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CHAPTER I

[Link] OF INTERNATIONAL MARKETING

1.1. Definitions and distinctions

“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 organizational Objectives.” AMA (American
Marketing Association).Limitations of the definition; by placing individual objectives at
one end of the definition and organizational objectives at the other, the definition stresses
a relationship between a consumer and an organization. In effect, it fails to do justice to
the significance of business to business marketing, which involves a transaction between
two organizations. And, in the world of international marketing, governments,
quasigovernment agencies, and profit-seeking and nonprofit entities are frequently
buyers. Finally, the “multinational process” implies that the international marketing
process is not a mere repetition of using identical strategies abroad. The four Ps of
marketing (product, place, promotion, and price) must be integrated and coordinated
across countries to bring about the most effective marketing mix. In some cases, the mix
may have to be adjusted for a market for better impact.

“International marketing is the performance of business activities designed to plan, price,

promote and direct the flow of a company’s goods and services to consumers or users in
more than one nation for a profit.” Cateora and Graham.

The only difference between the definitions of domestic marketing and international
marketing is that in the latter case marketing activities take place in more than one
[Link] difference is the “environment”Competition, legal restraints, government
controls, weather, unpredictable consumers, economic conditions, technological
constraints, infrastructure concerns, culture, and political situations.

Per, Gerald Albaum and others “International Marketing is the marketing of goods,
services and information across political boundaries.” Thus, it includes the same
elements as domestic marketing: planning, promoting, distributing, pricing and support of
the goods, services and information to be provided to intermediate and ultimate

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[Link] process of international marketing, however, is typically much more
complex and interesting, than domestic marketing.

The international marketer must deal with several key differences in foreign
environments as compared to domestic environments. These may include differences in
consumer tastes and needs, economic levels, market structures, ways of doing business,
laws and regulations, and many other factors. Together, these differences require careful
and well-planned approach to entering and expanding in the international marketplace.

[Link] marketing Vs. International Marketing

The efficient and effective management and utilization of a company’s resources to

satisfy the consumers’ demands and meet the company’s goals and objectives is known
as marketing.

Marketing involves a wide range of activities like planning and executing the conception,
pricing, promotion, and distribution of goods, services, and ideas to create exchanges
with target groups that aim to satisfy customer and organizational objectives.

Given below are some of the different features of domestic marketing and international
marketing:

Domestic Marketing

Domestic marketing is the supply and demand of goods and services within a single
country. In domestic trading, a firm faces only one set of competitive, economic, and
market issues and essentially must deal with only one set of customers, although the
company may have several segments in a market.

There are no language barriers in domestic marketing and obtaining and interpreting data
on local marketing trends and consumer demands is easier and faster.

Marketing within the native country helps the company in making decisions and develop
effective and efficient marketing strategies. The companies require less financial
resources and the risk factors are also less comparatively. In terms of geographical

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boundaries and available market platform, local markets are smaller than international
market, even though most companies are targeting at global business.

International Marketing

International marketing is the promotion of company’s market by providing auction of

company’s products to consumers in different countries. It is very complicated and
demands huge capital and financial resources. Every nation follows its own laws in
business and a company that targets entering into business in another country must first
learn about these laws, rules and regulations. Customer tastes, choices and preferences
are different in different nations. New marketing strategies must be adopted to match
with the requirements of different consumers.

International marketing is time consuming and requires more effort. It is highly prone to
risks. Any company in the international market must always be prepared to deal with
sudden changes in the marketing environment.

Generally, Domestic marketing involves oneset of uncontrollable derived from the

domestic [Link] marketing is much more complex because a marketer faces
two or more sets of uncontrollable variables originating from various countries.

1.3. International trade concepts

Basis for International Trade

Whenever a buyer and a seller come together, each expects to gain something from the
other. The same expectation applies to nations that trade with each [Link] is
virtually(nearly) impossible for a country to be completely self-sufficient without
incurring undue [Link], trade becomes a necessary activity, though, in some
cases, trade does not always work to the advantage of the nations [Link] all
governments feel political pressure when they experience trade deficits (scarcity).Too
much emphasis is often placed on the negative effects of trade, even though it is
questionable whether such perceived disadvantages are real or imaginary. The benefits of

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trade, in contrast, are not often stressed, nor are they well communicated to workers and
consumers.

Why do nations trade?

A nation trades because it expects to gain something from its trading [Link] may
ask whether trade is like a zero-sum game, in the sense that one must lose so that another
will [Link] answer is no, because, though one does not mind gaining benefits at
someone else’s expense, no one wants to engage in a transaction that includes a high risk
of loss.

For trade to take place, both nations must anticipate gain from it. In other words, trade is
a positive-sum game. Trade is about “mutualgain.”To explain how gain is derived from
trade, it is necessary to examine a country’s production possibility curve. How absolute
and relative advantages affect trade options is based on the trading partners’ production
possibility curves.

Production possibility curve

Without trade, a nation would have to produce all commodities by itself to satisfy all its
needs.

The country may elect to specialize or put all its resources into making either computers
(point A) or automobiles (point B). At point C, product specialization has not been
chosen, and thus a specific number of each of the two products will be produced. Because
each country has a unique set of resources, each country possesses its own unique
production possibility [Link] curve, when analyzed, provides an explanation of the
logic behind international trade.

The principles of absolute advantage and relative advantage explain how the production
possibility curve enables a country to determine what to export and what to import.

[Link] advantage theory

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Adam Smith may have been the first scholar to investigate formally the rationale behind
foreign trade. In his book, Wealth of Nations, Smith used the principle of absolute
advantage as the justification for international trade. Per this principle, a country should
export a commodity that can be produced at a lower cost than can other nations.
Conversely, it should import a commodity that can only be produced at a higher cost than
can other nations.

Let’s take hypothetical production figures for the USA and Japan based on two products:
the computer and the automobile.

Case 1 shows that, given certain resources and labor, the USA can produce twenty
computers or ten automobiles or some combination of both.

Product USA Japan

Case I Computer 20 10

Automobile 10 20

Case 2 Computer 20 10

Automobile 30 20

Case 3 Computer 20 10

Automobile 40 20

If each country specializes in the product for which it has an absolute advantage, each can
use its resources more effectively while improving consumer welfare at the same time.
Since the USA would use fewer resources in making computers, it should produce this
product for its own consumption as well as for export to Japan. Based on this same
rationale, the USA should import automobiles from Japan rather than manufacture them
itself. For Japan, of course, automobiles would be exported and computers imported.

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An analogy may help demonstrate the value of the principle of absolute advantage. A
doctor is better than a mechanic in performing surgery, whereas the mechanic is superior
in repairing cars. It would be impractical for the doctor to practice medicine as well as
repair the car when repairs are needed. For practicality, each person should concentrate
on and specialize in the craft which that person has mastered.

[Link] advantage theory

One problem with the principle of absolute advantage is that it fails to explain whether
trade will take place if one nation has absolute advantage for all products under
consideration. Nineteenth century British economist David Ricardo, perhaps the first
economist to fully appreciate relative costs as a basis for trade, argues that absolute
production costs are irrelevant.

More meaningful are relative production costs, which determine what trade should take
place and what items to export or import. Per Ricardo’s principle of relative (or
comparative) advantage, one country may be better than another country in producing
many products butshould produce only what it produces best. Essentially, it should
concentrate on either a product with the greatest comparative advantage or a product with
the least comparative disadvantage. Conversely, it should import either a product for
which it has the greatest comparative disadvantage or one for which it has the least
comparative advantage. The USA has a greater relative advantage for the computer
product. Therefore, the USA should specialize in producing the computer product. For
Japan, having the least comparative disadvantage in automobiles indicates that it should
make and export automobiles to the USA.

[Link] marketing and International Marketing

International marketing is often not the same as selling the product simply to several
countries. Companies need to take care of the language barrier, the ideals and habits in
the markets in which approaching. Adapting marketing strategies to attract a specific

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group that is trying to sell is very important and can be the cause number one a failure or
a success.

The procedure of planning and executing the rates, promotion and distribution of
products and services is the same worldwide.

In recent times, companies are not restricted to their national borders, but are open for
international marketing. With the increasing change in customers’ demands, choices,
preferences and tastes, the economies are expanding and giving way to more competitive
marketing. Thus, organizations need to respond rapidly to the demands of the customers
with well-defined marketing strategies.

Broader market is available

A wide platform is available for marketing and advertising products and services. The
market is not limited to some precise local market or for people residing in a particular
place, region or country but is free for all. People from different nations sharing different
cultures and traditions can actively participate in it.

Involves at least two set of uncontrollable variables

By uncontrollable variables, we mean the geographical factors, political factors

prevailing in different countries. At the global level, all the companies have to face
uncontrollable variables from different countries. While establishing business globally, a
company has to learn to deal with these variables.

Requires broader competence

International market requires more expertise and special management skills and wider
competence to deal with various circumstances and handle different situations like
changes in the strategies of the government, the mindset of the people and many other
such factors.

Competition is intense

Competition is very tough in international market, as the organizations at the global level
have to compete with both competitors in their home countries and also in the foreign
lands.

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Competition is high because the clash is between developed & developing countries and
both have different standards and are unequal partners.

Involves high risk and challenges

International marketing with its own advantages is also prone to different and tangible
risks and challenges. These challenges come in the form of political factors, regional and
cultural differences, changing fashion trends, sudden war situation, revision in
government rules and regulations and communication barriers

The nature of international marketing is dependent on various factors and conditions and
above all, it is dependent on the policies framed by different countries which are active
participants in international marketing. International marketing tends to ensure balanced
import and export to all countries big or small, rich or poor, developed or developing.

Management of international market is tough and requires thorough market research. It is

a predefined process which is directed towards designing and delivering products based
on the demands from the overseas customers. Proper management also helps the
company attain its objectives.

Large-scale operation

Large-scale operations involve relative amount of labor and capital to cater to the needs
such as transportation, and warehousing.

Domination of multinationals and developed countries

International marketing is highly dominated by multinational corporations due to their

worldwide reach. These organizations apply efficient and effective business practices to
all their business operations. They have a stable position and with their global approach
find themselves fitting into the arena of international marketing.

International restrictions

The international market needs to abide by different tariff and non-tariff constraints.
These constraints are regulated because different countries follow different regulations.
All nations tend to rationally abide by tariff barriers. All the imports and exports between

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the nations participating in international marketing follow some restrictions in foreign
exchange.

Sensitive character

International marketing is highly sensitive and flexible. The demand for a product in a
market is highly influenced by political and economic factors. These factors can create as
well as decrease the demand for a product. In fact, use of advanced technology by a
competitor or the launch of a new product by another competitor may affect the sale of a
firm’s product worldwide.

Importance of Advanced Technology

International market is dominated by developed countries like the USA, Japan, and
Germany as they use highly advanced technology in production, marketing, advertising
and establishing a brand name. They provide admirable quality of products at reasonable
prices. Presently, Japanese products have got substantial existence in markets around the
world. The Japanese could achieve this only because of automation and effective use of
advanced computer technology.

Need for specialized institutions

Marketing at global level is highly prone to risks & is very complex and knotty. It
undergoes lengthy and time taking procedures & formalities. Competent expertise is
required for handling various sections of international marketing.

Need for long term planning

International marketing calls for long term planning. Marketing practices differ from
nation to nation influenced by social, economic & political factors.

Lengthy & Time Consuming

The current trend of globalization does not limit companies to their national borders and
invites them for marketing on a higher platform, i.e., international platform. Every nation
is free to trade with any nation. New markets are indicating signs of growth and are
marking signs of development in economies like China, Indonesia, India, Korea, Mexico,
Chile, Brazil, Argentina, and many other economies all over the world.

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 [Link] International Marketing

Consequently, the orientation can best be described as an environmental/ cultural

approach to international strategic marketing. By no means is it intended to present
principles of marketing; rather, it is intended to demonstrate the unique problems of
international marketing. It attempts to relate the foreign environment to the marketing
process and to illustrate the many ways in which culture can influence the marketing task.
Although marketing principles are universally applicable, the cultural environment within
which the marketer must implement marketing plans can change dramatically from
country to country.

1.6.1. Phases of International Marketing Involvement

The literature describes several stages of internationalization. Many companies may have
begun as domestic firms concentrating on their own domestic markets before shifting or
expanding the focus to also cover international [Link] company marketing in or
into any other country or groups of countries, however slight the involvement or the
method of involvement. Hence, international marketing ranges from the marketing and
business practices of small [Link] a company has decided to gointernational, it
should decide the degree of marketing involvement and commitment it isprepared to
make. These decisions should reflect considerable study and analysis of market potential
and company capabilities a process not always followed.

Research hasrevealed several factors favoring faster internationalization:

(1) Companies with eitherhigh technology and/or marketing-based resources appear to be

better equipped to internationalize than more traditional manufacturing kinds of
companies;
(2) Smaller home markets and larger production capacities appear to favor
internationalization; and
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(3) Firmswith key managers well networked internationally can accelerate the
internationalization process.

Many companies begin tentatively in international marketing, growingas they gain

experience and gradually changing strategy and tactics as they become morecommitted.
Others enter international marketing after much research and with fully developed long-
range plans, prepared to make investments to acquire a market position andoften evincing
bursts of international activities. As they become more international, they are supposed to
move from being sporadic / irregularexporters to being frequent exporters before finally
doing manufacturing abroad.

One study found evidence to support the hypothesis that there are four identifiable stages
in a firm’s internationalization. The four stages are: non-exporters, export intenders,
sporadic exporters, and regular exporters. The process shows how firms were constrained
initially by resource limitations and a lack of export commitment, and how they can
become more and more internationalized as more resources are allocated to international
activity.

Cateora’s International Marketing Involvement

a. No direct foreign Marketing

A company in this stage does not actively cultivate customers outside national
boundaries; however, this company’s products may reach foreign markets. Sales may be
made totrading companies as well as foreign customers who directly contact the firm. Or
productsmay reach foreign markets via domestic wholesalers or distributors who sell
abroad without the explicit encouragement or even knowledge of the producer. As
companies developWeb sites on the Internet, many receive orders from international
Internet users. Often anunsolicited order from a foreign buyer is what piques the interest
of a company to seek additional international sales.

b. Infrequent Foreign Marketing – Reactive

Temporary surpluses caused by variations in production levels or demand may result

ininfrequent marketing overseas. The surpluses are characterized by their temporary

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nature;therefore, sales to foreign markets are made as goods become available, with little
or nointention of maintaining continuous market representation. As domestic demand
increasesand absorbs surpluses, foreign sales activity is reduced or even withdrawn. In
this stage,little or no change is seen in the company organization or product lines.
However, few companies fit this model today, because customers around the world
increasingly seek long term commercial relationships. Furthermore, evidence suggests
that financial returns fromsuch short-term international expansions are limited.

