competition and efficiency, reduction of debt and subsidies, return of flight
capital, and broadening domestic equity ownership.
Countries which are likely to pursue privatisation tend to have the following
characteristics: high budget deficits, high foreign debt, and high dependence on
such international agencies as the World Bank and International Monetary Fund.
In Latin America and Asia, countries pursuing privatisation are those which have
overused state enterprises and those with the private sector growing faster than
average, making them more ready to assume tasks once assigned to state
enterprises.

5.5 Indicators of Political Instability
To assess a potential marketing environment, a company should identify and
evaluate the relevant indicators of political difficulty. Potential sources of political
complication are:
a) Social unrest
b) Attitude of nationals and
c) Policies of the host government


5.5.1 Social Unrest
Social disorder is caused by such underlying conditions as economic hardship,
internal dissension and insurgency, and ideological, religious, social and cultural
differences. Labanon has experienced conflict among the Christians, Muslims
and other religious groups. The Hindu-Muslim conflict in India continues
unabated. A company may not be directly involved in local disputes, but its
business can still be severely disrupted by such conflicts. Recent incident of
Gujarath is a good example of how industries are affected by religious clashes.

5.5.2 Attitude of Nationals
An assessment of political climate is not complete without an investigation of the
attitudes of the citizens and government of the country-market(s). The national’s
attitude toward foreign enterprises and citizens can be quite inhospitable.
Nationals are often concerned with foreigner’s intensions regarding exploitation
and colonialism.

5.5.3 Policies of the Host Government
Unlike citizens inherent hostility, a Governments attitude toward foreigners is
often relatively short-lived. The mood can change either with time or change in
leadership, and it can change for either the better or the worse. Government
policy formulation can affect business operations either internally or externally.
The effect is internal when the policy regulates the firm’s operations within the
home country. The effect is external when the policy regulates the firm’s activities
in another country.
Although an external Government policy is irrelevant to firm’s doing business
only in one country, such a policy can create complex problems for firms doing
business in countries that are in conflict with each other. For example, a dispute
over the boundary between Chile and Argentina prompted Argentina to restrict
traditional exports to Chile, including petrochemicals, pharmaceuticals vehicles
and vehicle replacement parts. The restriction disrupted the marketing plans of General Motors, Puegeot, Renault, all of which supplied Chili with automobile
parts from Argentina plants.

5.6. Management of Political Risk
To manage political risk, an international marketer can pursue a strategy of either
avoidance or insurance. Avoidance means screening out politically uncertain
countries. Insurance, in contrast, is a strategy to shift the risk to other parties.
There are other strategies that international marketers can use to safeguard their
foreign investments. They may want to come to an understanding with a foreign
Government as to their rights and responsibilities. They can increase and
maintain their bargaining power when their technical, operational and managerial
complexity requirements are not within reach of a host country’s abilities. A firm
may try to gain control of the situation through political activities, market power,
exchange of threats, vertical integration, and horizontal mergers and acquisitions.
Furthermore, it may pursue product and/or geographic diversification to gain
flexibility. Also operational flexibility can be achieved through flexible input
sourcing and multinational production.


5.6.1 Measures to Minimise Political Risk
Political risk, though impossible to eliminate, can at the very least be minimised.
Some of the measures to minimise political risk are explained below:


5.6.1.1 Stimulation of the Local Economy
One defensive investment strategy calls for a company to link its business
activities with the host country’s national economic interest.
A local economy can be stimulated in a number of different ways. One strategy
may involve the company’s purchasing local products and raw-materials for its
production and operations. By assisting local firms, it can develop local allies who
can provide valuable political contacts. A modification of this strategy is to use subcontractors. Governments may require products to contain locally
manufactured components because local content improves the economy in two
ways: (1) it stimulates demand for domestic components, and (2) it saves the
necessity of a foreign exchange transaction. Finally, the company should attempt
to assist the host country be being export oriented.

5.6.1.2 Employment of Nationals
Frequently, international marketers make the simple but costly mistake of
assuming that citizens of less developed countries are poor by choice. Firms
should also carefully weigh the impact of automation in a cheap-labour, highemployment
area. For example, automation does not go over well in India, where
job creation, not job elimination, is national policy. Also using intermediate
technology, accompanied by additional labor, is less expensive, and it promotes
goodwill by increasing employment.

5.6.1.3 Sharing Ownership
Instead of keeping complete ownership for itself, a company should try to share
ownership with others, especially with local companies. One method is to convert
from a private company to a public one or from a foreign company to a local one.
One of the most common techniques for shared ownership is to simply form a
joint venture (e.g. Maruti – Suzuki, Toyota – Kirloskar). In some overseas
business ventures, it is not always necessary to have local firms as partners.
(e.g.: when cogntrix of U.S. wanted to set-up a powerplant near Padubidri,
Karnataka it had tied up with China Light and Power Company). A wise strategy
may be for the company to retain the marketing or technical side of the business
while allowing heavy local ownership in the physical assets and capital intensive
portions of the investment.


5.6.1.4 Political Neutrality
For the best long-term interest of the company it is not wise to become involved
in political disputes among local groups or between countries. A company should
clearly but discretely state that it is not in the political business and that its
primary concerns are economic in nature.

5.6.1.5 Behind the Scenes Lobby
Companies as well as special interest groups have varying interest, and each
party will want to make its opinion known. When the U.S. Mushroom Industry
asked for a quota against imports from China, Pizza Hut came to China’s rescue
by claiming that most domestic and other foreign suppliers could not meet its
specifications. Lobbying activities can be undertaken, and it is wise to lobby
quietly behind the scenes in order not to cause unnecessary political clamor.
Companies may not only have to lobby in their own country, but they also may
have to lobby in the host country. Companies may want to do the lobbying
themselves, or they may let their Government do it on their behalf. Their
Government can be requested to apply pressure against foreign Governments.

5.6.1.6 Observation of Political Mood and Reduction of Exposure
Marketers should be sensitive to changes in political mood. A contingency plan
should be in readiness. When the political climate turns hostile, when measures
are necessary to reduce exposure.

5.6.2 Political Insurance
Multinational marketers can employ the strategy of risk shifting. Insurance
coverage can be obtained from a number of sources.


5.6.2.1 Private Insurance
It is wiser for international marketers to shift political risk to a third party through
the purchase of political insurance. Although property expropriation seems to be
the most common reason for obtaining political insurance, the policy should
include coverage for kidnapping, terrorism and creeping expropriation.

5.6.2.2 Government Insurance
Multinational marketers do not have to rely solely on private insurers. There are
non-profit public agencies that can provide essentially the same kind of
coverage. In India Government agencies such as Export Credit Guarantee
Corporation of India, EXIM Bank etc. provide some kind of risk coverage for
international marketers.

5.7 Legal Environment
Regulations can sometimes be ambiguous. Because regulations do not allow
marketers to plead ignorance, they must themselves somehow try to take control
of the situation. They must attempt to conform to the legal requirements for each
of the product categories they are selling in the country-markets.

5.7.1 Legal Systems
There are two major legal systems:
a) Common law system and
b) Statute law system

5.7.1.1 Common Law System
There are some twenty-five common law or British law countries. A common law
system is a legal system that relies heavily on precedents and conventions.
Judge’s decisions are guided not so much by statutes as by previous court
decisions and interpretations of what certain laws are or should be. As a result, these countries laws are tradition-oriented. Countries with such a system include
the United States, Great Britain, Canada, India and other British colonies.

