Over View of world business environment

Nature of International Marketing: Challenges & Opportunities

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.

Strengths:
• recognition of the need to integrate all 4 Ps (place being only one of the
4 Ps and not being more important than the other 3 Ps)
• recognition of the need to coordinate marketing activities across
countries
• recognition of marketing of intangibles (ideas and services)
• recognition of nonprofit marketing
• recognition of the importance of determining consumer needs before
creating a product.

Limitations:
• It overemphasizes consumer marketing.
• The definition fails to recognize the importance of industrial marketing
(involving purchases made by governments, quasi-government agencies,
business firms, and nonprofit entities).

The Applicability of Marketing

• Marketing is needed in all countries

• Can be used to curb demand
• Manipulate Supply & stimulates innovation
• Marketing mix( Different) should not be confused with Marketing
principles(Universal)

& hence its desirable activity

Criteria used to identify MNCs: (a) size, (b) structure, (c) performance, and
(d) behavior.

• Size.
o The term MNC implies bigness, and it is not unusual for corporate
size in terms of sales to be used as a primary requirement for
judging whether or not a company is multinational.

o Although most multinational corporations are large, corporate sales

should not be used as the sole criterion for multinationalism.

o Many large U.S. companies are very local in nature.

• Structure.
o Structural requirements for the definition of MNC include the
number of countries in which the firm does business and the
citizenship of corporate owners and top managers.
o Examples: Tambrands does business in 135 foreign countries, and
Benetton operates 5,000 stores in 79 countries.
o In the case of NEC, it ships its products to 145 countries. Among
NEC's 25 factories outside Japan are 7 factories in the United States
which employ more than 7,000 workers.

• Performance.
o Definition of MNC by performance depends on such characteristics
as earnings, sales, and assets.
o These performance characteristics indicate the extent of the
commitment of corporate resources to foreign operations and the
amount of rewards from that commitment.
o The greater the commitment and reward, the greater the degree of
internationalization.
o One good example is Matsushita Electric Industrial which has 56
overseas manufacturing subsidiaries in 27 countries. Matsushita's
overseas factories are responsible for almost a third of the firm's
international sales. The company has regional headquarters in
Singapore for Asia, London for Europe, and New Jersey for the
United States, each with its own manufacturing, marketing, and
 R&D capability. Furthermore, the top executives at all three
headquarters are important board members, and most local
decisions are made locally. In South America, Matsushita's air
conditioners are 100 percent locally sourced.

• Behavior.
o The behavior requirement as a measure of multinationalism
concerns the behavioral characteristics of top management.
o Thus, a company becomes more multinational as its management
thinks more internationally.
o Apple Computer Inc. has begun to exhibit international orientation,
and it views the United States as simply one of the marketplaces.
According to Michael H. Spindler, the company's former chief
executive officer, "a global company does not have a ... nationality.
Global leaders do not think in the color of their passport. They think
in terms of where the opportunity is." One of the ways Apple has
become a global company involves the view that all R&D wisdom
does not reside in Silicon Valley. As a result, Apple has built a
product development laboratory in Paris and has carried out product
research work in Tokyo. Apple also makes an effort to achieve
similar expense ratios across the three geographic areas.

(a) Ethnocentricity, (b) Polycentricity, and (c) Geocentricity

• Ethnocentricity is a strong orientation toward the home

country.
i. Markets and consumers abroad are viewed as unfamiliar
and even inferior in taste, sophistication, and
opportunity.

• Polycentricity is the opposite of ethnocentricity. It is a strong

orientation to the host country.
i. The attitude places emphasis on differences between
markets that are caused by variations within, such as in
income, culture, laws, and politics.
ii. The assumption is that each market is unique and
consequently difficult for outsiders to understand.
 • Geocentricity considers the whole world rather than any
particular country as the target market.
i. Corporate resources are allocated without regard to
national frontiers, and there is no hesitation in making
direct investment abroad when warranted.
ii. Geocentric firms take the view that while countries may
differ, differences can be understood and managed.
iii. The company thus adapts its marketing program to
meet local needs within the broader framework of its
total strategy.
iv. The approach combines aspects of centralization and
decentralization in a synthesis that allows some degree
of efficiency and flexibility.