The first two stages of international marketing involvement are more reactive in
natureand most often do not represent careful strategic thinking about international
[Link], putting strategic thinking on the back burner has resulted in marketing
failures foreven the largest companies.

The consensus of researchers and authors in this area suggests three relatively
distinctapproaches to strategic decisions in firms involved in international markets:

1. Regular foreign marketing

2. Multi domestic or international marketing
3. Global marketing

Next, we discuss each of the three stages (and their associated strategic orientations)
inturn.

c. Regular Foreign Marketing - Proactive

At this level, the firm has permanent productive capacity devoted to the production
ofgoods and services to be marketed in foreign markets. A firm may employ foreign or
domestic overseas intermediaries, or it may have its own sales force or sales subsidiaries
inimportant foreign markets. The primary focus of operations and production is to
servicedomestic market needs. However, as overseas demand grows, production is
allocated forforeign markets, and products may be adapted to meet the needs of
individual foreign markets. Profit expectations from foreign markets move from being a
bonus in addition to regular domestic profits to a position in which the company becomes
dependent on foreign sales and profits to meet its goals.

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 d. International Marketing – Proactive

Companies in this stage are fully committed to and involved in international marketing
activities. Such companies seek markets all over the world and sell products that are a
resultof planned production for markets in various countries.

This planning generally entails notonly the marketing but also the production of goods
outside the home market. At this point,a company becomes an international or
multinational marketing firm.

e. Global Marketing – Proactive

At the global marketing level, the most profound change is the orientation of the
company toward markets and associated planning activities. At this stage, companies
treat the world, including their home market, as one market. Market segmentation
decisions are no longer focused on national borders. Instead, market segments are defined
by income levels, usage patterns, or other factors that frequently span countries and
regions. Often this transition from international marketing to global marketing is
catalyzed by a company’s crossing the threshold at which more than half its sales
revenues comes from abroad. The best people in the company begin to seek international
assignments, and the entire operation organizational structure, sources of finance,
production, marketing, and so forth begins to take on a global perspective.

International operations of businesses in global marketing reflect the heightened

competitiveness brought about by the globalization of markets, interdependence of the
world’s economies, and the growing number of competing firms from developed and
developing countries vying for the world’s markets. Global companies and global
marketing are terms frequently used to describe the scope of operations and marketing
management orientation of companies in this stage.

Global Market Orientation

This orientation entails operating as if all the country markets in a company’s scope of
operations (including the domestic market) were approachable as a single global market
and standardizing the marketing mix where culturally feasible and cost effective.

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Depending on the product and market, firms may pursue a global market strategy for one
product (global market orientation –P&G diapers) but a multi domestic strategy for
another product (international market orientation = P&G detergents).

More recently, an increasingly global economy has given birth to a new theory which
states that some companies are intended to go global from the outset, thus bypassing the
stages of internationalization.

[Link] and challenges of International Marketing

Opportunities of International Marketing

International marketing daily affects consumers in many ways, though its opportunities is
neither well understood nor [Link] officials and other observers seem
always to point to the negative aspects of international business. Many of their charges
are more imaginary than real.

Survival and growth

For companies to survive, they need to [Link] most countries are not as fortunate
as the USA in terms of market size, resources, and opportunities, they must trade with
others to [Link] most European nations are relatively small, they need foreign
markets to achieve economies of scale to be competitive with American firms.
International competition may not be a matter of choice when survival is at stake. A study
of five medical sector industries found that international expansion was necessary when
foreign firms entered a domestic market. However, only firms with previously substantial
market share and international experience could expand successfully

Sales and profits

Foreign markets constitute a large share of the total business of many firms that have
wisely cultivated markets [Link] case of Coca-Cola clearly emphasizes the
importance of overseas markets. International sales account for more than 80 percent of
the firm’s operating profits. For every gallon of soda that Coca-Cola sells, it earns 37
cents in Japan – a marked difference from the mere 7 cents per gallon earned in the USA.

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The Japanese market contributes about $350 million in operating income to Coca-Cola
(vs. $324 million in the US market), making Japan the company’s most profitable market

Diversification

Demand for most products is affected by such cyclical factors as recession and such
seasonal factors as [Link] unfortunate consequence of these variables is sales
fluctuations, which can frequently be substantial enough to cause layoffs of
[Link] way to diversify a company’s risk is to consider foreign markets as a
solution to variable demand

Inflation and price moderation

The benefits of export are readily [Link] can also be highly beneficial to a
country because they constitute reserve capacity for the local economy. Without imports
(or with severely restricted imports), there is no incentive for domestic firms to moderate
their prices. The lack of imported product alternatives forces consumers to pay more,
resulting in inflation and excessive profits for local firms. This development usually acts
as a prelude to workers’ demand for higher wages; further worsen the problem of
inflation

Employment

Trade restrictions, such as the high tariffs caused by the 1930 Smoot-Hawley Bill, which
forced the average tariff rates across the board to climb above 60 percent, contributed
significantly to the Great Depression and have the potential to cause widespread
unemployment again. Unrestricted trade, on the other hand, improves the world’s GDP
and enhances employment generally for all [Link], there is no question
that globalization is bound to hurt some workers whose employers are not cost
competitive. Some employers may also have to move certain jobs overseas to reduce
costs. Consequently, some workers will inevitably be unemployed

Standards of living

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Trade affords countries and their citizen’s higher standards of living than otherwise
possible. Without trade, product shortages force people to pay more for less. Products
taken for granted, such as coffee and bananas, may become unavailable overnight.

Understanding of marketing process

International marketing should not be considered a subset or special case of domestic

marketing. When an executive is required to observe marketing in other cultures, the
benefit derived is not so much the understanding of a foreign culture. Instead, the real
benefit is that the executive develops a better understanding of marketing in one’s own
culture.

Protection of Local Industries

While countries generally do not mind exporting, they simply do not like imports. Per a
survey of more than 28,000 people in twenty-three countries, even well-educated workers
in poorer countries are against free trade. In addition, workers in the industries that face
foreign competition tend to be against free trade. On the other hand, well-educated people
in well-educated countries are more likely to favor trade.

Arguments for protectionism:

• Protection of infant industry

• Protection of the home market

• Need to keep money at home

• Encouragement of capital accumulation

• Maintenance of the standard of living and real wages

• Conservation of natural resources

• Industrialization of a low-wage nation

• Maintenance of employment and reduction of unemployment

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 • National defense

• Increase of business size

• Retaliation and bargaining

Challenge of International Marketing

The modern world is organized on the theory that each nation state is sovereign and
independent from other countries. In reality, however, no country can completely isolate
its internal affairs from external forces. Even the most inward-looking regimes have
realized the limitations of their own resources as well as the benefits of opening up their
borders. This major change in the orientation of most regimes has led to an enormous
amount of activity in the international marketplace. A global economic boom in the last
decade of twentieth century has been one of the drivers for efficiency, productivity and
open, unregulated markets that swept the world.

1. Never before in world history have businesses been so deeply involved in and
affected by international global developments. Powerful economic, technological,
industrial, political and demographic forces are converging to build the
foundation of a new global economic order on which the structure of a world
economic and market system will be built.

2. Whether or not a company wants to participate directly in international business,

it cannot escape the effect of the ever-increasing number of domestic firms
exporting, importing, and/or manufacturing abroad; the number of foreign-based
firms operating in most markets; the growth of regional trade areas; the rapid
growth of world markets; and the increasing number of competitors for global
markets. Of all the trends affecting global business today, five stand out as the
most dynamic and as the ones that are influencing the shape of international
business:

I. The interdependence of the world economies.

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 II. The rapid growth of regional free trade areas such as EU, NAFTA,
ASEAN and APEC.
III. The increase in wealth and growth in most parts of the world,
causing enhanced purchasing power.
IV. The evolution of large emerging markets such as Brazil, China,
India, Malaysia, Russia, Hungary and Poland.
V. Availability of advanced methods of communication and
transportation due to developments in information technology.
These forces affecting the international business have led to a
dramatic growth in international trade and have contributed to a
perception that world has become a smaller and interdependent
place.

3. If we look at the Swiss Multinational Company, Nestlé, ‘The Food Company of

the World’, it claims its products are sold in every country in the world. It has
factories in more than 80 countries and it has many brands that are recognised all
over the world.

4. Toyota and its subsidiaries sell their cars in more than 170 countries, giving it a
presence in more countries than any other auto manufacturer.

5. Today most business activities are global in scope. Finance, technology, research,
capital and investment flows, production facilities, purchasing and marketing and
distribution networks all have global dimensions. Every business must be
prepared to compete in an increasingly interdependent global economic
environment, and all business people must be aware of the effects of these trends
when managing a multinational conglomerate or a domestic company that
exports.

As one international expert noted, ‘every company is international, at least to the

extent that its business performance is conditioned in part by events that occur
abroad.

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 6. Even companies that do not operate in the international arena are affected to some
degree by the success of the European Union, the post 9-11 political economy and
the economic changes taking place in China and India. The aftermath of 9-11 and
the war in Afghanistan and Iraq have changed the political as well as economic
scene.

[Link] product life cycle

The Three Stages of the International Product Life Cycle Theory. The International
Product Life Cycle Theory was authored by Raymond Vernon in the 1960s to explain the
cycle that products go through when exposed to an international market. The cycle
describes how a product matures and declines because of internationalization. There are
three stages contained within the theory.

New Product Introduction

The cycle always begins with the introduction of a new product. In this stage a
corporation in a developed country will innovate a new product. The market for this
product will be small and sales will be relatively low thus. As sales increase, corporations
may start to export the product out to other developed nations to increase sales and
revenue. It’s a straightforward step towards the internationalization of a product because
the appetites of people within developed nations tends to be quite similar.

Product Maturing

At this point, when the product has firmly established demand in developed countries, the
manufacturer of the product will need to consider opening production plants locally in
each developed country to meet the demand. As the product is being produced locally,
labor costs and export and costs will decrease thereby reducing the unit cost and
increasing revenue. Product development can still occur at this point as there is still room
to adapt and modify the product if needed. Appetites for the product in developed nations
will continue to increase in this stage.

Although the unit costs have decreased due to the decision to produce the product locally,
the manufacture of the product will still require a highly skilled labor force. Local

20
competition to offer alternatives start to form. The increased product exposure begins to
reach the countries that have a less developed economy, and demand from these nations
start to grow.

Product Standardization

Exports to nations with a less developed economy begin in earnest. Competitive product
offers saturate the market which means that the original purveyor of the product loses
their competitive edge because of innovation. In response to this, rather than continuing
to add new features to the product, the corporation focuses on driving down the cost of
the process to manufacture the product. They do this by moving production to nations
where the average income is much lower and standardizing and streamlining the
manufacturing methods needed to make the product.

The local workforce in lower income nations are then exposed to the technology and
methods to make the product and competitors begin to rise as they did in developed
nations previously. Meanwhile, demand in the original nation where the product came
from begins to decline and eventually dwindles as a new product grabs the attention of
the people.

Concepts of foreign exchange and balance of payment

Terms of trade – is the relationship between the average unit value of exports and
imports. It is the rate at which one country’s products exchange for those of another. It is
the ratio of export to import prices. The terms of trade are said to be favorable to a
country when the prices of its exports are high relatively to the price of its imports. The
opposite is true when prices of its exports are low relatively to the price of its imports.

Balance of paymentsis the set of accounts (a systematic record) which shows all the
economic transactions which take place between residents of one country and the
residents of all other countries during a given time, usually one year. In general terms, a
country’s balance of payments can be described under two main headings (major
categories): the current account and the capital account.

A. The Current Account

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The current account – is related with the country’s current national income and current
expenditures. This account includes both visible and invisible items. The visible imports
and exports consist of physical merchandise of all kinds whereas the invisible imports
and exports are mainly services and come under the following major headings: net
income from services rendered by residents to non-residents (this includes tourism,
shipping and various financial services like insurance and banking); the balance of gifts
and the transfer of migrant’s funds; net grants by the government to other countries,
interest, profits and dividends. It follows that an excess of imports over exports will give
rise to a current account deficit and an excess of exports over imports will give rise to a
current account surplus.

B. The Capital Account

Includes both long-term and short-term capital movements between the home country
and all other countries. The long-term capital movements include direct foreign
investment, portfolio investments(which involve the purchasing of the securities of a
foreign company or government) and inter-governmental loans. The short-term capital
movements include all forms of short-term private lending and short-term investments
many of which are designed to exploit international interest rate [Link] capital
account also includes the official financing required to cover any overall deficit or
surplus in the rest of the accounts. Official reserve transactions include ‘net changes in
the country’s reserves’ or monetary gold stock, holdings of convertible foreign currencies
or foreign currency borrowing and net transactions with any monetary authorities.

Balance of trade

Is the difference between exports and imports?It is regarded as favorable when exports
exceed imports and as unfavorable when imports exceed exports.

Foreign Exchange

Exports and imports between nations with different units of money introduce a new
economic factor: The foreign exchange [Link] exchange is the monetary
mechanism by which transactions involving two or more currencies take place. It is the
exchange of one country’s money for another country’s money. It is the price of a

22
foreign country’s unit of money in terms of our own. Three types of exchange rate
systems:

• The working of the gold standard

• Pure floating exchange rates

• Managed floating exchange rate

[Link] to international trade

 Tariffs
 Nontariff barriers

1. Government participation in trade

2. Customs and entry procedures

3. Product requirements

4. Quotas

5. Financial controls.

Tariffs

Tariffs are taxes imposed by a government on goods entering its borders. Tariff, derived
from a French word meaning rate, price, or list of charges, is a customs duty or a tax on
products that move across borders. Tariffs may be classified in several ways. The
classification scheme used here is based on direction, purpose, length, rate, and
distribution point. These classifications are not necessarily mutually exclusive.

Direction: import and export tariffs

23
Tariffs are often imposed based on the direction of product movement; that is, on imports
or exports, with the latter being the less common one. When export tariffs are levied, they
usually apply to an exporting country’s scarce resources or raw materials (rather than
finished manufactured products)

Purpose: protective and revenue tariffs

Tariffs may be classified as protective tariffs and revenue tariffs. This distinction is based
on [Link] purpose of a protective tariff is to protect home industry, agriculture, and
labor against foreign competitors by trying to keep foreign goods out of the [Link]
purpose of a revenue tariff, in contrast, is to generate tax revenues for the
[Link] to a protective tariff, a revenue tariff is relatively low. As in the
case of the EU, it applies tariffs of up to 236 percent on meat and 180 percent on cereals,
while its tariffs on raw materials and electronics rarely exceed 5 percent.