5.7.1.2 Statute Law System
Also known as code or civil law, include most continental European countries and
Japan. Most countries over seventy are guided by a statute law system. As the
name implies, the main rules of the law are embodied in legislative codes. Every
circumstance is clearly spelled out to indicate what is legal and what is not. There
is also a strict and literal interpretation of the law under this system.
There are many products that can not be legally imported into most countries.
Examples include counterfeit money, illicit drugs, pornographic materials, and
espionage requirement. It is usually also illegal to import live animals and fresh
fruit unless accompanied by the required certificates.
There is no international law per se that prescribes acceptable and legal
behaviour of international business enterprises. There are only national laws.
This complexity creates a special problem for those companies that do business
in various countries, where various laws may demand contradictory actions.

5.8 Bribery
Bribery is the use of interstate commerce to offer, pay, promise to pay, or
authorise giving anything of value to influence an act or decision by a foreign
government, politician or political party to assist in obtaining, retaining or directing
business to any person. A bribe may take the form of cash, gifts, jobs and free
trips. Bribing is illegal in most of the countries. Hence international marketers
have to be very careful while operating in various country markets.
In India bribery issues are very common. Recently, Xerox Corp. revealed that
they have used bribery in Indian market for their business purposes. We are all
well aware of Bofors scam.


5.8.1 Reasons for Bribery
Following are the reasons why business persons are willing and even eager to
offer a bribe.
a) To speed up the required work or processing.
b) To secure a contract.
c) To avoid the cancellation of the contract.
d) To prevent the competitors from getting the contract.
Whether bribery is ethical or unethical differs from one culture to another. Bribery
may thus be acceptable in some countries. In many less developed countries the
practice of providing bribes is so common that not to do so may be interpreted as
an insult or a lack of respect. The Japanese, viewing payments to foreign officials
to secure business deals as a normal practice, had a hard time understanding
why there was such an uproar when an advisor to President Regan, Richard
Allen, accepted a watch as a gift from a Japanese magazine and why he had to
resign over this common courtesy.
International marketers need to develop strategies to deal with bribery problems.
Good strategies should include having corporate codes of ethics, sensitisation of
ethics in managers through training and education, and conducting ethics audits.

5.9 Branch Versus Subsidiary
One legal decision that international marketers must make is whether to use
branches or subsidiaries to carry out its plans and to manage its operations in a
foreign country. A branch is the company’s extension or outpost at another
location. Although physically detached, it is not legally separated from its parent.
A subsidiary, in contrast, is both physically and legally separated from its parent.
It is considered a separate legal entity inspite of its ownership by another
corporation.

A subsidiary may be either wholly owned (i.e. 100% owned) or partially owned.
GE receives about $ 1 billion in revenues from its wholly owned and partially
owned subsidiaries in Europe. The usual practice of Pillsbury, Coca-Cola and
IBM is to have wholly owned subsidiaries. As a rule international marketers
prefer subsidiaries to branches.

5.9.1 Reasons why a Subsidiary is a Preferred Structure


5.9.1.1 Recruitment of Management
Titles mean a great deal in virtually all parts of the world. A top administrator of
an overseas operation wants a prestigious title of President, Chief Executive, or
Managing Director rather than being merely a “Branch Manager”.

5.9.1.2 Quick Access to a Market
Acquiring an existing company within the country-market and making it a
subsidiary helps the international marketer to access the market quickly.

5.9.1.3 Flexibility
When subsidiaries are formed, flexibility is created, which may allow the parent
company to take advantage of legal loopholes or of the opportunity to circumvent
certain government requirements. For example, when United States banned the
imports of crude oil from Iran in 1987, American companies are able to
circumvent the ban by using their overseas subsidiaries to buy and sell Iranian
crude.

5.9.1.4 Tax Benefits
When formed in a foreign country a subsidiary is considered a local company,
enabling it to receive tax benefits granted to other national companies. With a
foreign branch, the income is immediately taxable through the parent firm,
regardless of whether there is the remittance for the profit. Given their situation,
there is no opportunity for the parent company to defer any profit or loss.


5.9.1.5 Limited Liability
The limited liability advantage may be one of the most important reasons why a
subsidiary is formed. With this organisational structure, the parent firm’s liability is
limited to its investment in the foreign subsidiary. That is, its maximum loss can
be no greater than the assets invested in its subsidiary.

5.10 Intellectual Property
Individuals and firms have the freedom to own and control the rights to
intellectual property (i.e., inventions and creative works). The four basic forms of
intellectual property are:
a) Patent
b) Trademark
c) Copyright and
d) Trade Secret

5.10.1 Patent
A patent is a government grant of certain rights given to an inventor for a limited
time in exchange for the disclosure of the invention. The most important of these
rights is the one under which the patented invention can be made, used, or sold
only with the authorisation of the patent owner. Hence patent protects an
invention of a scientific or technical nature.

5.10.2 Trademark
A trademark relates to any work, name or symbol which is used in trade to
distinguish a product from other similar goods. Trademark, when accepted by the
Trademark office for registration, it becomes registered trademark. Trademark
laws are used to prevent others from making a product with a confusingly similar
mark.


5.10.3 Copyright
A copyright offers protection against unauthorised copying by others to an author
or artist for his or her literary, musical, dramatic and artistic works. More recently,
computer software works are included within the protection of copyright laws.
Copyright protects the form of expression rather than the subject matter.

5.10.4 Trade Secret
The term trade secret refers to know-how (e.g. manufacturing methods, formulas,
plans etc.) that is kept secret within a particular business. This know-how,
generally unknown in the industry, may offer the firm a competitive advantage.
Infringement occurs when there is commercial use (i.e. copying or imitating)
without owner’s consent, with the intent of confusing or deceiving the public. For
example, Texas Instruments charged that eight Japanese firms made memory
chips based on its patents after the expiration of license agreements, and the
U.S. company was able to force the Japanese firms to pay nearly $ 300 million in
royalties.

5.11 Counterfeiting
Counterfeiting is the practice of unauthorised and illegal copying of a product. A
counterfeit trademark is a spurious trademark which is identical with, or
substantially indistinguishable from a registered trademark. U.S. Trademark Act
prohibits imports of counterfeit goods into the United States. It is estimated that
counterfeit goods account for nearly 5 percent of world sales. Since 95 percent of
computer softwares used in China are illegal copies, software marketers lost
$ 351 million there is 1994.
Counterfeit is a serious business problem. In addition to the direct monetary loss,
companies face indirect loss as well, counterfeit goods injure the reputation of
companies whose brand names are placed on law-quality products. Certain
countries tend to specialise in counterfeiting certain products. The major sources

of counterfeits come from Italy, Taiwan, Hong Kong, South Korea and various
Southeast Asian countries.

5.12 Grey Market (Parallel Distribution)
A grey market exist when a manufacturer ends up with an unintended channel of
distribution that performs activities similar to the planned channel. Through this
extra channel, gre ymarket goods move internationally as well as domestically. In
India we have “Chor Bazaars” (also referred to as Burma Bazaars) in most of the
big cities where grey market goods are sold. Products notably affected by this
method of operations include watches, cameras, automobiles, perfumes and
electronic goods. Grey marketing of trademarked products occurs for several
reasons (1) Grey marketers can easily locate sources of supply because many
trademarked products are available in markets throughout the world (2) Price
differences among these sources of supply are great enough and (3) The legal
and other barriers to moving goods are low.
There is no justification for the existence of the grey market unless price in
atleast two domestic markets differ to the extent that even with extra
transportation costs reasonable profits can be made. Grey market goods can be
purchased, imported and resold by unauthorised distributor at prices lower than
those charged by manufacturer’s authorised importers/distributors. As a result,
identical items can carry two different retail prices. This could spoil the image of
the company’s product in that market. The most effective way to eliminate grey
market is to eliminate the cause price discrepancy between markets. Price
matching can put grey retailers out of business. But, this method requires the
manufacturer to reduce prices in most profitable markets.