The process of internationanalization:

Andersan U-Model Four stages:

(1) No regular export activities

(2) Export via independent representatives (agents)
(3) Establishment of an overseas sales subsidiary &
(4) Overseas Production /Manufacturing

Other
(1) Non exporter
(2) Export intender
(3) Sporadic exporters
(4) Regular exporters

The Benefits of Internationalization

• Survival: It can help a nation survive by trading its resources for what it
lacks.
• Second, it provides a means for growth as many overseas markets often
grow at a faster rate.
• Third, those foreign markets can provide more sales and profits.
 • Fourth, international marketing is a reasonable route for risk
diversification.
• Fifth, international marketing keeps prices relatively stable and
moderates the inflation rate.
• Sixth, it generates more employment.
• Seventh, it promotes the higher standards of living.
• Finally, international marketing provides insights for the understanding of
the marketing process.

Trade Theories & Economic Development

Is trade a zero-sum game or a positive-sum game?

• Trade is not a zero-sum game in the sense that one player (trading partner)
can win only at the expense of another.
• Instead it is a positive-sum game because, for trade to take place, both
nations must anticipate gain from it.

The principle of absolute advantage

• 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 be only produced at a
higher cost than can other nations.

The principle of relative advantage

• A country may be more efficient than another country in producing many

products; it still 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.
Should there be trade if:

(a) A country has an absolute advantage for all products over its trading
partner

• Trade still should take place even when a country has an absolute
advantage for all products over its trading partner as long as the degree of
efficiency is not uniform across all products.
• As explained by the principle of relative advantage, absolute costs are
irrelevant, and relative production costs instead should be used to
determine whether trade will take place.
• A country should concentrate on either a product with the greatest
comparative advantage or a product with the least comparative
disadvantage.

(b) The domestic exchange ratio of one country is identical to that of another
country?

Trade is unlikely when the domestic exchange ratio of one country is identical
to that of another country.

• There is simply no incentive or gain from trading for either party.

• Also when transaction costs and transportation costs are considered, it
becomes too expensive to export a product from one country to another.

The theory of factor endowment

• The theory of factor endowment holds that the inequality of relative prices
is a function of regional factor endowments and that comparative
advantage is determined in part by the relative abundance of such
endowments.
• Since countries have different factor endowments, a country would have
a relative advantage in a commodity that embodies in some degree that
country's comparatively abundant factors.
 • A country should thus export that commodity which is relatively
plentiful (i.e., in comparison to other commodities) within the relatively
abundant factor (i.e., in comparison to other countries).

The Leontief Paradox.

• The Leontief Paradox casts some doubt on the validity of classical trade
theories.
• Some empirical studies have shown that the United States' export &
import patterns are not consistent with the trade patterns as predicted by
the theory of factor endowment.
• According to these studies, the United States actually exports labor-
intensive goods and imports capital- intensive products (when the
opposite results were expected).

According to Porter the four major determinants of international

competitiveness

• Factor conditions (Factors of productions);

• Demand Conditions;
• Related and support Industries
And
• Firm strategy, structure and rivalry.

Chance and government policy are minor determinants.

The validity and limitations of trade theories.

• Based on the empirical evidence and world trade patterns, the validity of
trade theories is questionable and debatable as shown by the paradoxical
findings.
• Apparently, other variables in addition to factor endowment affect
trade practices. Trade theories fail to consider the demand side,
marketing activities, and trade barriers. All of these can significantly alter
trade patterns.
 • The value of the trade theories is limited by their assumptions:
immobility and constancy of factors of production, homogeneous
quality of factors of production, and fixed proportions of factor
inputs for a product.

In all fairness, certain simplifying assumptions are necessary, at least, in the

early part of the investigation

Determinants of Export Performance:

Simple Plan

• Sales growth
• Shift Share Analysis

Performance measures by Cavugil and zou\

• Export Sales Levels
• Export sales growth
• Export profit
• Ratio export profit to total profit
• Increase of importance of export to total business
• Overcoming barriers to export
• Propensity to export
• Acceptance of product by export distributors
• Export involvement
• Export internationalization
And
• Attitude toward export
Conceptual Model
• Export marketing Strategy [ is influenced by internal ( firm & product
charters tics) and external factors ( industry and export market
characteristics) ]
• Firm’s international Competence
and
• Managerial Commitment
 Also
• On R& D and Infrastructure

Economic cooperation:

(a) Free trade area (b) Customs union, (c) Common market, (d) Economic and
Monetary union, and (e) Political union.