Length: tariff surcharge versus countervailing duty

Protective tariffs may be further classified perlength of time. A tariff surcharge is a

temporary action, whereas a countervailing duty is a permanent [Link]
duties are imposed on certain imports when products are subsidized by foreign
governments. These duties are thus assessed to offset a special advantage or discount
allowed by an exporter’s government. Usually, a government provides an export subsidy
by rebating certain taxes if goods are exported.

Rates: specific, ad valorem, and combined

How are tax rates applied? To understand the computation, three kinds of tax rates must
be distinguished: specific, ad valorem, and combined

Specific duties

Specific duties are a fixed or specified amount of money per unit of weight, gauge, or
other measure of [Link] on a standard physical unit of a product, they are
specific rates of so many dollars or cents for a given unit of measure

Ad valorem duties

24
Ad valorem duties are duties “per value.”They are stated as a fixed percentage of the
invoice value and applied at a percentage to the dutiable value of the imported goods.
This is the opposite of specific duties since the percentage is fixed but the total duty is
not.

Combined rates Combined rates (or compound duty)are a combination of the specific
and ad valorem duties on a single product. They are duties based on both the specific rate
and the ad valorem rate that are applied to an imported product.

Marketing Barriers: Nontariff Barriers

Tariffs, though generally undesirable, are at least straightforward and [Link]

barriers, in comparison, are more elusive or [Link] have declined in
importance, reaching the lowest level ever of about 4 percent on average after fifty years
and eight global rounds of trade [Link] barriers may be grouped into five
major [Link] category contains many different nontariff barriers.

1. Government participation in trade

The degree of government involvement in trade varies from passive to active. The types
of participation include administrative guidance, state trading, and subsidies.

a. Administrative guidance

Many governments routinely provide trade consultation to private companies.

Japan has been doing this on a regular basis to help implement its industrial
policies. This systematic cooperation between government and business is labeled
“Japan, Inc.

b. Government procurement and state trading

State trading is the ultimate in government participation, because the government
itself is now the customer or buyer who determines what, when, where, how, and
how much to buy.

c. Subsidies

Per GATT, subsidy is a “financial contribution provided directly or indirectly by a

[Link] are several other kinds of subsidies that are not so obvious.

25
 Brazil’s rebate of the various taxes, coupled with other forms of assistance, may
be viewed as subsidies. Sheltered profit is another kind of subsidy. A country may
allow a corporation to shelter its profit from abroad.

2. Customs and entry procedures

Customs and entry procedures may be employed as nontariff barriers. These restrictions
involve classification, valuation, documentation, license, inspection, and health and
safety regulations.

a. Classification

How a product is classified can be arbitrary and inconsistent and is often based on
a customs officer’s judgment, at least at the time of entry. Product classification is
important because the way in which a product is classified determines its duty
status. A company can sometimes act to affect the classification of its product.

b. Valuation

Regardless of how products are classified, each product must still be [Link]
value affects the number of tariffs levied. A customs appraiser is the one who
determines the value. The process can be highly subjective, and the valuation of a
product may be interpreted in different ways, depending on what value is used
(e.g., foreign, export, import, or manufacturing costs) and how this value is
constructed.

c. Documentation

Documentation can present another problem at entry because many documents

and forms are often necessary, and the documents required can be complicated.
Without proper documentation, goods may not be cleared through customs. At the
very least, such complicated and lengthy documents serve to slow down product
clearance

d. License or permit

Not all products can be freely imported; controlled imports require licenses or
permits. For example, importations of distilled spirits, wines, malt beverages,

26
 arms, ammunition, and explosives into the USA require a license issued by the
Bureau of Alcohol, Tobacco, and Firearms. India requires a license for all
imported goods

e. Inspection

Inspection is an integral part of product [Link] must be examined to

determine quality and quantity. This step is closely related to other customs and
entry procedures. First, inspection classifies and values products for tariff
purposes.

Second, inspection reveals whether imported items are consistent with those
specified in the accompanying documents and whether such items require any
[Link], inspection determines whether products meet health and safety
regulations to make certain that food products are fit for human consumption or
that the products can be operated safely. Fourth, inspection prevents the
importation of prohibited articles/items/

f. Health and safety regulations

Many products are subject to health and safety regulations, which are necessary to
protect the public health and [Link] and safety regulations are not
restricted to agricultural [Link] regulations also apply to TV
receivers,microwave ovens, X-ray devices, cosmetics, chemical substances, and
clothing

3. Product requirements

For goods to enter a country, product requirements set by that country must be met.
Requirements may apply to product standards and product specifications as well as to
packaging, labeling, and marking.

a. Product standards

Each country determines its own product standards to protect the health and safety
of its consumers. Such standards may also be erected as barriers to prevent or
slow down importation of foreign [Link] of US grade, size, quality, and
maturity requirements, many Mexican agricultural commodities are barred from
27
 entering the USA. Japanese product standards are even more complex, and they
are based on physical characteristics rather than product performance

b. Packaging, labeling, and marking

Packaging, labeling, and marking are considered together because they are closely
interrelated. Many products must be packaged in a certain way for safety and
other reasons

c. Product testing

Many products must be tested to determine their safety and suitability before they
can be marketed. The various means by which manufacturers can certify product
conformance include manufacturer self-declaration of conformity, third-party
testing, quality assurance audit,and/or approval by an authorized body.

d. Product specifications

Product specifications, though appearing to be an innocent process, can wreak

havoc on [Link] can be written in such a way as to favor local
bidders and to keep out foreign [Link] example, specifications can be
extremely detailed, or they can be written to closely resemble domestic products.
Thus, they may be used against foreign suppliers who cannot satisfy the
specifications without expensive or lengthy modification.

4. Quotas

Quotas are a quantity control on imported [Link], they are specific provisions
limiting the number of foreign products imported to protect local firms and to conserve
foreign currency. An export quota is sometimes required by national planning to preserve
scarce resources.

5. Financial control

Financial regulations can also function to restrict international trade. These restrictive
monetary policies are designed to control capital flow so that currencies can be defended
or imports controlled.

28
 a. Exchange control

An exchange control is a technique that limits the amount of the currency that
may be taken [Link] reason exchange controls are usually applied is that the
local currency is overvalued, thus causing imports to be paid for in smaller
amounts of [Link] then try to use the relatively cheap foreign
exchange to obtain items that are either unavailable or more expensive in the local
currency

b. Multiple exchange rates

Multiple exchange rates are another form of exchange regulation or barrier. The
objectives of multiple exchange rates are twofold: to encourage exports and
imports of certain goods, and to discourage exports and imports of others. This
means that there is no single rate for all products or industries, but with the
application of multiple exchange rates, some products and industries will benefit
and some will not.

c. Prior import deposits and credit restrictions

Financial barriers may also include specific limitations on import restraints, such
as prior import deposits and credit restrictions. Both barriers operate by imposing
certain financial restriction on importers.A government can require prior import
deposits (forced deposits) that make imports difficult by tying up an importer’s
[Link] restrictions apply only to imports; that is, exporters may be able to
obtain loans from the government, usually at very favorable rates, but importers
will not be able to receive any credit or financing from the government

Chapter Two

INTERNATIONAL MARKETING ENVIRONMENT

One of the fundamental steps that needs to be taken prior to beginning international
marketing is the environmental analysis. Of course, there are many tools on Marketing
Teacher that would prove useful at this stage such as lessons on the marketing
environment, PEST Analysis, SWOT Analysis, and Five Forces Analysis. However, the

29
very specific and unique nature of each individual nation needs to be considered. Below
we consider the nature of an international PEST Analysis.

2.1 Cultural Environment

Culture prescribes acceptable beliefs, traditions, customs, and values that are then
socially shared. Culture is subjective, enduring yet dynamic, and cumulative. It affects
people’s behavior in diverse ways through logic, communication, and consumption.
Although some cultural traits are universal, many others are unique and vary from
country to country. And despite national norms, cultural differences as a rule even exist
within each country. While there may be a tendency to misunderstand different cultures
and subcultures, this temptation should be resisted.

Many companies modify their products and/or promotion strategies to suit the tastes and
preferences or other characteristics of the population of the different countries.
Significant differences in the tastes and preferences may exist even within the same
country, particularly when the country is very vast, populous and multi-cultural like
Ethiopia.

For a business to be successful, its strategy should be the one that is appropriate in the
socio-cultural environment. The marketing mix must be so designed as best to suit the
environmental characteristics of the market. In Thailand, Helene Curtis switched to black
shampoo because Thai women felt that it made their hair look glossier.

Even when people of different cultures use the same basic product, the mode of
consumption, conditions of use, purpose of use or the perceptions of the product
attributes may vary so much so that the product attributes, method of presentation,
positioning, or method of promoting the product may have to be varied to suit the
characteristics of different markets.

The differences in language sometime pose a serious problem, even necessitating a

change in the brand name. For instance, Chevrolet’s brand name Nova in Spanish means
“it doesn’t go”. In some languages, Pepsi-Cola’s slogan “come alive” translates as “come
out of the grave”. The values and beliefs associated with color vary significantly between

30
different cultures. White indicates death and mourning in China and Korea; but in some
countries, it expresses happiness and is the color of the bridal dress.

While dealing with the cultural environment, we must also consider the social
environment of the business which encompasses its social responsibility and the alertness
or vigilance of the consumers and of society at large. Marketing people are at interface
between company and society. In this position, they have the responsibility not merely
for designing a competitive marketing strategy, but for sensitizing business to the social
as well as the product, demand of the society.

Environmental Adjustment Needed

To adjust and adapt a marketing program to foreign markets, marketers must be able to
interpret effectively the influence and impact of each of the uncontrollable environmental
elements on the marketing plan for each foreign market in which they hope to do
business. In a broad sense, the uncontrollable elements constitute the culture; the
difficulty facing the marketer in adjusting to the culture (i.e. uncontrollable elements of
the marketplace) lies in recognizing their impact. In a domestic market, the reaction to
much of the uncontrollable’ (cultural) impact on the marketer’s activities is automatic;
the various cultural influences that fill our lives are simply a part of our history.

For example, a Westerner must learn that white is a symbol of mourning in parts of Asia,
quite different from Western culture’s white for bridal gowns. Also, time conscious
Westerners are not culturally prepared to understand the meaning of time to Latin
Americans or Arabs. These differences must be learned to avoid misunderstandings that
can lead to marketing failures. Such a failure occurred in the one situation when
ignorance led to ineffective advertising on the part of a Western firm; and a second
misunderstanding resulted in lost sales when a ‘long waiting period’ in the outer office of
an emerging market customer was misinterpreted by a Western sales executive.

To avoid such errors, the foreign marketer should be aware of the principle of marketing
relativism, that is, marketing strategies and judgements are based on experience, and
experience is interpreted by each marketer in terms of his or her own culture and
experience. We take into the marketplace, at home or in a foreign country, frames of
reference developed from past experiences that determine or modify our reactions to the

31
situations we face. Cultural conditioning is like an iceberg we are not aware of nine-
tenths of it. In any study of the market systems of different people, their political and
economic structures, religions and other elements of culture, foreign marketers must
constantly guard against measuring and assessing the markets against the fixed values
and assumptions of their own cultures. They must take specific steps to make themselves
aware of the home cultural reference in their analyses and decision making.

2.2 Economic environment

The general state of both national and international economies can have a profound effect
on an individual company’s success or failure. Most of the world’s economies went
through a significant growth period in the late 1990s, driven mainly by developments in
telecommunications and computing.

Global Economic Forces:

 Economic Growth and Unemployment: the level of new industrial growth? E.g.
China is experiencing terrific industrial growth. Low growth rates are reflected in
high unemployment levels, which in turn affect consumers spending power.

 Interest Rates and Exchange Rates: the impact of currency fluctuations on exchange
rates, and do your home market and your new international market share a common
currency. E.g. Polish companies trading in Eire will use Euros. One of the levers that
governments can use to manage the economy is interest rates. Interest rates are the
rate at which money is borrowed by businesses and individuals. Throughout the
world, interest rates are historically low.

 Development of Economic Areas: There are of course the usual economic indicators
that one needs to be aware of such as inflation, Gross Domestic Product (GDP), levels
of employment, national income, the predisposition of consumers to spend savings or
to use credit, as well as many others. Europe and Japan have suffered a sharp
economic slowdown over the past decade. To rekindle growth, they need to

32
 encourage competition (especially in the services sector), which will, in turn, boost
productivity growth, the most desirable source of growth in all economies.

2.3 Political – Legal environment

The international marketer’s political environment is complex and difficult due to the
interaction among domestic, foreign, and international politics. If a product is imported or
produced overseas, political groups and labor organizations accuse the marketer of taking
jobs from people in the home country. On the other hand, foreign governments are not
always receptive to overseas capital and investment because of suspicions about the
marketer’s motives and commitment. When both the host country and the home country
have different political and national interests, their conflicting policies can complicate the
problem further.

Marketing decisions are thus affected by political considerations. When investing in a

foreign country, companies must be sensitive to that country’s political concerns.
Because of the dynamic nature of politics in general, companies should prepare a
contingency plan to cope with changes that occur in the political environment.