Questions
1. What is the necessity of analysing the political and legal environments in
international marketing ?
2. What are the steps in assessing the political and legal environment ?
3. How the governments could be classified based on number of political
parties ?
4. How the governments could be classified based on economic systems ?
5. What are the various types of political risks ? Explain how these hazards
affect an international marketer ?
6. What is meant by privatisation ? What is the importance of privatisation for
an international marketer ?
7. What are the sources of political instability ? Explain how political instability
is dangerous for an international marketer ?
8. What is meant by management of political risk ?
9. What are the various measures available for an international marketer to
reduce political risk ?
10. What is the difference between common law system and statute law
system?
11. What are the reasons for bribery ? Why an international marketer should
have corporate code of ethics ?
12. Why subsidiaries are preferred to branches by international marketers ?
13. How an international marketer could protect the intellectual property ?
14. What is meant by grey market ? What are the dangers of grey market to an
international marketer ?

















UNIT 4

Unit 4 The Economic Environment
Structure
4.1 Assessing the economic environment
4.2 Bases of economic wealth
4.2.1 Population
4.2.2 Size and growth
4.2.3 Immigration
4.2.4 Age distribution
4.2.5 Urbanisation
4.2.6 Capabilities
4.3 Natural Environment
4.3.1 Natural resources
4.3.2 Topography
4.3.3 Climate
4.3.4 Impact on country-market viability
4.3.5 Sustainability
4.4 Technological resources
4.4.1 Infrastructure
4.5 Indicators of economic wealth
4.5.1 Gross National Product (GNP)
4.5.2 Personal income
4.5.3 Exchange rates

Learning objectives:
After studying this unit you will be able to
 Understand the importance of economic environment and the need for its
assessment for an international markets.
 Understand various bases on which a country-markets wealth could be  Understand the importance of natural and technological resources for a
country and its economic development.
 Understand the various indicators used to measure economic wealth of a
country.

4.1 Assessing the Economic Environment
The macro-environment of a company strongly influences the structure and state
of its operating environment which, together with the firms resources and
capabilities determines its potential success. The economy of a country is a
major part of each company’s macro-environment. In addition, besides purely
economic factors such as the economic system or the existing industrial sectors,
a modern society is strongly characterised by its human, technological and
natural resources.
A marketer serving international markets or planning to go international is
confronted with a greater number of such economic environments. The
international marketer first has to determine the various characteristics of the
economic environment which are relevant for company’s business. (Fig. 4.1)



Having determined the relevant factors of influence from the economic
environment, the marketer will need to analyse their current state in the countrymarkets
under consideration. A full evaluation of the impact of those factors on
the potential success of the firm will only be possible, however, if management
also tries to anticipate the potential states of the relevant factors on the planning
horizon. For example, economic factors such as four years of recession, reduced
tariffs and strong yen compared to other leading currencies helped to increase
significantly Japanese purchases of imported food in the mid-1990s.
A comparison of the current states of the economic environments in the countrymarkets
served or being considered, and their potential developments, allow the
marketer to decide how to ‘manage’ those environments. That is, management
will be able to find ways of specifically reacting to the expected developments.

4.2 Bases of Economic Wealth
The economic wealth of a country is based on its human, natural and
technological resources. These resources affect a country's ability to produce
globally competitive goods and services and to offer a viable market for such
products. How resources are used is largely influenced by the economic system
of the country.

4.2.1 Population
The total population of a country, its growth rate, the distribution of age groups
within the population and the degree of urbanisation are of interest to many
international marketers. The size of a potential local product-market is a key
element in its viability. The distribution of age groups in a country is closely
related to the demand for certain products, and the degree of urbanisation
represents concentration of potential customers.


4.2.2 Size and Growth
Many international marketers are interested in rapidly developing markets in
China and India which together represent some 70 percent of Asia’s population
and about 40 percent of the population of the world. The size of the population
and its rate of growth affect a society’s ability to progress economically and
provide for the future.
However, population size without purchasing power is not economically
meaningful. This is a particular problem in developing countries, notably those in
Africa. Even when those countries experience positive economic growth, their
per capita economic growth is negative owing to the rapid rate of population
growth.

4.2.3 Immigration
Population growth could also be due to immigration. For example, between 1980
and 1990 almost 9 million immigrated into the USA. This inflow represented 39
percent of total population growth for that decade. For the international
marketers, this means the creation of new markets or the growth of traditionally
less important niches. Immigrants bring considerable job skills and investment
capital.

4.2.4 Age Distribution
The age composition of a population may also be of interest to international
marketers. As people become older, new markets emerge among older age
groups. For example, retirement villages have become popular in the USA,
Australia and Spain. The need for home-care services for elderly people is
growing and both retirement funds and retirement age insurance are booming.

4.2.5 Urbanisation
This term urbanisation refers to the proportion of a population that lives in cities.
The degree of urbanisation in a society is of interest to international marketers

because it represents concentration of potential customers. Also, urban areas
are centers of industrial productivity and economic growth.
Australia is the world’s most urbanised country, with 86 percent of its 15 million
people living in urban areas. For the international marketer, this is of particular
interest because urban and rural dwellers often have different consumption
patterns. Urban dwellers in different countries are more likely to have similar
consumption pattern than urban and rural consumers within the same country.

For example, urban women in Argentina, Brazil, Peru, Algeria and Moracco have
more similar consumption patterns with regard to cosmetics than do urban and
rural women within any one of those countries. In industrially developing
countries, such as India, international marketers are often unable to reach
consumers outside urban agglomeration.

4.2.6 Capabilities
The capabilities to be found in a country’s population have a significant influence
on its wealth. Because such capabilities are to some extent based on the
available knowledge, the nature of country’s educational system is of interest to
international marketers. This information helps the international marketer to
decide the appropriate marketing mix. The educational system also affects the
level of local technological know-how an international marketer can take
advantage of for example, manufacturers of highly sophisticated software for
industrial robots and control systems, such as Japan’s Oki or Germany’s
Siemens, choose the locations of their research and development units
according to the availability of advanced teaching institutions and research
laboratories.

4.3 Natural Environment
The natural environment of a country-market represents an important source of
potential wealth for its population. Natural resources, such as minerals, water
and water power, oil, coal or gas and the country’s climate and topography are a major determinant of the economic structures and interdependencies of a local
economy.

4.3.1 Natural Resources
The oil wells of the North Sea have made a major contribution to the economic
success of the UK and Norway. They might even be a major reason why the UK
can afford to follow a rather independent policy inside the EU and why Norway
was able to refuse European Union (EU) membership without suffering any
significant economic disadvantages.