• Free trade area: The countries involved eliminate duties among

themselves, while maintaining separately their own tariffs against
outsiders. (Us & Israel-FTAA)

• Customs union: Member countries must also agree on a common

schedule of identical tariff rates against outsiders. (Benelux Custom
Union, Turkey & the European Union)

• Common market: Countries remove all customs and other restrictions on

the movement of the factors of production among the members of the
common market. ( European Union)

• Monetary union: Countries unify their currencies by either adopting a

single currency or having convertible currencies with irrevocably fixed
exchange rates. ( European Commission)

• Economic union: Countries harmonize their national economic policies

so as to create a single market. ( Unification of East & West Germany)

• Political union: It involves both economic and political ties, and a treaty
of integration between nations requires common economic and political
policies. ( European Union, ASEAN)

Does economic cooperation improve or impede trade?

 • Economic cooperation may either improve or impede international
trade, depending on how the result of the cooperation is viewed.

• The tendency is for a member of an economic group to shift from the

most efficient supplier in the world to the lowest-cost supplier within that
particular economic region.

• As such, trade creation among the partners is offset by trade diversion

from the rest of the world, and the net effect may be either positive or
negative.

Trade Distortion and Marketing Barriers

The Rationale and the weaknesses of each of these arguments for protection of
local industries

(a) keeping money at home, (b) reducing unemployment, (c) equalizing cost
and price, (d) enhancing national security, and (e) protecting infant industry.

Keeping money at home:

This argument is based on the belief that international trade will lead to
outflow of money, making foreigners richer and local people poorer.

• This argument rests on the fallacy of regarding money as the sole

indicator of wealth.
• Also it erroneously assumes that foreigners receive money without having
to give something of value in return.

Reducing unemployment:

This argument assumes that import reduction will create more demand for
local products and subsequently create more jobs.

The problems with this argument are:

 • It ignites inflation,
• The costs of job protection are enormous and must be borne by
consumers, and
• There is no hard evidence to support this argument.

Equalizing cost and price:

This argument attempts to show that foreign goods have lower prices
because of lower production costs and that these costs and prices must be
raised to make locally made products more competitive.

• But trade takes place only because of price differentials.

• Cost of protection to consumer
• Also trade, not the lack of it, is likely to bring about cost and price
equalization.

Enhancing national security:

This is based on the idea that a nation should be self-sufficient.

• One problem is that it is extremely difficult for any nation to be
completely self- sufficient.
• Furthermore, self sufficiency usually comes at great costs (at the
expense of efficiency).

Protecting infant industry:

This argument points out that some industries need to be protected until
they become viable.
• It is possible, however, that protection may make the protected
industries complacent and lack incentive to "grow up."

MARKETING BARRIERS: Tariffs:

(a) import and export tariffs, (b) protective and revenue tariffs, (c) surcharge
and countervailing duty, and (d) specific and ad valorem duties.

• Import and Export tariffs are imposed on the basis of the direction
of product movement. Usually, tariffs are imposed on imports, even
though some countries also impose tariffs on their exports. ( To scares
resources)

• Protective and Revenue tariffs are based on the purpose: to raise

revenues or to protect local industries. In general, a revenue tariff is
relatively lower.

• Surcharge and Countervailing duty are classified based on length

of time. A tariff surcharge is a temporary action ( to protect local
industry ) , whereas a countervailing duty is a permanent surcharge.
( to counter the products which are subsidized by the foreign
government)

• Rates (a) Specific duties are a fixed or specified amount of money per
unit of weight, gauge, or other measure of quantity. Ad valorem
duties are duties "according to value" and are stated as a fixed
percentage of the invoice value.

• Combined rate(Compound duty) Combination of above two

Distribution Point: Distribution & Consumption Taxes

• Single-stage sales tax is a tax collected only at one point in the

manufacturing and distribution chain.

• A value-added tax is a multistage, non- cumulative tax on

consumption. It is levied at each stage of the production and
distribution system, though only on the value added at that stage

• Cascade taxes are collected at each point in the manufacturing and

distribution chain and levied on the total value of a product, including
taxes borne by the product at earlier stages.
 • An excise tax is a one-time charge levied on the sales of specified
products.

MARKETING BARRIERS:Non -tariff barriers

Various forms of government participation in trade: administrative

guidance, subsidies, and state trading.