The International Marketing activities take place within the political environment of
national political institutions such as the government, political executive, legislative and
the judiciary. Any company doing business overseas should carefully study the political
environment of the country it intends to operate and analyze issues such as the attitude of
the political party in power toward: Sovereignty, Political Risk, Taxes, Threat of Equity
dilution and Expropriation.

a. Sovereignty:

The sovereign political power of a country in a command economy may determine every
aspect of economic life of the people. In contrast, in a market economy, the government
may only play the role of a facilitator and a regulator. However, after the fall of the
Soviet Union, the command economics around the world have progressed towards a
market oriented system. Eastern European countries, countries in Central America, and
most importantly, India and China have also adopted the free market system. With
globalization and economic integration, political sovereignty of individual nation states is

33
on the wane. However, erosion of political sovereignty is not without a quid pro quo.
There are definite economic advantages in forging a regional economic union as
exemplified in cases such as the European Union, NAFTA, ASEAN and others.

b. Political Risk:

There is always a political risk involved in making investments both within and without
the country. The element of risk and its severity is relatively high in foreign countries.
More objectively, the extent of political risk depends upon the political stability of the
host country. An unstable country is fraught with investment risks. A country needs to be
stable both internally and externally. Frequent changes in the government and attendant
changes in the economic policy of the government will increase the element of
uncertainty and adversely effect upon a company's ability to operate effectively in a
foreign country. Investments in highly destabilized countries like Yemen, Lebanon,
Afghanistan and Iraq may be very attractive economically speaking but the political risks
involved are overwhelming. Political instability is therefore a great deterrent to foreign
investment. To justify investment in a foreign country, risk assessment should be
undertaken on a regular basis and investments should be made only when opportunities to
make profits are much greater than the risks involved.

c. Taxes:

A company which is geographically diversified needs to take care of the tax laws of the
countries in which it operates. Companies, generally minimizes their tax liability by
shifting the location of their income. One method of reducing tax liability is called
earnings stripping. Foreign companies reduce earnings by making loans to their affiliates
in a country rather than making direct foreign investment. The subsidiary company which
takes the loan can deduct the interest it pays on such loans and reduce its tax burden.
There is an absence of international laws to govern the levy of taxes on companies that
are into international business. To provide fair treatment, governments in many countries
have negotiated bilateral tax treaties to provide tax credits for taxes paid abroad.
Generally foreign' companies are taxed by the host country up to the level imposed in the
home country.

d. Equity Stripping and Dilution of Control:

34
In less developed countries, there is a general tendency to exert political pressure for
governmental control of foreign companies. Host-nation governments may attempt to
control ownership of foreign-owned companies operating in their Countries. The threat of
equity dilution has forced companies to operate in host countries through joint ventures
and strategic alliances.

e. Expropriation:

Expropriation is the ultimate threat that a government can pose toward a foreign
company. Expropriation refers to governmental action to dispossess a company investor.
Generally, compensation is provided to foreign investors. However, quite often, the
compensation is not prompt, adequate and effective. If there is no compensation, then the
act of expropriation would be termed as confiscation..

International Marketing - Political Risk

The liability caused by the financial or personnel losses because of wrong political
decisions or conflicts are known as political risks. Apart from the market based causes,
business is highly influenced by political decisions taken by the governments in different
countries. For example, political decisions by a ruling party regarding taxes currency,
trade tariffs, investment, labor laws, environmental regulations and development
priorities have a major impact on the business conditions and profitability which thereby
may affect the national economy. Similarly, non-economic factors can also alter the
status of a business.

To minimize political risk, companies should attempt to accommodate the host country’s
national interests by stimulating the economy, employing nationals, sharing business
ownership with local firms, and being civic oriented. On the other hand, to protect their
own economic interests, companies should maintain political neutrality, lobby quietly for
their goals, and shift risks to a third party through the purchase of political insurance.
Finally, a company should institute a monitoring system that allows it to systematically
and routinely evaluate the political situation.

35
Some companies view politics as an obstacle to their effort to enter foreign markets and
as a barrier to the efficient use of resources. For other companies, political problems,
instead of being perceived as entry barriers, are challenges and opportunities. Per firms
with the more optimistic view, political situations are merely environmental conditions
that can be overcome and managed. Political risks, through skillful adaptation and
control, can thus be reduced or neutralized.

Because of the variety of legal systems and the different interpretations and enforcement
mechanisms, the discussion must, of necessity, be somewhat general. Based on the same
rationale, it is impossible for the top management and legal staff at corporate
headquarters to completely master the knowledge of foreign law on their own. To
appreciate the problem and subtlety of foreign law, it is clearly necessary to consult local
attorneys to find out how a company’s operation may be constrained by laws. To deal
with problems related to bribery, incorporation, counterfeiting, and infringement, the
services of local attorneys are essential. Just as essential is the cooperation of the
governments of both the host and home countries.

The legal environment is complex and dynamic, with different countries claiming
jurisdiction (or a lack of jurisdiction) over business operations. The interaction among
domestic, foreign, and international legal environments creates new obstacles as well as
new opportunities. A host country may use an MNC’s subsidiary in its country as a
method of influencing the MNC and subsequently its home country’s policies. Likewise,
the home country may instruct the parent company to dictate its foreign subsidiary’s
activities. It is thus not uncommon to find a situation in which the firm is being pressured
in opposing directions by two governments. However, the MNC can use its global
network to counter such a threat by shifting or threatening to shift the affected operations
to other countries, thus lessening the governments’ influence on its behavior. It is this
countervailing power that allows the company a great deal of freedom in adjusting its
marketing mix strategies.

It is important to keep in mind that legal contracts and agreements can only be as good as
the parties who create them and the countries that enforce them. Therefore, a contract

36
cannot be used as a substitute for trust and understanding between parties or careful
screening of business partners.

2.4 Technological Environment

Copyright, intellectual property laws or patents protect technology in other countries. E.g.
China and Jordan do not always respect international patents.

Due to the emergence of ICT and computing, technologies at different stages in the
Product Life Cycle (PLC) in various countries. E.g. versions/releases of software.

2.5 Regional economic integration

Levels of economic integration

Trade theorists have identified five levels of economic cooperation. They are: free trade
area, customs union, common market, economic and monetary union, and political union.

a. Free trade area

In a free trade area, the countries involved eliminate duties among themselves, while
maintaining separately their own tariffs against outsiders. Free trade areas include the
NAFTA (North American Free Trade Agreement), the EFTA (European Free Trade
Association), and the now defunct LAFTA (Latin American Free Trade Association).
The purpose of a free trade area is to facilitate trade among member nations.

The problem with this kind of arrangement is the lack of coordination of tariffs against
the nonmembers, enabling nonmembers to direct their exported products to enter the free
trade area at the point of lowest external tariffs.

b. Customs union

A customs union is an extension of the free trade area in the sense that member countries
must also agree on a common schedule of identical tariff rates. In effect, the objective of
the customs union is to harmonize trade regulations and to establish common barriers

37
against outsiders. Uniform tariffs and a common commercial policy against nonmembers
are necessary to prevent them from taking advantage of the situation by shipping goods
initially to a member country that has the lowest joint boundaries.

c. Common market

A common market is a higher and more complex level of economic integration than
either a free trade area or a customs union. In a common market, countries remove all
customs and other restrictions on the movement of the factors of production (such as
services, raw materials, labor, and capital) among the members of the common market.
Thus, business laws and labor laws are standardized to ensure undistorted competition.
For an outsider, the point of entry is no longer dictated by member countries’ tariff rates
since those rates are uniform across countries within the common market. The point of
entry is now determined by the members’ nontariff barriers. The outsider’s strategy
should be to enter a member country that has the least nontariff restrictions, because
goods can be shipped freely once inside the common market.

d. Economicandmonetaryunion

Cooperation among countries increases even more with an economic and monetary union
(EMU). Some authorities prefer to distinguish a monetary union from an economic union.
Monetary union means one money (i.e., a single currency). The Delors Committee,
chaired by Jacques Delors, who is President of the European
Commission, has issued a report entitled Economic and Monetary Union in the European
Community that defines monetary union as having three basic characteristics: total and
irreversible convertibility of currencies; complete freedom of capital movements in fully
integrated financial markets; and irrevocably fixed exchange rates with no fluctuation
margins between member currencies, leading
ultimately to a single currency. The economic advantages of a single currency include the
elimination of currency risk and lower transaction costs.

38
The European Commission’s One Market, One Money report defines an economic union
as a single market for goods, services, capital, and labor, complemented by common
policies and coordination in several economic and structural areas.

[Link]

A political union is the ultimate type of regional cooperation because it involves the
integration of both economic and political policies. With France and Germany leading the
way, the EU has been moving toward social, political, and economic integration. The
EU’s goal is to form a political union like the fifty states of the USA. The EU’s debate
over political union involves issues such as having common defense and foreign policies,
strengthening the role of the EU Parliament, and adopting an EU-wide social policy. The
EU, despite great strides, has been plagued by infighting among member states with
conflicting national interests. Although the Treaty of Rome calls for a free internal
market and permits market forces to equalize national economic differences, Germany,
France, and the Netherlands – which have expensive social welfare programs – argue that
the social dimension must be considered to prevent social dumping. In other words, they
seek to prevent a movement of business and jobs away from areas with high wages and
strong labor organizations to areas with low wages, less organized labor forces, and weak
social welfare policies. Member countries accused of social dumping must subject their
products to sanctions. To them, the Social Charter is nothing more than protectionism in
the guise of harmonization. Such expensive policies are also a major concern to European
industry. As may be expected, several initiatives are the subject of heated debate.

CHAPTER 4
INTERNATIONAL MARKETING PRODUCT POLICY

A product is a collection of physical, psychological, service, and symbolic attributes that

collectively yield satisfaction, or benefits, to a buyer or user. A number of frameworks
for classifying products have been developed. A frequently used classification is based on
users that are consumer and industrial products. Both types of goods, in turn, can be
further classified on the basis of other criteria, such as how they are purchased
(convenience, preference, shopping, and specialty goods) and their life span (durable,

39
nondurable, and disposable). These and other classification frameworks developed for
domestic marketing are fully applicable to global marketing. The product classification
and product life cycle you learn from principle of marketing are relevant here also. Let us
see classification based on geographical coverage.

7.1 Products: Local, National, International, and Global

1. Local products

A local product is available in a portion of a national market. The term regional product
is synonymous with local product. These products may be new products that a company
is introducing using a rollout strategy or a product that is distributed exclusively in that
region.

2. National Products

A national product is one that, in the context of a particular company, is offered in a

single national market. Sometimes national products appear when a global company
caters to the needs and preferences of particular country markets.

Similarly, Sony and other Japanese consumer electronics companies produce a variety of
products that are not sold outside of Japan. The reason: Japanese consumers have a
seemingly insatiable appetite for electronic gadgets.

3. International Products

International products are offered in multinational, regional markets. The classic

international product is the Euro product, offered throughout Europe but not in the rest of
the world. Renault was for many years a Euro product When Renault entered the
Brazilian market, it became a multiregional company. Most recently, Renault invested, in
Nissan and has taken control of the company. The combination of Renault in Europe: and
Latin America, and Nissan in Asia, the Americas, Europe, the Middle East and! Africa,
has catapulted Renault from a multiregional to a global position. Renault is an example of

40
how a company can move overnight through investment or acquisition from an
international to a global position.

4. Global Products and Global Brands

Global products are offered in global markets. Some global products were designed to
meet the needs of a global market; others were designed to meet the needs of a national
market but also, happily, meet the needs of a global market.

Note that a product is not a brand. For example, portable personal sound systems or
personal stereos are a category of global product; Sony is a global brand. A global brand,
like a national or international brand, is a symbol about which customers have beliefs or
perceptions. Many companies, including Sony, make personal stereos. Sony created the
category more than 10 years ago, when it introduced the Walkman. It is important to
understand that marketers must create global brands; a global brand name can be used as
an umbrella for introducing new products. Although Sony, as noted previously, markets a
number of local products, the company also has a stellar track record both as a global
brand and "a manufacturer of global products.

Global product differs from a global brand in one important respect: It does not carry the
same name and image from country to country. Like the global brand, however, it is
guided by the same strategic principles, is similarly positioned, and may have amarketing
mix that varies from country to country. Whenever a company finds itself with global
products, it faces an issue: Should the global product be turned into a global brand? This
requires that the name and image of the product be standardized.

Product Positioning

Product positioning is a communications strategy based on the notion of mental "space"

positioning refers to the act of locating a brand in customers' minds over and against
other products in terms of product attributes and benefits that the brand does and does not
offer.

7.2 Strategies for products positioning

1. Attribute or Benefit

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A frequently used positioning strategy exploits a particular product attribute, benefit, or
feature. In global marketing, the fact that a product is imported can itself represent a
benefit positioning. Economy, reliability, and durability are other frequently used
attribute/benefit positions. Volvo automobiles are known for solid construction that offers
safety in the event of a crash.

2. Quality/Price

This strategy can be thought of in terms of a continuum from high fashion/quality and
'nigh price to good value (rather than low quality) at a low price.8The American Express
Card, for example, has traditionally been positioned as an upscale card whose prestige
justifies higher annual fees than VISA or MasterCard. Discover’s value position results
from no annual fee and a cash rebate to cardholders each year.

3. Use/User

Positioning can also be achieved by describing how a product is used or associating a

product with a user or class of users the same way in every market. For example,
Benetton user s the same positioning for it’s clothing when it targets the global youth
market.

Why choose Marlboro instead of another brand? Smoking Marlboro is a way of getting in
touch with a powerful urge to be free and independent. Lack of physical space may be a
reflection of the Marlboro user’s own sense of “machoness” or a symbol of freedom and
independence.

7.3 Product Strategies in International marketing

As you remember from principle of marketing there are various product strategies like
penetration of existing markets, new-product development, diversification and new
market search. When a company is engaging in global marketing it has five strategic
alternatives to extend by combining product and promotion.

1. Product/Communication Extension (Dual Extension)

42
Many companies employ product/communication extension as a strategy for pursuing
opportunities outside the home market. Under the right conditions, this is the easiest
product marketing strategy. Companies pursuing this strategy sell exactly the same
product, with the same advertising and promotional appeals as used in the home country,
in some or all world-market countries or segments.

The product/ communication extension strategy has an enormous appeal to global

companies because of the cost savings associated with this approach. The two most
obvious sources of savings are manufacturing economies of scale and elimination of
duplicate product R&D costs. There are also substantial economies associated with
standardization of marketing communications. For a company with worldwide
operations, the cost of preparing separate print and TV ads for each market can be
enormous.

Although these cost savings are important, they should not distract executives Item the
more important objective of maximum profit performance, which may require the use of
an adaptation or invention strategy. As we have seen, product extension, in spite of its
immediate cost savings, may in fact result in market failure due to various environmental
differences in the world.

43
2. Product Extension/Communication Adaptation

When a product fills a different need, appeals to a different segment, or serves a different
function under conditions of use that are the same or similar to those in the domestic
market, the only adjustment that may be required is in marketing communications.
Bicycles and is examples of product that has been marketed with this approach. It
satisfies recreational needs in the United States but serve as basic or urban transportation
in Ethiopia.

The product extension/communication adaptation strategy either design or by accident-

results in product transformation. The same physical product serving a different function
or use than that for which it was originally designed.

The appeal of the product extension/communication adaptation strategy is it’s relatively

low cost of implementation. Because the product in this strategy is unchanged" R&D,
tooling, manufacturing setup, and inventory costs associated with additions to the product
line are avoided. The only costs of this approach are in identifying different product
functions and revising marketing communications (including advertising, sales
promotion, and point of-sale material) around the newly identified function.