4.3.2 Topography
Topography affects a country’s economic wealth in fundamental and enduring
ways. Topography as a product is illustrated by the examples of the beautiful
Maldive Islands of the Southwestern coast of India which atleast $ 30 million
worth of tourist income annually and the coast of Thailand which together with
the cultural treasures of Bangkok makes tourism the biggest foreign-currency
earner of the country.
Topography may also be a major constraint on a country’s economy as well as
for international marketing. It has a major impact on the cost and ease of
distributing an international marketers products. For example Zimbabwe, Nepal
or Switzerland, which does not have any coastline, must rely on the ports of
neighbouring countries to export goods by sea.


4.3.3 Climate
Climate is a part of country-markets natural environment that is closely linked to
the country’s economic development and functioning. The importance of climate
as a potential source of economic wealth is illustrated by the ability of Central
American countries to produce tropical fruits for export to countries where they
cannot be grown, because of different climatic conditions. For the international marketer, climate has a great deal to do with market
viability. Consumers living near the equator prefer different food products to
those living in milder climates. Heat and humidity result in lower levels of
production, and therefore income, particularly in countries with limited energy for
climate control and poorly developed infrastructure systems.

4.3.4 Impact on Country-Market Viability
How strong the influence of the natural environment, that is, present or absent
natural resources, topography and climate, can be on the economic development
of countries and their viability for international marketers is illustrated by the
countries in the Middle East. The rich oil producing countries of the Middle East
include Kuwait, Saudi Arabia and the United Arab Emirates. They have per
capita income of more than $ 19,000, 7,000 and 21,000 respectively. Their
normally stable governments are encouraging industrialisation by importing hightech
industrial goods, turnkey plants for food production, packaging, plastic and
metal treatment and construction material, as well as maintenance contracts and
industrial services. Those Middle Eastern countries constitute a generally
promising market for industrial goods.

4.3.5 Sustainability
In using resources from the natural environment of a country-market for their
business purposes, international marketers need to take care of the sustainability
of their activities. Sustainable production and marketing costs, but not
necessarily.
In many cases it provides increased customer satisfaction and secures
increasing return on investment.

4.4 Technological Resources
Managers of internationally operating companies need to be aware of differences
between technological environment of their home country and those of their various country markets. A lack of technological resources may make it difficult to
sell the marketer’s product and to satisfy customers. Differences in technological
development may also offer opportunities to market a firm’s product.

4.4.1 Infrastructure
A country’s infrastructure is the transportation, energy, communication and
commercial systems available to its population and industries. For international
marketing to be possible, a certain infrastructure has to be in place or needs to
be installed in a country-market. The level of development of a country’s
infrastructure affects the extent to which its natural resources can be used. The
level of development of a country’s infrastructure also determines how well its
human resources can be developed and used. Infrastructure also determines
whether international marketers can reach their potential markets. A large target
market with adequate buying power is of little value if goods and services cannot
be sold to customers because of a lack of transportation infrastructure, energy
shortage, faulty communications or lack of financial institutions.

4.5 Indicators of Economic Wealth
When assessing the attractiveness of country-markets, international marketers
require certain evaluation criteria to evaluate and compare economic
environments of potential and served markets.

4.5.1 Gross National Product (GNP)
GNP is a measure of the value of all the goods and services product by a nation.
GNP range from a mere $ 140 million for the Maldives to $ 6.4 trillion for the
United States. Although a higher GNP is generally regarded as an indicator of a
better market, GNP alone does not accurately reflect market potential. India’s
GNP of $ 1.7 trillion is much larger than Austria’s $ 134 billion’, yet the larger
number does not necessarily mean that India is a better market. A better
indicator can likely be derived by considering GNP together with population,


i.e. GNP/Capita, which measure market intensity. A country with a higher
GNP/Capita generally has a more advanced economy than a country with a
lower figure. In the case of Austria and India, Austria has a $ 17,000 GNP/Capita
and thus is much more attractive in terms of wealth than India, whose
GNP/Capita is only $ 1,300.

4.5.2 Personal Income
Personal income of its citizens is another indicator of a country’s wealth. Income
can reflect the degree of attractiveness of a market because consumption
generally rises as income increases. How the income is spent will provide
another clue to market potential. If a large portion of a persons income must go
towards purchases of essentials, market opportunities for luxuries may be
limited.

4.5.3 Exchange Rates
The exchange rate of a currency is its price in terms of another currency. This will
also help as a criterion for assessing the economic condition of a country.


Questions
1. What are the steps in analysing the economic environment ?
2. What are the uses of population of a country, its size and growth to an
international marketer ?
3. What is meant by urbanisation ? How it helps in assessing the economic
environment of a country ?
4. How does natural environment assessment help marketers in analysing
economic environment of a country ?
5. What are the various indicators of economic wealth of a country ?


UNIT 3


Unit 3 Planning to Determine Export Opportunities
Structure
3.1 Introduction
3.2 Export Constraints
3.3 Identifying export-oriented firms
3.4 Determinants of Export Performance
3.5 Research and Development (R&D) and Infrastructure

Learning objectives:
After studying this unit you will be able to
 Understand the importance of planning for international marketers so that
they can enter most potential country market.
 Understand the role of export constraints in planning determination of export
opportunities.
 Identify export-oriented firms.
 Understand the determinants used to measure export performance.
 Understand the necessity of studying R&D and infrastructure of various
country markets during planning to locate potential export markets.

3.1 Introduction
Because of limitations of trade theories, a trade theory should be considered as a
broad framework that merely describes trade in an ideal situation. For trade
theories to be useful to those who investigate export opportunities, the framework
must be modified to take into account more specific performance variables.
It is inappropriate for any policy makers to leave their country’s economic growth
to chance or to believe that luck is the only thing that matters. The fact that
several countries have performed well over the years means that they must have done something right. As an example, in 1965, Thailand was poorer than Ghana.
Subsequently, while Ghana discouraged foreign investment, Thailand pursued
economic policies that welcomed Japanese factories. Consequently, in 1993
more than half of Thailands exports were manufactured products and the
countrys gross domestic product per capita was 670 percent of Ghana’s.

Table 3.1 shows some international comparisons concerning the leading nations
share of world exports as percentage of G.D.P.



3.2 Export Constraints
A good starting point for the determination of export opportunities is the
identification of export barriers. Some export barriers are self-made in the sense
that some companies but not the others, create and impose those barriers upon
themselves. On the other hand, many export barriers are largely uncontrollable.
Such barriers include national export policy, tax systems, market distance and importing nations trade barriers.


3.3 Identifying export-oriented firms
It is useful to identify the characteristics that differentiate export-oriented firms
from those that are not so inclined. According to one study, systematic and nonsystematic
export firms differ in terms of organisational, export marketing and
managerial characteristics. In another study, sporadic exporters and regular
exporters are similar in terms of size, age and size of export orders. Differences
exist in the areas of initial market-entry influences, export profit margins, export
distribution channels and information use. In addition to deriving a much higher
proportion of their revenues in international markets, regular exporters have
greater management involvement in export marketing. Also regular exporters are
less likely than sporadic exporters to use domestic intermediaries and they are
more likely to exercise greater control in overseas marketing.