• In the case of administrative guidance, a government provides trade

consultation to private companies, providing guidance on how to trade.

• State trading is the ultimate in government participation (and

government interference) because the government itself is now the
customer or buyer who determines what, when, where, how, and how
much to buy.

• Subsidies are incentives (e.g., cash, credit, tax, interest rate, etc.)
provided by the government to lower its exporters' costs of doing
business. Other than cash, subsidies can take other forms: interest rate,
value-added tax, corporate income tax, sales tax, freight, insurance,
employee training, and schooling for foreign employees' children, and
infrastructure. Sheltered profit ( another kind of subsidy )means a
country may allow a cooperation to shelter its profit form abroad

Customs and Entry Procedures

(a) product classification, (b) product valuation, (c) documentation, (d)

license/permit, (e) inspection, and (f) health and safety regulations.

• Product classification can be used to determine the entry eligibility of a

product and its duty status.

• Product valuation can increase the duties imposed on a product because

the determined value affects the amount of tariffs levied.
• Documentation prevents a product's entry when the required documents
are missing or are not completely filled out. Usually

o The following documents are required: commercial invoice, pro-

forma invoice , certificate of origin, bill of lading , packing list ,
insurance certificate, import license and shipper’s export declaration

• A license/permit may not be granted or the issuance may be delayed.

• A thorough inspection of every item will delay the clearance of

merchandise through customs.

• Finally, health and safety regulations may be passed or arbitrarily

interpreted for the purpose of making imports difficult.

Product requirements (a) product standards, (b) packaging, labeling, and

marking, (c) product testing, and (d) product specifications.

• Product standards can be set unreasonably high or frequently

changed to frustrate foreign firms.

• Packaging, labeling, and marking may make foreign firms' product

packages illegal, and costly modification may be required to make the
marking and labeling complete as required.

• Product testing may be done, thoroughly and slowly, before a product

is certified as being suitable for consumption.

• Product specifications can be extremely detailed and written in such

a way as to favor local bidders while forcing foreign suppliers to
modify their products to conform to unnecessary details at great costs.

Export quota
 • An export quota is sometimes imposed in order to preserve the country's
scarce resources. It is also used to either keep prices stable at home or
increase prices abroad by restricting the supply for overseas markets.

• An absolute quota, the most restrictive, limits in absolute terms the

amount imported.

• A tariff quota permits the entry of a limited quantity of the quota product
at a reduced rate of duty. Quantities in excess of the quota can be
imported but are subject to a higher duty rate.

• Whereas an OMA involves a negotiation between two governments to

specify export management rules, the monitoring of trade volumes, and
consultation rights, a VER is a direct agreement between an importing
nation's government and a foreign exporting industry. Both are supposed
to be voluntary.

Financial control methods

1) Exchange control, 2) multiple exchange rates, 3) prior import deposits, 4)

credit restrictions, and 5) profit remittance restrictions.

• An exchange control limits the amount of the currency that can be taken
abroad, making less money available to pay for imports.

• Multiple exchange rates make it possible for exported items to benefit

from favorable exchange rates while making imports expensive because
of the use of other exchange rates which are less favorable.

• Prior import deposits are forced deposits tying up an importer's capital.

• Credit restrictions are employed to make it difficult for importers to

receive credit or financing.

• In the case of profit remittance restrictions, they regulate the remittance

of profits earned in local operations and sent to a parent organization
located abroad.
The WTO

• The WTO is the World Trade Organization that serves along with the
International Monetary Fund and the World Bank to monitor trade and
resolve disputes.

• It is more permanent and legally secure than GATT, its predecessor. Its
objective is to achieve a broad, multilateral, and free worldwide system of
trading.

• The WTO provides a single, coordinated mechanism to ensure full,

effective implementation of the trading system.

• It also provides a permanent, comprehensive forum to address the new or

evolving issues of the global market.

• GSP (Generalized System of Preferences) is the U.S. tariff preferential

system designed to promote economic development within less developed
countries.Products manufactured in the designated countries are permitted
to enter the United States duty free.

• CBI (Caribbean Basin Initiative) is a U.S. tariff preferential system

providing trade and tax measures to promote economic revitalization in
designated countries in the Caribbean Basin region. CBI eliminates U.S.
duties on almost all products entering from qualified countries.