3. Product Adaptation/Communication Extension

A third approach to global product planning is to extend, without change, the basic home-
market communications strategy while adapting the product to local use or preference
conditions. The critical difference is, as noted earlier, one of execution and mind-set.

Exxon adheres to this third strategy, it adapts its gasoline formulations to meet the
weather conditions prevailing in different markets while extending the basic
communications appeal, "Put a tiger in your tank," without change. There are many other
examples of products that have been adjusted to perform the same function around the
globe under different environmental conditions. Soap and detergent manufacturers have
adjusted their product formulations to meet local water and washing equipment
conditions with no change in their basic communications approach. Household
appliances have been scaled to sizes appropriate to different use environments, and

44
clothing has been adapted to meet fashion criteria. Also, food products, by virtue of their
potentially high degree of environmental sensitivity, are often adapted.

4. Dual Adaptation

Sometimes, when comparing a new geographic market to the home market, marketers
discover that environmental conditions or consumer preferences differ; the same may be
true of the function a product serves or consumer receptivity to advertising appeals.
Unilever’s experience with fabric softener in Europe exemplifies the classic multinational
road to adaptation. For years, the product was sold in 10 countries under seven different
brand names, with different bottles and marketing strategies. Unilever's decentralized
structure meant that product and marketing decisions were left to country managers. They
chose names that had local-language appeal and selected 'package designs to fit local
tastes.

Today, rival Procter & Gamble is introducing competitive products with a pan-European
strategy of standardized products with single names, suggesting that the European market
is more similar than Unilever assumed. In response, Unilever’s European brand managers
are attempting to move gradually toward standardization sometimes, a company will
draw on all four of these strategies simultaneously when marketing a given product in
different parts of the world. For example, Heinz utilizes a mix of strategies in its ketchup
marketing. Whereas a dual extension strategy works in England, spicier, hotter
formulations are also popular in Central Europe and Sweden. Recent ads in France
featured a cowboy lassoing a bottle of ketchup and, thus, reminded consumers of 'the
product's American heritage. Swedish ads conveyed a more cosmopolitan message; by
promoting Heinz as "the taste of the big world" and featuring well known landmarks such
as the Eiffel Tower, the ads disguised the product's origin.

5. Product Invention

When potential customers have limited purchasing power, a company may need to
develop an entirely new product, designed to satisfy the need or want at a price that is
within the reach of the potential customer. Invention is a demanding but potentially
rewarding product strategy for reaching mass markets in LDCs.

45
The winners in global competition are the companies that can develop products offering
the most benefits, which in turn create the greatest value for buyers.

How to Choose a Strategy

Most companies seek a product strategy that optimizes company profits over the long
term. Which strategy for global markets best achieves this goal? There is, unfortunately,
no general answer to this question. Rather, the answer depends on the specific product
market-company mix. The choice of product and communications strategy in
international marketing is a function of three key factors:

1. The product itself, defined in terms of the function or need it serves

2. The market, defined in terms of the conditions under which the product is used,
the preferences of potential customer and the ability to buy the products in
question and

3. The costs of adaptation and manufacture to the company considering these

product/communications approaches. Only after analysis of the product/ market
fit and of company capabilities and costs can executives choose the most
profitable international strategy.

The international product life cycle theory

The life cycle begins when a developed country, having a new product to satisfy
consumer needs, wants to exploit its technological breakthrough by selling abroad. Other
advanced nations soon start up their own production facilities, and before long LDCs do
the same Efficiency/comparative advantage shifts from developed countries todeveloping
nations. Finally, advanced nations, no longer cost-effective, & import product.

46
Stages and Characteristics

There are five distinct stages (Stage 0 through Stage 4) in the IPLC. Table below shows
the major characteristics of the IPLC stages, with the United States as the developer of
the innovation in question. Exhibit shows three life-cycle curves for the same innovation:
one for the initiating country (i.e., the United States in this instance), one for other
advanced nations, and one for LDCs. For each curve, net export results when the curve is
above the horizontal line; if under the horizontal line, net import results for that particular
country.

Stage O-Local Innovation

Stage 0, depicted as time 0 on the left of the vertical importing/exporting axis, represents
a regular and highly familiar product life cycle in operation within its original market.
Innovations are most likely to occur in highly developed countries because consumers in
such countries are affluent and have relatively unlimited wants. From the supply side,
firms in advanced nations have both the technological know-how and abundant capital to
develop new products. In most instances, regardless of whether a product is intended for
later export or not, an innovation is initially designed with an eye to capture the
Innovating nation market.

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Stage Import/Export Target Market Competitors Production
Costs

(0) Local None Innovating nation Few: Local Initially High

Innovation Firms

(1) Overseas Increasing Innovating nation Few: Local Decline

Innovation Export & other advanced firms
nations

(2) Maturity Stable Export Advanced & Advanced Stable

LDCs Nations

(3) Worldwide Declining LDCs Advanced Increase

Imitation Export Nations

(4) Reversal Increasing Innovating nation Advanced & Increase

Import LDCS

Stage 1-Overseas Innovation

As soon as the new product is well developed, its original market well cultivated, and
local demands adequately supplied, the innovating firm will look to overseas markets in
order to expand its sales and profit. Thus, this stage is known as a "pioneering" or
"international introduction" stage. The technological gap is first noticed in other
advanced nations because of their similar needs and high-income levels. Countries with
similar cultures and economicconditions are often perceived by exporters as posing less
risk and thus are approached first before proceeding to less familiar territories.

Competition in this stage usually comes from innovating nation firms since firms in other
countries may -not have much knowledge about the innovation. Production cost tends to
be decreasing at this stage because by this time the innovating firm will normally have
improved the production process. Supported by overseas sales, aggregate production
costs tend to decline further because of increased economies of scale. A low introductory
price overseas is usually not necessary because of the technological breakthrough; a low

48
price is not desirable because of the heavy and costly marketing effort needed in order to
educate consumers in other countries about the new product. In any case as the product
penetrates the market during this stage, there will be more exports from the Innovating
nation and, correspondingly, an increase in imports by other developed countries.

Stage 2-Maturity

Growing demand in advanced nations provides an impetus for firms there to commit
themselves to starting local production, often with the help of their government’s
protective measures to preserve infant industries. Thus, these firms can survive and thrive
in spite of relative inefficiency. Development of competition does not mean that the
initiating country’s export level will immediately suffer. The innovating firm’s sales and
export volumes are kept stable because LDC is now beginning to generate a need for the
product. Introduction of the product in LDCs helps offset any reduction in export sales to
advanced countries.

Stage 3-Worldwide Imitation

This stage means tough times for the innovating nation because of its continuous decline
in exports. There is no more new demand anywhere to cultivate. The decline will
inevitably affect the innovating firm's economies of scale, and its production costs thus
begin to rise again. Consequently, firms in other advanced nations use their lower prices
(coupled with product differentiation techniques) to gain more consumer acceptance
abroad. As the product becomes more and more widely disseminated, imitation picks up
at a faster pace.

Stage 4-Reversal

Not only must all good things end, but also misfortune frequently accompanies the end of
a favorable situation. The major functional characteristics of this stage are product
standardization and comparative disadvantage. The innovating country's comparative
advantage has disappeared, and what is left is comparative disadvantage. This
disadvantage is brought about because the product is no longer capital-intensive or
technology-intensive but instead has become labor-intensive-a strong advantage

49
possessed by LDCs. Thus, LDCs-the last imitators establish sufficient productive
facilities to satisfy their own domestic.

Validity of the IPLC

The production of semiconductors started in the United States before diffusing to the
United Kingdom, France, Germany, and Japan. Production facilities are now set up in
Hong Kong and Taiwan, as well as in other Asian countries. Similarly, at one time the
United States used to be an exporter of typewriters, adding machines, and cash registers.

The IPLC is probably more applicable for products related through an emerging
technology. These newly emerging products are likely to provide functional utility rather
than aesthetic values. Furthermore, these products likely satisfy basic needs that are
universally common in most parts of the world. Washers, for example, are much more
likely to fit this theory than are dryers. Dishwashing machines are not useful in countries
where labor is plentiful and cheap, and the diffusion of this kind of innovation as
described in IPLC is not likely to occur.

Product Standardization versus Product Adaptation

Product standardization means that a product originally designed for a local market is
exported to other countries with virtually no change, except perhaps for the translation of
words and other cosmetic changes. Revlon, for example, used to ship successful products
abroad without changes in product formulation, packaging (without any translation, in
some cases), and advertising. There are advantages and disadvantages to both
standardization and individualization.

Arguments for Standardization

The strength of standardization in the production and distribution of products and

services is in its simplicity and cost. It is an easy process for executives to understand and
implement, and it also is cost-effective. If cost is the only factor being considered, then
standardization is clearly a logical choice because economies of scale can operate to
reduce production costs. Yet minimizing production costs does not necessarily mean that
50
profit increases will follow. Simplicity is not always beneficial, and costs are often
confused with profits.

Cost reductions do not automatically lead to profit improvements, and in fact the reverse
may apply. By trying to control production costs through standardization, the product
involved may become unsuitable for a1temtive markets. The result may be that demand
abroad will decline, which leads to profit reduction. In some situations, cost control can
be achieved but at the expense of overall profit. It is therefore prudent to remember that
cost should not be overemphasized. The main marketing goal is to maximize profit, and
production-cost reductions should be considered as a secondary objective. The two
objectives are not, always convergent.

When appropriate, standardization is a good approach. For example when a consistent

company or product image is needed, product uniformity is required. The worldwide
success of McDonald's is based on consistent product quality and services. Hamburger
meat, buns, and fruit pies must meet strict specifications. Some products by their very
nature are not or cannot be easily modified. Musical recordings and works of art are
examples of products that are difficult to differentiate, as are books and motion pictures.
When this is the case, the product must rise and fall according to its own merit. Whether
such products will be successful in diverse markets is not easy to predict.

With regard to high-technology products, both users and manufacturers may find it
desirable to reduce confusion and promote compatibility by introducing industry
specifications that make standardization possible.

A condition that may support the production and distribution of standardized products
exists when certain products can be associated with particular cultural universals. That
is, when consumers from different countries share similar need characteristics and
therefore wants essentially identical products. Watches are used to keep time around the
world and thus can be standardized. The diamond is another example.

Advantage of standardization includes:

1. High cost of adaptation.

2. Primarily industrialized products, e.g. medical equipments

51
 3. Convergence and similar tastes in diverse country markets.

4. Marketing to predominantly similar countries, almost similar needs, income and

exposed to the same media.

5. Centralized management of international operations, headquarters prefer

standardization

6. Strong country of origin effect and image, e.g. Italian shoes, French fashion,
German cars,

7. Economies of scale in production, R&D, and marketing.

8. Competitors have “successful” standardized products.

Arguments for Adaptation

All countries are not the same in their preference for products due to their difference in
economy, culture, natural environment. Climate is a major factor which forces companies
to adapt their product accordingly. As petroleum companies are modifying their product
to hot country users and cold country users.

Let us see some of the reasons for product adaptations.

1. Difference in technical standards, e.g. voltage, driver side,

2. Primarily consumer and personal use products, e.g. clothes, food,

3. Variations in conditions of use.

4. Variations in ability to buy, i.e. difference in income levels.

5. Fragmentation with independent national subsidiaries.

6. Strong cultural differences, language may affect purchase.

7. Local environment-induced adaptation, e.g. governmental intervention.

8. Adaptation strategy successfully used by competitors

Product adaptation is necessary under several conditions. Some are mandatory,

whereas others are optional.

Mandatory Product Modification

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The mandatory factors affecting product modification are the following:

1. Government’s mandatory standards (i.e., country’s regulations)

2. Electrical current standards

3. Measurement standards

4. Product standards and systems

The most important factor that makes modification mandatory is government regulation.
To gain entry into a foreign market, certain requirements must be satisfied. Regulations
are usually specified and explained when a potential customer requests a price quotation
on a product to be imported.

For example, added vitamins in margarine, forbidden in Italy, are compulsory in the
United Kingdom and Holland. In the case of processed cheese, the incorporation of a
mold inhibitor may be fully allowed, allowed up to the permissible level, or forbidden
altogether.

Optional Product Modification

The conditions dictating product modification mentioned so far is mandatory in the sense
that without adaptation a product either cannot enter a market or is unable to perform its
function there. Such mandatory standards make the adaptation decision easy: a marketer
must either comply or remain out of the market. A more complex and difficult decision is
optional modification, which is based on the international marketer's discretion in taking
action. Nescafe in- Switzerland, for instance, tastes quite different from the same brand
sold just a short distance across the French border.

One condition that may make optional modification attractive is related to physical
distribution, and this involves the facilitation of product transportation at the lowest cost.
Since freight charges are assessed on either a weight or a volume basis, the carrier may
charge on the basis of whichever is more profitable. The marketer may be able to reduce
delivery costs if the products are assembled and then shipped. Many countries also have
narrow roads, doorways, stairways, or elevators that can cause transit problems when
products are large or are shipped assembled. Therefore, a slight product modification may
greatly facilitate product movement.
53
A local use condition is also requiring optional product modification, including climatic
conditions. The hot/cold, humid/dry conditions may affect product durability or
performance. Avon modified its Candid moist lipstick line for a hot, humid climate.
Certain changes may be required in gasoline formulations. If the heat is intense, gasoline
requires a higher flash point to avoid vapor locks and engine stalling. As a result, these
automobiles are attractive to customers in LDCs, especially when the automobiles are
also durable and simple to maintain.

Another local use condition that can necessitate product change is space constraint.
Sears's refrigerators were redesigned to be smaller in dimensions without sacrificing the
original capacity, so that they could fit the compact Japanese home. Philips, similarly,
had to reduce the size of its coffeemaker.

Philips downsized its shaver to fit the smaller Japanese hand. One U.S. brassiere
company did well initially in West Germany but failed to get repeat purchases. The
problem was that German women have a tendency, not to try on merchandize in the
store' and thus did not find out until later that the product was ill-fitting because of
measurement variations between American and German customers usually do not return
a product for refund or adjustment.

Local use conditions include user's habits. Since the Japanese prefer to work with
pencils-a big difference from the typed business correspondence common in the United
States--copiers require special characteristics that allow the copying of light pencil
[Link], other environmental characteristics related to use conditions should be
examined. Detergents should be reformulated to fit local water conditions.

Price may often influence a product's success or failure in the marketplace. Foreign
consumers are generally not convenience-oriented, and an elaborate product can be
simplified by removing any "frills" that may unnecessarily drive up the price.