3.4 Determinants of Export Performance
A systematic plan provides a pragmatic approach for assessing the relative
opportunities for multiple products. Such a plan is especially helpful for
governments and companies with many product lines (e.g. Export trading
companies and big multinational firms). A systematic plan is also useful for
smaller companies in investigating the feasibility of exporting their products.
One approach involves looking at sales growth, whether absolute or relative, as
an indicator of trade opportunity. The value of their approach lies in its simplicity.
A problem, however, occurs when a base-year sales figure is small, since any
increase is almost certain to be magnified in terms of importance. The result is an
overstated opportunity for those products that are being considered with a small
base-year figure. Thus, a heavy reliance on a net change in sales in a period of a
single year can be misleading.
Shift-share analysis can remedy some of the problems associated with sales
growth method. A shift-share analysis emphasizes the changes in market share
over time for each member of the importing countries. The net shift represents the difference between each members actual growth and its expected growth
(i.e. whether or not a members growth rate had been equal to the entire groups
average growth)
Researchers have used different variables as measures of export performance.
Cavusgil and Zou, for example, have identified the following performance
measures: export sales level, export sales growth, export profits, ratio of export
sales to total sales ratio of export profits to total profits, increase of importance of
export to total business, overcoming barriers to export, propensity to export,
acceptance of product by export distributors, export involvement, exporter
internationalisation, and attitudes towards export.
Dominguez and Sequeira, likewise have identified the following measures of
performance: proportion of export to sales, sectorial and firm export growth and
profitability, continued or discontinued exporting, decision to commence
exporting, export volume and international involvement. The predictors of export
performance include: export strategy (e.g. Low competitive price, product quality,
product adaptation), export commitment and motivation, firm competencies and
organisational characteristics.
Although each of these approaches is useful in identifying export opportunities,
some caveats are in order. When possible, these approaches should be used in
conjunction with one another, since the convergent results will serve to increase
the confidence in the prediction of potential trade performance.

3.5 Research and Development (R&D) and Infrastructure
Policymakers should attempt to understand factors that affect trade performance.
One study found that export knowledge, commitment, and the technological
intensity of the exported product contribute to export success but that external
support programs are viewed as a negative influence. A study of 200 U.S.
manufacturing industries found that high labour productivity and skill positively effects trade performance and that high labour content adversly affects such
performance.
One study examined the relationship between levels of Research and
Development (R&D) investment and productivity growth rates and living
standards in some fifty-three countries from 1960 to 1985. According to the
analysis, the rate of return on such intangible investment actually exceeds the
return on expenditures for plant and equipment by a factor of as much as seven
to one. To put it the other way, a rupee of private R&D investment is seven times
more powerful in facilitating productivity growth and higher per capita income
than a rupee of conventional capital investment.
Matsushita Electric Industrial Co. decided against locating a $ 400 million
consumer electronics complex in Thailand because of the countrys poorly
developed infrastructure.
There is a positive relationship between public works expenditures and
productivity. Fig. 3.1 shows that countries sustaining a high level of public
investment relative to output experience higher productivity growth than countries
that do not invest in infrastructure. Japan has invested about 5.1 percent of
output in public facilities and was awarded with a productivity growth of 3.3
percent. The United States, at the other end of the spectrum, has had a low
public investment of 0.3 percent per year, which has been accompanied by a low
productivity growth of 0.6 percent per annum.




Thus, a root cause of the decline in the competitiveness of the United States in
the international economy may be found in the low rate at which it has chosen to
add to its stock of highways, port facilities, airports and other facilities which aid
in the production and distribution of goods and services.
Questions
1. What is the necessity of planning for international marketers ?
2. How does export oriented firms differ from non-exporting firms ?
3. What are the various measures to find out export performances ?
4. How does R&D and infrastructure affects the trade performance of a
country ?


Friday, 2 December 2011

UNIT 2


Unit 2 International Marketing Strategy
Structure
2.1 Perspectives of International Business
2.1.1 Ethnocentric Perspective
2.1.2 Polycentric Perspective
2.1.3 Regional Perspective
2.1.4 Geocentric Perspective
2.2 Major Decisions
2.2.1 Local Versus International Business
2.2.2 Market attractiveness
2.2.3 Resource allocation
2.2.4 Building and sustaining competitive advantage
2.3 Business Environments
2.3.1 Macro-environment
2.3.2 Operating environment
2.3.3 Internal environment
2.4 Approaches to International Marketing
2.4.1 Multinational marketing
2.4.2 Global marketing
2.4.2.1 Experience curve effects
2.5 Standardisation versus Adaptation
2.5.1 Factors influencing standardisation potential of marketing programmes
2.5.1.1 Macro Environment
2.5.1.2 The Market
2.5.1.3 The Product
2.5.1.4 Internal Environment

2.6 The International Marketing Decision Process
2.6.1 Potential Market Assessment
2.6.2 Basic strategic decisions


Learning objectives:
After studying this unit you will be able to
 Understand different perspectives of international business.
 Understand major decisions to be taken before a film decides to go
international.
 Understand International marketing environment and importance of various
elements in the environment.
 Differentiate and understand different approaches to international marketing –
Multinational and Global and the arguments favouring these approaches.
 Understand standardisation of marketing programmes and its benefits; how
adaptation is inevitable under certain circumstances.
 Understand various factors influencing standardisation of international
marketing programmes.
 Understand international marketing decision process.


2.1 Perspective of International Business
The critical element for success in international business is not so much the size
of the company but an approach or business perspective of top management that
seeks to do business where it can be done with the greatest success. Business
Managers can approach business from various perspectives. One classification
of potential views is EPRG: ethnocentric, polycentric, regional, geocentric.


2.1.1 Ethnocentric Perspective
An ethnocentric manager sees the domestic market as most important, reacting
defensively to international markets, if at all. For example US car manufacturers
in the 1960s held this view when they argued that imports such as VW 'beetle',

and later Toyota's cars, wouldn't sell well, since only Detroit knew what US
customers wanted. The price of maintaining such a perspective in terms of sales
and profit was very high, as Japanese cars have gained nearly 30 percent of the
US market.


2.1.2 Polycentric perspective
A polycentric manager sees international market as a series of domestic (or
national) markets. The US based Ford Motor Company or the Netherlands based
Philips NV. For example, evolved to this orientation as evidenced by their
multiple production plants and marketing organisations throughout the world.


2.1.3 Regional Perspective
A manager with a regional orientation focuses on a clearly limited 'product
market', which is defined by specific benefits delivered to a group of customers
by the use of certain technologies. In serving the product market, the firm seeks
opportunities for coordinating and possibly standardising procurement,
production and marketing, but usually within a geographic or perhaps culturally
homogeneous region.


2.1.4 Geocentric Perspective
A manager with a geocentric view is continually seeking out opportunities for
procurement, production and marketing coordination and standardisation in a
world wide product-market, independent of national borders.

2.2 Major Decisions
Entrepreneurs and top managers who have overcome an ethnocentric
perspective of international business have to answer four fundamental questions:
 Should our firm go international or not ?
 Which markets should be served and in what sequence ?
 How much of our resources should we spend for what purposes ?
 How should we build and sustain our film's competitive advantages ?


The answers to these questions will depend on external and internal stimuli
facing a company's decision makers, their personal motives, and the major
company objectives agreed upon by the dominant management group in the firm
(fig. 2.1)





2.2.1 Local Versus International Business:
External and internal stimuli serve as triggers for decision-making processes.
External stimuli may include unsolicited orders from foreign customers, perceived
market opportunities, competitive pressures in the home market or government
programs to encourage exports.
Internal stimuli may include unique products, strong marketing skills or excess
capacities in the areas of production, finance, marketing or management. Going
international exposes managers to unknown environments, such as different
buyer behaviour, which increases their perceived risk. Management may have
heard of important differences, such as different symbolic meaning of colour. (For
example, white is a symbol of death in Japan. Therefore products packaged in white boxes do not sell as well as they in the USA, where white symbolises purity.)

2.2.2 Market Attractiveness
When management has decided to internationalise the business of their firm, the
question of which markets should be served arises. Because this decision will
bind the company's resources for a substantial amount of time, the risk involved
is high. To take a rational decision, management needs to undertake a market
assessment procedure that allows them to evaluate carefully the attractiveness
of different product and geographic (country) markets.

2.2.3. Resource Allocation
The resources of a company, even the world's largest are not unlimited. Hence
management has to answer another major question. How much of our resources
should we spend for what purpose ?
In answering this question, management has to find a balance between choosing
too many markets, which inevitably leads to a lack of sufficient resources in some
or each of the served markets, and deciding upon too small a number of markets,
keeping the firm from efficiently exploiting its opportunities. Depending upon a
number of factors such as the relative size of its home market, the competitive
situation these compared to other markets, the degree of globalisation of
competitors, growth objectives set by corporate policy, or the kind and
importance of competitive advantages, management will choose the degree of
globalisation for its company.

2.2.4 Building and Sustaining Competitive Advantage
The company choosing new markets in internationalising the business must be
able to offer a benefit to potential customers that is more attractive to them than
what those customers have experienced before. Competitive advantages are not available to a company forever. Management therefore has to answer another
important question: How to build and sustain the firm's competitive advantage ?
To answer that question, management will need to find out the success factors,
that is, the specific resources and capabilities a firm needs to be successful in a
market, in the market it plans to serve, and to compare their company's strength
and weaknesses to those of its major competitors concerning those success
factors.
In the discussion of the four major decisions to be taken in international business,
it is clear that the environment relevant to the decisions has to be defined, and
information has to be researched, analysed and structured.

2.3 Business Environments
When taking and implementing decisions concerning the internationalisation of
their business, a firm's management has to be aware of the considerably higher
complexity of the environment to be considered than for a strictly local firm.




Fig 2.2 shows a general nested model of a firm's environments. It demonstrates
that the decision makers of a company live in their firm's internal environment
which is embedded in the operative environment of the company which, in turn,
is surrounded by the macro environment.

2.3.1 Macro-Environment
A company's macro-environment is generally defined as the political, legal,
economic, ecological, social, cultural and technological dimensions of the
universe in which the operating environment of the firm is embedded. The macroenvironment
of a company strongly influences the structure and state of its
operating environment.

2.3.2 Operating Environment
The operating environment of a firm contains individuals or people representing
organisations and institutions, who have aspirations concerning the behaviour
and performance of the company in doing its business. Those are customers,
competitors, supplies, intermediaries, potential and existing workforce, owners,
shareholders, banks, media, trade unions, and other so called stake -holders of
the company.
The operating and macro-environment of a company are not separated from
each other by objectives and clear-cut boundaries.

2.3.3 Internal Environment
Company decision makers play their role as part of an organisation which has an
implicit, if not an explicitly stated, corporate policy that lays out the ground rules
of how it wants to function. It follows a competitive strategy a basic indication of
where to do business and how, based on management systems such as the
organisation structure or the controlling system as well as on resources and
capabilities-personnel, capital, know-how, which result in specific actions. These
elements make up the internal environment of the firm.


2.4 Approaches to International Marketing
There are two different ways in which marketing managers can approach
international business: a multinational and global approach.

2.4.1 Multinational Marketing
Multinational marketing concentrates largely on country-markets, developing a
distinct marketing strategy for each market.

2.4.2 Global Marketing
Global marketing is one where a company's managers concentrate on productmarkets,
that is, group of customers seeking shared benefits or to be served with
the same technology, emphasizing their similarities regardless of the geographic
areas in which they are located, rather than focus on country-markets, i.e.,
differences due to the physical location of customer groups. However, a global
approach to international marketing does not ignore differences among local
market segments. These differences are taken into account when implementing
marketing programme. For example, most Indian grocery stores are quite small,
requiring wholesale distribution and more frequent delivery of smaller quantities
than French hypermarkets which can be served directly from one central
production unit.


2.4.2.1. Experience Curve Effects: The most powerful argument in favour of a
global product-market orientation is the opportunity to benefit from experience
curve effects.


This concept has two dimensions: increased efficiency due to size effects and
increased effectiveness due to experience (accumulated know-how) effects. The
size effects result from decreasing fixed cost per unit sold.
For an internationally operating firm, an important source of economies of scale
is the marketing mix. When a company can use the same marketing mix in
several different countries, with only a few adjustments such as translation of
advertising copy, the average cost of marketing per unit declines.
Increased efficiency is more easily attained by larger than by smaller companies
if costs for increased coordination needs and substantially rising transportation
costs are kept under close control, and by serving a global rather than local
product-market.
Increased effectiveness occurs when a company learns by doing. The second
time a worker or manager does a job, he or she usually does it better than the


first time, thereby becoming more effective. Similarly, when a company enters its
second foreign market using what it learned when it entered its first such market,
it should be more effective.

2.5 Standardisation Versus Adaption
The degree of similarity among a company's international product-markets
largely determines the extent to which its marketing activities can be the same or
similar across country-markets i.e. to what extent they can be standardised.
Standardisation may occur either in marketing programmes or in marketing
processes. Marketing programmes contain the marketing strategies, policies and
activities of a company. Marketing processes are the procedure followed by a
firm in making marketing decisions, implementing them and controlling their
outcomes. The greatest experience curve effects occur when programmes and
processes are standardised.

2.5.1 Factors influencing Standardisation Potential of Marketing Programs
When evaluating foreign markets and deciding whether to standardise the
marketing programme for those market, several factors must be taken into
consideration. These factors are:
a) the macro-environment
b) the market
c) the product and
d) the internal environment



2.5.1.1 a) Macro-Environment: The important macro-environmental forces that
affect a firm in standardisation of marketing programmes are political, legal,
cultural and geographic.
When a product is politically sensitive in a particular country-market an adapted
marketing campaign is called for.


If legal regulations concerning taxes, patent, and trademark protection, product
liability, norms of hygiene, licensing and registration prerequisites etc. in the
country-markets served by a company are similar, marketing programme
standardisation is facilitated.
One reason for using an adapted strategy may be that technical specifications
are different in the target markets. Technical norms such as measurement units
(centimetre versus inch, for example) or industrial conventions can represent
insurmountable obstacles to standardisation. For example, US producers of
manufacturing equipment are at a disadvantage against local competitors in
Europe because they have to adapt every machine and tool for those markets a costly
process. Similarly, cars may have to be adapted for different markets, depending on
the safety and pollution-control standards of the country in which they are sold.
Social norms involve a wide variety of patterns of living, including behaviour
norms such as those regarding diet or styles of dresses. They play a major role
in determining what can and cannot be done in a given market.
In a market with unique cultural characteristics, a standardised strategy from
another culture is likely to be unsuccessful.
A society's attitudes towards change or the rate of change also affect the viable
degree of standardisation in particular markets. Rather conservative consumers
in a country market may not accept a marketing strategy that originates in a more
liberal society.
Variations in geography, such as climate may make it necessary to adapt either a
product or its distribution or promotion for different country-markets. For example,
Toyota has stripped out unnecessary items from the special version of its 'Tercel'
model destined for markets in southeast Asia, such as heaters because the
warm climate renders then unnecessary.