One reason that international marketers often voluntarily modify their products in
individual markets is their desire to maximize profit by limiting product movement
across national borders. The rationale for this desire to discourage gray marketing is that
some countries have price controls and other laws that restrict profits and prices. When
other nearby countries has no such laws, marketers are encouraged to move products into

54
those nearby countries where a higher price can be charged. A problem can arise in
which local firms in countries where product prices are high are bypassed by marketers
who buy directly from firms handling such products in countries where prices are low.

In spite of authorities’ efforts to prevent companies from keeping lower-priced goods out
of higher-priced countries, marketers may do so anyway as long as they do not get
caught. Some manufacturers try to hinder these practices by deliberately varying
packaging, package coding, product characteristics, coloring, and even brand names in
order to spot violators or to confuse consumers in markets where products have moved
across borders. Perhaps the most arbitrary yet most important reason for product change
abroad is historical preference, or local customs and culture. Product size, color, speed,
grade, and source may have to be redesigned in order to accommodate local preference

When products clash with a culture, the likely loser is the product, not the culture. Strong
religious 'beliefs make countries of the Middle East insist on halalled chickens. Product
changes are not necessarily related to functional attributes such as durability, quality,
operation method, maintenance, and other engineering aspects. Frequently, aesthetic or
secondary qualities must also be taken into account. There are instances in which minor,
cosmetic changes have significantly increased sales. Therefore, functional and aesthetic
changes should both be considered in regard to how they affect the total, complete
product.

In conclusion, marketers should not waste time resisting product modification. The
reluctance to change a product may be the result of insensitivity to cultural differences in
foreign markets. Whatever the reason for this reluctance, there is no question that it is
counterproductive in international marketing. Product adaptation should rarely become
an important issue to the marketer. A good marketer compares the incremental profits
against the incremental costs associated with product adaptation. If the incremental profit
is greater than the associated incremental cost, then the product should be adjusted-
without question. In making this comparison, marketers should primarily use only future
earnings and costs.

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 CHAPTER VI

INTERNATIONAL PRICING AND TERMS OF PAYMENT

[Link] pricing strategies versus domestic pricing strategies

Price is an integral part of a product – a product cannot exist without a price. Price is
important because it affects demand, and an inverse relationship between the two usually
prevails. Price also affects the larger economy because inflation is caused by rapid price
increases. International pricing is one of the most critical and complex issues that a firm
faces. Price is the only marketing mix element that creates revenue, while all the others
entail costs. Price is the money or other considerations (including other goods and
services) exchanged for the ownership or use of a good or service.

From the consumer point of view, price is used to indicate value when it is paired with
the perceived quality of a product or service. Value can be defined as the ratio of
perceived quality to price. For some products, the price itself influences the perception of
quality and the value to consumer.

Factors Affecting International Pricing Decisions

The factors affecting pricing internationally can be grouped in to three categories, as

presented in table.

Company factors Market factors Environmental factors

Company objectives Competition and market structure Regulations and government policies
and policies

Costs Customer demand and income Exchange rates

levels

Distribution channels Inflation &Price control

1. Company factors

56
 A. Company objectives and policies. When developing a pricing strategy a company
has to decide what it wants to accomplish with this strategy. A company’s pricing
objectives should take into consideration the marketing objectives, and these in turn are
based on the overall company strategy.

Pricing Description
objectives

Return on Prices are set at a predetermined level of return on the capital outlay on the short term
investment

Market The firm wants to get as much profit as possible from the market in a short period of
skimming time (through a high price)

Market The firm wants to grab as much market share as possible in a short period of time
penetration (through low price)

Early cash When the firm has a liquidity problem, it wants to generate high volume of sales and a
recovery high cash flow (special gifts, discounts

Prevent new Setting a low price in order to prevent new entrants from entering the market
entrants

Product Firms with a broad product range that wish to segment the market can do this on the
differentiation basis of price

B. Costs

Costs are often a major factor in price determination, because they provide a floor under
which prices cannot go in the long run. The company wants to set a price that will at least
cover the costs needed to make and sell its products. Therefore, the structure of the costs

57
becomes important. We know that the company costs consist of two parts: the variable
costs (which change with the sales volume) and the fixed costs (which do not vary with
the sales volume).

2. Market factors

A. Competition and market structure represents another key factor in international price
setting. The differences in the competitive situation across countries usually lead to cross
border price differentials. Also the prices of competitors’ products (the substitute
products for the consumer) have an impact on the sale volume attained by the
international company. The decision the company has to take is whether to price above,
at the same level or below the competition.

Market structures

• Pure competition- consists of many buyers and sellers trading in a uniform

commodity.

• Pure monopoly - consists of one seller and many buyers.

• Monopolistic competition- consists of many buyers and sellers who trade over a
range of prices rather than at a single market price by selling differentiated
products.

• Oligopolistic competition- consists of few sellers who are highly sensitive to

each other’s pricing and marketing strategies.

Any price differential from competitors has to be justified in the minds of consumers by a
differential in utility, namely perceived value. The closer the substitutability of products,
the closer prices should be. The firm must price the product more competitively if there
are other sellers in the market. A firm entering an oligopoly market where only few
sellers dominate the industry, will be under pressure to keep its prices in line with the
existing firms.

B. Customer Demand and Income level

Customer demand and income levels are important elements to be taken into
consideration when setting the price. While the costs set the floor for the price, the

58
consumer’s perceived value attached to the product will set the ceiling of the price.
Consumer demand depends on the buying power (correlated with the income level), the
tastes and habits of consumers, their lifestyles and substitutes. The income level and the
buying power is a key aspect in determining the price. The relationship between price and
demand is expressed in the concept of the elasticity of demand, which measures how
responsive is the demand to a change in price. In the countries where the per capita
income is low, consumers are very price-sensitive. In the countries where there are high
income levels, consumers have lower price elasticity. Practicing premium prices is
difficult in such countries, therefore an option is considered to be to go for the mass
market by adjusting the product (downsizing or lowering the quality of the product).

C. Distribution channel:

When setting the prices the marketer has to also consider distribution channels. The
distribution costs add up to the production costs and will increase the final price to the
consumer. Distribution costs are function of channel length, gross margin they practice
and logistics.

3. Environmental factors

A. Regulations and government policies: have both a direct and an indirect impact on
pricing policies. Factors that have a direct impact on pricing policies include taxes rates
(such as the value added taxes) and tariffs’ levels, import licenses and antidumping
legislation. Tariff levels differ from country to country. In countries where there are high
custom duties and the price elasticity is high, the price might have to be set at lower
levels if the product is to achieve a satisfactory sales volume. Consequently, profitability
will be low in these countries.

Also when import duties in a country are high on finished products, but relatively lower
for component parts and materials, it might be an incentive to produce or assemble
locally.

Import licenses are issued by some governments, when they consider that prices are too
low or too high. Antidumping regulations are found in most industrialized countries.
Dumping has been defined as the practice of selling in foreign markets at prices below

59
those in the domestic market or below the production cost. Antidumping legislation is
enacted by countries that wish to protect certain local industries from price fluctuations
that would disrupt/disturb/ local production.

B. Exchange rates movement: is one of the most unpredictable factors affecting pricing.
As the exchange rates move up and down, they affect all producers. A company’s costs
are often calculated in the domestic currency and as this currency weakens it means that
the company’s goods are cheaper in another currency. This can represent a new
opportunity as prices in foreign markets are reduced and sales and market share can be
kept or increased. The companies that produce in countries with appreciating currencies
have more difficult situations.

C. Inflation rate: is another major variable that can affect the cost and the pricing of a
product. First countries have different inflation rates and second inflation varies over
time. In stable economies inflation rate is single digit inflation (in most EU countries
inflation rate is between 0-2percent) while in instable economies inflation rate can go up
to several hundred or even thousands (it was the case of Brazil in 1980’s). In such highly
inflationary environments the company has to adjust the prices permanently to keep up
with inflation, in this way product may turn out to be more expensive.

D. Price controls. In some countries governments regulate and control prices either for
the entire economy or for specific industries (such as health, education, food and other
essential items). The justifications for price control are mainly political, but also
economical: the purpose is to stop inflation and the accelerating wage-price spiral, as well
as to protect consumers. In such markets the company functions as in a regulated
industry. Company representatives usually sustain that there are a number of negative
consequences to price controls:

 the maximum price often becomes the minimum price if a sector is allowed to
price increase, because all business in the sector will take it regardless of cost
justification,

 The wage-spiral advances highly in anticipation of price controls, labor often

turns against price restrictions because they are usually accompanied by salary
restrictions, authorities raise less taxes because less money is made.

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 [Link] standardization

International pricing is influenced as we have seen by a number of factors: it starts from

the companies’ objectives, is developed through the company policy, is based on product
cost and its structure and takes into consideration environmental factors. The main
alternatives when choosing one way or another of pricing are presented further.

A. Standardized or adapted pricing

Can price be standardized? Can we set a uniform price in all countries? The price is not
the same because the purchasing power differs from one country to another. To conclude,
we cannot standardize price in nominal terms, due to differences in incomes and
purchasing power, positioning of the product in different countries, due to product life
cycle (the product might be in different stages in different countries requiring therefore a
different price). When we talk about standardizing prices we have to distinguish the idea
of standardizing prices versus standardizing price policies. We cannot standardize prices,
but we can standardize pricing policies. We just have to retain that standardizing price is
not the same as standardizing pricing policies.

We can say that our strategy is to have a competitive price in all markets, to sell the
product at a low price and to position it as a mass product and we will set the price to
whatever this means in each country.

B. Full cost pricing or marginal pricing?

The full cost pricing strategyis also called the cost-plus pricing. This approach adds the
international costs and a markup at the domestic manufacturing costs. In other words, the
overseas customers pay for the total production cost of the product (including the fixed
costs), as well as for the marketing costs and logistical costs of selling the product
abroad. In many cases this method leads to very high prices for the end user, making the
product uncompetitive in some instances.

The marginal cost pricingis also known as the dynamic incremental pricing. Through
this method the price is set based on only variable costs for production and the exporting
costs for the product. In other words the costs incurred for the production of that
particular item, based on the judgment that the overheads are recovered from the previous

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products. The actual cost floor can be somewhere between direct costs and the full cost.
If the export price is much lower than the domestic price (due to non-inclusion of fixed
costs) dumping accusations might be triggered/generate/ from the export market. Among
the reasons for pricing exports at less than the full price are: to assist a dealer
organization to grow, to keep a group of employees working together, to sell a special
product outside the usual export line, orders for large volumes, the export customer
provides his own installation and services and when incremental sales may result. On the
short run when the company has excess capacity, prices can be set only on direct costs,
such as labor, raw materials, shipping, but on the long run prices should recover full cots.

C. Skimming or penetration pricing?

A company may enter new markets either using high prices or low prices. The skimming
strategy consists of selling products at high prices in a new market, based on the idea
that you are selling a new product, an innovative product and you can maximize your
profits until the competition enters the market. This strategy can be used in those
countries where there are only two income level groups: the wealthy and the poor. The
poor cannot buy the product because its cost is higher than the price they can afford to
pay and you address the wealthy segment that is usually in-sensitive to prices. The
strategy is used in the introduction phase of the product life cycle, by limiting the demand
to the early adopters who are willing to pay the price. The goals of this pricing strategy
are on the one hand to maximize revenue on limited volume and on the other hand to
reinforce the customers’ perceptions of high quality, the price being part of the
positioning strategy.

Or, by setting a deliberately high price, demand is limited to innovators and early
adopters who are willing and able to pay the price. When the product enters the growth
stage of the life cycle and competition increases, manufacturers start to cut prices. This
strategy has been used consistently in the consumer electronics industry; for example,
when Sony introduced the first consumer VCRs in the 1970s, the retail price exceeded
$1,000.

The same was true when compact disc players were launched in the early 1980s. Within a
few years, prices for these products dropped well below $500. This pattern was evident in

62
the fall of 1998, when HDTV sets went on sale in the United States with prices starting at
about $7,000. This price both maximizes revenue on limited volume and matches demand
to available supply.

The penetration strategy:In this case the objective is to “penetrate” the market, to get a
good market share, to cover the market well in a short period of time and it is done by
selling the product at low prices. Obtaining the high market share in a short period of
time will compensate for a lower per unit return. This approach usually requires mass
markets, price sensitive customers and decreasing production and marketing costs as the
sales volume increase.

It should be noted that a first-time exporter is unlikely to use penetration pricing. The
reason is simple: Penetration pricing often means that the product may be sold at a loss
for a certain length of time. Many companies, especially those in the food industry,
launch new products that are not innovative enough to qualify for patent protection.
When this occurs, penetration pricing is recommended as a means of achieving market
saturation before competitors copy the product.

Forms of the penetration strategies:

 Expansionistic pricing:means that the price goes much lower in order to get a
larger percentage of customers who are potential buyers at very low prices.

 The pre-emptive pricing:means to set the prices so low in order to discourage

competition, the price level being close to the total unit cost.

 The extinction pricing:has the purpose to eliminate existing competitors from

international markets, by again setting very low prices, close or under the total
unit cost.

The strategy may be adopted by large low-cost producers with the purpose of driving
weaker marginal and small producers in the industry. Whatever the pricing strategy the
company uses, the one who finally decides what is the right price is the consumer. He
sets the price at the level he perceives, he receives value for the money paid (for that
price).

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Companies from different countries can use different strategies in setting the price for
their products. An important aspect when setting the export price internationally is the
price quotation. Different levels of prices can be used when exporting according to who
pays the transportation, handling and insurance costs.

Specific Aspects in International Pricing

Price escalation

It occurs when the price in the foreign market ends up higher than the price in the
domestic market due to transportation costs, local taxes, custom duties, distribution
margins, export documentation charges, insurance etc. Transportation costsare important
because international marketing requires shipments of products over long distances. The
contribution of transportation costs to the final price depends on the type of product. High
technology products are less sensitive to transportation costs than standardized consumer
goods or commodities.

For expensive goods (such as computers and electronic instruments) transportation costs
usually represent only a small fraction of total costs and rarely influence pricing
decisions, while for commodities, transportation costs represent a higher percentage from
the total costs and can decide who gets an order. Tariffs and local taxesalso add to the
domestic costs. Administrative costsconsist of fees for imports certificates or export or
import licenses and other documents. Distribution channel costs. Every time the product
goes down the channel towards the consumer, somebody gets a commission every time
the product changes hands, there are more taxes paid (VAT), there are added more
margins and the product gets more expensive.

Ways to lessen price escalation/growth/

1. Rearrange the distribution channel

Distribution channels are often responsible for price escalation, /go up, rise/ either due to
the length of channel or the high margins practiced by intermediaries. One way to lower
export prices is to shorten the channel and to try to negotiate with intermediaries lower
margins. Obtaining lower margins from distributors is possible only when a large part of
their business depends on the company’s product.