2.5.1.2 b) The Market: If a standardised marketing programme is to succeed, the
country-markets of interest must have certain characteristics in common, at least
to some degree. For example, customers must seek similar benefits or use the product or service in a similar way, the available distribution infrastructure must
be similar, or customers must be comparable in their reaction to prices.
An important factor influencing the standardisation of marketing programmes is
the stage of product life cycle a market is in. For a standardised marketing
programme to be successful, the product should be in the same stage of lifecycle
in all the country-markets involved. When the stages of life-cycle are
different, variations in the degree and type of competition, the rate of growth in
sales, and the most effective form of promotion distribution and pricing require
adapted marketing programmes.
The degree to which a market is urbanised is another important factor in deciding
whether to standardise a marketing programme. A programme that was
developed for a highly urbanised market like Hong Kong or Singapore might not
be able to reach enough potential customers in countries like India, where more
than half the population lives in rural areas or very small towns.
The structure of distribution system available in most international consumer
product markets is far from being similar. In some countries consumer products
retailing is concentrated whereas in some other countries wholesalers and
retailers play a major role in distribution. Hence standardisation of distribution for
consumer product is very difficult.
The distribution of industrial products and services in most cases is more direct
and relies on personal selling. Therefore, the distribution system can be more
easily standardised.
When the customers in a market are mainly interested in the technology of a
product, a higher degree of marketing programme standardisation is possible.
Whether the life cycle of a firm's product is driven by technological or cultural
factors is an additional important consideration. A firm that is faced with two
country-markets in which its product is in the growth stage of the life cycle might
assume that a standardised marketing programme could be used in both
markets. But if one market is driven by technology and the other by cultural
factors, a standardised campaign is unlikely to be successful.
Price also plays an important role in standardisation potential of marketing
programmes products or services that are purchased largely on the basis of low price, which means that potential buyers are willing to give up satisfaction of
individual expectations in exchange for a good with lower price, can be marketed
through relatively standardised marketing programmes.

2.5.1.3 c) The Product: product is another important factor influencing the
decision regarding standardisation of marketing programmes. Industrial products
are said to be marketed relatively easier with standardised marketing programmes
than consumer goods. Which, in turn, allow more standardised marketing
programmes than services. However, in business practices many consumer
products have maintained standardised marketing programmes. (e.g., McDonald's)
Many food products, in particular those with high cultural specificity must be
marketed through adopted programmes in other countries where the cultural
background is different.

2.5.1.4 d) Internal Environment: The amount of international experience a firm's
management has accumulated will influence their attitudes. An experienced firm is
likely to seek a close match between its current offerings and the demand of new
country-markets, so that only minimal adaptation of the marketing mix is required.
Internationally more experienced managers will have a higher degree of flexibility and
acceptance of change that may support more adaptation of marketing programmes.
The successful management of differentiated products, multiple communication
campaigns, different distribution systems and various pricing scheme requires a
flexible corporate view and culture, one which accepts quick change and multiple
perspectives on who the customer is, and what benefits is being sought.
Finally, if research and development costs of a product are low, an individualised
marketing programme may be appropriate. But if these costs are high, such as
for pharmaceutical products largely standardised marketing programme are essential.

2.6 The International Marketing Decision Process
A Strategic approach to global business is very closely related to marketing
analysis and decision. For international marketing to be effective and efficient,
analysis and decisions need to follow a specific sequence which is called
international marketing decision process (Fig. 2.5)



2.6.1 Potential Market Assessment
This is the first step after corporate policy has been set up and the productmarkets
to be served are identified. Assessment of potential country-markets
include assessment of their economic, cultural, political and legal environment as
well as the specific operating environments of the local product-markets have to
be carefully analysed to determine the most attractive markets.


2.6.2 Basic Strategic decisions
The comparison with major competitors will help the firm identify whether it can
excel in any of the success factors. Management will then assess existing
strategic alternatives based on those distinctive competencies which can be
transformed into customer benefits based on firm's competitive advantages.
Management will develop an international portfolio strategy, that is, it will choose
the product and country-markets to serve as well as select the technologies
necessary to satisfy the existing and potential aspirations of customers and
stakeholders in those markets. Management will also decide the most promising
competitive strategy choosing the alternatives ranging from frontal attack on any
competitor to co-operative agreements.
In addition, the company must decide as to how it should position itself in every
country market selected. It should also differentiate low-risk markets from high
risk markets for proper resource allocation decisions.
Finally, decisions are made regarding marketing mix (product, distribution, sales
management, pricing and promotions). Country market managers, however are
given enough flexibility in setting prices, establishing product characteristics and
service levels and managing market communication to adopt to local market
conditions. All the analysis made and the decisions taken to reach that point are
summarised in an international marketing plan. This plan also indicates what and
how much resources are to be spent, and how the planned activities are to be
financed.


Questions
1. What are the various perspectives of international business ?
2. What are the major decisions to be taken when a firm decides to go
international ?
3. What are the various business environments of international marketing ? Why
are these environments important for a firm ?
4. How does multinational approach to international marketing differ from global
approach ?
5. What is meant by experience curve effects ? What is the importance of this
experience curve effect in international marketing decisions ?
6. What is meant by standardisation of marketing programmes ? How does
standardisation of marketing programmes help a firm ?
7. Is it possible to standardise all marketing programmes ? What are the factors
that affect the standardisation potential of marketing programmes ?
8. What are the various steps in international marketing decision process ?
9. What is the role of marketing mix in international marketing decision process ?

UNIT 1


Unit 1 Introduction
Structure
1.1 International Marketing
1.2 Driving Forces of International Business
1.2.1 Comparative Costs
1.2.2 International Product Life Cycle
1.3 Stimuli for International Business
1.3.1 Limited Growth in Domestic Markets
1.3.2 Technological Change
1.3.3 Global Competition
1.3.4 Access to Resources
1.4 Definition of International Marketing
1.5 Domestic Marketing Versus International Marketing
1.6 Benefits of International Marketing
1.6.1 Survival
1.6.2 Growth of Overseas Market
1.6.3 Sales and Profits
1.6.4 Diversification
1.6.5 Inflation and Price Moderation
1.6.6 Employment
1.6.7 Standard of Living
Learning objectives:
After studying this unit you will be able to
 Understand what is international business
 Understand what forces companies to do international business
 Understand various theories explaining international business evolution
 Differentiate between domestic and international marketing
 Understand the benefits of international marketing.


1.1 International Marketing
International marketing is the application of marketing orientation and marketing
techniques to international business.
1.2 Driving Forces of International Business
Economists have provided some theoretical explanations for the described
evolution of international business. The most well-known are the theory of
comparative costs and the related concept of international product life cycles.


1.2.1 Comparative Costs
In simple terms theory of comparative costs suggests that each country, owing to
its available resources and the efficiency of their use, has or can develop specific
advantages compared with other countries. If each country specialises in
products and services it can produce or perform comparatively better than others
and exchanges them for products and services in which other countries have
advantages, all exchange partners will profit. The standard of living will increase
in all economics.
Economic reality shows, however that resources as well as their efficient use
underlie a dynamic process which leads to continual changes in comparative
advantages and, as a consequence, continuing changes in production sites. For
example, because of technical expertise required, the production of TV sets first
started in the USA and Europe. From there most of the production sites went to
Southeast Asia, where mass production costs for labour - intensive production
were much lower. But production was not lost for western countries for ever. On
the one hand, economic success led to increasing labour costs in countries such
as Japan, Taiwan, Hong Kong or Singapore. On the other, the fierce cost
competition from those countries led to heavy restructuring of industrial
organisation and processes in Europe and in the USA. As a result, some of the
production came back to the highly industrialised countries, because there existed a sufficient number of highly trained workers who could ensure the
expected level of high-quality output.