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2. Lower the production costs for foreign markets

There are a few ways how the company can lower production costs for foreign markets:

A. By using different materials (cheaper materials) of lower quality and a lower

price.

B. By eliminating costly features or make them optional. A company can offer in a

foreign market a core product and all other features to become optional. Such an example
is represented by the automobiles, which in some markets have a lot of expensive
features (such as central locking, leather sofa, air conditioning, etc) optional. The
customers buy the core product and they can decide if they want to pay extra or not for
the optional features.

C. By down-sizing the product. Another option would be to downsize the product by

offering a smaller version of the product or less content.

3. Assemble or manufacture the product in foreign markets

A closer proximity/nearness/ to the customer will lower the transportation costs. But it is
not necessary to manufacture in the export market. Another argument in favor of
assembling goods in a foreign market would be that usually taxes for raw materials and
part components are lower than for manufactured goods, so it is more advantageous to
import part components than finished goods.

4. Lowering tariffs:

A. If the production costs are lowered, that will also mean lower tariffs as the tax will be
applied to a lower value.

B. Modify slightly the product so that it can be reclassified into a different lower tariff
classification or simply trying to persuade the custom officer to classify it under a lower
tariff category.

C. Repackaging may be a solution to lower custom duties when the taxes differ for
different sizes of the package.

In USA tequila bottled in larger bottles is taxed half than in the smaller bottles, so the
product was rebottled in larger recipients in order to lower the custom duty.

65
 5. Using free trade zones or free ports when possible

There are more than 300 free trade zones in the world: In a free trade zone, the payment
of the import duties is postponed until the product leaves the free trade zone and either
enters the country or is exported to a third country.

Dumping

Dumping is an important global pricing strategy issue. Dumping is defined differently by

various economists as well as by different governments, either as prices below cost of
production or prices below the price of the same goods in the home market. In many
cases dumping is defined as an unfair price.

There are a number of causes for dumping, among which the most frequent are:

• Subsidies from government in production.

• Subsidies from government in export.

• Subsidies from government in transport.

• Pricing on marginal cost.

Types of Dumping

Description
Types

Predatory A firm is selling the product at a considerable loss to gain access to the market and
dumping drive out competitors.

Persistent A firm consistently sells at lower prices in one market than in others, as a permanent
dumping strategy, usually due to different market conditions.

Sporadic/irregular/ A firm wants to get rid of the unsold stocks and dumps the excess in markets abroad
dumping where they are not usually exporting to.

Unintentional Occurs because of the existence of a time lag between the date of the sales agreement
and the arrival of the goods. The exchange rates’ fluctuations can cause the final price

66
dumping of the good to be below the usual price in the manufacturer’s home market.

Reverse dumping Occurs when the price of a good is much lower in the manufacturer’s home market.

Strategies that companies can use in order to avoid dumping:

1. To base its strategy on non-price competition, such as the use of credit facilities to both
consumers and distributors, that is equivalent with a price reduction and avoids the
dumping laws.

2. To differentiate the home product from the exported one, by selling different brands in
foreign markets for comparable products, so that removing any basis for price
comparison and avoiding charges of dumping.

3. To move away from low value to high value products through product differentiation.

4. To move the location of the production in the host market.

[Link] quotation terms

In quoting the price of goods for international sale, a contract may include specific
elementsaffecting the price, such as credit, sales terms, and transportation. Parties to the
transactionmust be certain that the quotation settled on appropriately locates
responsibility for the goodsduring transportation and spells out who pays transportation
charges and from what [Link] quotations must also specify the currency to be used,
credit terms, and the type of documentation required. Finally, the price quotation and
contract should define quantity and quality. A quantity definition might be necessary
because different countries use different units ofmeasurement. In specifying a ton, for
example, the contract should identify it as a metric or anEnglish ton and as a long or short
ton. Quality specifications can also be misunderstood if notcompletely spelled out.
Furthermore, there should be complete agreement on quality standardsto be used in
evaluating the product.

Terms of Sales

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INCOTERMS Description

(main terms)

Ex works The seller’s responsibility and costs ends in his home country.

(point of origin)

Free on board The seller’s responsibility and costs end in most cases when the goods are loaded on the
appropriate carrier (ship or other)
(FOB)

Free along side The seller has to provide the delivery of goods free alongside, but not on board of the
transportation carrier, but only in the port of shipment
(FAS)

Cost and freight The seller’s responsibility ends when the goods are loaded on board a carrier or in the
(C&F) custody of a [Link] seller is responsible for paying for the transportation, but the
buyer still has to pay for the insurance.

Cost, insurance The seller responsibility ends when the goods are loaded on board a carrier and also has to
and freight (CIF) provide and pay for the transportation and for the insurance.

Ex dock The seller is responsible to provide and pay all the costs so that the goods arrive on the
dock of the overseas port of destination, with the import duty paid.

• Ex-works (EXW) - at the point of origin

The exporter agrees to deliver the goods at the disposal of the buyer to the
specified place on the specified date or within a fixed period. All other charges
are borne by the buyer.
• Free Alongside Ship (FAS) - at a named port of export
The exporter quotes a price for the goods, including charges for delivery of the
goods alongside a vessel at a port. The seller covers the costs of unloading and
wharf age. Loading onto the ship, ocean transportation, insurance, unloading and

68
 wharf age at a port of destination and transport to the site required by the buyer
are on the importer’s account.
• Free on Board (FOB) - at a named port of export
In addition to FAS, the exporter undertakes to load the goods on the vessel to be
used for ocean transportation and the price quoted by the exporter reflects this
cost.
• Cost and Freight (CFR) - to a named overseas port of disembarkation
The exporter quotes a price for the goods, including the cost of transportation to a
named overseas port of disembarkation. The cost of insurance and the choice of
the insurer are left to the importer.

• Cost, Insurance and Freight (CIF) - to a named overseas port of

disembarkation

The exporter quotes a price including insurance and all transportation and
miscellaneous charges to the port of disembarkation from the ship or aircraft. CIF
costs are influenced by port charges (unloading, wharf age, storage, heavy lift,
and demurrage), documentation charges (certification of invoice, certification of
origin, weight certificate) and other miscellaneous charges (fees of freight
forwarder, insurance premiums).
• Delivery Duty Paid (DDP) - to an overseas buyer’s premises
The exporter delivers the goods with import duties paid including inland
transportation from the docks to the importer’s premises.

[Link] of payment

Table 2 Methods of payment

Method Payment Goods Risk to Risk to importer

available to exporter
buyer

Cash in Before shipment After None None Relies on

advance payment exporter to ship

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 goods as ordered

Letter of credit When goods After Little or Relies on exporter to

shippedand payment none ship goods described
documents in documents
depending
comply, with on L/C*
L/C*

Sight draft, On presentation After Buyer can Same as L/C* unless

of draft to buyer payment refusegoods he can inspect goods
documents
before payment
against

payment

Time draft, On maturity of Before Relies on Same as above

documents payment buyer to
draft
pay draft
Against
acceptance

Open account As agreed Before Relies None

payment completely
on buyer to
pay

his account

Note

*L/C denotes letter of credit. The terms “exporter,” “beneficiary” and “seller” are
used interchangeably throughout the workbook unless otherwise noted. The terms
“importer,” “applicant” and “buyer” are also interchangeable. Source: International
Workbook (Chicago: Unibanc Trust, 1985), 1. Reprinted with permission of
UnibancTrust.

Cash in advance: The seller may want to demand cash in advance when:

1. The buyer is financially weak or an unknown credit risk.

70
 2. The economic/political conditions in the buyer’s country are unstable.
3. The seller is not interested in assuming credit risk, as in the case of consignment
and open account sales.

Because of the immediate uses of money and the maximum protection, sellers
naturally prefer cash in advance. The problem, of course, is that the buyer is not eager to
tie up its money, especially if the buyer has some doubt about whether it will receive the
goods as ordered. By insisting on cash in advance, the seller shifts the risk completely to
the buyer, but the seller may end up losing the sale by this insistence.

• Cash with order – Cash payment when order is placed

Letter of credit (L/C)

Letter of credit (L/C)An alternative to the sight draft is a sight letter of credit (L/C). As
a legal instrument, it is a written undertaking by a bank through prior agreement with its
client to honor a withdrawal by a third party for goods and services rendered. The
document, issued by the bank at the buyer’s request in favor of the seller, is the bank’s
promise to pay an agreed amount of money on its receipt of certain documents within the
specified time period. Usually, the required documents are the same as those used with
the sight draft. In effect, the bank is being asked to substitute its credit for that of the
buyer. The bank agrees to allow one party to the transaction (the seller, creditor, or
exporter) to collect payment from that party’s correspondent bank or branch abroad.
There are several types of letters of credit, including revocable, irrevocable, confirmed,
unconfirmed, standby, back-to-back, and transferable.

• Confirmed irrevocable/unchangeable/ letter of credit – A letter of credit issued by

the importer’s bank and confirmed by a bank, usually in the exporter’s country. The
obligation of the second bank is added to the obligation of the issuing bank to honor
drafts presented in accordance with the terms of credit.
• Unconfirmed irrevocable letter of credit – A letter of credit issued by the
importer’s bank. The issuing bank still has an obligation to pay.
• Revocable letter of credit – A letter of credit that may be withdrawn from the
beneficiary at any time without prior notice to the exporter. It does not carry a bank’s
obligation to pay.

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Bill of exchange (draft)

Bill of exchange (draft): A means of financing international transactions is through a bill

of exchange or draft, which is a request for payment (see Figure 2).The request is an
unconditional order in writing from one person (drawer) requiring the person to whom it
is addressed (drawee) to pay the payee or bearer on demand or at a fixed or determinable
time. The drawer, usually the exporter, is the maker or originator of the draft requesting
payment. The drawee, usually the buyer, is the party responsible for honoring or paying
the draft. The payee may be the exporter, the exporter’s bank, the bearer, or any specified
person. In short, a draft is a request for payment. It is a negotiable instrument that
contains an order to pay a payee. As noted by John Stuart Mill many years ago, the
purpose is to save expense and minimize the risk of transporting precious metals from
place to place as payment of imports. The bill of exchange simply allows banks to make
adjustments by debiting or crediting accounts maintained in buyer or seller names with
other bank.

There are two principal types of bill of exchange: sight and time. A sight draft, as the
name implies, is drawn at sight, meaning that it is paid when it is first seen by the drawee.
A sight draft is commonly used for either credit reasons or for the purpose of title
retention. A time (usanceor date) draft is drawn for the purpose of financing the sale or
temporary storage of specified goods for a specified number of days after sight (e.g.,
thirty, sixty, ninety days, or longer). There are other variations of this kind of draft. If
bills of lading, invoices, and the like accompany the draft, this is known as documents
against payment (D/P). If financial documents are omitted to avoid stamp tax charges
against such documents or if bills of lading come from countries where drafts are not
used, this type of collection is known as cash against documents. Frequently, the draft
terms may read “90 days sight D/A” or documents against acceptance.

Open Account

With an open account, goods are shipped without documents calling for payment, other
than the invoice. The buyer can pick up goods without having to make payment first. The
advantage with the open account is simplicity and assistance to the buyer, who does not
have to pay credit charges to banks. In return the seller expects that the invoice will be

72
paid at the agreed time. A major weakness of this method is that there is no safeguard
against default, since a tangible payment instrument does not exist.

• No draft drawn; transaction payable when specified on invoice.

Consignment – A shipment that is held by the importer until the merchandise has been
sold, at which time payment is made to the exporter.

Other export documents / terms

• A bill of lading – is a contract between the exporter and the shipper indicating that
the shipper has accepted responsibility for the goods and will provide transportation
in return for payment.
– A straight bill of lading is non-negotiable.
– A shipper’s order bill of lading is negotiable; it can be bought, sold or
traded while the goods are still in transit, (title of goods can change hands)
- normally the original bill of lading is needed to take possession of goods.
• Air way bill – a contract between the exporter and the air-cargo company
• Country of origin certificate – certifying where the goods were manufactured
• Commercial invoice / Consular invoice from consulate office of importing country
in importing country language
• LC margin – a percent of payment of the total import amount paid by the importer to
his bank for the bank to issue a letter of credit for the whole value of the import
• Pre-Shipment inspection – inspection of the goods done by or on behalf of the
importer before the shipment
• Export packing list – a list in the export documents listing the packaging and items
in each packing
• Insurance certificate – issued by an insurer for the insurance of the export
merchandise
• Export / Import registration – required in various countries to allow firms to import
or export goods
• Export / Import license – a license needed in some countries for specific imports or
exports
• Freight forwarder – a company involved in packing and shipment of export goods

73
• Customs / Clearing Agent – company involved in dealing with the customs
clearance of imported or exported goods
• Bonded warehouse – a designated warehouse where imported goods may be stored
prior to the payment of import duties. Importers pay customs duties when they take
the goods out of the bonded warehouse
• Marking of the shipments – markings on the outer packaging of the export
consignment for the purpose of identification
• Marine cargo insurance (special onetime / open policy) – export goods’ insurance
for the transportation
 Containers – metal containers (normally 20 or 40 feet long) for safe
transportation of cargo by sea
• Bulk-break – normally goods are transported by sea in large metal containers – some
exporters may not have enough cargo to fill a container then the cargo companies
combine cargos from a number of exporters to fill a container for shipment to a
destination.

[Link] pricing

A substantial amount of global business takes place between subsidiaries of the same
company. It is estimated that one third of the world trade volume takes place among the
largest eight hundred multinationals. The pricing of goods and services bought and sold
by operating units or divisions of a single company represent the transfer pricing. So,
transfer prices (or the intra-company prices) are prices used in transactions between
buyers and sellers that have the same corporate parent. How these prices are set is a
major issue for international companies and governments. Transfer prices can create
problems because they are not determined in the market place through the interaction of
willing buyers and sellers and this can result in a situation where foreign transfer prices
are set at a level that does not reflect a fair value. Due to a number of factors related to
the context in which multinational companies operate, transfer prices are used to
manipulate profits, duties and incomes of the company.

Factors influencing transfer pricing

74
1. Market conditions in the foreign country

2. Competition in the foreign country

3. Reasonable profit for the foreign affiliate

4. Economic conditions in the foreign country

5. Import restrictions

6. Custom duties

7. Price controls

8. Taxation in the foreign country

9. Exchange controls

Different tax, tariff or subsidy policies in different countries invite to the manipulation of
transfer prices. By accumulating more profits in a low-tax country, a company lowers its
overall tax bill and thus increases profit. At the same time the company is interested to
minimize income in high tax countries. The higher the duty rates, the higher the incentive
to reduce transfer prices, so that to minimize the custom duties. There are a number of
reasons for which multinational companies use transfer prices in their favor.

[Link] Trade

Counter trade is a pricing tool that involves some form of non-cash compensation.
Counter trade comes in a few forms, some of them that involve cash compensations and
some others that do not involve the use of money. Forms that do not involve any type of
cash payments are barter, clearing agreements and switch trading, while forms that
involve some use of money are product buy-back, compensation, counter purchase and
offset as presented in table

Types of counter trade

Non cash counter trade Cash counter trade forms

forms

Barter Product buy-back

75
Clearing agreements Compensation deals

Switch trading Counter purchase

Offset

Non-cash counter trade forms

Barter: Barter is a direct exchange of goods between two parties: one product is
exchanged for another product without the use of money. It is a one-time direct and
simultaneous exchange of products of equal value (i.e., one product for another)

Clearing agreements: Under this form two governments agree to import a specified
value of preset goods from one another over a given period of time.

Each party sets up an account that is debited whenever goods are traded. Imbalances at
the end of the contract period are cleared through payment in goods (and sometimes can
be in hard currency too).

Switch trading. This is a variant of the clearing agreements, where a third party is
involved. The right to the surplus credits between the two governments is sold to
specialized traders (switch trader) at a discount. The third party then uses the credits to
buy goods from the deficit country.

Plus cash counter trade forms

A. Compensation: takes place when a company sells industrial equipment to a country

and receives a certain portion of the payment in convertible currency and the rest in kind.
The advantage is that as compared with the barter, there is an immediate cash settlement
of a portion of the bill. If the seller has to rely on a third party to find a buyer, the cost
involved has to be taken into consideration in the original compensation negotiation.

B. Counter Purchase: Consists in signing two parallel contracts. Every party agrees to
buy from the other party a certain amount of goods for hard currency. Both parties pay in

76
hard currency, but each party commits to buy goods from the other party. It is the most
popular form of counter trade.

C. Product buy-back: Is usually used when a production plant, a turnkey plant,

production equipment or technology is sold. The seller of the production facility agrees to
be paid integrally or partially with the products manufactured with the equipment.

D. Offset: is a variant of the counter purchase, in which the seller agrees to “offset”
the purchase price by sourcing from the importer’s country or transferring
technology to the other party’s country.

Advantages

The counter trade is used as a pricing tool in certain situations, when it offers certain
advantages:

1. To gain access to new or difficult markets, markets that lack hard currency in cash
and would prefer to pay with goods.

2. Shortages of hard currency lead to exchange controls. A company may overcome

government imposed currency restrictions by using barter agreements.

3. Companies that have a large amount of overhead need to increase sales. They can
use counter trade in order to dispose of the surplus products.

4. Also companies that accept counter trade as a form of payment will be able to
capitalize, to benefit of a long-term good-will from those countries.

Its Risk and Shortages

A. The goods offered in exchange cannot be used in-house and the company might face
a problem of what to do with those goods.

B. Such deals usually involve a longer period of time in order to agree over the goods to
be treated and their perspective valuation, the percentage of cash and goods, the time
horizon for contracts.

C. There is always the risk that the price of the goods that will be received to change
from the time the contract is signed until the products are delivered and sold. Also,
there is always the uncertainty over the quality of the goods.

77
D. Transaction costs are usually higher as the company has to find buyers for the goods
received, they have to pay commissions to middlemen if they use any.

Among those we present the most frequent ones:

1. To minimize tax liabilities. Given the different level of taxation, companies will try to
maximize profits in low income countries and to minimize profits in high income
countries.

A. From countries with low income taxes: transfer prices are set high for goods and
services sold from countries with lower corporation tax to another subsidiary of the
firm in a high tax country. By transferring (selling) the goods at high prices the
company gets high income that is taxed low, while the partner company in the high
income country to which the goods are transferred have higher costs (by buying at
high prices) and get less income to be taxed.

B. From countries with a high corporation tax: transfer prices are set low for goods
and services transferred from countries with high corporation tax to a country with a
low corporation tax. By transferring (selling) the goods at low prices, companies are
obtaining low incomes and consequently low profits to be taxed in a high tax country.
At the same time the companies from low tax countries to which products are
transferred at low prices get large incomes that are low taxed.

2. To avoid host country government regulation

If the foreign government places restrictions on the repatriation of dividends, interests or

royalties, the company can manipulate again the transfer prices in order to shift funds out.
Usually it is the case of developing countries that have such restrictions and from where
multinational are willing to transfer the funds.

A. From the developing country (with restrictions). The goods will be transferred from
the developing country to another country by setting low transfer prices. In this way the
company does not accumulate high income and high profits in a country from which it is
difficult to repatriate.

B. From the developed country: The goods will be transferred from the developed
country to the developing country at high prices that represent high costs of

78
acquisition/gaining/ for the company in the developing country, and at the same time
money (costs paid) get out of the country.

3. Reduce tariff duties (when they are ad valorem): Goods are transferred to countries
with high tariffs at low transfer prices, so that lowering the value of goods and services
and paying a lower tariff.

4. Avoid sharing profits. When the company has a form of a joint venture and not a
wholly owned subsidiary in a foreign country, does not want to share the profits with the
foreign partner. In these cases there is an incentive for companies to transfer goods and
services in subsidiaries that are joint ventures in foreign countries at high prices,
involving high costs for the company and therefore less profit to be shared with the local
partners. A low transfer price towards a subsidiary that is a joint venture would mean that
profits obtained have to be shared.

There are a number of methods that multinational use to set the transfer prices

A. The market based transfer pricing uses the market mechanism as a cue for setting
transfer pricing. Such prices are usually referred to as arm’s length prices, meaning
that the company charges the price that any buyer, any third party from outside the
company would be charged.

B. The non-market based transfer pricing comprises various policies that deviate
from the market based pricing. Among those the most well-known are:

a. The negotiated pricing

b. Cost based pricing

a. Negotiated prices can be set at any levels and can solve any of the multinational’s
problem from the ones mentioned above.

b. The cost based pricing can also be done in at least three different ways, all having at
starting point the cost, but different levels of costs:

79
 1. Based on the manufacturing cost, when the transfer price is set at the level of the
production cost.

2. Cost plus approach

 Local manufacturing cost plus a standard mark-up Cost of most efficient

producer plus standard mark-up

CHAPTER VII

7. Distribution Strategies in International Context

Distribution is the physical flow of goods through channels. Channels are made up of a
coordinated group of individuals or firms that perform functions that add utility to a
product or service. Distributor are wholesale intermediary that typically carries product
lines or brands on a selective basis. Agent is an intermediary who negotiates transactions
between two or more parties but does not take title to the goods being purchased or sold.

There are six channel structure alternatives for consumer products. The characteristics of
both buyers and products have an important influence on channel design. The first
alternative is to market directly to buyers via the Internet, mail order, various types of
door-to-door selling, or manufacturer owned retail outlets. The other options utilize
retailers and various combinations of sales forces, agents/brokers, and wholesalers. The
number of individual buyers and their geographic distribution, income, shopping habits,
and reaction to different selling methods frequently vary from country to country and
may require different channel approaches. Product characteristics such as degree of
standardization, perish-ability, bulk, service requirements, and unit price have an impact
as well. Generally speaking, channels tend to be longer (require more intermediaries) as
the number of customers to be served increases and the price per unit decreases. Bulky
products usually require channel arrangements that minimize the shipping distances and
the number of times products change hands before they reach the ultimate customer.

Although channels for consumer products and industrial products are similar, there are
also some distinct differences. In business-to-consumer marketing (b-to-c or B2C),
consumer channels are designed to put products in the hands of people for their own use;
as participants in a process known as business to- business marketing (b-to-b or B2B),

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industrial channels deliver products to manufacturers or other types of organizations that
use them as inputs in the production process or in day-to-day operations.

The marketing channel alternatives for the industrial- or business-products company. As

is true with consumer channels, product and customer characteristics have an impact on
channel structure. Three basic elements are involved: the manufacturer’s sales force,
distributors or agents, and wholesalers. A manufacturer can reach customers with its own
sales force, a sales force that calls on wholesalers who sell to customers, or a combination
of these two arrangements. A manufacturer can sell directly to wholesalers without using
a sales force, and wholesalers, in turn, can supply customers. Finally, a distributor or
agent can call on wholesalers or customers for the manufacturer.

Marketing channels exist to create utility for customers

Place utility - availability of a product or service in a location that is convenient

to a potential customer

Time utility - availability of a product or service when desired by a customer

Form utility - availability of the product processed, prepared, in proper condition

and/or ready to use

information utility - availability of answers to questions and general

communication about useful product features and benefits

[Link] of logistic

Marketing was described as one of the activities in a firm’s value chain. The distribution
“P” of the marketing mix plays a central role in a given firm’s value chain; because
global companies create value by making sure their products are available where and
when customers want to buy them. Physical distribution consists of activities involved in
moving finished goods from manufacturers to customers. However, the value chain
concept is much broader, for two basic reasons. First, the value chain is a useful tool for
assessing an organization’s competence as it performs value-creating activities with a

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broader supply chain. Second, the particular industry in which a firm competes (for
example, automobiles, pharmaceuticals, or consumer electronics) is characterized by a
value chain. The specific activities an individual firm performs help define its position in
the value chain.

Supply Chain: includes all the firms that perform support activities by generating raw
materials, converting them into components or finished products and making them
available to customers. Logistics: is the management process that integrates the activities
of all companies to ensure tan efficient flow of goods through the supply chain.

Order Processing: includes order entry in which the order is actually entered into a
company’s information system; order handling, which involves locating, assembling, and
moving products into distribution; and order delivery

Warehousing: warehouses are used to store goods until they are sold. Distribution
centers are designed to efficiently receive goods from suppliers and then fill orders for
individual stores or customers

Inventory Management: ensures that a company neither runs out of manufacturing

components or finished goods nor incurs the expense and risk of carrying excessive
stocks of these items.

Transportation: the method or mode a company should utilize when moving products
through domestic and global channels; the most common modes of transportation are rail,
truck, air, and water.

[Link] foreign market channels of distribution

A global company expanding across national boundaries must utilize existing distribution
channels or build its own. Channel obstacles are often encountered when a company
enters a competitive market where brands and supply relationships are already
established. Direct involvement in distribution in a new market can entail considerable
expense. Sales representatives and sales management must be hired and trained. The sales
organization will inevitably be a heavy loser in its early stage of operation in a new
market because it will not have sufficient volume to cover its overhead costs. Therefore,

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any company contemplating establishing its own sales force should be prepared to
underwrite losses for this sales force for a reasonable period of time.

Channel strategy must fit the company’s competitive position and marketing objectives
with in each national market.

 Direct involvement – the company establishes its own sales force or operates its
own retail stores.
 Indirect involvement – the company utilizes independent agents, distributors,
and/or wholesalers.

Working with Channel Intermediaries:

Select distributors – don’t let them select you

Look for distributors capable of developing markets, rather than those with a few
good customer contacts

Treat local distributors as long-term partners, not temporary market-entry vehicles

Support market entry by committing money, managers, and proven marketing

ideas

From the start, maintain control over marketing strategy

Make sure distributors provide you with detailed market and financial
performance data

Build links among national distributors at the earliest opportunity

Channel decisions are important because of the number and nature of relationships that
must be managed. Channel decisions typically involve long-term legal commitments and
obligations to various intermediaries. Such commitments are often extremely expensive
to terminate or change, so it is imperative for companies to document the nature of the
relationship with the foreign partner.

Global Retailing

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Global retailing is any retailing activity that crosses national boundaries. Since the mid-
1970s, there has been growing interest among successful retailers in expanding globally.
However, this not a new phenomenon. Today’s global retailing scene is characterized by
great variety. Retail stores can be divided into categories according to the amount of
square feet of floor space, the level of service offered, width and depth of product
offerings, or other criteria.

Department stores

Specialty retailers

Supermarkets

Convenience stores

Discount stores and warehouse clubs

Hypermarkets

Supercenters

Category killers

Outlet stores

A number of factors have prompted retailers to look overseas for new store development.
When competition, local laws governing retailing practice, distribution patterns, or other
factors are taken into account. However, a company may possess competencies that can
be the basis for competitive advantage in a particular retail market. A retailer has several
things to offer consumers. Some are readily perceived by customers, such as selection,
price, and the overall manner in which the goods are offered in the store setting. The last
includes such things as store location, parking facilities, in-store atmosphere, and
customer service. Competencies can also be found in less visible value chain activities
such as distribution, logistics, and information technology.

Environmental Factors:

 Saturation in the home country market

 Recession or other economic factors

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  Strict regulation on store development

 High operating costs

[Link] of Free ports

Moving cargo to an overseas destination is a muchmore complex task than transportation

of freight
locally. Other than the usual package designed toprotect and/or promote a product while
on display,packing (shipping package) is necessary if the merchandise is to be properly
protected during shipment. Because of a greater number of hazards, thelength of time
during which the cargo is in transit,and a carrier’s limited liability, the shipper
shouldobtain marine insurance. In addition, the shippershould take necessary packing
precautions to minimize any chance of damage.

Containerization is one of several transportation modes that can achievethis [Link]

cannot move without proper documentation. There are a huge number of documents
thatmust be filed to satisfy an exporter’s governmentrequirements and an importer’s legal
[Link] compound this problem, the document requirements of the various
countries are far from beinguniform. The shipper, however, does not have anyoption the
shipper simply must submit all requireddocuments if a cargo is to be moved and if the
shipper is going to collect payment from the [Link] specialists in cargo
movement who can facilitatethe process for a fee. Freight forwarders and customhouse
brokers work for the shipper and theimporter, respectively. They are capable of
takingover all aspects of physical distribution and [Link] the shipper wants
to be relieved ofthese responsibilities, these intermediaries can help.

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Reference:

Coteora, Philip R., International Marketing, 13 editions, Boston Irwin Inc. 2006.
International marketing by Francis Charonican 1999
International marketing by BS Bathor and other 1997
Philip Kolter, marketing Management, Analysis, planning implementation and
control, 9th edition.
William J. Stanton, Fundamentals of Marketing, 10th edition.
Kolter and Armstrong, principle of Marketing, 8th edition.
International Marketing, John J. Saw, SakOukvist, 2nd edition

N.B. Other books and articles written on similar topics could also be refereed.

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