1.2.2 International Product Life Cycle
International product life cycle theory claims to explain the process of
dissemination of innovations across national borders. Following this theory, an
economically developed country which possesses the ability to provide a new
way of satisfying customer needs, that is, a product or service innovation, will try
to profit from the resulting advantages by selling the new product or service to
other countries. Soon other economically developed countries will follow. They
will create their own production capacities for the new product or service. Next,
the less developed countries will follow when they have gained the needed
production know-how in one way or another. Finally, more and more of the
economically advanced countries which, in the meantime, have lost their
comparative advantage to the less developed countries will start importing the
product or service from their former customers.
This process can be visualised by three overlapping life cycle curves



They show development of innovation in the three types of countries, the

innovating country, the highly developed early followers and the less developed
late followers. Each curve is characterised by net exports when it is situated
above the time axis. Below the time axis more products are imported than
exported.
Phase 1 starts with the export of the local innovation to other markets, for
example, when a French company which has successfully introduced an
electronic telephone terminal starts exporting it to other European markets,
Phase 2 is characterised by relative stability. Demand in the markets served so
far continues to grow, but is increasingly satisfied by local production. In phase 3
the exports of innovator start decreasing. Demand for the new good in the less
economically developed countries is rising, but is increasingly satisfied by the
production capacities installed by the early followers. Finally in phase 4, the
picture changes completely. The product or service is no longer an innovation. It
has become common to an intent where companies in economically less
developed countries are able to provide a perhaps simplified, version at very low
cost.
The duration of each of the phases may vary. High tariffs or transportation costs,
high production volumes needed to be cost efficient, high capital investment
intensity, or patents can extend the cycles. Culture-dependent innovations may
not even experience the process described at all because no demand for the
product or service can be created in other markets.

1.3 Stimuli for International Business
There are four major driving forces which have made companies to go
international:

1.3.1 Limited Growth in Domestic Markets
In order to remain financially healthy, most companies must grow. However,
many product-markets in the industrialised nations are saturated. For many small to medium sized forms, growth through additions to the existing product line is
difficult. Diversification into new areas of business as a growth alternative is
always risky. The most viable way to grow may be to enter less saturated foreign
markets.
According to a study by management consultants McKinsey in 1991, US firms
depended on home sales for 70 percent of turnover, but sales growth from the
domestic market for the period 1991 to 1996 was expected to reach only 5
percent. In contrast, sales to foreign markets were expected to grow by 10 to 20
percent during the same period. US companies have been successful in
diversifying into emerging markets in Asia and Latin America. In 1990, such
markets accounted for 35 percent of US merchandise exports, compared with 42
percent going to Europe and Japan. But by 1995, the emerging - market share
was up 42 percent versus 34 percent for Europe and Japan.


1.3.2 Technological Change
Important drivers for international business are technological improvement and
change in the areas of transportation and communication. The number of direct
airline connections inside Europe, to Asia and from many different points in the
USA to overseas destinations has dramatically increased.
Telecommunications have revolutionised the economic and political world, and
changed the way business is conducted. A seemingly simple invention like the
fax machine has permitted real-time global communication without the difficulties
involved in taking time zone differences into account.
In a more advanced way, computers are increasingly hooked to each other
online, around the world. An internal memo with attachments can therefore be
shared by e-mail with all managers at the same time, for example such
connections have improved the international logistics and shipment of goods.
Satellite TV has also changed the way business is conducted, for example
advertising. Commercials broadcast in USA may be seen in India, increasing the need to understand cultural differences and the effects of communication standardisation.

1.3.3 Global Competition
For many firms, the primary driving force to start international business is
competition. Both local and national firms are confronted with foreign competitors
in their home markets. For example, more than 70 percent of all goods produced
in USA have faced direct competition from non-domestic sources.
Competition can be local/national, regional or global competition is purely local or
national when the companies serving a country market are all based in that
market. Competition is regional when competitors serving a country-market come
from different neighbouring countries. Global competition exists when the
companies competing for customers in a country-market come from all over the
world. This is the case for an increasing number of products, such as consumer
electronics, food products, cars, machinery, pharmaceuticals, industrial
engineering, bank or insurance services, especially in the highly developed
industrial countries.

1.3.4 Access to Resources
Companies that operate internationally treat the world as a source of supply as
well as demand. They obtain the resources they need wherever they can buy
them at the best price. Co-operation with firms in other nations can reduce costs
and increase management knowledge, further enhancing the competitiveness of
global firms relative to other.
In many industries the rate of innovation is not very dramatic. As a consequence,
domestic as well as global competition for market share often boils down to a
race to lower prices. The firm with non-domestic business has an advantage. It
has access to cheaper source of raw-material, capital and labour.


1.4 Definition of International Marketing
According to American Marketing Association, international marketing is the
multinational process of planning and executing the conception, pricing,
promotion and distribution of ideas, goods and services to create exchanges that
satisfy individual and organisational objectives.

1.5 Domestic Marketing Versus International Marketing
Domestic marketing involves one set of uncontrollables derived from the
domestic market. International marketing is much more complex because a
marketer faces two or more sets of uncontrollable variables originating from
various countries. The marketer must cope with different cultural, legal, political
and monetary systems.


1.6 Benefits of International Marketing


1.6.1 Survival
Most countries lack market size, resources and opportunities and hence they
must trade with others to survive.


1.6.2 Growth of Overseas Markets
Developing countries inspite of economic and marketing problems, are excellent
markets. The world market is four times larger than the US market. Hence many
US companies grow by going international. For example in case of Amway Corp.,
a privately held US manufacturer of cosmetics, soaps and vitamins Japan
represents a larger market than the United States.


1.6.3 Sales and Profits
Foreign markets constitute a larger share of the total business of many firms that
have wisely cultivated markets abroad. IBM and Compaq, for example sell more
computers abroad than at home. In the case of Coca-Cola, international sales
account for more than 80 percent of the firm’s operating profits.


1.6.4 Diversification
Demands for most products is affected by such cyclical factors as recession and
such seasonal factors as climate. The unfortunate consequence of these
variables is sales fluctuations, which can frequently be substantional enough to
cause layoffs of personnel. One way to diversify a company’s risk is to consider
foreign markets as a solution for variable demand.

1.6.5 Inflation and Price Moderation
Imports can also be highly beneficial to a country because they constitute
reserve capacity for 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.

1.6.6 Employment
Trade restrictions in US in 1930s contributed significantly to the great depression
and caused widespread unemployment. Unrestricted trade, on the other hand,
improves the world’s GNP and enhances employment generally for all nations.

1.6.7 Standard of Living
Trade affords countries and their citizens higher standard of living than otherwise
possible. Without trade, product shortages force people to pay more for less.
Trade also makes it easier for industries to specialise and gain access to rawmaterials,
while at the same time fostering competition and efficiency. A diffusion
of innovations across national boundaries is a useful by product of international
trade.


Exercise
1. Define international marketing.
2. What are the driving forces of international business ?
3. Why companies engage in international business ?
4. How does international marketing differ from domestic marketing ?
5. What are the benefits of international marketing ?




 
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